Cera Sanitaryware Ltd
NSE:CERA
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
6 630.15
10 420.45
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of Cera Sanitaryware Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Devrishi Singh of CDR India. Thank you, and over to you, Mr. Singh.
Thank you. Good morning, everyone, and thank you for joining us on the Earnings Conference Call for Cera Sanitaryware Limited for Q1 FY '23 Earnings, which were announced yesterday. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; and Mr. Rajesh B Shah, CFO and COO of Cera Sanitaryware. We will start with brief opening remarks from the management, following which we will open the call for Q&A.
A quick disclaimer before we begin. Some of the statements made in today's conference call may be forward-looking in nature, and a detailed note in this regard is contained in the result documents that have been shared with all of you earlier.
I would now turn the call over to Mr. Ayush Bagla for his opening remarks. Thank you, and over to you, sir.
Good morning, everyone. The earnings for the first quarter for the period ended 30th June 2022, was adopted by the Board of Directors yesterday, 4th August, 2022. The earnings documents have been released to the stock exchanges. During the quarter gone by, we continued to witness strong demand for our products as the overall replacement demand remains quite positive, with consumers continuing to spend on home upgradation and improvement. The velocity of sales in residential apartments continues to see good momentum with new project launches getting announced by many real estate players across most regions.
We are well positioned to monetize current and ongoing demand. We are positive that this scenario will lead to sustained new demand generation for Cera's products. At present, our manufacturing facility continues to function at high utilization levels. Capacity utilization for Q1 FY '23 for sanitaryware was at 109.53%, and we endeavor to operate the plant at similar levels all through FY '23. In faucetware, the capacity utilization was 102.65% during Q1 FY '23, and all efforts are on to maintain these capacity utilization levels.
As indicated in our previous earnings call, our average production at the faucetware plant was 1.8 lakh pieces per month, up to H1 of FY '22, which in March 2022 increased to an average of 2.5 lakh pieces. The current production in July 2022 is 3 lakh pieces, an all-time high, almost 67% over the previous year's numbers. This development has set new volume benchmarks, enabling us to sweat our existing assets more extensively and also allow us to cater to the increasing demand over the next 12 months.
The faucetware expansion program commenced in July 2022, and current indications are that the program will be completed in Q1 FY '23, and an enhanced capacity of another 1 lakh pieces, totaling last 4 lakh pieces per month will be available for in-house manufacturing. During the expansion phase no disruption to current manufacturing is envisaged and a comprehensive risk mitigation model has been implemented envisaging various scenarios to ensure that the market need for faucetware products are continuously met from the existing plant.
For fresh capacity for manufacturing in sanitaryware, the company has carried out extensive surveys of water, gas and labor availability for a greenfield facility. A few land parcels have been short-listed and the company is currently conducting due diligence for those land parcels. Since CapEx will commence post land acquisition, the detailed plan of the phase-wise capital expenditure will be made available in due course.
As on 30th June, 2022, our cash and cash equivalents stood at INR 566 crores against INR 433 crores in June 2021, registering an increase of 30.72%. Positive cash flow for this quarter is INR 49 crores. In FY '22, for the full year, positive cash flow was INR 164 crores. Therefore, going forward, internal accruals will be deployed to fund the 2 CapEx programs, and we also have the flexibility to use some part of the accumulated cash and cash equivalent, if required. I would like to reiterate that no debt raising or equity dilution is planned or required for the entire capacity expansion.
Q1 FY '23 also continued to witness a stable to slightly upward bias in prices of raw materials. To counter these cost pressures, the company undertook necessary price hikes in the month of May 2022. In sanitaryware, a price hike of 3% and in faucetware, a price hike of 5% was implemented in May 2022. Despite the external environment witnessing an increase in prices of inputs and raw materials, Cera has not witnessed a material impact during Q1 FY '23. On the sanitaryware side, key items like China clay, feldspar and plaster of Paris, which constitute more than 95% of sanitaryware's raw material mix had a combined impact of 2%.
In the sanitaryware business, within the glazing recipe, which constitutes less than 2% of sanitaryware's raw material mix, the key consequence of color and zinc have moved up 11% during Q1. Due to availability of gas from isolated well near our plant, the pricing of gas from Gail continues to remain below market and will do so in the future. Price has increased at INR 25.69 per cubic meter in June 2022, which was INR 13.26 per cubic meter in March 2020. In Q1 FY '23, Gail provided 49% of the gas requirement of the sanitaryware business. Sabarmati Gas, a JV of BPCL & GSPC's pricing went down from INR 75.01 per cubic meter in March '22 to INR 73.58 per cubic meter in June 2022, supplying 51% of the gas needs of the plant for Q1. Gas costs constituted 3.06% of Cera's top line.
There have also been price increases in some ancillary cost items like transportation cost at 2% to 3%. Cost of corrugated boxes has gone up by 6%. Our reliance on in-house renewable energy for over 2 decades has significantly benefited us, given that 65% of our electricity needs are met from in-house wind and solar power sources. As a result, we have been able to keep significant parts of our cost market stable. There has been significant innovation in marketing and sales, a retail engagement and loyalty program was launched, unlike any other in the building materials industry. In a span of 3 months, 11,500 plus retailers have adopted this platform. More than 5,000 plus or 40% of those retailers are regular users of the app-based software. Various artificial intelligence tools and algorithms are used to skull out meaningful insights from this program.
The company has rewarded retailers on a well thought out metrics of sales and profitability. The dealer distributor is also fully on board with this program as the retailer service by the dealer receives an incentive with no cost to the deal. There is full transparency in margins and discounts that a dealer offers the retailer. The company has access to valuable data, which is being monetized by mining to cross-sell and upsell. This is one unique step in Cera getting very close to the retailer, to the point-of-sale and to the ultimate consumer.
In that backdrop, we can go over the financials. Revenues from operations in Q1 FY '23 was INR 396 crores versus INR 223 crores in Q1 FY '22, an increase of 77.6%. EBITDA, excluding other income, was INR 62 crores in Q1 FY '23 versus INR 20 crores in Q1 FY '22, a growth of 210.6%. The EBITDA margin is higher by 660 basis points at 15.5% in Q1 FY '23 versus 8.9% in Q1 FY '22, therefore, margin expanded by 74%. PAT was INR 40 crores in Q1 FY '23 versus INR 13 crores in Q1 FY '22, an increase of 207% Y-o-Y. Earnings per share for Q1 FY '23 was INR 30.47 versus INR 9.93 in Q1 FY '22.
For Q1 FY '23, 54% of the top line was from sanitaryware, 35% from faucetware, tiles represented 10% and wellness 1%. On a Y-o-Y basis, sanitaryware revenues registered an increase of 89%. The faucetware revenues increased by 99%, tiles increased by 9% and wellness increased by 49%. The sanitaryware and faucetware verticals remain the bedrock of the business with the contribution of 89% to Cera's overall revenues. We continue to witness encouraging demand from newly launched products. During the last 3 years, the new product development program contributed close to 22% of revenues.
Inventory days in Q1 FY '23 was 72.76 days compared to 60.86 days in Q1 FY '22. Receivable days in Q1 FY '23 were 26.38 days versus 38.51 days. Payable days in Q1 FY '23 were 38.94 days against 29.11 days in Q1 of FY '22. Therefore, net working capital days in Q1 FY '23 was 60.20 days versus 70.37 days in Q1 of FY '20. After a fairly low CapEx last year, were against the CapEx budget of INR 17.19 crores for FY '22, the total CapEx spend was INR 11.12 crores. In the current year, the CapEx budget other than the faucetware and sanitaryware expansion programs is INR 24.7 crores, of which INR 7.7 crores is for sanitaryware automation, INR 6.4 crores is for faucetware automation, INR 6.6 crores for land and building, and INR 4 crores for logistics and IT. During Q1, INR 0.26 crores was spent on sanitaryware automation, INR 0.02 crores on faucetware automation, INR 0.01 crore on land and building and INR 0.03 crore on logistics and IT.
In conclusion, I would like to say that today, there are multiple industry tailwinds, which we believe would enable the sanitaryware and faucetware industries to maintain a steady and consistent growth. Cera's growth plan remains intact as we plan to expand its capacities and be at the forefront to capture this rising demand. After taking a few years to break the INR 1,250 crores to INR 1,350 crores top line band, in FY '22 Cera touched a top line of INR 1,446 crores. The impact on PAT and EBITDA margins was clearly visible. Going forward, Cera is set on a new top line trajectory, which is reflected in the Q1 numbers. Every decision made at Cera is from the shareholders' point of view with ROCE, payback period, impact on EPS, fully considered before being placed for deliberation before the Board of Directors.
The positive macro factor in our industry, coupled with the company's strong balance sheet, distribution channels, R&D capabilities, comprehensive offerings, high brand salience and other such strong [ grid strength ] of this 4-decade-old company could not only enable it to face any macro level uncertainties, but also continue to support its growth and its leadership position going forward.
I would now require our moderator to open up the line for Q&A. Thank you very much.
[Operator Instructions] The first question is from the line of [ Naysar Parikh from VTF Capital ].
Two questions. One is, can you talk a bit about your market share in both sanitaryware and faucetware and how that has been moving and how you see that going forward?
We would like to, but there is no third-party published data on market shares in both sanitaryware and faucetware, but I can give you some rough estimates. Cera has been for the last 4 years, the largest player in sanitaryware in the country, and our growth is, let's say, 25% higher than industry growth. And industry growth for the last 4, 5 years has been in high single digits. So if you take the mix of price and volume, you'll find that we are growing the theme. And going forward, that growth number will increase. In faucetware, we are the second largest player, but let's say the market is growing by 9%, 10%, and we are growing, let's say, 40%. Our share of incremental market share is 15%. So we are growing at 1.5x the growth in industry in faucetware.
Understood. Got it. And the second question was on -- in terms of your pricing and margins, right, you mentioned the 3%, 5% price hike that you've taken. So going forward, for this fiscal, are there any other projected price hikes? And with where the raw material prices are, what should we expect on the margin front going forward?
See the bulk of price hikes was also due to the ability of the market to bear these price hikes. So last year, we took 21% price hike in sanitaryware, 26% on that. On the back of that, 3% and 5% makes sanitaryware closer to 26%, 27% and faucetware closer to 31% in about 15 months. And you're seeing more dents on sales velocity. So you can see how strong the markets are, how strong the brand promise and brand recall and brand salience is. So our strategy towards price hike is very simple. There is -- in most cases, sanitaryware, very little push from raw materials. Sometimes there is a pressure on other costs like transport, gas, labor and packaging. So we take a very nimble and agile decision as and when the situation presents itself.
And in the past, there has never been any price roll banks. But you're seeing raw material prices cool off. So we do expect margin expansion on that front. As far as the next hike is concerned, earlier we used to reduce pricing twice a year. But last year, we reduced 3, 4 times a year. So we just be very nimble about it as and when there are changes in the market.
Got it. And just last question. What would be your mix between retail and projects?
Yes, B2C business is now 68% of sales. And this is a very important question because it takes 15 years to get there. So I'll just give you another example based on the question you have asked. 13, 14 years ago when large tariff companies entered sanitaryware and faucetware there was a threat. But to bulk up they immediately went the other way, they went the B2B way. And there is a lot of temptation to do that to bulk on your volumes. But the problem with that is, when you enter a business and start negotiating your pricing, it dilutes the brand so much you can never be a B2C player. Same thing is happening with newer entrants now in the temptation to bulk up and show some immediate benefit, they are all going the B2B way.
The next question is from the line of Saurabh Shroff from QRC Investment Advisors LLP.
Congratulations on a very strong show. You mentioned something interesting on the trajectory of faucetware, you've gone from 1.8 lakh pieces a month to 3 lakh and eventually 4 lakh. So if you could sort of maybe help us understand better what has led to this massive expansion? What steps has the company taken to be able to do this with very minimum CapEx?
And also, the second question, overall, sort of we look at, let's say, economy or [ market ], what is the sales mix across faucetware and sanitaryware and is there a shift and is there a benefit of sort of more premium products in the mix that has already happened as you anticipate happening, which should also help margins going forward?
So in faucetware the company was growing between 25% and 35% annually for the last 4, 5 years, we are the second largest player. And last year, we grew 37% to 40%, almost 4x the growth in industry. And there was some addition of talent in the faucetware manufacturing facility, SOPs were changed and some processes were changed, some automation projects, which were completed last year, helped in this increase from 1.8% to first 2.5% and now 3%. So with virtually close to 0 CapEx, this was achieved.
And I mean, there was a lot of question and answer for the last 7, 8 quarters, why aren't we expanding faucetware when the faucetware business is doing so well. And we kept saying that without really having to invest through money, there are other changes that can take place in the business, which will make the business even more profitable and that is exactly what has happened. With minimal CapEx we've achieved 3 lakh pieces per month. And now with just expenditure of INR 69 crores in the brownfield expansion, we'll go to INR 4 lakhs a month. So this is all, I think, outcome of managerial decision-making and trying to optimize and maximize every rupee spend, both on OpEx and CapEx.
The second question was on upselling. So I'll give you some data, which will add color to your question and also give you some initiatives that the company is taking. So same quarter last year, entry-level products were 40.5% of sales. And we've done a full reclassification of what is entry, what is mid, what is premium based on all the price hikes. So the base values have all been taken up dramatically. So what was considered mid last year is now entry, what was considered luxury last year, now mid. So from 40.5% of sales value, entry level in sanitaryware, it's 46.7%. In the mid category, last year, we had 49.9%, which is 43.1%. And in the premium category, we had 9.6%, which is 10.2%.
In faucetware, entry level was 59.5% last year, which is down 51.7%. Mid-level was 22.8%, which is now 30.4%, and premium was 17.6%, which is now 17.9%. So we are consistently taking the bar up on a blended basis for the overall company. Last year, entry level was 48.5%, which is now 48.8%. Mid-level was 38.5%, which is 37.8%; and premium was 13.0%, which is now 13.4%.
Okay. Got it, sir. And the initiatives that we are taking on the retailers, et cetera, one would imagine that all of that and the data analytics that you spoke about, that should eventually help us rise little more of a premium push as well over time?
So far, this industry has been dealing only with dealers or distributors. And there was across the industry and also for Cera, there was very little engagement directly with retailers and very little data collection of consumer behavior or retailer. So we also would rely on our sales team, which is on the ground in all the states, that was one, and a lot of feedback from the dealers. But we wanted to go one step beyond.
And now with AI tools and software-based apps available, we've rolled out a very large program, brought onboard 11,500 dealers. We are getting consumer behavior, point-of-sale behavior, the interplay between dealer discounts and margins and retailer discounts and margins, all of that data. So cross-selling is the obvious thing that we're having to do and we want to do, but upselling is going to be a huge scheme this year.
The next question is from the line of [ Sherly Jain ] from LIC Mutual Fund.
Sir, basically, I want to understand that over the longer term, what is the view for the company? Will we continue to be a bachelor player or we will also plan to get into other adjacent products like currently investigating, like the pipeware, you are getting into bathware and paints, the tile player, the wood panels and different plots. So what is your view on a longer-term basis? As we are making healthy cash flows, how do we plan to deploy it effectively?
Obviously, you would have heard that we are expanding the faucetware facility on a brownfield basis at a cost of INR 69 crores, and we have estimated that a greenfield facility for sanitaryware will cost INR 129 crores. So we see tremendous opportunities in sanitaryware and faucetware, going forward, not only in the short term, in the medium term. And there are significant advantages in profitability being the largest player in sanitaryware. And of course, taking our market share in faucetware after 37% to 40% growth.
No industry, even in building materials, is listing that kind of growth that Cera's faucetware listing. So there are tremendous opportunities available. And currently, there are no plans. And for other companies, of course, they are also profitable, they want to deploy the cash in newer businesses. But this is a temptation to start a new business and then become a B2B player, that is a very risky temptation. Because then you're always a marginal player with marginal profitability and the return metrics on capital deployed, it might get lost in the overall balance sheet. But on a stand-alone basis, is not more than single digit.
Sure. So but over the longer term, if we plan to go into another existing use, which are the products that we can get into which use the similar channel as we are currently having?
Currently, there are no plans. There is no discussion in front of the Board or even at a nascent stage. Currently, the discussion is maximize the throughput in your current manufacturing facilities and put up new capacity. See, there's another angle to this. Product life cycle is reducing. The industry average for new product development is 10% to 11% of sales, Cera's is 22% of sales. That is like entering a new business with incremental 11% of sales that Cera is getting is purely new business, which was not there. So managing a shorter product life cycle is a full-time department and a full-time understanding of the consumer, dealer, retail all of that. So currently there are no plans of entering any new businesses, not even at the nascent stage.
Sure. So got it. And sir, you talk on margins. So over the next 3, 4 years, our own capacities will improve and our top line will grow, I'm sure operating leverage benefit is seasoned. So where do you see our EBITDA margins in normal scenario 3 years down the line?
See, our steady-state EBITDA margin for the last many years has been 14%. That went up dramatically in Q4 and also for the year last year. So now on our diluted EBITDA has crossed, let's say, 15.5%, which was the number for last year. So going forward, you could see between 50 basis point to 75 basis point increase annually. And I'm saying this annually because in 40 months, the company will definitely double its FY '22 top line. So you can calculate the absolute impact it will have our numbers.
Sir, if we…
Sorry to interrupt sir. I would request you to please get back in the queue.
We'll move to the next question from the line of Pritesh Chheda from Lucky Investment.
Sir, just a clarification. We exited Anjani tiles in quarter 4, right. So the number that we see and the margin that we likely see, now is for Anjani tiles, is that correct because that portfolio of products was a lower margin?
Yes. See, over 6 years ago, the company took a decision never to have any tile manufacturing on its own balance sheet. So it took stakes in 2 ventures, one was Anjani Tiles and one was Milo, where our risk was restricted to our equity investment. So once Anjani put up the plant and it's become large enough and it's profitable and doing well, the company decided to exit its investment at the optimum time, at the peak of their performance of the last 4, 5 years, and that's what happened in August, September last year.
So when the agreement was signed, Ind-AS was followed. The turnover was consolidated in the first 3 quarters and in the fourth quarter, whatever amount was added was deducted. So you will see a note by the auditor in Q1. INR 5 crores has been deducted off from Q1 FY '22's turnover. So as to give investors and shareholders a like-to-like comparison between Q1 FY '22 and Q1 FY '23.
So now instead of consolidation, we will have a credit sales, right?
Now there is no consolidation with Anjani after last year. After…
And what is the margin impacts on it?
Yes, Anjani was making EBITDA of INR 5 crores, INR 6 crores for the year. And the top line Cera was consuming 70%, 80% of the products, so it was getting added to top line of Cera on a consolidated basis and a stand-alone basis.
Okay. Sir, my another question is, I missed your revenue target for FY '23, and you were mentioning that with this capacity expenses that you have lined up, what is the revenue -- you mentioned that the revenue will double, right, but over how many years?
40 months, 3.5 years.
3.5 years it will double and what is your revenue target for FY '23?
That we've been careful about giving forward-looking numbers for the year. Those who have built the financial model, if you put the Q1 numbers and you -- normally 22% of the annual top line in Q1. You will get the annual number.
Okay. And lastly, sir, if you could tell me again the sanitaryware and the faucetware revenues for the quarter, absolute revenue.
Yes, I'll give you that and I'll also give you one more data point that will help you about outsourcing. The absolute number in sanitaryware was INR 211.63 crores.
INR 211 crores.
Which is 53.56% of sales, out of which, outsourcing was 50.03%. Last year, the same outsourcing figure was 58.62%.
This time it is 53%?
Yes, because the -- 50 -- 50.03%. And it's a dramatic change because of the throughput increase -- for the year was 58.62%, last year for Q1, it was INR 55.21%, so a 10% change. In faucetware the absolute numbers for top line for Q1 FY '23 is INR 136.32 crores. That is 34.50% of sales, outsourcing is 54.80% -- this has been close to 54.55%.
Okay. And sir, lastly if you could give anything about the tiles revenues?
Yes. Tiles revenue for the quarter is 40.48%, which is 10.25% of sales. And this number last year was INR 37.2 crores, which was 16.73% of sales.
[Operator Instructions] The next question is from the line of Alisha Mahawla from Envision Capital.
Just taking forward the earlier participant's question. Sir, for the current year, for '23, our capacities are more than 100% utilized. So any kind of volume growth will only be by increasing the share of outsourcing?
Till fresh capacity comes on stream in faucetware...
Sir, please if you can just start with the answer again.
Right. Till fresh capacity comes on stream in faucetware, which will be Q1 of FY '24, there might be some increase in outsourcing. And similarly, in sanitaryware. So for the next 2 years, 2.5 years, they would be increasing outsourcing percentage, but that percentage doesn't tell you the entire story. There are a lot of SKUs, which the company was making and they may decide to outsource because the company wants to adopt the new development program and make those in-house, because those are too complicated for vendors to meet. So the company might decide to free up certain capacity to make new products.
So is this expected to have any negative impact on the margins as the share of outsourcing increases?
In fact, outsourcing partners and vendors have a dramatically lower cost base than the company, which is why they choose to make low-end products in large quantities. And for the company to buy and sell the margins are the same as own manufacturing.
Okay. And my second question is, a couple of quarters ago, you highlighted that for most players in this industry were facing challenges because they were importing from China and other countries? And hence, there was supply-side disruptions. Can you just share with us the latest update on the competitive intensity in this industry now?
Yes, please. I'll give you some background of what is happening in China. After the Chinese New Year, there are 2 clusters, the Chengdu cluster and the Henan cluster. In the Henan cluster, which is a much larger cluster due to frequent lockdowns, capacity are still between 60% and 70% operational. In the smaller cost cluster, the Chengdu cluster, there is more or less 90% availability. But again, the largest impediment to importing from China continues to be the container cost, which pre-COVID was $600, currently $6,400 in June. And one container of sanitaryware imports only contains $18,000 worth of sanitaryware products. So from a landed cost perspective, 1/3 of the landed cost is freight.
Alisha, do you have any further questions?
No, that's it.
The next question is from the line of [ Sudarshan Lal from Tenacity Investment ].
I note your comments on the margin thing that we should expect the 50 basis point to 75 basis point improvement every year. But like last year, our exit margins were 19%. So what should be the starting point, let's say, for FY '23? Should it be like -- I think on a TV interview you mentioned something between 17% to 19%. Is that the correct...
See, margins have been very susceptible to increases in top line. When you saw a significant jump in top line in Q4 last year, you saw a significant jump in EBITDA margins. And that is the trend going forward. As you see, slight changes in top line, you will see massive changes in EBITDA and PAT margins. And that happened not only for Q4 last year, it happened for the calendar year last year, the financial year and for Q1 of this year. So the steady state, which was 14% has already moved to 15.5%. And I'm talking about a increment of 50 basis to 75 basis annually on a full year basis on 15% to 15.5%. And the driver of that is 80-20 mix between variable costs and fixed costs. So fixed costs are increasing, maybe at a nominal rate of inflation and variable costs may increase, but it's completely linked to...
Sir, I understood, sir. I understood the operation wasn't paying out. All I'm trying to understand in the TV interview, I heard that margin guidance for FY '23 stands between 17% to 19%. Is that a correct...
We'll be careful about giving out any number for the full year FY '23.
The next question is from the line of Mithun Aswath from Kivah Advisors.
A couple of questions. One is on the kind of revenue growth we expect in the current year versus Q1 last year with a low base. Just wanted to understand how the market dynamics are faring? And do you see some robust growth this year as well? And number two, on your expansion plans, when do you think these will come on board? So these are the 2 questions that I had.
See over the last 30 months, last 30 months, which includes some part of pre-COVID, the industry was dealing with a shortage of products. So in sanitaryware, the industry size is very small, and that is why the 4 largest players command such as sizable market share, more than 60% plus combined market share is divided amongst 4 players and that has not changed for decades. And the size of the industry does not allow for external entrant to suddenly disrupt the industry. It does not allow us, it's not that big. That is one reason.
So dealing with shortage was something all 4 players were grappling with. Now at least I can speak for Cera. Cera has come out of that problem over the last 12 months to 15 months. There is no shortage of any sanitaryware or faucetware product, and that will remain for the foreseeable future. So our ability to monetize all the opportunities coming from the market that is going to be important and that is available. There are very strong tailwinds, both in the B2B and B2C business. We restrict our involvement in the B2B business, because we don't want to change this ratio too fast. After so much effort over the last 15 years, we've somehow reached 68% of sales as B2C sales. We don't want to change that ratio.
Second question was, when will we get access to product from an expanded capacity? So in faucetware we expect Q1 FY '24 to be the time where capacity expansion goes on stream. So our 3 lakh current production will become 4 lakh. And in sanitaryware it will take a little more time because once the 0 date is set, which will be set sometime in this calendar year once plant is acquired and permissions for water, gas and a few other regulatory permissions are obtained, since -- from the 0 date will be another 24 months to completion of the plant.
Right. And just one last one. On your raw materials -- not raw materials, on the energy costs because of natural gas going up, do you see -- have you taken any further price hikes in the last few months? Or are you planning anything? Just wanted...
Yes. In May of this year, which was part of the quarter, we took a price hike of 3% in sanitaryware and 5% in faucetware. But unlike tile companies, where some tile companies have an impact of INR 200 crores or INR 300 crores in changes in gas cost. In Cera's case, the impact is always between INR 5 crores and INR 10 crores annual in a rising gas cost environment. So gas is 3% of sales. It's very different metrics to be applied for Cera and other tile companies.
The next question is from the line of Archana Gude from IDBI Capital.
Ayush, congrats on a very decent set of numbers. So I had 2 questions. Firstly, like on the competitive intensity, so a very strong player in pipes has entered into bathware and the 2 tiles players have been very aggressive on increasing the sales from this segment. So is the demand at retail is strong enough to support the pricing and margins going forward, how we should look at the competitive intensity going forward? I know you have replied this even earlier, but what should give us the assurance that we should not be too much worried about Cera's growth, like how we delivered in the past?
We welcome any new entrant. The same topic was raised when the top 2 tile companies entered this business 12, 13 years ago, then a very large paints company, a giant entered this business 9 years ago. Again, the same question was asked. And the last mile between paints and sanitaryware is very different. And again, the last mile between tiles and sanitaryware is very different and tiles is a predominantly B2B business. A B2B player entering a B2C segment is almost like a new business, which has to phase all the challenges. You cannot just replicate the entire distribution model. Even the brand, the brand transferability is not that simple. So yes, you are seeing some tiles -- sorry, pipes companies are entering the business. If they come up with good designs, it will be good for the consumer. That's great.
But globally, we have not heard of any success stories of companies who have replicated a behind-the-wall strategy to front of the wall. We've not really heard of those success stories. And behind-the-wall strategy is selling through a plumber. Front-of-the-wall strategy is selling directly to the consumer based on aesthetics, design and functionality. So they are very different models.
Sure. Sure, Ayush. Ayush, I missed out on the number. What is the percent of tiles in total sales for Q1?
It is 10.25%, INR 40.48 crores, which translates into 10.25%.
And should we assume the same kind of run rate going ahead?
See, tiles, what we've done is, we've changed the complete product mix. So now triple fired tiles, then full body double charged. Now even GBP, the way prices of GBP has been declining, it is no more a premium tile. So I'll give you one example. Our double charged, which is now pretty much the most expensive tile that we are selling. Share of double charged has moved from 16% to 22% of sales. Share of soluble salt which is commoditized remains at 6% of sales. Share of wall tiles has moved from 26% to 30% of sales. Those are the initiatives. So without really going into a top line number, we are focusing totally on the bottom line number because it's a pure outsourced model, a trading business.
Sure. That's helpful. And lastly, Ayush, I guess many would like to know, what is the succession plan for Cera, who would be taking over from Mr. Vikram Somani as and when he retires.
I think the promoters have already made their intent clear that Deepshikha Khaitan is already Joint Managing Director. She's been on the Board for more than 10 years. She is running the business already for many years. So that is already an event that is behind us.
So Mrs. Deepshikha will be the next -- in the shoes of Mr. Vikram Somani?
No, that I'm not saying what will happen in the future. I'm saying succession plan can be analyzed from the intent and past actions.
Right. But if the management can give us slightly more clear guidance to us, that would be really helpful.
The promoter team is Mrs. Deepshikha Khaitan and Mr. Vikram Somani and they are running the business currently. And as Joint Managing Director, Mrs. Khaitan is running every aspect of the business for the last many years.
The next question is from the line of Deepak Lalwani from Unifi Capital.
So my question was on the volume growth. So if we compare our top line with pre-COVID levels, our sanitaryware has grown at 15%, faucetware at 25% and our tiles business has declined. So in this number, if you could spell out the volume growth which you have seen, that will be helpful.
See volume growth is important and without volume growth a business really can't grow, but there's a reason why we don't discuss SKU-wise growth simply because now the number of SKUs, I'll just give you the numbers. Total SKUs in sanitaryware are already 515. Intentionally, the company might decide to lower the sales of some SKUs and increase the sales of newer SKUs because the profitability metrics is completely different. In faucet, we are now 978 SKUs. So if we only restrict our discussion to volumes, it will not give a good lever on this new product development, because product life cycle has come down dramatically, and those who know the marble industry and they can take up the best reference is the marble industry where designs come in and out of fashion. So similar trends are now visible in faucetware and sanitary.
Okay. So if you could just give a ballpark range that will be useful, because it would help us ascertain the quality of growth and help us forecast better as well?
The best way to look at it is, let's say, the industry growth at 7% to 9% or 7% to 10%. And Cera faucetware will growth at almost 50% to 75% higher than industry growth. Half of that growth will be volume, half will be value. And sanitaryware will grow 25% above industry growth. Again, half of that will be pricing led and half will be volume led.
The next question is from the line of Akash Shah from UTI Mutual Fund.
Yes. Am I audible?
Yes, sir, you audible.
Yes. Ayush, congratulations on a good set of result. So on a 3-year CAGR basis from Q1 FY '20 to Q1 FY '23, what would be the price increase in sanitaryware and faucetware segment?
See, for last year, sanitaryware pricing went up by 21% and faucet by 26%, but last year was an extraordinary year. But normally you'll find that we have been a little ahead of the inflation curve. So if you look at right from 2015 to up to COVID, we just would review our pricing twice a year, every March and October and we would stay ahead of the inflation curve. So early...
Yes, sure. And sir, so if we look at on a year-on-year basis, stand-alone gross margin numbers. So our gross margins actually reduced from 55.8% in Q1 FY '22 to 53.7% in Q1 FY '23. So even though the product mix would have improved some bit and outsourcing portion would not have been not changed materially. So still, there was some pressure on gross margin. So will you please help us reconcile or maybe understand why this was so?
So inward freight, gas and labor, were the 3 variable costs that went up. So [indiscernible] you'll find that the fixed costs, which were 20% of costs more or less was stable. Amongst the 80% [indiscernible], there was a slight increase.
And if another price hike is to happen, it will come with a slight lag effect. Having taken so many price hikes in the last 15 months, we'll get to see because now bulk of the raw materials, including brass and many other raw materials are now declining. Even gas from Sabarmati has declined by INR 2.5. So in a declining RM environment, we'll wait to take any more price hikes, because there'll be a sufficient cushion. You are right, 55.78% has become 53.7%, but that's the impact of slight changes in the variable cost, which is part of the [indiscernible]. Sure. And going forward, maybe the price hikes that we have taken would help us come back to normalized gross margins?
See, normalized was always between 48% and 52%, because we saw 55%-plus last year and that has become a new bottom. But if you go back to last 8, 9 years, you'll see between 48% to 52% was the normalized gross margin.
Yes, sure. And just last bit on rural demand. So how is the demand situation in Tier 3, Tier 2 towns, because predominantly, I mean, our large town [ COGS ] sales comes from these towns. So if you can just help us understand. I mean, are there new smaller projects coming up? And is there a visibility over the next 3, 4 years that we will be able to drive sanitaryware and faucet sales in these towns?
See, Tier 3 and below are exactly where the meat of the market lies. So I'll give you some data to add color to your question. Export is 1% of sales this quarter. Tier 1 sales which are population centers about 25 lakhs is 30% of sales. Tier 2 cities, with population of between 10 and 25 lakhs is 13% of sales; and Tier 3 towns with population up to 10 lakhs is 56% of sales. So though our definition of T3 is very high, but that's where the meat of the market is. And bulk of the efforts, whether it's opening new showroom, new dealer engagement, appointing new dealers, creating infrastructure, sales team, all is directed in Tier 3 markets.
But at the same time, you saw share of Tier 1 go from 27% last year to 30% this year. And that's, again, the outcome of new product development programs and newer higher-end SKUs being launched by the company and being accepted by the marketplace.
Sure. So sorry, so are we seeing new projects coming up, just last thing?
Yes, the new projects in Tier 3 towns are self-funded projects, and they don't have multiple stage approval processes like we have in Bombay and other cities. So the life cycle of those projects is 6 months, 9 months, and they are not dependent on external bank funding, construction finance, et cetera. So this is much lower risk, and we are not dealing with those projects directly. Our dealers are as and when required, there's no negotiated pricing. There is no credit risk. So those are the pluses of those projects. And the velocity is very strong in those cities.
This was the last question for today. I now hand the conference over to management for closing comments.
Thank you. I would like to thank everyone for attending this call and for showing interest in Cera Sanitaryware Limited. Cera remains positive that its strong positioning in the industry, improving macros would help it deliver steady and consistent growth going forward. Should you need any further clarification or would like to know more about the company, please feel free to reach out to me or CDR India. Thank you once again for taking time to join the call and see you all next quarter.
Thank you very much, sir. On behalf of Cera Sanitaryware Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.