Cera Sanitaryware Ltd

NSE:CERA

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Earnings Conference Call of Cera Sanitaryware Limited. [Operator Instructions]

I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, Mr. Vaswani.

[Mayank Vaswani]

Thank you, Rujuta. Good morning, everyone, and thank you for joining us on the earnings call to discuss Cera Sanitaryware Limited's Q4 and FY '22 earnings, which were announced yesterday. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; and Mr. Rajesh B. Shah, CFO and COO of Cera Sanitaryware. We will start the call with brief opening remarks from the management team, 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 would now turn the call over to Mr. Ayush Bagla for his opening remarks. Thank you.

[Ayush Bagla, executive]

Good morning, everyone. The earnings for the fourth quarter and 12 months for the period ended 31st March, 2022, adopted by the Board of Directors yesterday, 10th May, 2022. The earnings documents have been released to the stock exchanges. We witnessed continued strong demand, as the need for and trend towards home upgradation and home improvement persists. Accelerating real estate demand due to vectors like low mortgage rates, traction in residential unit sales, strong salary and hiring growth in the IT/ITES sector has combined to contribute to an all-time high sales velocity, and an all-time high top line and an all-time high bottom line.

For the fourth quarter of FY 2022, there are, in fact, 2 separate elements of impact that must be considered while evaluating revenue growth on a Y-o-Y basis. First, there is total income from operations from Anjani Tiles Limited, where definitive agreements to divest the stake was signed in Q3 FY '22. Anjani Tiles income from operations were included in the total income for the fourth quarter FY '21 on a line-by-line basis, contributing to a higher base effect and there is no corresponding income in the fourth quarter of FY '22 this year.

Second, due to the application of Accounting Standard 105, all income recognized in FY '22 on a year-to-date basis. up to the effective date of sale of our stake in Anjani, has been reversed in the fourth quarter. As a result, income from operations stands reduced by INR 52.48 crores in Q4 of FY 2021/2022 to reverse the income recognized in the first 3 quarters of the financial year. If IndAS 105 would not have been applied, consolidated revenues would have been INR 462 crores in Q4 FY '20 compared to INR 410 crores that has been reported in the financial statements that are available to all.

However, to enable an apple-to-apple comparison, I will provide all of you with revenues of the sanitaryware, faucetware verticals in Q4 this year compared to Q4 last year. At present, our manufacturing facility continues to function at high utilization levels. Capacity utilization for Q4 for sanitaryware was at 112%, and we endeavor to operate the plant at similar levels through FY '23. In faucetware, capacity utilization was at 117% during Q4 and further increases our ongoing in FY '23, even before the CapEx program commences. This has been achieved by productivity enhancement projects undertaken at the manufacturing plants.

The initiatives undertaking as part of the productivity enhancement programs at the faucetware facility include; number one, identifying and improving the net running time of machines. Number two, increasing the brass casting production by way of higher throughput. Number two, this has been achieved through development of higher cavity tools. Number three, extensive study and related modifications to reduce the machining cycle time of equipment at the machine shop. Number 4, increase in recovery of Zamac-plated handles, resulting in better raw materials to finished product yields. Number 5, increase in production of brass plating.

In addition to the above, we have introduced automatic peeling machines in the grinding and polishing section, which provides consistent contours, which are very crucial in high-end SKUs. All these initiatives have served to debottleneck the production lines at the shop floor. By aligning the capacities of various processes, we have been able to increase the overall production capacity of the existing plant and machinery. Importantly, all of the above-mentioned initiatives have been undertaken at minimal cost and well within the CapEx budget.

The average production at the faucetware plant was 1.8 lakh SKUs per month up to September 2021. That is H1 financial year '22, which has in March '22, increased to an average of 2.5 lakh SKUs. Production will be ramped up further to 2.75 lakh SKUs per month during FY '23, which will set newer volume benchmarks enabling us to sweat our existing assets more extensively. This will also enable us to cater to the increased demand over the next 12 months. The surge in demand for Cera's faucet wear continues. We are already the second largest player in faucetware, and our growth rate is much higher than the rate of growth of the market size. As a result, our incremental market share is 1.5x our current market share. To cater to the rising demand and volumes, there is a need to increase manufacturing capacity, a detailed capacity expansion program has been proposed to the Board of Directors on 10th May yesterday, and after our deliberation, the Board has approved the capital expenditure program for the faucetware business.

An expansion program has been approved, which will enhance capacity from 2.75 lakh SKUs per month to 4 lakh SKUs per month at a cost of INR 69 crores. Post commissioning of the added capacity, a review of market conditions demand and the performance of the business will be undertaken by the Board, after which further capacity enhancement will be considered. The capacity expansion would entail developing both horizontal and vertical physical infrastructure and the existing facility.

The existing floorplate of 10,900 square meters will become 30,300 square meters. The expansion would include construction of new grinding, polishing and casting departments, as well as warehouse. There will be minimal increase in fixed costs and manufacturing other than the capital costs, since the bulk of the costs are variable in nature. With debottlenecking of capacity and automation of processes, there will now be greater agility in the manufacturing setup, to respond to dynamic changes in market demands and type of product. There will be uniqueness in technologies, with increase in automation and use of low-pressure die casting.

We witnessed changes in the buying patterns of the consumer in the last few years, especially post-COVID. There is demand for color faucets, PVD, gold colored products and Z-Black painted products. The margin profile in each of these product categories are completely different than most chrome based products.

In addition to the benefit of higher capacity, there will be significant manpower cost savings, and there will be an increased share of large-sized SKUs and complicated SKUs. Expansion will cost INR 69 crores and will take 12 months from June '22 to June '23. Q2 Financial year '24 will be the full revenue of the first phase of the expanded faucetware capacity. There will be no impact on outsourcing, as the outsourced SKUs are low tech and low value. During the expansion phase, no disruption to current manufacturing is envisaged, and a comprehensive risk mitigation model has been implemented, envisaging various scenarios to ensure that market needs for faucetware products are continuously met from the existing plant.

For sanitaryware, the board deliberated on the need for additional capacity and passed a proposal for a greenfield manufacturing facility. The existing location does not have adequate surplus land for a meaningful expansion and a new greenfield plant within a radius of 100 kilometers from the current manufacturing plant is being planned. The size of the plant will be most likely 1 lakh SKUs per month, and it will deliver product in 24 to 30 months at a cost of INR 128 crores. The zero date will be firmed up after the purchase of land and approvals for construction and supply of gas.

During FY '23, out of the total plant cost of INR 128 crores, a budget of INR 25 crores has been estimated for purchase of land. Since CapEx will commence post land acquisition, detailed plans for the phase-wise capital expenditure will be made available. Post commissioning of the plant, there will be an extensive review of the market of demand and the possibility of another round of expansion at the sanitaryware facility.

Cash and cash equivalents as of 31st March '22 of INR 580 crores against INR 479 crores in March '21, an increase of 21%. Annual positive cash flow was in excess of INR 160 crores. So going forward, internal accruals will be used to fund the 2 CapEx programs, and we have the flexibility to use some part of the cash and cash equivalents, if required. No debt raising or equity dilution is planned or required for the entire capacity expense.

The quarter continued to witness an increase in prices of raw materials in line with the secular inflation trend prevailing across all industries. The company undertook necessary price hikes to remain ahead of cost pressures. In sanitaryware we undertook a price hike of 5% to 7% in February '21, 4% in August '21 and 10% in November '21. The compounded impact of all this increases, is 21%. In faucetware, the price hike was 8% to 10% in February '21, another 10% in August '21 and 5.5% in December '21. The compounded impact of all these price increases was 26%. Another price hike from May '22 for both sanitaryware and faucetware is under finalization.

Despite the external environment witnessing an increase in prices of input costs and raw materials, Cera has not seen a material impact in Q4 FY '22. On the sanitaryware side, key items like China clay, feldspar, and Plaster of Paris, which constitute more than 95% of sanitaryware's raw material mix had a combined impact of 6%. In the sanitaryware business, within the glazing recipe, which constitutes less than 1% of the sanitaryware's raw material mix, key constituents have moved 20% during Q4. Due to availability of gas from isolated well near our plants, the pricing of gas from GAIL continue to remain below market, and will do so in the future. Price has remained stable at INR 13.26 per cubic meter in March 2022, which was INR 13.25 per cubic meter in December 2021. In Q4, GAIL provided 44% of the gas requirement of the sanitaryware business.

Sabarmati, our second source of gas, which is a JV of BPCL and GSPC, the pricing went from INR 70.92 per cubic meter in December '21 to INR 75.01 per cubic meter in March '22, supplying 56% of the gas needs of the plant for Q4. The impact of Sabarmati Gas' price rise per month was INR 21 lakh, as and for the entire quarter was INR 63 lakhs. There have also been price increases in some ancillary cost items like transportation cost of 3%, cost of corrugated boxes have gone up by 15%. Our high reliance on renewable energy for over 2 decades has significantly benefited us, given that 70% of our energy requirements is made from wind and solar power sources. As a result, we have been able to keep significant parts of our cost basket stable.

In that backdrop, we can go over the financials. Revenues in Q4 FY '22 were INR 439 crores versus INR 431 crores in Q4 FY '21. EBITDA excluding other income was INR 82 crores in Q4 versus INR 63 crores in Q4 FY '21. The gross margin has improved at 53.47% in Q4 FY '22 against 47.20% in Q4 FY '21. The EBITDA margin is higher by 406 basis points at 18.7% in Q4 FY '22 versus 14.6% in Q4 FY '21, a growth of 30%. PAT was INR 52 crores in Q4 FY '22 versus INR 43 crores in Q4 FY '21, an increase of 20.9% Y-o-Y. EPS for Q4 was INR 40.04 versus INR 33.07 in Q4 FY 2021.

For Q4 FY '22, 54% of the top line was from sanitaryware, 33% from faucetware, tiles represented 11% and wellness 2%. On a Y-o-Y basis, sanitaryware revenues registered an increase of 13%, faucetware revenues increased by 11%, tiles decreased by 42% and wellness increased by 5%. The sanitaryware and faucetware verticals remained the backdrop of the business with contribution of 87% of our overall revenues. There has been a reduction in the revenues from tiles of INR 85 crores in Q4 FY '21 to INR 50 crores in the fourth quarter this year, along with the reversal of revenues from Anjani Tiles aggregating to INR 52 crores, these have served to optically deflate our revenue growth. If we compare revenues from the remaining business lines of sanitaryware, faucetware and wellness, these grew from INR 346 crores in Q4 FY '21 to INR 389 crores in Q4 FY '22 Y-o-Y, a growth of 12.43%. In comparison to Q3, FY '22 revenues from these 3 business lines grew by 12.10% on a Q-on-Q basis. This clearly indicates that the revenue momentum is intact, and we continue to witness encouraging demand for newly launched products.

During the last 3 years, the new product development program contributed close to 23% of revenues. Inventory days in Q4 FY '22 was 73 days compared to 52 days in Q4 FY '21. Receivable days in Q4 FY '22 were 35 days versus 53 days. Payable days in Q4 were 49 days against 52 days in Q4 of FY '21. Therefore, net working capital days in Q4 FY '22 were 59 days versus 53 days in Q4 of FY '21.

The company is at an inflection point, after having successfully broken the INR 1,250 crore top line barrier. It has achieved a top line of INR 1,442 crores, an increase of 20% Y-o-Y, whereas EBITDA excluding other income, has increased from INR 150 crores to INR 221 crores, an increase of 47% Y-o-Y. We have witnessed robust profit growth, as PAT has increased from INR 101 crores to INR 149 crores, an increase of 48%. The multiplier effect of INR 200 crores of additional sales is visible to all. So top line has increased by 20%, EBITDA has increased by 47%, and PAT has increased by 48%. We have indicated earlier that a high proportion of costs are variable in nature, and given the incremental increase in top line with limited rise in fixed costs, the delta and profitability has been sharp.

Annual EBITDA margin expansion from 12.48% to 15.38% has already taken place and going forward, we believe there is more to come. During FY '22 as markets were robust and receptive of our initiatives, we took a detailed look at all the shop floor SOPs and undertook many yield improvement initiatives. Those have borne meaningful outcomes in terms of margin expansion. After a fairly low CapEx year of '21-'22 during which we spent INR 11.12 crores against a CapEx budget of INR 17.19 crores, of which INR 6.12 crores was spent on sanitaryware automation; INR 1.99 crores was spent on faucetware automation and INR 3.01 crores on logistics and IT. Other than the 2 expansion projects of INR 69 crores for faucetware and INR 129 crores for sanitaryware totaling INR 197 crores, which the Board of Directors have approved yesterday, the CapEx for financial year '22-'23 is INR 24.6 crores, which will be divided amongst sanitaryware automation at INR 7.7 crores, faucetware automation at INR 6.4 crores, land and building at INR 6.6 crores and IT and logistics at INR 3.9 crores.

To conclude, I would like to mention that overall, the internal and external factors today bode well for Cera's future growth. We remain very enthusiastic and optimistic about the market opportunity. The efforts of the last 3, 4 years in new product development, productivity gains at the shop floor and deeper penetration of the brand, provides a superb opportunity to scale up the business and enhance all metrices of profitability. Given our strong positioning in the industry for over 4 decades now, we at Cera, continue to remain excited to make most out of the positive evolving opportunities in our business.

I would now request the moderator to open the line for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of [ Puneet Khanna ] from [ BOB Investment ].

[Unknown Analyst]

So I want to understand the breakdown of detail in project channel of sanitary and faucetware, that is my first question. The second is what is the next 2 to 3 years top line plan for the company overall? How the company is planning to grow in sanitary and faucetware?

[Ayush Bagla, executive]

See the project pipeline is very strong, and the project business is basically available for the taking, but we don't want that to become more than 30% or 33% of our overall top line, because the brand has been built to monetize maximum margins via the B2C sales. So B2C sales are at 67%, 68% currently. We want that near that -- between 68% and 72% number. It's very easy to increase project sales, and people have done it, including Cera has done it during the first periods of real estate, let's say between 2012 and 2016. But given the buoyancy in household demand, in home upgradation, there is a case to increase the D2C business. The project pipeline is very strong. We have built customers, whether it's in the public sector, private sector, the national developers, smaller developers, we have built these customers over 20 years, and we will retain these customers.

So bulk of it is national customers, repeat orders, that's the nature of the pipeline. And if you wanted to get a peep into the future top line, you see this trajectory that we have displayed this year, that is the best indicator. It is 1.5 to 2x the size of the market growth. Market might be growing at 7% to 11%. We don't have that number because we don't have a third-party authenticated data on market size or market growth. And we are growing at 1.5x to 2x that number. So that is the trajectory we are talking about now. So based on even a higher base of [ INR 1,464 crores ], we might look at 18% to 20% growth going forward over the next 3 years. So if you see our previous commentary, we used to say that the company doubles its top line every 5 years, and every 5 years, the PAT goes up by 2.5x. So now we are looking at the company doubling itself every 3.5 years.

[Unknown Analyst]

Understood. And one more area to take -- just a brief -- how much price increase you are planning in the current month?

[Ayush Bagla, executive]

The voice was not clear at all.

[Unknown Analyst]

So what I want to understand, how much price increase we are planning in May month?

[Ayush Bagla, executive]

That number will be out very soon. That's a decision that the sales and marketing team takes, but that circular will be out to the market, dealers, and all our channel partners within the next 10 days.

[Operator]

The next question is from the line of Hrishikesh Bhagat from Kotak Asset Management.

[Hrishikesh Bhagat, analyst]

Just want your sense, if I look at -- what is -- how much was the growth in sanitaryware and faucetware Y-o-Y basis in Q4?

[Ayush Bagla, executive]

In sanitaryware, just on a Q4 to Q4 comparison, the increase was 13% and in faucetware 11.3%.

[Hrishikesh Bhagat, analyst]

Okay. So I just made one clarification, sir. If I look at it, especially from the last multiple quarters' commentary, we have been fairly consistent, talking about competitors facing challenges, because they have imported these? And secondly, if you look at it, the price hikes in both this category, I could be wrong here, but it has been fairly low double digit, if I'm not wrong. Now if I do a reverse calculation and plus your commentary on the real estate has been fairly bullish, regarding good inquiries and everything. Now if I combine all these things, the implied volume growth looks hardly low single digit or rather decline also, if the price hikes have been probably mid-double digit also. So how should we look at this, in the sense, are we facing some challenge in gaining the incremental side, despite these tailwinds?

[Ayush Bagla, executive]

We had 12 months working, but effectively, we got 1.5 months, 15 days in January was not working. And the first month of the financial year, April '21 was also not working. So these numbers, you have to look at it in that respect...

[Hrishikesh Bhagat, analyst]

I'm talking specific about Q4. This has nothing to do with April -- specific to Q4?

[Ayush Bagla, executive]

Specific to Q4, 15 days of January was also -- the markets were not working. And as far as availability is concerned, you hit a very important point, availability over the last 2.5 years in sanitaryware, was a big issue. Now that issue, we did not face for the bulk of this year. The single reason for that was throughput at the factory increased dramatically. And that's also the reason you saw a slight buildup of inventory on 31st of March, which will, of course, get fully absorbed in Q1 of this financial year. But the throughput of the factory has really increased.

[Hrishikesh Bhagat, analyst]

Sir, but that doesn't explain why the volume was low. I'm trying to understand why the implied volume looks lower. I mean how should I reconfirm this fact that your double-digit price hikes, but revenue growth is also low double digit, then implied volume growth is hardly anything, if I look at it. So how do I reconcile this against your commentary of bullish real estate and supply chain disruption?

[Ayush Bagla, executive]

The best way to reconcile it is to look at the 12-month numbers. In Sanitarywares of INR 581 crores to INR 758 crores and in Faucetware from INR 339 crores to INR 477 crores, so increase of 41% in Faucetware and 30% in Sanitarywares.

[Operator]

The next question is from the line of Eshit Sheth from Anvil.

[Eshit Sheth;Anvil Wealth Management;Fund Manager, analyst]

I want to know your outlook on margins at what aims are you looking at for the margin for coming 3 years. That is my first question.

[Ayush Bagla, executive]

See the EBITDA margin, even without other income for the quarter hit 18.78%. Now this is a number that has never happened in the last 5, 6 years. And even though the year of 15.35% without other income, this is also a number which has not happened in the last 5, 6 years. So margin growth, we are on the trajectory of margin growth. Annually, 50 basis points to 75 basis points increase is definitely possible. And I'm giving a fairly conservative note.

[Eshit Sheth;Anvil Wealth Management;Fund Manager, analyst]

Okay. That's helpful, sir. And sir, when you said sanitary 65% of sales and 33% Faucetware. So growth, when you say 13% growth, is there more of value driven, right as they increased prices around 70% quarter. So sir, can you give outlook on volume also how a market share like other players.

[Ayush Bagla, executive]

See, the sanitaryware business and the sanitaryware industry is a very tiny industry. The industry size is very, very small, which is why the protective industry has got a bill more around it and especially companies like Cera, they have never had to operate outside that mode. So hanging on to your profitability by securing raw material, by making distributed availability of products across the country, those are the severe challenges. You should look at the overall numbers, 31% increase in sanitaryware sales, some of it is volume, some of it is value. It should be the trajectory that we use going forward.

[Operator]

Sorry to interrupt you Ms. Eshit, may I request you to please rejoin the queue. We have participants waiting.

[Operator Instructions] The next question is from the line of Suruchi Jain from Opportune Wealth Advisors Private Limited.