ANALYSIS BEYOND CONSENSUS

…THE NEW ABC OF RESEARCH

Kajaria and Somany | Annual Report Analysis

FY18 annual reports of Kajaria Ceramics (Kajaria) and Somany Ceramics

(Somany) highlight subdued performance led by GST-related disruptions,
competition from unorganised players and rising input prices. Key
highlights of a comparative analysis of the two are: 1) Kajaria’s margin,
profitability & ROCE have been consistently higher versus Somany’s,
though the gap has narrowed recently; 2) IND-AS implementation in FY17
by Somany led to full consolidation of associates and increase in debt by
73% (from INR2.9bn under IGAAP to INR5.0bn under IND-AS). This
impacted FY17 ROCE, which dipped 100bps under IND-AS despite 300bps
rise in EBITDA margin; 3) while Kajaria’s net debt fell from INR2.3bn to
INR879mn over FY14-18, Somany’s increased from INR993mn to
INR4.1bn; 4) Somany’s working capital-to-sales ratio (%) rose 3x over
FY14-18 versus 2x for Kajaria; and 5) key related party transactions
include managerial remuneration / commission at 9% of PAT (INR198mn)
for Kajaria versus 18% (INR139mn) for Somany.

Kajaria leads on profitability and margin fronts

Kajaria has consistently clocked higher gross and EBITDA margins compared to Somany
over the past five years, though the gap has narrowed. Increase in power and fuel costs
in FY18 led by higher gas prices impacted Somany by 200bps and Kajaria by 160bps.
Kajaria’s PAT margin stood at 8.4% in FY18, 2x Somany’s (4.6%).
Auditors
Somany’s capital employed and ROCE impacted under IND-AS
While Somany’s revenue mix from JV/ associates manufacturing tie-ups rose from 24% Kajaria - Walker Chandiok & Co LLP
to 41% over FY14-18, Kajaria’s declined from 27% to 24%. Under IND-AS, Somany Somany - Singhi & Co.
consolidated associates/JV wherein its equity stake was less than 50% however, it
exercised control over these entities. Consequently, its debt catapulted 73% to
INR5.0bn on transition to IND-AS in FY17 and impacted return ratios.

Kajaria stood ahead in terms of FCF generation

Cumulative FCF over the past five years stood at INR2.4bn for Kajaria versus INR(2.3)bn
for Somany led by higher working capital and capex. Though working capital-to-sales
ratio increased for both the companies, Somany’s jumped 3x (10% to 30% of sales over Nilesh Aiya
FY14-18) versus 2x (11% to 21%) for Kajaria. Kajaria’s payables include acceptances +91 22 4040 7575
(akin to debt), which declined from INR0.9bn in FY17 to INR0.6bn in FY18. nilesh.aiya@edelweissfin.com

Ankit Dangayach, CFA

Somany’s net debt rose versus decline for Kajaria +91 22 6620 3077
ankit.dangayach@edelweissfin.com
While Kajaria’s net debt continues to decline, Somany’s has jumped 4x over the past
five years. Average borrowing cost for Kajaria stood higher @ 12% (9% adjusted for Raj Koradia
acceptances); Somany’s has dipped over the past five years (11% to 7%). Other income +91 22 4040 3422
raj.koradia@edelweissfin.com
component for Somany stood higher (15% of PBT) versus Kajaria (3%).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
September 25, 2018
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com, Edelweiss Securities Limited
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
 Annual Report Analysis

Profitability analysis
Table 1: Consolidated profitability analysis (INR mn)
Kajaria Somany
FY14 FY15 FY16 FY17 FY18 5Yr CAGR (%) FY14 FY15 FY16 FY17 FY18 5Yr CAGR (%)
Sales 18,363 21,869 24,135 25,496 27,106 11 12,648 15,431 17,116 17,309 17,127 10
Raw Materials Consumed 7,132 7,497 7,537 8,047 8,850 6 7,490 9,039 9,766 6,430 6,370 1
Operating & Admin. Exp. 6,661 8,757 9,510 9,599 10,516 15 3,512 4,303 4,689 6,619 6,724 20
Personnel cost 1,713 2,073 2,523 2,887 3,177 18 832 1,014 1,232 1,922 2,175 24
EBITDA 2,858 3,541 4,564 4,963 4,564 13 814 1,076 1,429 2,337 1,858 17
Depreciation 470 559 726 814 885 15 224 266 283 313 413 15
EBIT 2,388 2,983 3,838 4,149 3,678 13 590 810 1,146 2,024 1,446 17
Financial Charges 415 294 345 340 241 (12) 185 205 225 390 399 15
Other income 19 72 104 154 108 29 31 77 91 172 181 48
PBT 1,992 2,761 3,598 3,963 3,546 18 435 681 1,012 1,806 1,228 21
Exceptional items - (58) - - 8 - - - (44) (41) (44) -
PBT (after exceptional) 1,992 2,703 3,598 3,963 3,553 18 435 681 968 1,765 1,184 20
Tax expense 678 854 1,244 1,425 1,267 21 170 222 312 615 393 21
PAT 1,314 1,849 2,354 2,538 2,286 16 265 459 656 1,150 791 19
Sales growth- YoY (%) 16.0 19.1 10.4 5.6 6.3 20.0 22.0 10.9 1.1 (1.0)
Gross margin (%) 61.2 65.7 68.8 68.4 67.4 40.8 41.4 42.9 62.8 62.8
EBITDA margin (%) 15.6 16.2 18.9 19.5 16.8 6.4 7.0 8.3 13.5 10.9
PAT margin (%) 7.2 8.5 9.8 10.0 8.4 2.1 3.0 3.8 6.6 4.6
Operating and admin expense (% ) 36.3 40.0 39.4 37.6 38.8 27.8 27.9 27.4 38.2 39.3
Personnel cost (%) 9.3 9.5 10.5 11.3 11.7 6.6 6.6 7.2 11.1 12.7
Effective tax rate 34.1 31.6 34.6 36.0 35.7 39.1 32.6 32.3 34.8 33.2
Source: Company annual report, Edelweiss research

Kajaria’s revenue CAGR stood slightly higher at 11% versus Somany’s 10%. GST disruptions
and competition from the unorganised sector impacted growth in the past two years.
Further, Somany’s growth was impacted by internal issues related to SAP implementation.

Kajaria’s gross and EBITDA margins have stood consistently higher than Somany’s in the past
five years. The former’s margin declined in FY18 led by increased cost pressure on account
of higher gas prices and inability to pass on the increase to consumers due to weak demand.

Chart 1: Gross and EBITDA margins

83.0 24.0
Gross margin (%) EBITDA margin (%)

72.4 20.2

61.8 16.4
(%)

(%)

51.2 12.6

40.6 8.8

30.0 5.0
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Kajaria Somany Kajaria Somany
Source: Company annual report, Edelweiss research

The gap between gross and EBITDA margins of both the companies has narrowed over the
past two years as Somany’s margin has improved due to change in product mix/pricing and

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 Kajaria & Somany

mix of own manufacturing vis-à-vis JV/associates/outsourcing. Kajaria’s PAT margin has

been nearly 2x Somany’s in the past and the gap has slightly narrowed in the past two years.

Table 2: Major other expenditure analysis (INR mn)

Kajaria Somany
Particulars Amount % to sales Amount % to sales
FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18
Power and fuel 4,480 5,194 17.6 19.2 3,209 3,488 18.5 20.4
Advertisement, publicity and sales promotion 799 1,053 3.1 3.9 665 595 3.8 3.5
Stores and spares consumed 889 885 3.5 3.3 670 650 3.9 3.8
Packing freight and forwarding expenses 860 508 3.4 1.9 556 436 3.2 2.5
Traveling and conveyance 303 330 1.2 1.2 206 240 1.2 1.4
Other expenses 1,120 794 4.4 2.9 673 615 3.9 3.6
8,452 8,763 33.1 32.3 5,980 6,025 34.5 35.2
Source: Company annual report, Edelweiss research

Power and fuel cost was slightly lower for Kajaria versus Somany and YoY increase in FY18
for Somany has been higher. Packing, freight and forwarding expenses along with other
costs declined sharply for Kajaria in FY18 versus Somany.

Chart 2: Advertisement & sales promotion cost analysis

2.0 5.0 1.0 5.0
Somany
Kajaria
1.6 3.9 4.2 0.8 3.8 4.2
3.5

(As % of sales)
(As % of sales)

1.2 3.1 3.4 0.6 3.4

(INR bn)
(INR bn)

2.5 2.4 2.0

0.8 2.6 0.4 2.6
1.9
1.7 1.6
0.4 1.8 0.2 1.8

0.0 1.0 0.0 1.0

FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Advertising, Publicity and Sales Promotion Advertising, Publicity and Sales Promotion
As a % of Sales As a % of Sales
Source: Company annual report, Edelweiss research

Kajaria’s ad spends have consistently increased and jumped more than 3x over the past five
years from INR0.3bn (1.7% of sales) in FY14 to INR1.1bn (3.9%) in FY18. Similarly, Somany’s
ad spends too jumped 3x from INR0.2bn (1.6% of sales) in FY14 to INR0.6bn (3.5%) in FY18.

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 Annual Report Analysis

Manufacturing mix and subsidiaries, JVs and associates structuring

Table 3: Volume and revenue mix

Sales volume mix (In mn sqm) Kajaria Somany
Particulars FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Own Manufacturing 27.6 29.3 32.7 37.4 39.8 19.4 18.7 19.7 21.9 20.3
JV, Associates ans Subsidiaries 14.2 18.5 24.1 22.2 18.8 6.6 14.5 18.8 21.9 19.6
Other outsourced partners 10.3 11.0 7.6 8.2 13.4 11.9 9.2 7.8 6.0 9.6
Total (MSM) 52.0 58.7 64.3 67.7 72.0 37.9 42.4 46.4 49.7 49.5

Sales mix (In bn) Somany

Particulars FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Own Manufacturing 9.5 10.8 11.9 13.8 15.3 6.4 6.2 6.2 6.4 6.1
JV, Associates ans Subsidiaries 4.8 6.8 9.0 7.9 6.6 3.0 6.1 8.2 7.8 6.7
Other outsourced partners 4.0 4.2 2.5 2.6 3.8 3.3 3.1 3.5 2.4 3.5
Sanitary ware/ Faucets - - 0.7 1.2 1.4 n.a. n.a. n.a. n.a. n.a.
Total 18.3 21.8 24.1 25.5 27.1 12.7 15.4 17.9 16.7 16.3
n.a. – not available separately in analyst presentation
Chart 3: Proportion of own vs. outsourced manufacturing
Kajaria Somany
100% - - 0.7 100%
1.2 1.4 2.4
4.0 4.2 2.5 2.6 3.8 3.3 3.1 3.5 3.5
80% 80%
9.0 7.9 6.6
4.8 6.8 60% 3.0 6.1 7.8
60% 8.2 6.7

40% 40%

9.5 13.8 15.3 6.4

10.8 11.9 20% 6.2 6.2 6.4 6.1
20%
0%
0%
FY14 FY15 FY16 FY17 FY18
FY14 FY15 FY16 FY17 FY18
Own Manufacturing
Own Manufacturing
JV, Associates ans Subsidiaries JV, Associates ans Subsidiaries
Other outsourced partners Other outsourced partners
Source: Company annual report, Edelweiss research

Kajaria’s revenue mix from own manufacturing and subsidiaries cumulatively increased from
78% in FY14 to 85% in FY17; however, it declined to 81% in FY18. Outsourced manufacturing
proportion declined from 22% in FY14 to 14% in FY18.

For Somany, own manufacturing declined from 50% to 38% over FY14 to FY18 while
associates and JV manufacturing increased significantly from 24% to 41% over the same
period.

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 Kajaria & Somany

Details of subsidiaries, JVs and associates

Table 4: Kajaria
FY17 FY18
Particulars % Stake Networth Sales PAT Networth Sales PAT
Subsidiaries
Soriso Ceramic Pvt. Ltd. 51% 189 757 32 206 586 17
Jaxx Vitrified Pvt. Ltd. 82% 295 3,115 9 111 2,291 (185)
Vennar Ceramics Ltd. 51% 302 795 10 327 631 (67)
Cosa Ceramics Pvt. Ltd. 51% 624 1,816 83 683 1,632 60
Kajaria Bathware Pvt. Ltd.* 100% 152 1,201 (191) 53 1,412 (98)
Kajaria Floera Ceramics Pvt. Ltd.^ 70% 95 - 0 102 - -
Total 1,657 7,683 (57) 1,481 6,552 (273)
PAT margin (%) -0.7% -4.2%
*Cons ol i da ted fi gures i ncl udi ng performa nce of i ts s ubs i di a ry Ka ja ri a Sa ni ta rywa re P.Ltd.
^ Na me cha nged to Ka ja ri a Fl oera Cera mi cs Pri va te Li mi ted from Fl oera Cera mi cs P. Ltd.
Source: Company annual report, Edelweiss research

Subsidiary losses increased from INR57mn in FY17 to INR273mn in FY18 primarily led by
higher losses in Jaxx Vitrified and Vennar Ceramics. However, it was offset by lower losses in
Kajaria Bathware. The company increased its stake in Jaxx Vitrified from 61% to 82% in FY18
and reduced stake in Taurus Tiles from 51% to 5%.

Kajaria invested more than 51% in all its manufacturing partners and hence the latter were
consolidated by the company under IGAAP and IND-AS.

Table 5: Somany
FY17 FY18
Particulars % holding (%) Networth Sales PAT Networth Sales PAT

Subsidiaries
SR Continental Ltd. 100% 15 6 4 15 2 (1)
Somany Global Ltd. 100% 8 0 0 8 1 1
Somany Excel Vitrified Pvt. Ltd. 100% 13 - (0) 13 - (0)
Amora Tiles Pvt. Ltd. 51% 176 990 31 205 1,000 29
Somany Fine Vitrified Pvt. Ltd. 51% 198 1,069 33 240 964 19
Somany Sanitaryware Pvt. Ltd. 51% 110 174 11 106 351 (3)
Sudha Somany Ceramics Private Limited 51% 49 - - 69 - (1)
Amora Ceramics Pvt. Ltd. 51% - - - 48 0 (1)
JV Investment Investment
Vintage Tiles Pvt. Ltd. 50% 140 n.a. 32 140 n.a. (53)
SKPL Ceramics Private Limited (till 1st June
50% 9 n.a. (0) 9 - -
2017)
Sudha Somany Ceramics Private Limited 50% 25 n.a. (1) 36 - -
Associates
Acer Granito Pvt. Ltd. 26% 51 n.a. 24 51 n.a. 50
Commander Vitrified Pvt. Ltd. 26% 33 n.a. 9 33 n.a. 21
Vicon Ceramic Pvt. Ltd. 26% 19 n.a. 12 19 n.a. (100)
Total 845 2,239 155 992 2,318 (40)
PAT margin (%) 6.9% -1.7%
Source: Company annual report, Edelweiss research
* Note – n.a. refers to data not separately available in annual report.

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 Annual Report Analysis

Profitability of aggregate subsidiaries, JVs and associates deteriorated for Somany from
INR155mn in FY17 to INR(40)mn in FY18. During FY18, the company increased stake in
Sudha Somany Ceramics from 50% to 51% and acquired 51% in Amora Ceramics (FY17: Nil).

Somany’s investments in several JVs and associates were less than 51% and hence they
were not fully consolidated as subsidiaries under IGAAP, while under IND-AS the company
has 100% consolidated all the associates and JVs as it exercised control over all these
entities. Consequently, the company’s capital employed & minority interest under IND-AS
increased and ROE/ ROCE declined, further aggravated by decline in margin due to
disruptions in the industry.

Capital allocation

Table 6: Capital allocation and RoE/ RoCE (INR mn)

Kajaria Somany
IGAAP IND AS IGAAP IND AS
Particulars FY14 FY15 FY16 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY17 FY18
Sales 18,363 21,869 24,135 24,135 25,496 27,106 12,648 15,431 17,116 17,732 17,309 17,127
EBITDA 2,858 3,541 4,576 4,564 4,963 4,564 814 1,076 1,429 1,947 2,337 1,858
EBITDA margin (%) 16 16 19 19 19 17 6 7 8 11 14 11
RoE (%) 30 28 28 27 24 18 14 19 18 20 23 14
RoCE (%) 33 35 36 34 32 26 17 21 22 24 23 15
Net fixed assets 6,916 8,601 11,205 11,205 11,773 11,451 2,405 2,638 3,805 3,757 5,274 6,482
CWIP 405 778 78 78 83 176 29 8 63 357 563 279
Equity shareholders' funds 5,295 7,409 9,251 9,719 11,751 13,510 2,235 2,580 4,282 5,212 5,242 5,807
Loan funds 2,364 2,434 2,963 2,937 2,132 1,703 1,710 1,921 2,443 2,882 4,973 5,399
Total capital employed (A+B) 7,660 9,844 12,214 12,656 13,883 15,214 3,944 4,501 6,725 8,094 10,214 11,206
Source: Company annual report, Edelweiss research

Over the past five years, while Kajaria’s revenue and EBITDA surged 1.5x and 1.6x,
respectively, its ROCE declined from 35% to 26% primarily in FY18 led by GST related
disruptions in the industry. However, its margin and ROCE remain the highest in the industry.

Similarly, Somany’s revenue and EBITDA jumped 1.4x and 2.3x, respectively, over the past
five years led by margin improvement. However, its ROCE declined to 15% as IND-AS
implementation in FY17 led to full consolidation of associates, leading to increase in debt by
73% in FY17 from INR2.9bn to INR5.0bn. Consequently, its ROCE declined from 24% under
IGAAP to 23% under IND-AS despite 20% increase in EBITDA and 300 bps jump in margin.

Table 7: Fixed asset turnover analysis (INR mn)

Kajaria Somany
Particulars
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Sales (net of outsourcing revenue) 14,323 17,596 21,582 22,912 23,264 9,332 12,359 13,616 14,862 13,666
Gross tangible fixed assets 10,152 12,356 15,251 16,423 16,751 4,463 4,907 6,284 5,543 6,953
Fixed asset turnover ratio 1.4 1.4 1.4 1.4 1.4 2.1 2.5 2.2 2.7 2.0
Source: Company annual report, Edelweiss research

Asset turns (adjusted for outsourcing revenue) stood stable for Kajaria, while they declined
for Somany led by higher share of associates and JVs. Post IND-AS implementation from
FY17, Somany’s fixed assets increased led by consolidation of associates/JVs.

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Chart 4: Capital allocation

Kajaria 12,500
Somany 30.0
20,000 40.0

16,000 32.0 10,000 24.0

7,500 18.0

(INR mn)
12,000 24.0
(INR mn)

(%)
(%)
8,000 16.0 5,000 12.0

4,000 8.0 2,500 6.0

0 0.0 0 0.0
FY14 FY15 FY16 FY16 FY17 FY18 FY14 FY15 FY16 FY16 FY17 FY18
Equity Debt EBITDA margin RoCE Equity Debt EBITDA margin RoCE
Source: Company annual report, Edelweiss research

Table 8: Debt, Borrowing cost, cash & liquid investments analysis (INR mn)
Particulars FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Gross debt 2,364 2,434 2,937 2,132 1,703 1,710 1,921 2,443 4,973 5,399
Cash and investments 61 112 215 520 824 717 425 1,064 1,426 1,278
Net debt 2,303 2,323 2,721 1,612 879 993 1,496 1,379 3,547 4,121
Net debt/Equity 0.4 0.3 0.3 0.1 0.1 0.4 0.6 0.3 0.7 0.7
Average borrowing cost 14 12 12 13 12 11 11 10 10 7
Average borrowing cost
9
(adjusted for acceptances)
Average yield on cash 11 15 10 6 5 5 9 6 9 10
Other income as % of PBT 1 3 3 4 3 7 11 9 10 15
Source: Company annual report, Edelweiss research

While Kajaria’s net debt has declined consistently over the years led by healthy cash flow
generation, Somany’s has jumped 4x over the past five years partly led by consolidation of
associates post IND-AS implementation.

Average borrowing cost for Kajaria stood higher @ 12% led by acceptances worth INR0.6bn
(FY17: INR0.9bn) not classified as debt; adjusted for which, borrowing cost stood at 9% in
FY18. Somany’s borrowing cost has dipped over the years.

While Kajaria’s yield on cash declined to 5%, Somany’s increased to 10%. The latter’s cash
and liquid investments include liquid mutual funds and high yield NCDs of infra & power
companies and NBFCs. Other income stood higher for Somany at 15% of PBT versus 3% for
Kajaria.

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Cash flow analysis

Table 9: Cash flow analysis – Kajaria (INR mn)
Kajaria Total Somany Total
Particulars FY14 FY15 FY16 FY17 FY18 FY14-18 FY14 FY15 FY16 FY17 FY18 FY14-18
Profit before tax 1,992 2,703 3,608 3,963 3,553 15,819 435 681 968 1,765 1,184 5,033
Non-operating expense 356 293 383 351 213 1,595 178 172 189 262 303 1,105
Non-cash adjustments 470 559 733 836 902 3,499 226 259 282 370 431 1,567
Direct taxes paid (647) (799) (1,034) (1,289) (1,275) (5,044) (134) (216) (241) (495) (327) (1,412)
Cash profit after tax 2,170 2,756 3,691 3,861 3,392 15,870 705 896 1,198 1,902 1,590 6,293
Increase in receivables (483) (601) (697) (549) (1,131) (3,461) (509) (657) (644) (920) (813) (3,542)
Increase in inventories 266 (1,102) (809) 122 (176) (1,699) 299 (458) 14 (251) (390) (786)
Increase in advances - - - 77 170 247 - - - - - -
Increase in trade & other payables 63 1,046 971 (134) 128 2,073 244 467 28 440 721 1,900
Increase in working capital (154) (658) (534) (485) (1,009) (2,840) 34 (648) (602) (730) (482) (2,429)
Net cash from operating activities 2,017 2,098 3,156 3,377 2,383 13,030 738 248 596 1,172 1,109 3,864
Interest expenses paid - - (345) (340) (241) (926) (184) (205) (220) (396) (396) (1,401)
Net cash from operating activities
2,017 2,098 2,812 3,037 2,142 12,105 554 43 376 776 713 2,463
post interest
Capital expenditure (1,522) (2,646) (2,686) (1,425) (1,382) (9,661) (589) (508) (1,364) (1,045) (1,299) (4,805)
Free cash flows 494 (548) 126 1,612 760 2,444 (35) (464) (988) (269) (586) (2,342)
Source: Company annual report, Edelweiss research

Kajaria’s cumulative OCF generation (post interest) stood at INR12.1bn versus INR15.8bn
PBT, led by increase in working capital, predominantly receivables. Significant capex
(INR9.7bn) in the past five years led to lower FCF of INR2.4bn.

Somany’s cumulative OCF post interest stood at INR2.5bn versus PBT of INR5.0bn led by
higher working capital, which along with capex led to negative FCF over the past five years.
Somany incurred significant expenditure on plant modernisation.

Table 10: Working capital analysis (INR mn)

Kajaria Somany
Particulars I-GAAP IND-AS I-GAAP IND-AS
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Trade receivables 1,649 2,071 2,741 3,389 4,507 2,149 2,591 3,172 4,268 5,037
Inventories 1,931 3,033 3,842 3,720 3,785 906 1,364 1,387 2,208 2,597
Trade Payables # 1,520 2,418 2,928 2,677 2,578 1,783 2,079 2,008 1,636 2,332
Advance from customers 97 106 113 151 138 62 100 93 146 93
Advance to suppliers - - 128 168 83 - - - - -
Trade working capital 1,962.5 2,579.4 3,670.0 4,449.3 5,658.8 1,210.8 1,776.7 2,458.6 4,693.4 5,209.8
Working capital days
Receivable days 29 29 35 42 51 56 56 61 79 99
Inventory days 65 69 94 102 91 42 36 41 73 83
Payable days (49) (55) (72) (72) (61) (59) (64) (63) (54) (71)
Cash conversion cycle 45 44 58 72 81 39 29 39 99 111
Trade working capital (%) 11 12 15 17 21 10 12 14 27 30
Adj. cash conversion cycle # 100
Adj. trade working capital (%) 23
Source: Company annual report, Edelweiss research
Note: # Adjusted for acceptances included under trade payables for Kajaria

While both the players’ working capital increased, it stood significantly higher for Somany
(3x jump in five years versus 2x for Kajaria) primarily led by higher receivable days.
Inventory and payable days stood largely in line.

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 Kajaria & Somany

In FY18, Somany’s payable days increased aiding working capital, whereas Kajaria’s declined.
Kajaria’s payables include acceptances (akin to debt), adjusted for which cash conversion
cycle increased to 100 days versus reported 81 days in FY18.

Somany has advanced inter-corporate deposits to third parties worth INR60mn (Zealous
Financial Services -INR50mn and Tinna Rubber & Infra – INR10mn).

Table 11: Earnings to cash conversion and FCF generation (INR bn)
Kajaria Somany
Particulars
FY14 FY15 FY16 FY17 FY18 FY14-18 FY14 FY15 FY16 FY17 FY18 FY14-18
Net cash from operating activities (a) 2,017 2,098 3,156 3,377 2,383 13,030 738 248 596 1,172 1,109 3,864
Profit after tax (PAT) 1,314 1,849 2,354 2,538 2,286 10,341 265 459 656 1,150 791 3,321
Depreciation 470 559 726 814 885 3,454 224 266 283 313 413 1,499
Other income (19) (72) (104) (154) (108) (457) (31) (77) (91) (172) (181) (551)
Adj PAT (b) 1,765 2,336 2,976 3,198 3,063 13,338 459 649 848 1,291 1,023 4,269
OCF represented by Adj PAT (%) (a/b) 114 90 106 106 78 98 161 38 70 91 108 91
Free cash flows (c) 494 (548) 126 1,612 760 2,444 (35) (464) (988) (269) (586) (2,342)
Conversion of OCF into FCF % (c/a) 25 (26) 4 48 32 19 (5) (187) (166) (23) (53) (61)
Source: Company annual report, Edelweiss research

Earnings-to-cash conversion stood consistently higher for Kajaria versus Somany, except for
FY18, wherein it stood lower as payable days declined for Kajaria, while they increased for
Somany.

OCF to FCF conversion for Kajaria stood much higher than Somany. Kajaria generated
INR2.4bn of FCF over the past five years, while Somany’s stood at INR(2.3bn). This was
primarily due to higher cash conversion and lower capex for Kajaria compared to Somany.

Related party transactions

Table 12: Managerial remuneration/commission (INR mn)

Particulars Kajaria Somany
FY17 FY18 FY17 FY18
KMP & directors remuneration 197 198 157 139
As % of PAT 8% 9% 14% 18%
Source: Company annual report, Edelweiss research

Kajaria’s managerial remuneration stood at INR198mn, 9% of PAT, versus Somany’s

INR139mn, 18% of PAT.

9 Edelweiss Securities Limited

Annual Report Analysis

Table 13: Other major related party transactions - Somany (INR mn)
Particulars FY16 FY17 FY18
Purchases of goods
Vidres India Ceramics Private Limited 144.3 571.7 410.0
Schablona India Limited - - 5.7
Shree Cement Limited - 2.4 3.4
Wolkem India Limited 1.6 1.6 1.2
Yogi Cerachem Private Limited 10.9 6.8 3.3
Ishiv India Solution Private Limited 14.8 54.3 18.4
Total 171.7 636.7 442.2
% of Total Purchases 1.7 9.0 6.3

Sales of Goods
Schablona India Limited - - 33.8
Biba Apparels Private Limted 3.6 2.4 0.7
Aashiana Housing Limited - 32.8 -

Total 3.6 35.2 34.6

% of Net Sales 0.0 0.2 0.2
Source: Company annual report, Edelweiss research

Other related party transactions include purchase of goods worth INR442mn, 7% of

purchases (FY17: INR637mn, 10%).

Other matters:

Kajaria:
 Fixed assets include display assets that are capitalised (FY18: INR78mn, FY17: INR77mn).
In FY18, INR66mn worth display assets were disposed of (FY17: INR11mn).
 The company has merged Kajaria Securities (KSPL; a promoter entity holding 40.5% in
Kajaria) in FY18. The difference between the net assets acquired and reserves of KSPL
that vested with the company has been debited to capital reserves.
Somany:

 Acquisition of non-controlling interest impacted networth by INR48mn in previous year

FY17.

10 Edelweiss Securities Limited

 Kajaria & Somany

Table 14: Summary financials (INR mn)

Kajaria Somany
Particulars FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Sales 18,363 21,869 24,135 25,496 27,106 12,648 15,431 17,116 17,309 17,127
Total income 18,382 21,941 24,239 25,650 27,214 12,678 15,508 17,207 17,480 17,308
Gross Margin 11,232 14,372 16,597 17,450 18,256 5,158 6,392 7,350 10,878 10,757
Gross margin % 61 66 69 68 67 41 41 43 63 63
EBITDA 2,858 3,541 4,564 4,963 4,564 814 1,076 1,429 2,337 1,858
EBITDA margin (%) 15.6 16.2 18.9 19.5 16.8 6.4 7.0 8.3 13.5 10.9
RoE (%) 27.9 28.3 26.4 23.5 18.6 15.3 19.3 14.2 20.9 13.3
RoCE (%) 33.3 34.9 34.4 32.4 26.0 17.5 21.0 22.0 23.1 15.2
Depreciation 470 559 726 814 885 224 266 283 313 413
Financial costs 415 294 345 340 241 185 205 225 390 399
Net profit 1,314 1,849 2,354 2,538 2,286 265 459 656 1,150 791
Equity shareholders' funds 5,295 7,409 9,719 11,751 13,510 2,235 2,580 4,282 5,242 5,807
Loan funds 2,364 2,434 2,937 2,132 1,703 1,710 1,921 2,443 4,973 5,399
Net fixed assets 6,916 8,601 11,205 11,773 11,451 2,405 2,638 3,805 5,274 6,482
CWIP 405 778 78 83 176 29 8 63 522 279
Current assets loans and advances 4,667 6,431 8,392 7,701 8,689 3,984 5,182 5,959 8,308 9,781
Current liabilities and provisions 3,461 4,970 5,726 4,564 4,378 2,989 3,589 3,805 3,932 4,979
Net current assets 1,206 1,461 2,667 3,138 4,312 995 1,594 2,154 4,376 4,802
Cash and cash equivalents 61 112 215 520 824 717 425 1,064 1,426 1,278
Net Debt 2,303 2,323 2,721 1,612 879 993 1,496 1,379 3,547 4,121
Cash flow from operating activities 1,661 1,803 3,156 3,377 2,383 738 248 596 1,172 1,109
Cash flow from investing activities (1,514) (2,630) (2,670) (1,397) (1,368) (1,039) (376) (1,919) (1,313) (1,104)
Cash flow from financing activities (131) 874 (387) (1,679) (720) 388 (64) 1,310 104 (96)
Net cash flows 17 47 99 301 295 88 (192) (13) (37) (91)
CAPEX 1,522 2,646 2,686 1,425 1,382 589 508 1,364 1,045 1,299
Working capital investments (154) (658) (534) (485) (1,009) 34 (648) (602) (730) (482)
Note: Figures are as per IND-AS post FY16 for Kajaria and post FY17 for Somany
Source: Company annual report, Edelweiss research

11 Edelweiss Securities Limited

 Annual Report Analysis

Summary financialsEdelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES
LIMITED, ou=HEAD RESEARCH,
Aditya Narain cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27
990f20bf0213f69235fc3f1bcd0fa1c300927

NARAIN
Head of Research 92c20, postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a
8e0c89e548e5001b4f8141cf423fd58c07b
aditya.narain@edelweissfin.com 02, st=Maharashtra
Date: 2018.09.25 21:29:15 +05'30'

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12 Edelweiss Securities Limited

 Kajaria & Somany
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