Somany Ceramics is an interesting company to evaluate against 15 point checklist of Philip Fisher.
The company has been growing amazingly at over 26% for last 5 years. This has been largely achieved by incorporating an asset light model, by outsourcing much of the manufacturing (50% of the turnover is from outsourced manufacturing). During the last couple of years, with the introduction of digital printing, the unorganized sector in ceramics has grown at a good pace. Somany compounded largely on it by getting into joint-ventures with these unorganized manufactures, and focusing on sales and branding. The detailed annual reports hint of a "fortunate and able" management.
Over the last few years the company has tried to enter into sanitary-wares too through their "Aquaware" brand. This has contributed little to the revenues and profits currently.
On the research front, the company received a patent for "VC Shield" in 2009. VC Shield has higher realizations and contributes over 100 crores in the revenues. Apart from this, the company has been enthusiastic about introducing latest machines, and pursuing licences and certifications. During the year the company as also filed another patent for slip resistant tiles.
While the revenues have been increasing, the concerning thing has been the decreasing margins. The margins have fallen from 10-12% till 2010 to current 7%. This has been primarily due to increase in raw-material costs.
From ICRA's report:
[The major concern is the] highly competitive nature of the tile industry marked by the presence of both large and organised players as well as numerous small scale tile manufacturers, centred largely around Morbi, which continue to operate with leaner cost structure. The company’s margins will be vulnerable to rise in input costs, especially power and gas.
The company is also the net foreign exchange spender. The last quarter results included MTM losses of 1.73 crores.
Overall, the company looks very interesting and will keep a close look on it.