Cera Sanitaryware Ltd

NSE:CERA

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the 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.

[Mayank Vaswani]

Thank you, Yashasvi. Good morning, everyone, and thank you for joining us on the earnings conference call for Cera Sanitaryware Limited, which is being hosted for the second quarter and first half of financial year 2025. The earnings of which were announced yesterday.

We have with us today the management team comprising Mr. Vikas Kothari, CFO; and Mr. Deepak Chaudhary, VP, Finance and Investor Relations. 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 results documents that have been shared with all of you earlier.

I will now turn the call over to the management for their opening remarks. Thank you.

[Deepak Chaudhary, executive]

Thank you, Mayank. Good morning, everyone. On behalf of the management team of Cera Sanitaryware Limited, I would like to welcome you to our earnings conference call. I will begin by sharing some updates on the operations and strategy, following which, our CFO; Mr. Vikas Kothari will run you through the key financial highlights.

Building on the challenges of the first quarter, Q2 FY '25 continued to face market pressures. It was further intensified by an extended monsoon season. Despite these headwinds, Cera recorded revenues from operations of INR 490 crores and profit after tax of INR 68 crores for quarter 2 FY '25, achieving a year-on-year growth of 6.3% and 19.7%, respectively.

EBITDA for the quarter was INR 88 crores, marking a marginal increase of 0.8%. These results underscore the resilience of our core business segments and our ability to adapt and perform in a complex environment.

Compared to Q1 FY '25, with gradual demand uptrend strengthens our optimism for a steady recovery as we progress into the second half of FY '25. In terms of segment contributions, Sanitaryware and Faucetware accounted for 46% and 41% of the total revenues, respectively.

We are optimistic about the continued recovery in demand in the second half of FY '25 and our ability to effectively leverage this momentum to drive growth. New product development across all segments accounted for 34% of total sales in this quarter. To adjust the impact of rising input costs, mainly brass prices, wherein prices increased by 18% between March and June, we implemented a strategic price adjustment in September 2024, applying that 6% increase for faucets and 1% increase for Sanitaryware.

These pricing adjustments are expected to help cushion our margins in the upcoming quarters, supporting our ability to increase profitability in a challenging cost environment.

We remain focused on gradually expanding our footprint in the luxury segment. The ongoing expansion of SKUs across our premium brands, Senator and Luxe, will enrich our presence in this market, catering to the increasing demand for high-value, design-centric bathroom solutions. As consumer preferences evolve towards luxury property and sophisticated fittings, we are enhancing our product range offerings, including innovations such as electronic toilets, touch-free flushing with [ light sense ], tankless sensor closets, et cetera, to meet these expectations.

While it may take some time for significant results to materialize, our strategic efforts have established a robust foundation for future growth, and we are confident of the long potential of our high-end offerings. Having said this, our flagship brand setup continues to perform well across key markets.

The expanded Faucetware capacity, which now stands at 4 lakh units per month is yielding positive results with utilization rates steadily improving. There remains a noteworthy opportunity in the growing Faucetware segment with demand further driven by a shorter replacement cycle compared to other categories.

We have seen subdued traction in the Sanitaryware segment in the recent months, but are confident that the pickup is around the corner, which will allow us to capitalize on strong growth potential of this segment. As a result, we are well placed across both Sanitaryware and Faucetware segments to capture growth opportunities.

Planned acquisition for Sanitaryware greenfield project has been completed. The construction of the new facility would be completed in 18 months from the zero date. It is not expected that expansion shall start in the current financial year, looking at the current market situation. The start date shall be revisited at the end of the current financial year.

With adequate inventory levels, we have optimized our production strategy to balance production and inventory, achieving Faucetware capacity utilization of 93% and Sanitaryware capacity utilization at 89% in Q2 FY '25. These initiatives will strengthen our ability to effectively meet anticipated demand, and we expect enhanced performance as the market continues to stabilize and grow.

Our planned CapEx for FY '25 stands at INR 25 crores, of which we have already deployed INR 11 crores by the H1 of FY '25. These investments are directed towards key operational enhancements, including upgrades to our Sanitaryware and Faucetware facilities, improvement to customer touch points and advancements in IT infrastructure.

This CapEx aligns with our strategy to drive operational efficiency and consistently deliver high-quality products. In terms of marketing, Cera continues to maintain strong visibility in the market. Our advertisement spends are on track with INR 16 crores allocated in Q2 FY '25 compared to INR 15 crores in Q2 of FY '24. This level of investment reinforces our brand's presence and supports our premiumization efforts, particularly in Tier 2 and Tier 3 towns, where we see growing demand. Since the launch of the retailer loyalty program, we have enrolled about 21,700 retailers with more than 3.6 lakh invoices recorded. This program has been instrumental in driving loyalty and supporting retail sales.

Of the total retail sales amounting INR 297 crores, 39% are eligible for loyalty rewards. We continue to see strong engagement with our loyalty program, which underpins our market position and foster stronger partnerships within the retail network.

As part of our strategic initiatives, we are also strengthening our B2B sales approach. B2B sales contributed 37% of Q2 revenue, demonstrating our selective focus on project sales that align with our profitability and margin growth. We believe that balancing our B2C and B2B sale channels while optimizing inventory levels enable us to effectively capture growth opportunities across various bright market segments.

During the quarter, we successfully completed the buyback of shares amounting to INR 130 crores. The buyback involved purchase of 108,333, fully paid up equity shares at INR 12,000 per share, effectively returning part of the surplus cash to shareholders.

This initiative, along with our consistent and steadily increasing dividend payments over the years, reinforces our commitment to delivering value to our shareholders, while uploading a robust financial foundation. Our business fundamentals remain strong, supported by 5 key pillars.

First, our operational excellence with advanced automated processes in our Sanitaryware and Faucetware facilities; second, our disciplined capital management, which has strengthened our financial position; third, our efficient operations, including just-in-time vendor arrangements, streamline inventory management and the focus on receivables.

Fourth, our strong distribution network built over many years, which ensures availability and accessibility of Cera products, enhancing our market reach and customer satisfaction.

Finally, our commitment to innovation drives continuous improvement in our product offerings, ensuring we need evolving customer needs and maintain a competitive edge in the market.

To summarize, Q2 FY '25 marked an encouraging period as we observed early signs of recovery within a relatively challenging macro-led environment, and we anticipate improved performance in the second half of this financial year. As we expect an uptick in the demand, Cera is poised to capitalize on the growth momentum.

The company remains committed to its strategic initiatives aimed at sustaining growth, enhancing brand visibility and strengthening its market presence. We are confident that our focus on innovation, advancement and financial prudence, coupled with our inherent strengths position us to effectively navigate any macroeconomic uncertainties and drive value for our stakeholders.

With this, I would like to hand over to Mr. Vikas Kothari, our CFO, who will present the operational and financial highlights for the quarter ended 30th September 2024. Thank you. And over to you, Mr. Vikas Kothari.

[Vikas Kothari, executive]

Thank you, Deepak. A very good morning to everyone. I will now provide a brief overview of the company's financial performance for the quarter and half year ended 30th September 2024. In Q2 FY '25, revenue from operations stood at INR 490 crores as against INR 461 crores in Q2 FY '24, registering an increase of 6.3%. EBITDA in Q2 FY '25 stood at INR 88 crores as against INR 87 crores in Q2 FY '24.

EBITDA margins for the current quarter stood at 17.3% as against 18.4% in Q2 FY '24, registering a decrease of 110 basis points. This decline in margin was mainly on account of increase in OpEx cost, which is partially offset by favorable absorption. Gas prices remained favorable during the quarter, the average gas price from GAIL was INR 28.46 per cubic meter in Q2 FY '25 as opposed to INR 28.72 per cubic meter in Q2 FY '24. The average gas price from Sabarmati, which rose to INR 53.89 per cubic meter in Q2 FY '25 from INR 44.53 per cubic meter in Q2 FY '24.

The positive trend is further supported by increased drawal of gas from GAIL, reaching 78% in Q2 FY '25 compared to 70% in Q2 FY '24. The weighted average cost of debt in Q2 FY '25 was INR 33.95 per cubic meter, which is notably below the industry average.

Gas cost constitutes 1.55% of the total revenue. For the quarter under review, revenue contributions were as follows: Sanitaryware at 46%, Faucetware at 41%, Tiles at 10% and Wellness at 3%. On a Y-o-Y basis, Faucetware revenue increased by 20%, Wellness by 38%, while Sanitaryware revenue decreased by 6% and Tiles by 11%.

The Sanitaryware and Faucetware segments remain the cornerstone of our business, contributed 87% of the total revenue. In Q2 FY '25, 41% of our sales were in premium category, 34% in mid category and 25% in entry-level category. Profit after tax was INR 68 crores in Q2 FY '25 as compared to INR 57 crores in Q2 FY '24, registering an increase of 19.3%. EPS for the quarter stood at INR 52.44 versus INR 43.74 in Q2 FY '24.

In terms of the working capital management, inventory days increased from 73 days to 80 days, receivable days increased from 29 days to 33 days and payable days decreased from 42 days to 41 days. Consequently, the net working capital days increased from 60 days to 72 days in Q2 FY '25.

Regarding the sales distribution, Tier 1 cities accounted for 34% of the total sales, Tier 2 cities, 21% and Tier 3 cities led with 45% of total sales. For H1 FY '25, the company reported net revenues INR 888 crores, consistent with H1 FY '24, EBITDA INR 160 crores, a decrease from INR 171 crores in H1 FY '24. Profit after tax INR 115 crores, a slight increase from INR 113 crores in H1 FY '24. Overall, the company maintained stable revenues and profit on Y-o-Y basis.

As on September 30, 2024, our cash and cash equivalents stood at INR 659 crores, marking a decrease of INR 92 crores or 12.3% compared to the previous corresponding quarter. This reduction was mainly on account of buyback offerings during the quarter.

In conclusion, I would like to emphasize that Cera is dedicated to upholding strong financial discipline and effectively managing our resources to drive profitability. Our focus on operational efficiency and strategic initiatives will ensure as we continue to strengthen our financial performance. With this, I would now request the moderator to open the line for Q&A. Thank you so much.

[Operator]

[Operator Instructions] We'll take our first question from the line of Jenish Karia from Antique Stockbroking.

[Jenish Karia, analyst]

So, firstly, while your commentary on premiumization is very encouraging. However, we cannot see that in your premium mix, which has fall down to 41% during the quarter and also in your gross margin. So considering the Faucetware segment, mix has improved to 41% compared to 36% in the last year. The gross margins do not reflect the similar performance. So any highlight on that why the gross margin is not reflecting the premiumization?

[Deepak Chaudhary, executive]

Yes, Jenish, in respect of the gross margin, like one thing, which we'd want to highlight is that the premium offerings as well as the entry levels both have been kind of stressed because of the market conditions. And in the last few quarters, if you see the amount of discounts that we have been offering that has gone up.

Now the encouraging trend, which has been happening in this particular quarter is that the discounts have started, we can say kind of, pulling back. We have reduced our discounts as opposed to the previous few quarters. We are at levels, which was there in the previous year.

So that is one positive trend which has happened that the discounts have come down. But simultaneously, especially in the Faucetware segment, the costs have gone up compared to the previous year, with the impact that the impact on the gross margins is not visible. The premiumization which you're talking about, that is something which will reverse over a period of time. But on a quarter-on-quarter basis, if you see, the larger impact comes in account of the discounts and the cost impact.

So we have been able to maintain margins in the kind of, you can say, the stress environment, which is prevailing right now. That has been primarily because of the kind of discounts, which we are able to pull back, which has been slightly hampered maybe extra cost increase which has happened from the last quarter -- from the last year's corresponding quarter.

[Jenish Karia, analyst]

Sure, sir. And sir, could you quantify the discount and reason for increase in other expenses on sequential and Y-o-Y business?

[Deepak Chaudhary, executive]

Discounts have come back to the previous level. If I compare on the like immediate preceding quarters, discounts have come down by something like, you can say, 1.25% to 1.5%.

And the cost increase is happening across all segments, like especially in Faucetware, brass prices have increased significantly. There have been increases on account of the inflationary impact also. Like salary costs, they go up on a regular basis on a yearly basis. There would be increasing on average by roughly 10.5% to 11%. So the gas costs have kind of remained stable. So we have been benefited by -- to that extent in respect of the gas cost. So the...

[Jenish Karia, analyst]

I was asking about other expenses.

[Deepak Chaudhary, executive]

Other expenses, it's mostly some expenses -- most of the expenses are unique in nature. Like most of them have happened in this particular quarter. I'll just give you a breakup of the major expenses which have led to the increase. One would be we have carried out the buyback during this particular quarter. So there were buyback expenses. That was to the region of INR 12.8 crores. The power generation costs have gone up. They've gone up by something like INR 4 crores. That has been mostly on account of reduced generation from our wind farm.

Normally, what happens is the wind farm which we have, that generates power. So we get a credit for that and our own power bill goes down. So in this particular quarter, the power generation was down because of which the fuel and power costs went up by INR 4 crores. There were some showrooms that we had closed because kind of -- we had to write off some assets in that respect. So loss in respect of that came to something like INR 1.15 crores, and rental increases was in the region of INR 1 crore. So that will kind of explain rough cut, I think, INR 7 crores to INR 8 crores of increase in the other expenses.

[Jenish Karia, analyst]

That's very helpful. Sir, next on the balance sheet, we did the INR 130 crore buyback. But if I look at the cash flow statement, it shows around INR 160 crores. So am I missing something? Or am I reading it wrong? Could you help me in that?

[Deepak Chaudhary, executive]

Right. INR 130 crores was the amount of buyback and you have to also pay tax on that separately. As of now, till October, if you're conducting a buyback in the period of October, before October, then the buyback tax liability was on the company itself. Now when we do a buyback next time, that tax lability will not be on the company, it will be on the person who is receiving the buyback money from the shareholder. That balance which you are seeing is on account of the taxation.

[Jenish Karia, analyst]

Perfect, sir. And last one thing. Do you want to revise your long-term guidance that you have given of INR 2,900 crores revenue? And the recovery that you mentioned in second half that you are seeing, is it majorly from the products business because our B2B mix also has been improving, the B2B sales mix. So that would be the last 2 questions from my end.

[Deepak Chaudhary, executive]

Regarding your first question, whether we are wanting to revise the guideline of INR 2,900 crores by March 2027. When we were making the projections, we had already factored in that the first 2 quarters of the current financial year would not be going as strong, and we foresee that with the kind of upswing, which should happen in H2, we should be ending the current year with kind of high single-digit growth kind of situation. And we foresee 30% plus kind of growth in the next 2 years. And that guidance, which we have given for INR 2,900 crores, as of now, we're going to continue with that. There's no change in respect of the INR 2,900 crores by March 2027.

Your second question was in respect of?

[Jenish Karia, analyst]

Sir, recovery that we are seeing is majorly from the project side of the business, Tier 1 cities and like that because our B2B sales mix has been increasing?

[Deepak Chaudhary, executive]

Correct. If you look at the total project business in the last 6 months from March to September, it has gone up by around about 15%. And we anticipate a strong project demand in the coming half year also. But we are anticipating that the pickup in the retail segment should also happen in H2, because most of the factors, which were -- there were specific factors which were operating in this first half year. There were elections, there were extended monsoon, there was kind of extreme heatwave. So we don't foresee that same thing should be happening in H2. And we anticipate that along with the projects, the retail business should also pick up.

[Jenish Karia, analyst]

Sir, if project mix is increasing, should our margin for this year be around 14%, 15% only? Or should we get back to 16%, 18%?

[Deepak Chaudhary, executive]

No. We should be having a margin in the range of 16%, 17%. Like we have done something like 14.3% in the current quarter. So with the price increase implemented in Faucetware, we anticipate that 6% increase happened in Faucetware, 1% in Sanitaryware. So the total impact in that respect in the second quarter rather than in the second half should be to the extent of 1.5%. And the increase in volumes, et cetera, will enable us to better lead to better absorption of fixed costs. So we should be back in that range of 16% to 17% in the coming H2.

[Jenish Karia, analyst]

Perfect, sir. And just one last thing. When you say we have -- we expect 20% growth in the next 2 years. Why don't we prepone our Sanitaryware capacity expansion and why wait till the end of the year?

[Deepak Chaudhary, executive]

The reason is that if you look at the current capacity utilization, we are something at 88%, 89% for Sanitaryware. We have -- we can take it up to something like 120%, which we have been doing in the recent past, like if you go back, let's say, by 1, 1.5 years, we were something like 115% to 120% capacity utilization [ while we're ] working on the Sanitaryware plant. So we have quite some legroom over there to increase capacities. Second, what has happened is the like reduction in the demand in the Sanitaryware segment. The mix has also changed within the Sanitaryware plant. Earlier, there were quite a few items which we were outsourcing, which have now with the kind of reduction in offtake and the increase in the inventory. We have changed from outsourced to in-house. So once the demand starts picking up, we have even scope for, again, changing all these products, which we've started manufacturing in-house to back to outsource.

So we have 2 like kind of space to increase our production. One is that we can increase our production by, you can say, from 89% to 115%, 116% should be earlier. And second, if we can again change the mix, the items that we have bought in-house can again be outsourced. Plus, we also have a kind of inventory, which we have built up over this period, which can also take care of any interim demand spikes, which can happen in between the time that we take up start and complete our Sanitaryware -- new Sanitaryware project. So in view of all these situations, we are holding up till the end of the year to take a view again and then start the project.

[Operator]

[Operator Instructions] Next question is from the line of Praveen Sahay from PL Capital.

[Praveen Sahay, analyst]

Sir, in your opening remarks, you had said about the expansion of product in the luxury and the premium segment. And whereas on the number side, if I look at for a quarter, at least, your other side of the business growing or the contribution has increased. So whatever the launch or the strategy change you are doing is going to impact or reflect in the coming quarters? So the first thing is that.

[Deepak Chaudhary, executive]

Yes. I just try to answer that in the kind of the demarcation that we do in our business, the luxury segment, which we talk about is something that we are trying to explore like we have mostly been in the entry level, mid-level and the premium segment. And the entry level is more where the multinationals are operating. So we have now started up a program where we want to, let's say, within the next 3 years to 5 years, we want to have a total turnover 10% at least coming from this luxury segment.

But this program is going to take some time. As of now, we are in the process of building and kind of revamping our total luxury portfolio. So as of now, we are in the process of revamping of the products. This, we anticipate, should be completed by the end of the current financial year, wherein we'll be having a total revamped portfolio and the formal launch of that should be coming by the end of the current year.

Next stage would be the kind of, you can say, placement of that particular product for which we'll be having kind of 50 [ banned ] stores, which will be kind of dealing exclusively with these products, only the luxury products, not kind of displaying high-end products, not mixing it with the regular products. So this we intend that by March, we should be having roughly 25 stores ready and balance 25 should be coming in within the next financial year.

So the luxury segment is a kind of long gone program, which will take some time, and it will be more or less a target of 3 to 5 years, as I said before, by which we are targeting. 10% of our revenues come from -- should come from this segment. And the balance, the effort is always there to try to be like introduce new products in the premium segment. And that movement is again a gradual affair.

We find that currently more of our offerings even within the entry range are more moving towards the higher price level. So that is something which was happening on a continuous basis, and we find that it will start reflecting in our results in a more phased manner, much sooner than as we expect for the luxury segment.

[Praveen Sahay, analyst]

The next question is related to the Faucet. And Faucet has given some 23% of growth on the Y-o-Y side. Also, you had said 6% increase in prices. So in the 23%, 6% is the prices, rest is the volume growth you had done?

[Deepak Chaudhary, executive]

No, no, no. This 6% which has happened, that will be happening more in the future. This price hike was announced by the middle of September. So the effect would be coming in the future period, in H2, but the impact again would not be 6% because what happens is the project business is something where the price increase takes some time to materialize because most of the businesses where the orders are already locked in and the effect of price increase would take some time to come in. So in the H2 on the basis of price increase, it will be to be -- you can expect in this more to the effect of 6% into, we can say, 60%. Rough cut 3.5% in Faucetware.

[Operator]

Praveen, sorry to interrupt. May I request you to join back the queue, please, as we have participants waiting in the queue.

[Operator Instructions] We'll take our next question from the line of Udit Gajiwala from Yes Securities.

[Udit Gajiwala, analyst]

Sir, on the Faucet that we have displayed the growth, I believe you have mentioned that project is one part, but otherwise, the retail was soft. So have the discounting been more to gain market share and we have pushed volumes? Was that a strategy for the quarter?

[Deepak Chaudhary, executive]

If you can repeat your question, please, like discounts?

[Udit Gajiwala, analyst]

For the Faucet, we have seen huge growth versus our peers have definitely underperformed as per their numbers. So have we given the discounts and initiatives that as per your remarks, you have rolled back, but during the quarter, was there a discounting thing or higher incentives given to push the volumes?

[Deepak Chaudhary, executive]

No, no, no. There has been no increase in discount in Faucetware. In fact, as I mentioned earlier, vis-a-vis the previous -- immediate previous quarter, the discounts have come down. So in Faucetware, we are seeing an actual increase in volume, both in the project as well as in the retail market that is primarily on account of the fact that what we believe that the project -- sorry, the retail business in Faucetware is benefiting because of the fact that it has a shorter replacement cycle as opposed to your Sanitaryware.

Also, because the total average cost of Faucetware is slightly -- is much lower as opposed to that of a Sanitaryware, whenever a discriminatory spending kind of goes down, you'll find that higher spending items are held back. And we feel that on account of that, the Sanitaryware market is not doing as well as Faucetware.

So Faucetware because of its shorter replacement as well as, you can say, lower kind of pricing as compared to Sanitaryware and other categories, they have been kind of having an upswing in the current quarter, both in the retail as well as projects. We anticipate that even going forward, Sanitaryware, which has been muted in the retail segment, should also start looking up. And coming in H2 or maybe in the next year, we should start seeing that be reflecting in the Sanitaryware segment also. To again summarize and answer your question, like there was no discounting in Faucetware. It was upswing in both the retail as well as the project B2B segment, upswing in the volumes.

[Udit Gajiwala, analyst]

Got it. And just secondly, when you look at your remarks stating that the 20% kind of a growth is possible for coming 2 years. So does that mean that we are in the cycle that with the pickup in handover of real estate, we may see Sanitaryware Faucet demand picking up? Or it's more to do with the new construction, if you can just throw some light there.

[Vikas Kothari, executive]

So regarding this point, for the growth, which is coming in the coming next few years, so when we prepared our guidance for reaching INR 2,900 crores by March '27, so we have taken a detailed inputs on the market rounds as well as from our internal team, and we form that considering this up to H1, there is going to be slowness and which is evident also and is seen in the competitions also.

We see that from H2, the things are getting improved -- will get improved and we will see upswing in retail segment also. Projects like Deepak told already, if we compare the previous 6 months data, there is an upswing already is there because post-COVID, whatever the projects which have started are going to be leading to their completion stage. And this will enable us to achieve our estimated growth, which is going to be 20% roughly in financial year '26 and '27 to reach out to our guidance what we have given.

[Operator]

We'll take our next question from the line of Mithun Aswath from Kivah Advisors.

[Mithun Aswath, analyst]

Yes. Sir, you mentioned that the second half is looing better. So I just wanted to get your thoughts in terms of do you think the Sanitaryware which has declined in this quarter, do you see a pickup happening there in the second half? And obviously, Faucetware is growing. So the full year, what sort of kind of overall growth would we end up with? Also, with this price hike you've taken in Faucetware, do you see margins improving quarter-on-quarter? You've taken some hike also on the Sanitaryware side. So just wanted your sense on would there be improvements in margins as well in the next 2 quarters? That was my first question. The second question is...

[Deepak Chaudhary, executive]

I'll take your first question first. Otherwise [indiscernible]. Regarding the overall growth, like Faucetware as well as the Sanitaryware, for the entire year, we are anticipating that we should be ending with kind of high single-digit kind of growth.

As I mentioned in my previous question, when we're answering the previous question, that the retail segment as of now in Sanitaryware has been not doing well. Faucet -- the project segment has already started showing some signs of improvement in the Sanitaryware segment. So we anticipate that the H2, going forward, once the retail market also picks up, we should be ending up with stronger volumes in Sanitaryware. Faucetware, we have already started showing good growth numbers. We expect that this should continue in H2 also.

So with the retail segment picking up, we should expect to end the entire year with high single-digit kind of a growth. In respect of margins, like we anticipate that we should be reaching back to that level of -- for the company as a whole, 16% to 17%, because price increase will be giving us some leeway in terms of improvement of the margins, but the cost pressures have also been there, costs have also increased. So on an overall basis, we anticipate that with the price increase, we should be having a benefit of 1.5%. So we should be ending up in the same range of 16% to 17% for the second half.

[Mithun Aswath, analyst]

16% to 17%, right, you mentioned?

[Deepak Chaudhary, executive]

Correct. Yes.

[Mithun Aswath, analyst]

Yes. And just wanted a better sense there is no capacity expansion, I think in Sanitaryware in the next couple of years, it's going to take 18 months to set up. So your INR 2,900 crore revenue target is not with this expansion, right?

[Deepak Chaudhary, executive]

That is correct because as I explained earlier, we have a lot of leeway within our current facility to increase capacity as well as the kind of inventory that we are having right now, plus the kind of outsourcing arrangement that we have with our partners. All these factors taken together, we feel we are comfortable with the kind of volume increases, which will happen over the next 2 years. So within the next 2 years, for reaching this INR 2,900 crores, we don't anticipate any capacity challenges with the current plan.

[Mithun Aswath, analyst]

Okay. Okay. So this new capacity of Sanitaryware would give you growth FY '28 onwards, right?

[Deepak Chaudhary, executive]

Correct. Correct.

[Mithun Aswath, analyst]

Got it. And what is that CapEx? And what sort of revenues can we achieve from that?

[Deepak Chaudhary, executive]

The CapEx, we are planning it in 2 phases. The first phase, the capacity increase would be something like [indiscernible] per annum. So for that, the capital expenditure would be in the region of INR 130 crores. And this is including the expenditure that we have already done for acquisition of land. That would be in the region of INR 25 crores to INR 30 crores. And the expected revenues from this expansion in Phase 1 should be the reason of INR 300 crores per annum.

[Operator]

We'll take our next question from the line of Prakash Kapadia from Spark PMS.

[Prakash Kapadia, analyst]

Just 1 question from my end. Earlier, there were some supply disruptions from China, one of our large competitors was hinting at. Currently, what's the scene? Have, as you know, supply disruptions been okay? Is it easy or difficult to import from China? Are costs going up, if you could give us some sense?

[Deepak Chaudhary, executive]

I can speak in respect of Cera. For Cera, we'll find that we have reduced our China imports to a great extent. Most of the items that we were importing earlier from China, we have been able to internalize and we have started manufacturing those items within our own plant.

The total Chinese import now constitutes only 3% of our total revenue. It is in the region of INR 13 crores only right now. So for us, it is not making any difference as to what is happening in China, we are mostly -- doing mostly from our plant or outsourcing from Morbi.

[Prakash Kapadia, analyst]

Okay. Okay. But in general, costs have gone up, are they same? Is it easy or difficult to import from China? Any trade sense you're getting?

[Deepak Chaudhary, executive]

Earlier, the main problem which has happened was the container rates had gone up to very high levels. They have now normalized. In between, there have been a few spikes because of the Red Sea and other item -- other disruptions which are happening across the world. But more or less, those problems which had occurred in between at that time have now been resolved.

[Prakash Kapadia, analyst]

Right, right. Understood. And you mentioned about your real estate delivery being the driver in the medium term. So typically, post-COVID, all of these projects were launched. And even now, we are seeing real estate buoyancy in terms of sales happening. So how does one get the trajectory in terms of your sales and the delivery sales or registration data? Because we've primarily focused on Tier 2, Tier 3 cities, and that's been a large part of our sales, and whatever we are reading, sensing about real estate sales, it's been pretty buoyant, but it's been very metro-specific also. So how do we try and relate the 2 in terms of our visibility? If you could give us some sense, that would be very helpful.

[Deepak Chaudhary, executive]

Like most of the sales which have been happening in the metro cities have been presales. Because our products are installed at the last stage, our sales -- the impact of that sales which have been happening in the buoyancy, which we have been seeing in the real estate will start reflecting when the projects start getting completed, they reach the completion stages. So typically, a real estate project would take 5 years to 6 years to reach the completion stage. So we can now anticipate that with -- post-COVID, the projects which are started sometime in 2021 should be getting completed by more or less next financial year, '25 to '26 or '26 to '27.

So the impact should start coming over there. You can see the kind of -- the break, which you are seeing, most of the figures have been reported in respect of metro cities. That is mostly because the figures reported and more in respect of larger builders. But the same buoyancy which is there in metros are also there in Tier 2 and Tier 3 cities, but they are not reported as much. So the same cycle, which we are seeing in metro is happening over there also. And over there also, we expect that coming years, next 2 years, the delivery should start happening.

[Prakash Kapadia, analyst]

And that would add and lead to the confidence to our sales trajectory growth because it's a large part of our business, Tier 2, Tier 3, right? That's the right way to look at it, right?

[Deepak Chaudhary, executive]

Correct. Correct.

[Operator]

We'll take our next question from the line of Naysar Parikh from Native Capital.

[Naysar Parikh, analyst]

So my question is that you spoke about Sanitaryware, Faucetware and why the demands are slightly different. Can you just talk also about offering similar lines of rural and urban? Earlier, there was a slowdown in rural, but recent FMCG commentary suggests that we could be seeing some uptick in rural, slowdown in urban and things like that. What are you seeing at your end?

[Deepak Chaudhary, executive]

For us, we have still not started seeing that upswing in the retail in the rural segment. So our sense would be it started happening slightly in the Faucetware, but it has not happened in the Sanitary. But going forward, we are hopeful that even the retail segment in the rural should start picking up. But to your question, as you said, this has started happening in the FMCG, do you see it in case of Sanitaryware and Faucet? Faucet, slightly, yes, but Sanitaryware still not visible, which should happen in the next H1 and the coming years.

[Naysar Parikh, analyst]

Okay. Understood. And you mentioned that H2 is slightly looking better. So just can you -- again, just based on the outlook on -- based on the sales that real estate sector is seeing and the kind of -- because the real estate obviously is doing very well. There is a lag for us, which is understandable. But still the lag seems to be rather long because on one side, real estate companies are showing such stellar numbers, but we are struggling. So is it raw materials? Is it competition? Or is it actually just end demand that -- which is not there?

[Deepak Chaudhary, executive]

So as you mentioned yourself, there's a long gestation period for real estate, so that most of the buoyancy which we are seeing right now is in respect of presales. So we should be seeing that translating into our numbers once we start reaching completion in the next, let's say, 2 to 3 years. So we have to wait for the [ JV ] to come out. We can't press it.

[Naysar Parikh, analyst]

Okay. Understood. And what about competition? Because especially in these kind of where you are seeing the demand is low, but a lot of peers who are in tiles and pipes, they are obviously setting up plants for Sanitaryware, Faucetware, et cetera. So the number of players in a small market relatively is obviously increasing drastically. And on the other side, some of the Italian players also being more aggressive. So how do you look at competition now in this environment?

[Deepak Chaudhary, executive]

We are not too concerned about the competition because, as you mentioned, like most of the other pipe companies, paint companies, et cetera, have also started with the Sanitaryware and Faucetware business. But we find that most of them are mostly outsourcing from Morbi and trying to sell within a very basic kind of [indiscernible]. So they are more in line with the unorganized market. And those are not the markets that we present or we want to enter. So we are not, as of now, too concerned with the new players which have started coming up. They are again -- why -- the question would be why they are coming in because they are, as of now, looking at the same real estate buoyancy which has been happening, and that is why they want to be present when the sales translation actually starts happening.

So we are already presenting with a very strong distribution network, with a very strong brand and the very strong promotional kind of spend which we do. So we do not anticipate that there will be too much of a challenge. Once the upswing happens, we'll be -- we are well positioned to capture the market.

[Naysar Parikh, analyst]

Okay. And do you think the upswing is still 1 or 2 years away, right?

[Deepak Chaudhary, executive]

Correct. Correct.

[Operator]

We'll take our next question from the line of Vinamra Hirawat from JM Financial.

[Vinamra Hirawat, analyst]

So sir, my question was on Faucetware and Sanitaryware. Firstly, you mentioned, of course, Faucetware is getting stronger orders from the B2B side. But any onetime sale in Faucetware that pushed up the number substantially this quarter? And could I also know the differences in margins between Sanitaryware and Faucetware?

[Deepak Chaudhary, executive]

It is -- there is no onetime kind of a thing which can push up the sales to certain extent. It is more, as I mentioned earlier also, that the project demand has been going strong. And in Faucetware, in this particular quarter, the retail demand has also picked up. So it is not on account of pickup, it is not on account of a single large bulk order, which we have received.

In respect of the margin, you'll find that there is a difference at the gross margin levels between the Sanitaryware and Faucet, mainly on account of the high input cost in case of Faucetware, which is brass. So -- but this margin is kind of made up in terms of the distribution logistic costs. Sanitaryware being kind of bulky items, the distribution cost is much higher, the logistic costs are much higher. In case of Faucetware, that is lower, which kind of offset the difference in the gross margins. So that at the EBITDA level, we are able to get the same margins more or less for both Sanitaryware as well as Faucet.

[Vinamra Hirawat, analyst]

Got it. Got it, sir. And sir, secondly, your interest cost as a percentage of debt has been increasing substantially for the past couple of years. Any color on this as to why the percentage is going up?

[Deepak Chaudhary, executive]

The interest cost has not really gone up. Interest cost in the sense that the interest on our borrowing has not gone up.

[Vinamra Hirawat, analyst]

Yes, yes. Interest as a percentage of the debt.

[Deepak Chaudhary, executive]

Coming to your part of your question, I'm just coming to that. It has not gone up. Why that interest finance cost has gone up, what we are looking at the profit and loss account on account of the fact that we make our accounts based on Ind AS. And as per Ind AS, whenever we do a long-term arrangement in respect of rentals, which we have been doing for our various showrooms that we have opened. And also mostly for our new warehouse that we have taken up, which became operational in Q2. So once it became operational, it's a long-term arrangement of 9 to 10 years, wherein the future rental payments are capitalized and then you need to provide for depreciation and interest on that. So what happens is the rentals don't come into the profit and loss account. Instead of that, the rentals go away and you have depreciation and interest coming in instead of the rentals. That is why because of this reason, you find both depreciation as well as the interest has gone up by roughly INR 50 lakhs, INR 60 lakhs on account of this reason alone.

[Vikas Kothari, executive]

It's a notional impact as per the Ind AS.

[Deepak Chaudhary, executive]

So it is kind of notional. It would have been coming as a rental under normal accounting, but instead of rental, it is coming as interest and your depreciation. Our total drawing CC limit is something like INR 100 crores, whereas we normally draw only to the extent of INR 15 crores to INR 20 crores. But that has remained static in the last few quarters. That has not changed.

[Vinamra Hirawat, analyst]

Okay. And this has also been the case 2, 3 years ago, like whenever you opened showrooms, warehouses, it was capitalized and was recorded in the finance cost. So that is what you guys used to do 2, 3 years ago as well?

[Deepak Chaudhary, executive]

See, we are a cash-rich company. We are having a huge amount of cash balances in our balance sheet. So there is no reason we would be taking up debt. So the interest, if it goes up can only be an amount of actual debt, which has been taken, which has not happened in our case. Only interest costs which you are seeing, which is going up is on account of this Ind AS effect only.

[Operator]

We'll take our next question from the line of Utkarsh Nopany from BOB Caps.

[Utkarsh Nopany, analyst]

Sir, my first question is regarding your revenue growth guidance, which you have given earlier. Like -- so if we see our revenue growth has been flat in the first half of FY '25. So are we looking to grow our revenue in mid-teens in the second half of FY '25 to clock high single-digit growth for this fiscal year?

[Deepak Chaudhary, executive]

That is correct. Like as I mentioned earlier, we should be ending the current year with higher single-digit growth.

[Utkarsh Nopany, analyst]

Okay. And sir, will -- on the APM gas, sir, just wanted to know, will there be any impact to us due to the change in APM gas allocation policy by the government?

[Vikas Kothari, executive]

No, I think as far as our arrangement is concerned, since we are having a mix of both GAIL and Sabarmati, so the impact Sabarmati is having, the gas prices which are more market driven, whereas from GAIL, we are getting at subsidized rate. So in our case, specifically in case of Cera, we do not see any sort of major impact. And secondly, the important thing is the drawers, which we are making from the subsidized source that is GAIL, that has also increased. It is ranging between 75% to 78% we draw from GAIL, that is making us more favorable in terms of gas prices.

[Deepak Chaudhary, executive]

So this 75% to 78% from GAIL is from localized wells. So that is an exclusive arrangement that the GAIL is having with a few companies within this particular Hatana area. So any other change that is happening will not affect our drawers from GAIL. That can only be supplied to the localized companies, which are already having that supply.

[Utkarsh Nopany, analyst]

Okay. So just wanted to know, sir, the share of GAIL gas is likely to remain stable at around, say, 75% to 78% going forward for us?

[Vikas Kothari, executive]

This is more of a stable pattern because what we see over the last, I would say, 1.5 years, we are drawing the similar quantum of gas from GAIL. So we do not see any major challenge in terms of drawing -- reaching out to the maximization of gas from GAIL.

[Utkarsh Nopany, analyst]

Okay. And sir, lastly, sir, like if you can just give some sense, what is your ad spend budget for the second half of FY '25? And if you can also provide your sales breakup by region-wise into North, South, East, West and Central?

[Vikas Kothari, executive]

So as far as spends are concerned. So despite of all these challenging headwinds, which are there in terms of market conditions and all, considering the publicity spend being the long-term measure, what we want to continue and what we want to showcase in terms of our different products, and especially now working on the luxury segment also.

So we have not compromised with respect to our publicity spends. So publicity spends for the quarter ended 30th September '24, it was around INR 15.5 crores versus previous corresponding quarter around INR 14.9 crores. So that is there. And what's your second question?

[Utkarsh Nopany, analyst]

Sir, sales breakup by region-wise into North, South, East, West and Central?

[Vikas Kothari, executive]

So as far as the breakup is concerned, for the Q2, North, it was around 33%, then West, it was 21%, South leading by 36% and East 9%.

[Operator]

Ladies and gentlemen, we'll take that as a last question for today. I now hand the conference over to management team for closing comments. Over to you, sir.

[Deepak Chaudhary, executive]

Thank you, everyone, for attending this call and for showing interest in Cera Sanitaryware Limited. 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. Thank you, and bye.

[Operator]

Thank you, sir. On behalf of Cera Sanitaryware Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.