Somany Ceramics Ltd

NSE:SOMANYCERA

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Somany Ceramics Limited Q2 FY '25 Earnings Conference Call hosted by SKP Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agrawal, Head Institutional Equities at SKP Securities. Thank you, and over to you, sir.

[Navin B. Agrawal]

Good afternoon, ladies and gentlemen. On behalf of Somany Ceramics Limited and SKP Securities, it's our pleasure to welcome you to this financial results conference call. We have with us, Mr. Abhishek Somany, MD and CEO; Mr. Shrivatsa Somany, Head Bathware; Mr. Sailesh Raj Kedawat, CFO; Mr. Kumar Sunit, Head, Strategy and IR. We'll have the opening remarks from Mr. Somany, followed by a Q&A session. Thank you, and over to you, Abhishek-ji.

[Abhishek Somany, executive]

Hi. Thank you very much. I hope I'm audible. Thank you, ladies and gentlemen, for the earnings call for Q2 and H1. As you must have seen, it's been a very muted H1 and a muted quarter. It's been weak domestic demand, which got impacted largely by lower exports, which means that, that material was being dumped into India and also incessant rains across the country between July, August and September. Exports to be precise, declined by 15% in H1 and declined by 40% from its peak of 2023 of INR 2,000 crores. And even if I take the average of last year, which was INR 16,500 crores to INR 17,000 crores (sic) [ INR 1,650 crores to INR 1,700 crores ] per month average, it is down to INR 1,280 crores in the month of August '24. Our sales, however, grew by 2.6% in Q2. The operating margin, nevertheless, remained the same as 8.5% in Q2 just like it was in Q1.

There was price pressure due to softer demand, which resulted in slightly more discounting at the end of the quarter. However, the product mix improved greatly in Q2. Therefore, we were able to mitigate the lower -- the higher discounting and maintained more or less the same average realization. The gross margin declined by 1.9% from 35.2% to 33.3% basically on the back of capacity utilization, the capacity utilization was down on a consol level by 4% from 81% in Q1 to 77%. This is one of the lowest we have been working at for some time now. And if you look at Y-o-Y, it had gone down by 11%. Last year same time, it was 88%. And now this time, it is 77%. Similarly, in the Bathware, capacity utilization was at 82%. However, the faucet was at 100% capacity utilization.

The other highlights are that the gas price largely remained the same in Q2 and the Bathware sales grew by 10%, which was better than the tiles growth of 2.6%. The product mix -- and the EBITDA at 8.5%, everything corresponding was lower in Q2. The tile segment, the ceramics went down by 2% from 36% to 34%. PBT went down from 30% to 28%, again by 2%. And this was all in favor of GVT, which went up from 34% to 38%. This is what the dynamics was. As far as the bathware mix is concerned, the bathware was at INR 38 crores for the bathware -- the sanitaryware segment and INR 32 crores for the bath fitting segment, up 9% and 12%, a total of 10% growth. The brand spend remained at the same level of 2%, and the guidance is that it will remain at 2.5%. Working capital days were maintained, 13 days in H1 as compared to 8 days in March '24. So we were kind of okay as far as the working days are concerned.

The debtor days, the inventory days and the creditor days. The debtor days stood at 45 days against 48 days in FY '24. Inventories were slightly up at 55 days compared to 49 days in FY '24. And the creditors were slightly lower at 76 than 79. So overall working capital days is 13 instead of 8. The total debt stood at INR 315 crores. 70% of that debt is in 2 names, which is Sudha Somany, which is our south plant, which expanded 15 months ago -- 18 months ago and the Max plant, which started 9 months ago. The total term loan is INR 200 crores, out of which we have a maturity of INR 40 crores this year. So the net would remain at INR 160 crores at the end of the year, and the working capital is at INR 115 crores. So very much under control on the consol level. And at the stand-alone level, we are a net debt-free company.

The Max plant is running at a 36% capacity utilization, as expected. We were expecting a 50% capacity utilization, is lower than their expectation to 36% because of the muted demand in quarter 2. But this year end, we are looking at a much better capacity utilization going forward because we are launching -- we're doing 2 more launches in this quarter and next quarter. So that should augment the capacity utilization of the Max plant. So other than that JV, which is still under losses, all the other JVs are performing better or at the same level as last year. We have made an investment for INR 3.7 crores in the solar SPV, which should give us a benefit of INR 1.5 crores to INR 2 crores. This is now pending government approval. Haryana Government approval with the -- as you know, the election was around the corner. So with this, this should -- permissions should come through and we should start getting these benefits very quickly.

Otherwise, material costs and fuel costs largely remain under control. The guidance for next year -- for the H2 is that we should be able to do a double-digit growth, high single-digit, low double-digit growth, which means that we should be able to conclude the year in the mid-single digits between the 5% and 6%, 6.5% growth. The EBITDA margins, obviously, for the current levels -- from the current levels will go up by 1%, 1.5% if we achieve that with the caveat being that there is no surprises on the gas pricing, especially from a geopolitical point of view and the branding remaining at 2.5%. So we should be able to improve the EBITDA by about 1% to 1.5%, which is basically in line with last year's EBITDA, considering that the growth is not as how we expected.

We are looking at a better H2 because all the festivities are over. October started at a decent note, so we're looking at a good Q3 and a decent H2. And next year, again, we're looking at a better year with the real estate segment doing fairly well and all the buildings would come under completion. And also, we are hoping that there would be a reversal in trend of the export where the freight rates should go down from the highs. They've already started going down, which means that there will be the reversal in the export. And a lot of the material, which is in India currently, would start getting exported. So these are the highlights from Q2. Overall, very optimistic, but not too happy with the Q2 results, especially due to rains and the lower export, which put pressure on the Indian volume and also the value, also the pricing. So over to you. Thank you very much.

[Operator]

[Operator Instructions] The first question is from the line of Sneha Talreja from Nuvama.

[Sneha Talreja, analyst]

Just a couple of questions from my end. Firstly, on the volume growth side, we have seen a slightly muted volume growth versus leader. Now this is second consecutive quarter where our volume growth is not aligning with the leader, generally, it used to be largely line. Firstly, we wanted to understand on that particular front. And then I'll just switch to my second question.

[Abhishek Somany, executive]

Yes. I think the volume growth, we have seen volume growth coming in certain companies, certain competition out of introducing a very low-end segment. So if I had to discount that particular low-end segment, I think we're in line for the larger part of the normal volume, which we've got. So we've not launched any new brand or any new lower segment, it's been normal volume growth. That's one. And number two, there are a couple of states, specifically one South state, where there has been lower-than-expected volume as far as we are concerned. The thirdly, the INR 30 crores, INR 35 crores, which was taken the previous year, which is still an effect this year in the first quarter where last year, we had a booster in the first quarter. So from that point of view, it's 1%, 1.5% lower. But largely, it is basically on the non-introduction of the lower priced or lower brand from our side. We have been business as usual. In fact, we are trying to premiumize the brand rather than go down on introducing a lower brand.

[Sneha Talreja, analyst]

Okay. Understood. That was helpful. And in fact, a related question that way, one of the reasons why you have maintained margins despite a lower operating level is because of your product mix. Could you quantify where does your product mix stand in Q2 this year versus last year Q2?

[Abhishek Somany, executive]

So we've had a pressure of about INR 4 a square meter in terms of discounting, in terms of average realization. All of that has got mitigated with the product mix. So the entire amount has got mitigated by the product mix and I did mention on the call, GVT is now 38% versus 34%.

[Sneha Talreja, analyst]

Understood. And lastly, based on your current performance and what you're looking at, any revision in guidance, both for the volumes as well as margins?

[Abhishek Somany, executive]

I missed you there, Sneha. Can you repeat, please?

[Sneha Talreja, analyst]

I was saying based on the muted volume growth that we've seen in H1 and probably your outlook ahead, is there any revised guidance that you stand for FY '25, both in terms of volumes as well as margins?

[Abhishek Somany, executive]

Yes, I think you missed my introductory comments. The guidance is that we should be able to manage a single digit, which is 5% to 6.5% volume growth, which means that we would be in the double digits -- high single digits, low double digits as far as the H2 is concerned. And as far as margin is concerned, we should be able to maintain last year margins, which means that it will be up by 1%, 1.5% EBITDA from the current levels. And this comes with the caveat that there should not be any other geopolitical issues, which will spike the gas price. As of now, gas price looks under complete control. So if that doesn't happen, then that's the guidance.

[Operator]

[Operator Instructions] Next question is from the line of Rohit from Samatva Investments.

[Rohit Suresh, analyst]

Sir, just my first question is, could you highlight how has the demand been in South India for the overall tile industry?

[Abhishek Somany, executive]

No, across the industry -- across the country, the demand has been muted. In fact, South is probably slightly more affected because the base was higher. But otherwise, I think it's across the country where we've seen a muted demand. The rains have been completely across the country and covers the entire country. So -- and also from a Morbi's perspective, which is the cluster which makes tiles, a lot of that gets into South market because it's easy for them to transport by sea. From the Kandla port, it goes directly into Kerala market, directly into Tamil Nadu market. So from that point of view, South gets the lion's share of Morbi produce other than the West. So overall, the demand has been muted.

[Operator]

[Operator Instructions] Next question is from the line of Vinamra Hirawat from JM Financial.

[Vinamra Hirawat, analyst]

Am I audible?

[Operator]

Yes, you are.

[Abhishek Somany, executive]

Yes, absolutely.

[Vinamra Hirawat, analyst]

So I want to know the split between metros, Tier 1, Tier 2, Tier 3 and lower cities. And I want to know like other consumer companies, is the slow growth more pronounced in the metro cities that you are in?

[Abhishek Somany, executive]

So you were a little not so audible, but let me reiterate. You asked what is our sales mix between Tier 1, Tier 2, Tier 3. And the second thing you asked was that is there a lower -- is there a slower growth in metro versus the rest. Is that right?

[Vinamra Hirawat, analyst]

Yes, yes, yes. That's right.

[Abhishek Somany, executive]

Okay, okay. Thank you. So our mix between Tier 1, Tier 2, Tier 3, 75% of our retail sales. Considering out of the total sales, approximately 75% we sell in retail, 25% we sell in project. So out of the retail sale, a large part of the retail sale, which is approximately 75% to 80% of the 75%, we are selling in the Tier 2, Tier 3, Tier 4 towns. And as far as the project sale is concerned, which is the balance 25%, project is divided 50-50 or maybe slightly more towards the metro. So most metros, which is Bangalore, Delhi, Bombay, Chennai. Most of these metros have become project markets. There are very little bungalows and IHBs, which is individual houses coming. These are more project markets and also replacement market. So I hope I'm answering -- able to answer the first question. I reiterate, 75% to 80% of our retail sale comes from Tier 2, Tier 3, Tier 4 towns and approximately 50% to 40% of our rest of the sale comes from Tier 2, Tier 3 towns and the balance amount comes from metros.

Your second question whether the metros have slowed down more or the Tier 2, 3, towns have slowed down more? I think I don't have an exact BI because everything has slowed down. It's the Tier 2, Tier 3, Tier 4 towns also which has slowed and metros, I don't have too many surprises on the metros because metros, I mentioned, is a builder market. And as far as the buildings are concerned in the metros, I've mentioned earlier in the call that we are an item which goes literally 3 months before delivery takes place for a consumer. That means it's largely builder-centric market, we will only come into action in the metro in the next half of the year. So metros, I don't have too many surprises. It is what it is. I hope I'm able to answer your question, sir.

[Vinamra Hirawat, analyst]

Yes, yes. Sir, I just had a question on the export scenario as well. Just firstly, with the freight rates coming down, how much have the exports picked up by in the month of October? And secondly, with regards to exports as well, is it that easy for exporters to dump in the domestic market because unlike Somany, they don't have a distribution network. They aren't spending on branding. So why is it so easy for their tiles to replace ours in retail sale?

[Abhishek Somany, executive]

Okay. I'll clarify that. So export figures, the peak was INR 2,000 crores, last year was INR 16,700 crores average -- sorry, INR 1,670 crores per month average, which totaled about INR 20,000 crores, INR 20,500 crores of last year. August figures, I have. The latest BI I have is of August, I don't have published data after that. August was INR 1,280 crores. I believe this has improved to about INR 1,350 crores is what of my information is from Morbi, but nothing beyond, which means that the exports this year will be anywhere between INR 14,000 crores to INR 15,000 crores annualized compared to INR 20,000 crores last year.

Your second question -- and is it improving? It will only improve when freight rates go down. And anyway, the season is kind of not there in November and December for most of the European and American markets because whatever had to leave the country has left. Christmas stocking has taken place. Now the next export for these markets will happen only in December, which will be reaching their port in January after Christmas. As far as your second question is concerned, you're absolutely right. So the problem is not of the volume which they're selling in India. In fact, if you see the domestic industry, the domestic sales is a negative growth. The industry has grown negatively. And the problem is not of volume. These guys because to run their cash flow, they are putting pressure on pricing. So when they put pressure on pricing, the trade inventory goes down because the trade is always unsure as to what the price would be next week.

So therefore, if you see, the trade inventory currently is not very high. And as a result, we have been forced to lower our capacity utilization from 81% to 77%. Normally, if the trade would have been more receptive, we would have been able to push some stock in the trade and make our capacity utilization slightly better. I don't think it would have had super-duper numbers, but it would have been definitely better than what it is now. So this is a vicious cycle where export not happening puts pressure on the pricing. Putting pressure on the pricing, the shopkeepers are very wary of what is going to happen next. Therefore, they are stocking less. Therefore, they're stocking the vanilla items, they're not stocking so much of the value-added items. And as a result, our capacity utilization has seen a down trend. I hope I've been able to answer.

[Vinamra Hirawat, analyst]

Yes, yes, got it sir. I think just one more question. You had stated that festive demand...

[Operator]

Vinamra, sorry to interrupt you, your voice is breaking. Can you please come at a good reception area?

[Vinamra Hirawat, analyst]

Is this better?

[Abhishek Somany, executive]

Yes, please.

[Vinamra Hirawat, analyst]

Yes. So you had stated that festive demand should bring pick in sales, October marks the start of the festive season. If we can have what kind of volume growth have we seen this month? Any indication on that?

[Abhishek Somany, executive]

So this month is better than it was the same time last year, 3 days are left of the month. But as I speak, as of today versus last year same date, it's slightly better. And if October being a Diwali month is better, there is a lot of green shoots, considering November and December are completely green months for us. Last year, mid-November was Diwali, we lost one week before, one week after.

[Operator]

[Operator Instructions] Next question is from the line of Keshav Lahoti from HDFC Securities.

[Keshav Lahoti, analyst]

Sir, what we understand, the industry leader is low on project sales and they have a big plan of 30% growth on this segment. So how should we see, like we already have a good presence, so it would be more like a 10% growth for Somany or do we have scope to grow at a faster rate of 20%, 30%?

[Abhishek Somany, executive]

I missed the first part. You were a little -- what were you saying, the industry leader what?

[Keshav Lahoti, analyst]

The industry leader talks about growing in project business by 30% year-on-year for this, and in fact, next year also, although their mix is lower in the entire revenue pie. So how would be that for you?

[Abhishek Somany, executive]

Yes. So I don't have the calculation, I can do that. But last year, we were at 80% retail. This year, we would be at 75% retail. So I don't have the growth, if that 5% goes up in project, which is between government and private project. So government also, I think the only people spending in the Indian industry right now are the government, so that is going up. And the -- with the RERA coming in, the better builders, we have started supplying more products to. So the mix is changing from an 80% project to 75% retail. So if I had to look at that 5% shift, the project would grow at about 25%, more or less, yes, so similar figures.

[Keshav Lahoti, analyst]

Understood. Got it. So you're talking about retail sales growth of 2% to 3% for this year, if I assume project will grow at such a fast pace. So how should we look, is it like the market is so weak or somewhere because of higher dumping by Morbi, the -- possibly the domestic players have to lose market share, the big industry players also?

[Abhishek Somany, executive]

The lion's share is projects and the lion's share of the value is coming off from retail.

[Keshav Lahoti, analyst]

So is it right to assume the retail industry just growing by 2% to 3% this year because that would be your growth rate for this year?

[Abhishek Somany, executive]

So not really because a lot of these builders are not directly buying from us. They also buy from the retail. So the smaller towns, most of the builders are buying from the retail.

[Keshav Lahoti, analyst]

Understood. Got it. One last question, Max plant capacity utilization is around 36% for both Q1 and Q2, right?

[Abhishek Somany, executive]

Yes, yes, yes. Correct.

[Keshav Lahoti, analyst]

So we haven't seen any ramp-up in Max. Ideally, Q2 is a better quarter and Max was a new plant. So ideally the ramp-up should be faster. So why is that so?

[Abhishek Somany, executive]

So exactly the point. If you -- I mentioned on my introductory comments that Max we were hoping that it would go to 50%. But two reasons: a, most of the products of Max are for projects. Decent amount goes into projects, which because of rains have been affected. Secondly, because the price have been volatile and also the market has been down, the dealers have bought more of the slightly lower added -- lower value-added material than the Max material. And therefore, we are about 12%, 13% lower than what we had expected for quarter 2. So very rightly said. But that should reverse in quarter 3 and 4.

[Keshav Lahoti, analyst]

Understood. Got it. One last question I'll ask. So is your project and retail margin similar or project would be lower?

[Abhishek Somany, executive]

Project is lower. Retail is obviously much better in terms of payment and in terms of margins, both.

[Keshav Lahoti, analyst]

Okay. So as your mix is changing more towards projects, so ideally, your margin will take a hit because of this. So what would that difference be?

[Abhishek Somany, executive]

No, no. The delta is only by 4%, 5% is changing. So out of that 4%, 5%, see government -- so let us say, 20% from project and 10% and 10%, 10% was -- actually, it was -- 7% or 8% was the private projects and government was 12%. So the lowest margins are from government. That is not changing very much, that -- it will go from 12% to maybe 13%, 14%. And the projects of -- the private projects will move from 7%, 8% to about 10%, totaling 25%. That business has slightly better margins than the government. So the government part is the delta is only 2%. We increase. And the private part anyway is slightly better realization. So it's not going to really take a large toll on the realization considering we are improving our value-add mix. We should be -- if we are able to pull off more volume, we will be probably in a better average realization this year than last year.

[Keshav Lahoti, analyst]

Okay. Got it. So just to follow-up on this. So the 10% margin guidance, which is there for FY '25, so normally if the 10% is for a company, how would your -- this private project margin look like?

[Abhishek Somany, executive]

I don't have offhand on that from an EBITDA perspective.

[Operator]

[Operator Instructions] Next follow-up question is from the line of Vinamra Hirawat from JM Financial.

[Vinamra Hirawat, analyst]

So sir, I understand we've had 2 issues this quarter: export dumping caused by lower -- which caused lower prices and heavy rains. The good thing is that they both can somewhat be classed as [indiscernible]. If you can just give us some numbers on these issues so we can understand what your growth would look like without them. Like how many retail days did you lose because of rains? How much lower were prices that the export players dumped in the domestic market? So just some more color into like numeric evidence of the 2 issues that caused weak demand this quarter.

[Abhishek Somany, executive]

I wouldn't be able to give you a number of days lost as per rains because that's state specific. But I do have numbers as far as what we have been pressurized in terms of the export dumping. We've had a 4% reduction in our average realization if I discount the mitigation by the product mix. So if there is a INR 4 decline in our asset realization apple-to-apple, that has been mitigated because we've been able to push slightly better product mix. So large part of it has got mitigated. So that has been the pressure. So let's say INR 4 has been the pressure. And even on the value-added, I'm looking at only mitigation, but there also there's been pressure. Had it not been pressure, probably the value-added also would have got sold at a slightly better price.

[Vinamra Hirawat, analyst]

Sir, how much lower are the prices that the export players are dumping in the market than our prices?

[Abhishek Somany, executive]

See export, most of these unbranded guys are exporting. So it's really not a yardstick or a benchmark. But the only problem is that they confuse the market, they confuse the dealers. The dealers feel that if this is going to happen, volumes are down, rains are there. Even the brand leaders might discount the product, which really didn't happen so much.

[Operator]

[Operator Instructions] Next question is from the line of Gunit Singh from Counter Cyclical PMS.

[Gunit Singh, analyst]

Sir, the guidance that you have given of about 6% to 7% growth in FY '25, I mean, I would like to understand what are the downside risks to it that you see? Is it a conservative guidance? Or is it optimistic from the management's point of view when you give such a guidance?

[Abhishek Somany, executive]

I would think that lower -- higher single digit is a fair guidance, looking at high single digit would be a good guidance. I wouldn't say it would be a stretch guidance by any stroke of imagination. I would say that was a good guidance and higher single digit would be a fair guidance. So any -- that's why I mentioned anywhere between 5% and 6.5%, considering that we are at approximately 0.6%, 0.7% growth currently in the H1.

[Gunit Singh, analyst]

So sir, what are the downside risks to this guidance? I mean, like you mentioned that monsoons as well as...?

[Abhishek Somany, executive]

Yes. So the downside risk is, let us say, it is lower than expected hypothetically. We're a net debt-free company. Our balance sheet is strong. Our cash flows are strong. Raw material prices are completely under check, namely, gas and also other raw material prices. So the downside risk is that we won't be able to increase our EBITDA from the 1% to 1.5%. It would probably be at the same EBITDA level. That's the downside risk. Fortunately, we're not a debt company. It's a net debt company. Even on the consol level, we don't have a large debt. So that's the only really downside risk. There is -- I don't see any other downside risk.

No other investments are taking place. All the investments have taken place. We've put in about INR 500 crores in the last 30, 35 months to put in with -- again, with completely good balance sheet. We are keeping our eye on our receivables. We're not extending or stretching on our receivables. So I don't really see any downside risk considering that there is no capital expenditure, raw material prices are stable. And it is what it is. That's why beyond a point, if the industry goes that way like every other building material industry, all I can assure you is that we will not be behind any other building material industry or behind competition.

[Operator]

[Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Somany for closing comments.

[Abhishek Somany, executive]

Thank you so much, everyone. Optimistic about Q3 and Q4. Like I said, October started well. So hopefully, things should be better. And we have a clean 5 months ahead of us with not too many festivities, which spoils the rhythm of the market. And I'm wishing every one of you a very happy and prosperous Diwali. Happy Diwali to all of you.

[Operator]

Thank you very much. On behalf of SKP Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.