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Ladies and gentlemen, good day, and welcome to the Q2 FY '20 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. Mayank Vaswani of CDR India. Thank you, and over to you.
Thank you. Good morning, everyone, and thank you for joining us on the earnings conference call for Cera Sanitaryware Limited for the Q2 FY '23 earnings, which were announced on Monday.
We have with us today the management team comprising Mr. Ayush Bagla, executive Director; Mr. Rajesh B. Shah, CFO and COO; and Mr. Vikas Kothari, Deputy CFO of Cera Sanitaryware. We will begin the quarter brief opening remarks from the management, following which we shall open the low 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 the detailed note in this regard is contained with the earnings documents that have been shared with all of you earlier.
I will now turn the call over to Mr. Ayush Bagla for his opening remarks.
Good morning, everyone. The earnings for the second quarter and half year ended 30th September 2022, adopted by the Board of Directors on 7th November 2022, the earnings documents have been released to the stock exchanges.
At present, our manufacturing facility continues to function at high utilization levels. Capacity utilization for Q2 FY '23 for Sanitaryware was at 115%, and we endeavor to operate the plant at similar levels all through FY '23. In Faucetware, the capacity utilization was at 116% during Q2 FY '23 and all efforts are on to maintain these levels. As indicated in our previous earnings con call, our current production for September 2022 at the Faucetware plant has been 2.9 lakh pieces. In FY '21, it was 1.25 lakh pieces per month. In FY '22, it was 2.18 lakh pieces per month. The current production is a 132% increase over the production level of FY '21 and a 33% increase over FY '22. The Faucetware expansion program to take capacity to 4 lakh pieces per month commenced from July 2022. Requisite approval from the Gujarat Pollution Control Board was and. The enhanced production is scheduled to go on stream in July 2023.
The total cost of project is INR 69 crores to be funded entirely from annual operating cash flow. The cost breakup is; Building and civil work INR 37 crores, equipment and planned INR 24.75 crores, electrical substations INR 7.5 crores. The product mix planned is colored SKUs, water turn SKUs, PVD SKUs and a few more SKUs that can be taken in -- from outsourced partners. So far, not a single day of disruption of current manufacturing has taken place. The market has been continuously [indiscernible] products from the existing plant.
We expect to end FY '24 with an output of 4 lakh pieces per month. In April 2022, newer value-added SKUs in Faucetware were introduced at the National Media Meet. SKUs in 4 ranges and in 6 colors were introduced to the trade. These value-added products included black mesh finished faucets, red mesh finished faucets and other PVD products. An intensive range of rose gold, French gold, yellow gold products were part of the event. These new products are being gradually rolled out with a grand display at 100 dealers outlets. Over time, these new ranges will provide 319 SKUs.
The Sanitaryware plant is operating at a capacity utilization of 115%. This is the highest utilization in the past 10 years for Cera. If you look beyond the numbers, the capacity is very agile allowing shifting between outsourced SKUs and manufacturing SKUs, some of which may require shorter runs. Certain products, which used to be outsourced within India and from China are now taken in and are being manufactured in-house. The plant can, in a cost-effective way, manufacture short batches of SKUs whenever required. China imports in FY '21 were INR 57.2 crores or 4.76% of sales. In FY '22, China imports was INR 67.87 crores or 4.71% of sales. In H1 FY '23 China imports were INR 27.66 crores, only 3.41% of sales.
Cera was already one of the lowest users of products made in China and with availability of manufacturing infrastructure in-house, the percentage of Chinese imports to sales have been continuously declining. In the business, which is brand driven, the fulcrum of success is now completely manufacturing and plant efficiency. For best capacity for manufacturing sanitary, where the company has carried out extensive surveys of water, gas and labor availability for a greenfield facility. A few land parcels have been shortlisted and the company is currently in discussions for those land parcels. Since CapEx will commence post land acquisition, the detailed plans of the phase-wise capital expenditure will be made available.
So far, no binding or nonbinding documents have been signed for any land parcel. As of 30th September 2022, our cash and cash equivalents stood at INR 573 crores against INR 485 crores in September 2021 registering an increase of INR 88 crores or an 18% increase. Positive cash flow for Q2 FY '23 has been INR 50 crores as compared to INR 45 crores in Q2 FY '22. Therefore, going forward, only internal accruals are being used to fund the 2 CapEx programs.
And we would also retain the flexibility to use some part of the cash and cash equivalents, if required. I would like to reiterate that no debt raising or equity dilution is planned or required for both the capacity expansions. Q2 FY '23 also continued to witness stable raw material dividend and Sanitaryware and a downward bias in raw materials for Faucetware. During Q2 FY '23, no price hikes were undertaken. On the Sanitaryware business, key items like China clay, feldspar, plaster of paris, which constitute more than 95% of Sanitaryware's raw material mix had no impact. Within the glazing recipe, which constitutes less than 1% of Sanitaryware's raw material mix, the key consequence has moved down by 16% during Q2.
Due to the availability of gas from isolated wells near our plan, the pricing of gas from GAIL continues to remain below market and will do so in the future. Prices remained stable at INR 25.72 per cubic meter in September 2022, which was INR 25.69 per cubic meter in June 2022. In Q2 FY '23 GAIL provided 54% of the gas requirement of the Sanitaryware business. Sabarmati Gas, the JV of BPCL and GSPC pricing went from INR 73.58 per cubic meter in June 22 to INR 75.38 per cubic meter September 22. Sabarmati supplies 46% of the gas needs of the plant. Gas costs constituent is 3.12% of Cera's top line. There have been no changes in the price of ancillary cost items like transportation cost. The cost of corrugated boxes have remained stable. Our high reliance on renewable energy for over 2 decades has significantly benefited us given that 63% of our electricity needs are from wind and solar power sources. As a result, we have been able to keep significant parts of our cost base stable.
Also some further developments in the retailer loyalty program, which was launched by Cera in Q1 FY '23, which is now almost completed 6 months. More than 13 housing retailers have already used the retailer as these retailers form the bulk of Cera's distribution reach. We expect the total number of retailers to be around 15,000 plus who most likely will be part of this loyalty program by end FY '21. The feedback received from retailers has helped us in the understanding the consumer's changing demands geographical segmentation of SKUs and evolution of the rewards program to retailers. Besides standardizing invoices in H1, more than INR 145 crores of sales to retailers have become eligible to receive rewards through this program. Many below-the-line marketing activities such as displays at the point of sale are being driven by this program.
The company's ability to tweak trade practices, trade pricing and ability to steer the direction of the dealer and retailer equation have all undergone a sea change. We have also seen an improvement in multi-brand retailers who have undertaken various initiatives to sell Cera products. This ties in very well with our new product development. As product life cycle reduces, new product offerings at higher price points with dramatically new aesthetics and functionality are core to our top line and margin expansion. In H1 FY '21, 81 new products were introduced. In H1 FY '22, 3 new products were introduced. And in H1 FY '23, 59 new products have been introduced.
In that backdrop, we can go over the financials. Revenue from operations in Q2 FY '23 was INR 414 crores versus INR 393 crores in Q2 FY '22. EBITDA excluding other income, was INR 66 crores in Q2 FY '23 versus INR 58 crores in Q2 FY '22. The gross margin has improved at 56% in Q2 FY '23 against 51% in Q2 FY '22. The EBITDA margin is higher by 120 basis points at 15.9% in Q2 FY '23 versus 14.7% in Q2 FY '22, a growth of 14%. Profit after tax was INR 51 crores in Q2 FY '23 versus INR 42 crores in Q2 FY '22, an increase of 20.5%. EPS for Q2 FY '23 was 38.99% versus 32.36% in Q2 FY '22. For Q2 FY '23, 54% of the top line was from Sanitaryware, 34% from Faucetware, Tiles represented 10% and Wellness 2%. On a Y-o-Y basis, Sanitaryware revenues registered an increase of 10%, Faucetware revenues increased by 7%, Tiles decreased by 20% and Wellness increased by 10%. The Sanitaryware and Faucetware verticals remain the bedrock of our business with contribution of 88% to Cera's overall revenues.
We continue to witness encouraging demand for newly launched products. Products launched during the last 2 years contributed close to 24% of the revenues. Products launched during the last 3 years contributed to 36% of revenues. Inventory days in Q2 FY '23 were 81 days compared to 60 days in Q2 FY '22. Receivable days in Q2 FY '23 were 26 days versus 36 days last year. Payable days in Q2 FY '23 was 36 days against 35 days in Q2 of FY '22. Therefore, net working capital days in Q2 FY '23 was 71 days versus 61 days in Q2 FY '22.
After a fairly low CapEx last year as against the CapEx budget of INR 7.19 crores for FY '22, the total CapEx spend was INR 11.12 crores. In the current year, the CapEx budget other than the brownfield Faucetware expansion and the proposed greenfield Sanitaryware capacity expansion programs are INR 24.6 crores of which INR 7.7 crores is for Sanitaryware automation, INR 6.4 crores for Faucetware automation, INR 6.6 crores for land and building and INR 3.9 crores for logistics and IT. Cera's growth plan remains intact as it plans to expand capacities and to monetize rising demand. After taking a few years to break the INR 1,250 crores to INR 1,350 crore top line band, in FY '22, Cera touched the top line of INR 1,446 crores. We all saw the impact on EBITDA and PAT margins.
Going forward, Cera is on a new top line trajectory, which we can call witness in the Q1 and Q2 numbers. Every decision made at Cera is from the shareholders' point of view with ROCE payback period and impact on EPS fully considered before being placed for deliberation amongst the Board of Directors. The classification of sale in FY '22 was 42% in the premium category, 28% in the mid-category, 30% in the entry category.
In Q1 FY '23, the data classification had an error and should be read as 43% premium category, 30% mid category, 27% entry category. There is now standardization of classification based on price point and positioning of SKUs and therefore, the data for classification of sales in Q2 FY '23 is 43%, in the premium category, 30% in the mid category and 27% in the entry category. Cera has launched a new ad campaign with brand ambassador Kiara Advani and Vijay Devarkonda titled, This is your space, Play it your way. We have received very positive feedback on the campaign as the brand moves up the pricing and design pyramid.
I will now request the moderator to open up the line for Q&A. Thank you very much.
[Operator Instructions] We have a first question from the line of [ Disha Sheth ] from Anvil Research. Sorry, you are not audible. Can you speak louder, please?
Now Am I audible?
Yes.
Yes. Sir, top line has grown by 5% and the volume growth in Sanitaryware and Faucetware is upwards of 10% and 7%, respectively. So is there any price hike have you take? Or if you can throw some light?
So Disha, the company is now at a very crucial stage of metamorphosis. Normally, the number of new products and the new products we need to classify as the products launched in the last 3 years is to be around 22% to 24% of sales. This quarter is 36% of sales. So new products with complete change in aesthetics and functionality and therefore, at a much higher price point is the way to go. And we are the market leader. So we asked ourselves a question, who is looking out for the consumer, the leader has to guard the price. And with softer raw materials, softer cost base, there was no compulsion to increase the price, even though we have pricing power, the brand promise and brand sales are so strong, we could have taken a price rise in Q2, just like we had taken at the beginning of Q1.
But enough price rises were taken all through the last 15 months. So we believe for the short term, there is no compulsion to take a price rise. And in case our peer group takes a price rise, we will gain a tremendous market share. So these are some of the efforts being made to not only remain as a leader, but gain market share.
Okay. So we are not even planning to decrease it because of the market leadership.
No, decrease has never really happened in the past.
Okay. Because, sir, the sales are 5% with volume growth is 10% for Sanitaryware. So that's why the difference is because of the Wellness size degrowth. Is that -- my understanding, right?
No, the value growth in Sanitaryware is 10% and Faucetware 7%. And overall, the company's top line, if you add all the income, has grown 6.25%. So Tile, as you know, we have virtually no capital employed in that business. We have no fixed assets in that business. There is just a little bit of capital deployed in working capital. It's a pure trading business, and we retain the flexibility to keep changing our product mix to get to an optimum EBITDA number. So the gain for us in Tiles is not to be gain -- reach a certain number in top line, but to reach a certain EBITDA percentage number.
Okay. And also as a shareholder, we would like to see volume growth, but just stressing on that what you mentioned 10% and 7% is a mix of volume and price or only value growth, then what would be the volume growth?
It is truly value growth. And I take you the reason why I emphasized on that. See, right now, we are dealing with in Sanitaryware 518 SKUs, with almost 100 SKUs being added every year. So it is not difficult for a company like Cera to increase volumes by continuing to sell mid-level products. But as the company moves up the value chain, the pricing chain and design chain, volumes will not be the driver of growth. Value is the best way to look at the company. Again in Faucetware, you're dealing with 994 SKUs.
Okay. Sir, our volume growth this quarter would be how much then?
Again, the volume growth is not the way to look at the company.
Yes. Okay. Okay, sir. And sir, going forward, margin, if you can throw some light since you mentioned they are on the downward trend. And we do not plan to increase rise and keep it stable. So we can see our gross margin expansion and also EBITDA margin expenses. Am I understanding it right?
Yes, what we said was raw materials are not downward trend, especially brass. So ring, brass and faucetware, they have declined, and I can give you some details on that. In Sanitaryware, 95% of the RM is these 3 items: feldspar, China clay. So there has been no increase in Q2. In zinc, there has been a slight increase last year, but that's less than 1% of the RM market.
In the glaze recipe, there's a 10% increase last year and no increase in Q2. So overall, there was almost a reduction in the Sanitaryware basket. In Faucetware, the reduction was even more pronounced because zinc and brass bot declined -- sorry zamak and brass both declined. Brass declined from INR 545 to INR 495 per tonne. There was a saving of INR 3.82 crores in the quarter. And zamak 371 to 317 per tonne and the savings only in this quarter was INR 30 lakhs.
Okay. So we can expect gross margin expansion or it will restate even going forward?
Again, gross margin has already expanded. The 56% is an all-time high. And the way that has been achieved is not only through RM decrease, but sweating the assets more and making sure that the efficiencies have increased.
Okay. And sir, operating leverage must be also at the peak since we're setting it so nicely. So more leverage may not be possible because we're already running plus 100 capacity.
More leverage is possible because the SKUs at the bottom end will be continuously moved out to our vendors and higher-end SKUs. And some SKUs, which we used to import from China have also been taken in. The reason for import from China was not that we couldn't make it in-house, the reason was the quantities of those SKUs are very small. We didn't want to have short runs in the factory. But now the factory manufacturing capability is agile enough to allow for these short-term SKs.
Okay. Okay. And sir, your medium-term guidance for the sales growth if you can specify this.
So once we achieve INR 1,440 crores in March '22, we had said that we will double in 40 months, and that remains intact. And the best way to look at this is if you look at the H1 numbers. Now, normally, H1 is 45% of sales. So you'll have a pretty good estimate of FY '23 and then beyond. The numbers we are looking at is a dramatic, H1 is 30.52% over last year's H1.
Yes. Because of the lower base in Q1 FY '22 maybe because of COVID.
Correct.
We have a next question from the line of Pritesh Chheda from Lucky Investment Managers.
Sir, I wanted to know the asset turn on the CapEx of Faucetware of INR 70 crores. And what would be the CapEx in the greenfield Sanitaryware whenever you plan finally and what will be the assets turn?
Asset turn for Faucet will be higher simply because we're getting a lot of advantages of the current facility. There's no cost of land, et cetera. Cost of civil is also maybe half of what it would have been in a greenfield facility. So on INR 69 crores, asset turn will mean between 2 and 3 once it's commissioned. But a lot will depend on which SKUs are made. So this number can be reinvested once the plant has been operating for 6, 8 months, but current numbers based on what we plan on producing will be about between 2 and 3.
In Sanitaryware, we had identified the 2 land parcels, but we didn't reach a conclusive end of a binding or nonbinding document. So we are looking at a few more locations. Land prices in Gujarat have gone up, availability of labor, water and gas, all 4 factors confluencing has not been so easy. So that is why I mentioned that no document has been signed for any land so far. So we hope to complete something before March '23.
But what approximate CapEx in Sanitaryware would happen?
Land would cost INR 25 crores, and the overall plant we estimate right now will cost INR 129 crores.
An asset turn on this INR 150 crores?
Together, it's INR 129 million. So asset turns will be above 2. But again, it will be a function of which SKUs are made in a current manufacturing facility and which SKUs are the newer one.
So until this capacity comes, you have the scope of improving your product mix within your existing capacity, right, sourcing versus buying from outside?
That's right. And that is the reason you are seeing improvement in gross margins.
Okay. So if I have to look at your strategy incrementally on having slightly more premium products and also better utilizing our own asset by what to purchase and what to make in-house, the 15% margin that we see have actually a scope for an upside buyers and can improve as you double your revenue over the next 40 months?
Yes, we would be -- I would say we would be satisfied with the 50 to 75 bps annual increase in EBITDA margins in this journey. And that has already happened between '21 and '22, more than that has happened. Even currently, you're seeing more than that happens. So we will just say on an annualized basis, anything above 50 would be a very welcome development.
Okay. And sir, lastly, if you could give for H1 '23, what was the Sanitaryware, Faucetware, Tiles and Wellness revenues? And for quarter 2 also?
Yes, I can give you H1 number, INR 436.82 crores in Sanitaryware versus INR 315 crores last year in H1. Faucetware was INR 278 crores this year versus INR 201 crores last year. Wellness INR 14.46 crores versus INR 11.5 crores last year, Tile INR 79.21 crores versus INR 85.60 crores last year, that was H1. I'll give you Q2. Q2 Sanitaryware was INR 225.19 crores this year. versus INR 203.97 crores last year. Faucet was INR 141.76 crores this year versus INR 133.01 crores last year, Wellness 7.81 crores this year versus INR 7.11 crores last year, Tiles INR 38.72 crores versus INR 48.46 crores last year.
And any reason for a slightly slower growth, what we see this quarter?
Again, this is the outcome of a metamorphosis that the company is going through. You have seen the latest add campaigns. They completely repositioned Cera and consumer mind. We are now trying to compete both with MNCs with companies which import not only from China, but from Western European countries and also from our traditional peer group who are large sanitaryware players. So we will have already product approach the entire pricing pyramid. And the emphasis of the company is to make sure the share of premium items continues to increase.
You mentioned that H1 is 45% of the revenue, right?
Yes.
Okay. I was not convinced by the answer which you gave us slower growth of 7%. So was there a distribution change or anything because of which, was there product SKU realignment where you are slowly migrating to a premium SKU? That's the reason I couldn't actually comprehend the answer that you mentioned for slower growth.
See, we were always like higher growth and we would like industry-beating growth, but that has to be looked at in all -- from 360 degrees. You can't have growth with increasing receivable days. You can't have growth with suddenly expanding in a geography after spending INR 10 crores on loans. So being a listed company and a highly disciplined financial company, we take all those factors into account before making any moves in the market.
The name of the game is retain your core base, your core identity of SKUs and keep on launching new SKUs, so that share of new SKUs may not necessarily take place in volume, but tremendously in value. So I would only request you to look at one statistic that I read out, share of new products were always between 22% and 24% share of products launched in the last 3 years, but now they are at 36%. That is a tectonic shift in the company's functioning.
We have our next question from the line of Shrenik Bachhawat from LIC AMC.
So my first question is, as you have seen recently, pipe players like Astral and Price have entered the bathware segment. And these guys have strong distribution in Tier-2 and below markets, which is the core market for us, which is 80% of our revenue, right? And also, there is the overlap benefit they have, where the hardware stores would sell the pipes also sell the bathware products. We were reducing our focus on metros because of the competition of MNC, but do you see an increasing competitive intensity in the Tier-2 and below cities because of these pipe players coming in our business?
You're in the market, you know the numbers. The pipe companies have not really been able to achieve scale so far, maybe they make all the current moves going forward. The kind of pressure that the financial community has put on them, they are to become B2B suppliers. And transferability of our brand from behind the wall to front of the wall is very, very difficult. We are seeing that even tile companies with such strong financial muscle, distribution muscle have not been able to transfer the brand from Tiles to Sanitaryware and Faucetware the last 15 years. So transferability from a low-end product, which is completely commoditized to a high-end design and aesthetic-based product is not easy. And I mean I'm waiting to see more evidence on that. So far, there's no evidence that has been put in front of us, whether the consumer has accepted them or not accepted them. As far as Tier-3 is concerned, you see the census says all population centers above 1 lakh in Tier-1 town.
But our definition for easy understanding, we have set Tier-1 towns of population centers above 25 lakhs. And Tier-2 cities are between 10 lakh and 25 lakh and Tier-3 cities, we classify for discussion purposes only as population centers below 10 lakhs, which is a very broad range. Which is why you see that number. So currently, the number this quarter was [ 27%, 12% and 60% ]. And that 60% number if we were to further reduce the band from INR 10 lakhs to INR 5 lacks or even 2.5 lakhs, that number will get more evenly distributed between Tier-1 and Tier-2 cities.
Could you also see some light on the demand scenario in metros versus Tier-2 in cities, like is there any sharp gap or broadly similar?
I would say demand continues to be strong and most important is the B2C demand where interest rates are not a deciding factor. Unlike in the B2B demand and the new apartments offtake category where interest rates are, of course, one of the factors that determine velocity of sales. So our focus is completely on the B2C category, where the consumer is neither taking a loan nor is trying to time is home improvement with any kind of economic cycle. So that's our focus that remains strong in all categories.
And basically we're talking about sharp growth in our numbers, but where do you see a Tile segment? How should we as analysts look at the Tile segment? Is it just a side segment where we will not concentrate or how will we see that growth?
The Tile segment, in any case, for the last so many years, we derisked our balance sheet from the Tile segment. We participated in equities in 2 JVs. One we have exited, the other one is not currently working. But our total exposure to the JV is only INR 8 crores. So other than that, there are no assets on the books. It's a purely trading venture. Currently, the dies industry is going through a lot of upheaval and that you are seeing in the results of many tile companies. The upheaval is because there is tremendous overcapacity of tile players in Morbi and other places. There is no pricing power even with the brands, and there is no product differentiation between different players. So till that upheaval subsides, it's a very difficult call to try and increase your share of Tiles. And in any case, it's the lowest contributor to profits in Cera. So you are seeing that when tile was 17%, 18% of the P&L, the margins were much lower than what it is now when Tiles are 9% to 10% of the P&L. So the focus right now is to be a niche Tiles player, try and sell double charged, triple fired GVT, some walls, some paving tiles, a mixture of tiles, which are not fully commoditized.
We have a next question from the line of Rahul Agarwal from Incred Capital.
I have 3 questions. Firstly on CapEx. I understand the regular part of it, which is a INR 25 crores breakdown. On the Faucet side, INR 70 crores largely should be spent in this year, but I'm seeing first of INR 10 crores. Could you help me with time lines for Faucet expenses purely on cash CapEx, and then I'll come down to Sanitaryware.
Faucet is a total of INR 69 crores, and we started in June, July this year after requisite approvals were in place. So, so far, a very small portion of that INR 69 crores, the bulk of it has been spent in advances to plant and equipment manufacturers, technology suppliers and a little bit in civil works. So bulk of it will be more end loaded and you'll see bulk of it in Q3, Q4 and also Q1 and Q2 of FY '24, a total of INR 69 crores.
So by [indiscernible] by 2023 Faucet starts, so bulk of it should be done by April, May of 2023. Is that correct?
That's right.
So second half, obviously, will be CapEx-heavy on Faucet.
That's right. Out of the INR 69 crores.
Right. And on Sanitaryware, obviously, it's not finalized yet, but you expand INR 25 crores land which should happen by March and then bulk of the balance of [indiscernible] should come down in fiscal '24. Is that correct?
'24 and '25. It will be 18 to 24 months of CapEx post land acquisition.
2-year post land acquisition.
That's right.
Second question was on growth. So Sanitaryware plant obviously will come much later. Right now, you're fully utilized, the plant is fuller the second half. So the growth next year is taken care of from outsourcing. Is that understanding correct?
No, you see. If we look at our commentary from -- before COVID in Jan '19, even in March '19, we have said that the industry faces a problem of availability. And at that time, that message didn't find too much resonance because nobody -- no other listed players talks about availability problems. But we said the pace at which demand is growing, capacity across the board for the industry has not kept pace. And that is something we witnessed in the first half of the COVID period as well, not because of factory disruption, but demand completely excluded.
Now this is the first time this year that we have had no shortage of a single SKU in a single geography. And it has been our aim to keep on increasing inventory days just because there is no cost of carry. There is no cost of obsolescence. So it was an important objective to have achieved. And going forward, we will keep this 80 to 90 days inventory days. We will keep on outsourcing lower-end products to third-party vendors.
Incidentally, I just wanted to share with you that the cost of Indian vendors is 35% to 45% lower than Chinese imports even after container costs have come down from INR 6,000 per container to INR 1,500 per container in September. So Indian vendors and Indian outsourcing is a way to go and to keep freeing up infrastructure and capacity in the old plant to make newer SKUs.
Sir, the question is, next year, for Sanitaryware, if you, let's say you grow between 10% to 15%, how -- where does this growth come from? Because you're anyway at 115%, you will still be the same in second half. So do we go to like another 15% on that overcapacity utilization, that's how we should look at it?
We'll be making newer SKUs, which were launched last year and this year in our own plant, and our vendor will be making the traditional SKUs. But in rupee terms, you will not see an outsourcing increase. because the value increase in-house production will be much more disproportionately higher.
Okay. Now I get it. I get it. And lastly, on the other income, the first quarter was negative. That question was unanswered last time. Second quarter is INR 10 crores. What is really happening there? Why is the fluctuation?
Because we did -- as per IndAs, we did M2M valuations of all our mutual funds, which are all in safe instruments. So even GOI bond funds had fluctuations when the interest rate cycle in April and May spiked when they settled down. So this was all noncash charge. Even out of the INR 10.95 crores you see, INR 8.34 crores is M2M changes. Only INR 2.61 crores is actual cash flow.
Okay. I got it. Got it. And lastly, just to clarify on the CapEx. So about INR 25 crores in Sanitaryware land, above INR 35 crores in regular CapEx, that's INR 50 crores and another, let's say, INR 30 crores INR 40 crores on process, that's close to INR 90 crores this year. Then there will have another INR 20 crores regular next year and about INR 100 crores -- about, let's say, INR 70 crores, INR 80 crores of Sanitaryware. So that's another INR 100 crores. So about INR 100 crore average this year, next year CapEx is fine from a cash perspective?
Yes. That will be just half of our annual operating cash flow. So they most likely there will not be a need to depend to the treasury reserves.
We have our next question from the line of Akhil Parekh from Centrum Broking.
Ayush, my first question is on the mix in terms of in-house manufacturing versus outsourcing for this quarter and how it was in 2Q of FY '22, across the 2 categories, Sanitaryware and Faucetware.
The mix in terms of premium and...
No, the in-house manufacturing versus outsourcing you mentioned.
In-house in Q2 was 40% in Sanitaryware, outsourcing was 60%. In Faucetware, in-house was 48% and outsourcing was 54%. Versus last year, in-house in Sanitaryware was 41%, outsourcing was 59%. In Faucetware, in-house was 43% and outsourcing was 57%.
Okay. And what you just commented like previously, as this contribution from in-house will kind of go up mainly because of better product next year, FY '23.
That's right.
Okay. Okay. And second question is a general demand trend, right? There is mix reviews that we keep hearing in terms of the real estate market, given the interest rates are going up. If you can just qualitatively highlight how it is in a Tier-2 and Tier-3 market vis-a-vis premium markets or urban market basis?
We find no change in any demand trends. And maybe what you have heard is more Tiles driven because the tiles industry is going through once in a lifetime or once in 30, 40 years upheaval with too much overcapacity. And no product differentiation between the lowest end players and the brands who charge a higher price. So that really reduces the pricing power. Those are the reasons for the upheaval in Tiles rather than any demand-led upheaval. In Sanitaryware and Faucetware, we have not found any trends so far, which are different in Q1, Q2 or even in October.
Okay. Okay. Sure. And second question is on this Faucetware capacity, which we're going to commence. Like I mean this 4 lakh pieces per month. So that complete absorption will happen by end of FY '24 or probably by first half of '25?
So after July '23 when the plant starts producing those numbers, it might take a few months to reach that final INR 4 lakh per month destination but that will definitely happen during that financial year.
Okay. So '24 itself basically, end of '24 itself, we should see [indiscernible].
Yes.
Okay. And last question on the Tiles segment, we are kind of defocusing from this segment. And I believe this year, '23 will kind of be flattish vis-a-vis FY '22. So going ahead, should we anticipate this category to remain at that level or probably even decline, say, for FY '24 and '25?
First of all, the first filter we use is we don't want to deploy more capital in Tiles. That's the first filter. Second filter is we need a certain EBITDA percentage in every sale that we do. So that is only possible in high-end double charged and triple fired GBT. And that's where the concentration is. So we are not that focused on a certain top line to be achieved in Tiles. And Tiles have gone through a major upheaval and Cera has been completely spared of that upheaval. If we were a larger player, then we would have somewhere gotten finished like all other players have gotten finished.
Sure. Sure. This is helpful. Sorry. And one last piece, I missed the gas prices [indiscernible] for this quarter, how it was and how it was last year?
The cash number?
No, no. The gas price.
Okay. I'll just give you the gas prices. Average from GAIL which is about 56% of our consumption was INR 25.70. And from Sabarmati, which is 44%, 45%, was INR 74.87. Weighted average after considering the respective shares is INR 48.6, which is dramatically lower than anybody's average.
And how did it go last year in GAIL and Sabarmati?
GAIL last year I'll give you the number for the full year '21, '22. GAIL was 11.13%. Sabarmati was 59.46% and the weighted average was INR 32.93.
Okay. So from INR 32.9, it has gone up to INR 48.5.
Yes. So this INR 16 in Cera case works out to about INR 15 crores. The annual impact is INR 15 crores.
We have a next question from the line of Akash Shah from UTI Mutual Fund.
And I just had 2 questions. One, from Q2 FY '22 to Q2 FY '23, what would be the price growth that we would have taken in Sanitaryware and Faucetware segment.
I'll give you the breakup also of the price. After Q2 last year, in November was the first price hike of 10% in Sanitaryware, 5.5% in Faucetware. And then there was no price hike till May 2022, 3% in Sanitaryware and 5% in Faucetware. And both came with the lag effect because dealers rush to place orders when there's an announcement of price hike and some orders need to be fulfilled at the old price as well. So with a slight lag, there have been 2 price hikes between the 2 Q2s.
Yes. Understood. Ayush, so going forward, how should we think percentage contribution of Tiles would be to our overall top line? Would it be 10%, 15% of revenue? Or I mean -- or would it go to 20%, maybe 1 or 2 years down the line?
I would say any number between 8% and 12% would be a very comfortable number because that would make sure that our estimate of margin increase at the EBITDA level of 50 to 75 basis is maintained. And if the company adds between INR 350 crores to INR 400 crores of top line annually, so Tiles could be anything between INR 150 crores, INR 180 crores business.
Yes. Understood. And so we have around -- please correct me if I'm wrong. We have around INR 485 crores of cash as of September 2020. So any thoughts on how we are planning to utilize this cash because internal accruals would be able to fund the CapEx plan that we have. So any thoughts around that?
INR 485 crores was the number in September '21. In September '22, it's INR 573 crores. And in any case, last year, there was a special dividend on the 40th year of the company in addition to the regular dividend. So dividend is normally 17%, 18% of PAT last year, of course, the number instead of INR 20 crores was INR 46 crores. So let's see, based on the CapEx needs, the growth of the company, the working capital needs, the Board will decide on this year's dividend. Normally, the ratio of the last 6 years has been 17%, 18%. But other than that, growth is something that the company is more interested in rather than using the cash for any other purposes.
Yes, understood. And just one last question, if I can. So if I look at H1 FY '23, we have clocked around 55% -- 54.8% gross margins, which was higher than even H1 FY '19. So broadly, can we build this gross margin as a sustainable number going forward? Or this may once again mean 50% to 53% that we have seen in the past?
There are a lot of activities being carried on in the company. The trade margins are being negotiated wherever they can. The cost basket is being analyzed on a regular basis. The aim is to keep on increasing the gross margins, unless something volatile happens in the RM basket, labor basket or transport basket. We don't see the gross margin changing. Only one addition that I'd like to highlight to you is that the company has embarked on a new advertising and publicity campaign that will play out over the next 6 to 8 months and that will be an extensive campaign, but that will upgrade the brand tremendously, the benefits of which the company will get at least over the next 5, 6 years in higher sales. And the company is trying to increase its sales by 1.25x annually.
So this kind of brand upgradation and repositioning upwards, this was an exercise that was required, and you're seeing the benefits of that. So that is the only major change, but that will not influence COGS or gross margins that will come right at the selling and marketing expenses and other expenses side.
Yes. Sir, and just one last bookkeeping. Ad spend for the year for FY '23 would be how much percentage roughly?
Normally, they are 3.5%, 4%. This year, we could look at 5%, but that is subject to further discussion during Q3 and Q4.
We have the next question from the line of Udit Gajiwala from YES Securities.
Just broadly -- you have answered all the questions. Just one thing that for H2, we are aiming revising the number that you said that H1 is 45%. So if I just do a simple math, we are aiming for an 18% year-on-year growth in H2. So how much -- I know you don't would like to comment on the volume thing. But given that we are not looking at any price hikes, what gives us the confidence of achieving such?
See, price hike is not on the table at the current moment. So I mean, we're talking about early November. In the short term, there is no discussion on the price hike. In the medium term, which is end of Q3 or Q4 is too long a time period to talk about price hikes given the changes in RM mix that we see.
But the growth will come from new product introduction. And which is why we are not that focused or not that hung up on pure volume growth because we want to keep on increasing our share of premium products, where the margin profile, the brand image all come into play. And there are 3, 4 other things that have been done in the background. Cera's the only company which has not outsourced its aftersales service to third-party contractors. We are the only company which has faced a 10-year filling in Faucetware warranties. Our Faucetware comes with a 15-year warranty on the forged brass piece in the Faucet. So those are the things which have been done behind the scenes to make sure that our share of new products continue to grow and our market share growth.
Understood. Understood. So sir, would that imply that the dealer inventory would be at a normalized level or they are stocking up or what would be the on-ground scenario currently?
First of all, the company has to have inventory, and we have let to 99 -- 19 distributed warehouses, which have to carry so many SKUs. So if the company has inventory, then there will be availability to the dealers, which is a very important metric for the way we look at sales. We have achieved that over the last 12 months. After many years, we want to keep that intact.
The 80 days of inventory that you see does not include the dealer inventory. And dealers, they have access to just-in-time inventory, in most cases, 2, 3 hours away from them because it's the company depots and warehouses which stock a very large scale of inventory. For them to have a high need for inventory is not there because they -- once they raise once the company raises an invoice, the dealer has to pay. So for them, there is no need to have a high inventory.
We have a next question from the line of Akshay from Canara Robeco Mutual Fund.
My question was on the down-trading aspects. So how do you see that down trading happening in Sanitaryware and Faucetware going forward? Because at least in other categories, there are a lot of companies which are -- at least in the, say, building material, pavings or paint company or even a plywood company, so they are talking about a lot of turn trading happening. So wouldn't that happen in our case because at least last part of our focus is on the premium side. So I mean, how do you see that?
In fact, we are seeing trends which are contrary because the bulk of our new products like I explained in faucetware, PVD, black mat, French gold, yellow gold or water turns, all our premium category launches. Over time, they'll be 319 SKUs. And share of new products has been increasing. New products are primarily in the mid and premium segment. So new product development, brand repositioning, new ad campaign all have tied in very well together. So we are seeing exactly the opposite of the commentary many other companies have been providing. And there's one more reason for that, a lot of these companies are more focused on new home sales, which Cera is not.
I would now like to hand the conference over to management for closing comments. Over to you, sir.
Thank you. I would like to thank everyone for attending this call and for showing interest in Cera's Sanitaryware Limited. Cera remains positive and its strong positioning in the industry and 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.
Thank you. On behalf of Cera Sanitaryware Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.