Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Q3 FY '20 Earnings Conference Call of Cera Sanitaryware Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, sir.

Thank you, Margaret. Good morning, everyone, and thank you for joining us on the Q3 and 9-month FY '20 Earnings Conference Call of Cera Sanitaryware Limited. We have with us today the management team of Cera Sanitaryware comprising Mr. Ayush Bagla, Executive Director; and Mr. Rajesh B. Shah, CFO and COO of the company. We will begin the call with brief opening remarks from the management, following which we will have the forum open for an interactive Q&A session. Before we begin, I would like to state that some statements made in today's conference call may be forward-looking in nature and a disclaimer in this regard is available in the earnings documents that have been shared with all of you earlier. I would now hand over the floor to Mr. Ayush Bagla for his opening remarks.

Good morning, everyone, and thank you for taking time to join our call. The earnings for the third quarter and 9 months were adopted by the Board of Directors yesterday, February 5, 2020. The earnings documents have been released to the stock exchanges. I'm pleased to share that we have delivered a positive top line performance in the third quarter. During the current fiscal, we have continued our efforts towards more detailed product segmentation, widening our distribution network and enhancing our product portfolio. These initiatives have served us well. In addition to this, our steadfast focus on inventory and receivable management have continued to strengthen our balance sheet and operating cash flow. As a debt-free company with over INR 209 crores of cash in our balance sheet, we believe, we are insulated from the short-term impact of business cycles and are well positioned to take advantage of the economic upswing as it unfolds. More importantly, our financial strength allows us to continue to make investments in product development, network expansion as well as marketing and promotional activities, positioning us favorably to capitalize on an improvement in demand. For Q3 FY 2020, revenue for the quarter stood at INR 326 crores versus INR 323 crores in Q3 of '18-'19, registering a 1% Y-o-Y increase. For Q3 FY '20, 46% of the topline was from sanitaryware, 25% from faucetware, tiles represented 25% and wellness 4%. On a Y-o-Y basis, sanitaryware revenues registered a decline of 11.3%, faucetware revenues grew by 8.5%, tiles was higher by 22% and wellness grew by 11%. EBITDA, excluding other income for FY '20 quarter 3 was INR 43 crores versus INR 46 crores in Q3 of FY '19. The EBITDA margin stood at 13.36%, lower by 105 basis points. Profit after tax for Q3 FY '20 was INR 28.37 crores, largely stable compared to INR 28.36 crores posted in Q3 FY '19. EPS on a quarterly basis was INR 21.81 per share versus INR 21.80 per share on a Y-o-Y basis. Having completed the festive season and 9 months into the fiscal, the sanitaryware segment has been -- has seen a sustained period of growth and will soon return to its normal trajectory of growth. The primary reason attributable is extremely subdued economic environment, which has led to lower demand. We anticipate a return to growth in the next year for the following reasons. Number one, as the incremental real estate projects are largely affordable housing, Cera, which has had a large portfolio of sanitaryware products focused on affordable housing projects, has further segmented the market with newer options within categories. Number two, we have launched 50 new SKUs in Q3 of the current fiscal. Number three, we have enhanced our customer touch points with 9 dealer-owned Cera-exclusive showrooms and added 172 new dealers in Q3. Number four, immense focus on sustainable manufacturing and global recognition and certification for water-saving products will continue to benefit the business. As the numbers indicate, we have built a resilient model where a large proportion of costs are variable. The EBITDA margin and profitability have held up even in times of subdued demand. The faucetware segment has delivered an encouraging performance. We have reported growth on the back of continued market penetration of our products. We seek to build on this and endeavor to continue this trajectory well into the next year. Sanitaryware and faucetware business remain the core focus area for us, and we are confident of the prospects on a sustained basis. The tiles segment is growing according to business plan and have enhanced our brand presence as a complete bathroom solutions provider across the distribution network. Wellness has grown well on a small base. Inventory days in Q3 FY '20 were 52.83 days compared to 48.03 days in Q3 FY '19. Receivable days in Q3 FY '20 were 58.34 days versus 58.35 days in Q3 FY '19. Payable days in Q3 were 33.35 days against 34.56 days in Q3 of FY '19. Therefore, net working capital days in Q3 FY '20 were 78 days versus 72 days in Q3 FY '19. On a sequential quarter basis, working capital days have reduced from 80 days in Q2 of FY '20 to 78 days in Q3 FY '20. We remain sanguine about the prospects for the industry, given multiple government initiatives, including: number one, recapitalization of PSU banks, which we expect will have a multiplier effect; number two, NBFCs being able to raise debt and equity, which would result in increased pace of disbursements. Number three, in the Union budget announced a few days ago, we welcome announcements on increasing allocation to smart cities and the push towards affordable housing. The government's focus on infrastructure, rural development and improving farmers' income is encouraging. And we believe this will reinvigorate economic growth, especially in Tier 2 and Tier 3 centers as well as rural areas. Lastly, the extension of SOPs towards affordable housing by 1 more year is favorable for demand for our products. We continue to believe that we are well poised to capitalize on the revival in customer sentiment, given our comprehensive product offerings, wide distribution network and high brand recall. We have just completed a rewarding festive season, and the seasonal uptick towards the second half of the year continues. We believe that affordable housing will continue to comprise a majority of completed projects and under-construction projects as well. We are also witnessing encouraging signs across commercial real estate, co-working, co-living and the hospitality industry. Before I conclude, I would like to inform you about some developments in the management team. At yesterday's Board meeting, the Board has elevated M. Deepshikha Khaitan as Joint Managing Director for a period of 5 years and also reappointed Mr. Atul Sanghvi as Executive Director and CEO for a further period of 3 years. Both the appointments take effect from April 1, 2020, and subject to approval by the members of the next general meeting. On that note, I would now like the moderator to open up the line for Q&A. Thank you very much.

[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.

I have 3 questions. Sir, how is the demand scenario in Q3? And has there been any improvement, particularly on the retailer side?

See, the market has remained subdued, and we continue to find that though the end consumer is willing to spend and willing to buy products, they are postponing decisions in some case. That is one trend. The second trend we are seeing that retailers and dealers are rightsizing their businesses. So over the last 2, 3 years, we have found that retailers and dealers, who were expanded into too many areas, opened too many outlets and created a very large infrastructure of sales people and logistics, are now rightsizing their business. So whatever problems there were in the trade of liquidity and cash flow, those they are addressing on a individual level. So I feel that in this business, the trade and the financials of the trade are extremely important, and that is finally getting addressed after 3 quarters.

So you mean to say there are early signs of revival in the, let's say, Jan month?

See, the consumer sentiment, in my opinion, for products where Cera is present was never that muted. They have merely postponing demands, but the manner in which the company has introduced new SKUs, new models address the changed dynamics of the market. That has really made a huge impact. For example, of the total number of SKUs, 20% have been launched in the last 18 months, which constitute a little more than 10% of our top line. So this is purely a addition to our top line. Where we found the problem was, like we discussed in the last call, payments from the retailer to the dealer were delayed, and that was causing a lot of problems. And as Cera is a very conservative company, we don't really relax our credit rules for any dealer. So we had to become even more conservative in terms of taking credit calls. So all that is now getting streamlined, sorted out because those individual entrepreneurs who are retailers and dealers are rightsizing their businesses.

Right, right. Sir, in the last con call, you mentioned that instead of October, sanitaryware price may be increased in December, Jan. Sir, have we taken any price hike? And if yes, then to what extent?

The last price -- normally, we review our pricing every April and October. The last April pricing was implemented on 1st May. And then subsequently, the October price hike was reviewed. And because of a very benign raw material environment in sanitaryware and faucetware, there was no price hike taken in October. So brass prices in faucetware have declined considerably, which is more than 40%, 45% of the total cost.

Yes. But sir, you've have mentioned that prices may be increasing in December, January. So have we taken a price hike?

The new price hike between 3% to 5% across all sanitaryware products will kick in from 1st April. On faucetware, the model is much more dynamic and very linked to brass prices. So we've not reduced prices, but we are not going to take a price increase unless there's an upward movement in brass. Overall, you'll find in sanitaryware 3% to 5% price increase implemented from April 1, 2020.

Sure. And sir, lastly, have you decided on CapEx front for FY '21?

No. Currently, that is still being worked out because the CapEx planned for this year, '19-'20, that has also not been exhausted. So there's still some money spend from the allocation of this year to be spent. And for next year, it's still being worked out.

The next question is from the line of Hiral Desai from Anived Portfolio Managers.

I had a couple of questions. One was this -- you did mention in the opening comments regarding most of the cost being variable. Now my question was if I look at the other expenses in this quarter, it is sequentially down about 13.5%. So can you just explain us was this specific cost savings or were there other moving parts?

The largest item of saving -- see, other expenses have a number of headings. So production overheads is more or less similar with the slight trend downwards. Power and fuel is more or less similar. Publicity, there's a saving of about INR 2.5 crores. Packing material, there's a saving of about INR 50 lakhs. Sales and marketing expense, there is a saving of INR 9 crores.

Sales and marketing?

Yes. Freight and forwarding, there is a saving of about INR 2.25 crores. And IndAs adjustment, there is a benefit of INR 5.4 crores. So those big items have resulted in the major savings. These are for 9 months. I've given you 9 months. I can give you for 3 months as well.

So sir, the INR 9 crore number on sales and marketing is a full year number year-to-date?

9-month number, yes. Now the same number for Q3, it is almost INR 4 crores.

INR 4 crores for Q3?

Yes.

Okay. And do you think this benefit that we are seeing on the other expenses can sustain as we go along for probably next 3 or 4 quarters?

See, this sales and marketing is totally dependent on the management's view on whether that money should be spent in opening touch points or spending on the media and further enhancing the brand. 1.5 years ago, we took a view, we want to open a very large format in Bangalore, a very large format in Morbi and redo the Ahmedabad customer experience center so that a lot of money of sales and marketing was used for that purpose. This year, again, a lot of money has been spent on the brand, but it's still lower than the year before. So this is purely a function of the view management takes.

And the other is we were in Gujarat, I think, about a month ago. And there are a lot of these regional players like Simpola (sic) [ Simpolo ], Commander, Plumber. So just wanted to understand like how large would some of these players be and how competitive they are from a depth of the product offering perspective.

They are largely me-too products. They basically grab the catalogs of 3, 4 companies like Cera, identify a few products which are fast moving for companies like Cera, and then try and manufacture those on an outsourced basis or on a local level basis. So the technology level of whether it's natural gas or 1,200-degree firing or even glazing, those things are never possible. So there's a marked difference in the touch and feel from an end consumer standpoint. And for a 25-year product, if you are differentiating yourself by a price advantage of INR 400, INR 500, it's making less and less of a difference going forward.

Got it. And the other is, if I just look at sanitaryware, let's say, over last 3 years, what would have been the cumulative pricing that you would have taken over the last 3 years?

Normally, every 6 months is between 2% and 7% across all products. So you can say average of 3.5%, 4% annually.

Okay, okay. And within sanitaryware and faucetware both, what would be the share of premium products at an industry level?

Yes, I can give you our share because industry data is very hard to come by. We rely...

No, no, that's fair. That's fair.

So we have divided our sanitaryware and faucetware into entry, mid and premium based on MRP now. The MRP number, I'm not being able to give you simply because it will reveal our pricing strategy to the market.

No, no problem. Just the share.

Yes. So for Q3, sanitaryware plus faucetware, entry products constituted 35% of our sales, mid was 15% and premium was 50%. And the same thing, if you want to cumulate, it was the same. The percentage was the same for 9 months.

Okay, okay. And I'm presuming, at the industry level, the premium share would be slightly lower, right, given that some of our competitors, at least the organized guys, would operate in the premium space? So at the industry level, the premium share would be slightly lower as compared to Cera's share, right?

If you're talking about our peer group, Indian peer group, their range and range is very similar. If you're talking about the MNC tier group, yes, the Japanese and the German companies operate at a dramatically different market.

[Operator Instructions] The next question is from the line of Achal Lohade from JM Financial.

My first question was with respect to the reach. So you said that in 3Q, you've added a certain number of dealers. So if you could help us with what is the universe and how much have we reached out to. I know it's hard to give a number, but just a broad sense with respect to where we are in terms of the overall reach.

Okay. See, I'll just give you some numbers -- before we get into that, I'll just give you some more numbers. As of December 2019, our total dealers were 3,461, which is a 19% increase from March '19. Our total retailers were 11,306. Now this number, you'll find it similar to March '19 because the new dealers that we have attracted, we don't know how many retailers they are servicing. So we've kept the number same.

What would be the universe, the total retail universe according to our best estimate?

Between the top 4, 5 players, it would be at least 50,000 to 60,000, 50,000.

So roughly, we have just reached out to 20%. Is that right?

No, no. Between our total dealers and retailers of 14,767. So let's say that's 15,000. So the top 4 players would have between 10,000 and 15,000 each, some of which are overlapping, some of which are exclusive.

Understood. Okay. Number two, with respect to tiles business, can you help us in terms of the mix, how it has changed in the last 3 years? And in terms of the ROCE, what is the capital employed in this business if you could share that? And how do you see it growing going forward?

For Q3 FY '20, the share of GVT is 28% of our sales. Out of INR 80 crores, 28% is GVT. Soluble salt is 13%. And the rest 59% include double-charged, wall tiles, paving tiles, et cetera. Capital employed is basically our investment in our 2 JVs, which is INR 29 crores and INR 8 crores. So in -- our Andhra JV is INR 29 crores, INR 8 crores in our Gujarat JV. And the...

In addition to that, there would be some working capital as well?

Yes. So the receivables minus the payables.

Okay. And plus inventory as well?

Yes, correct.

How much would that be?

Inventory, I'll tell you, our 2 JVs together do not supply more than 35% of our total sales. We buy with them -- we buy from them on a just-in-time basis. And the balance 65% is direct supply from those vendors directly to our consumers, in most cases, to save on duplication of logistics. So we don't keep any inventory from neither outsourced nor from our JV partners.

Right. Okay. So inventory -- sorry, receivable minus payable would be how much in number of days broadly?

We've not split it on a segment basis.

No, I'm just trying to figure out what is the return we are making in the tiles business?

The total receivable days as on December '19 is 58 days. And if you take out tiles, it becomes 39.85 days. With the same number of 39.85 on a Y-o-Y December '18 was 44.6 days.

Okay, okay. Understood. And payable?

Payable, not really split the payable on -- total payable is 33.35 days, which was 34.56 days.

Fair to assume it will be similar for tiles as well or it would be higher?

We've not really split it up. So it won't be correct for me to say.

The next question is from the line of Sonali Salgaonkar from Jefferies India.

Sir, my first question is mainly to do with the industry dynamics. So in your opening comments, you mentioned that affordable housing is expected to be a prime demand driver going forward and urban construction is not doing as well. So with the increasing proportion of affordable housing in the revenue mix, do you think the margin trajectory could possibly change from here on, considering that we have a different line of products for affordable housing versus our premium housing?

Within affordable housing, also, there are a lot of premium products being sold. So I'll give you one more statistic to just bring out some flavor on that. Tier 1 sales for 9 months was 31%; for Q3, were 30% of our sales. This is for towns and cities with a population of above 25 lakhs. Tier 2 for 9 months were 12.6% of our sales, which were 11.8% in Q3, which is 10 lakh to 25 lakh population. And below 10 lakhs which is Tier 3 and below, in 9 months, our sales were 55%. In Q3, it was 56.5%. So I just mentioned a few minutes ago that our share of premium products, according to MRP, are more than 50% of our total products. So you'll find a significant overlap between sales in Tier 3 towns and those premium products. And in affordable housing, the type and brand and the design of sanitaryware and faucetware that is being used is a significant marketing tool.

Okay. Got it, sir. Sir, my second question is, could you help us with 2 data points, how much is B2B versus B2C for your business? And what is the ad spend to net sales that you look at a sustainable basis going forward?

Last quarter, I had said 72% of our sales is retail through dealers. That number is now 75% for Q3. So 72%, 28% has become 75%, 25%.

Sir, ad spend?

As a rule, we keep that at 4% of our top line. And in '18-'19, you'll find that number lower. And the year before that also, you'll find that number lower because a lot of that money was used for customer touch points. But as a rule, we end up spending 4% in advertising and brand building.

The next question is from the line of Shreyans Jain from Renaissance Investment.

Sir, just wanted to understand, if I look at your 9-month FY '18, FY '19 and FY '20, we haven't improved our gross margin significantly. And same thing has happened with the EBITDA margin. So what I'm trying to understand is, with this increase in affordable housing, is this trend going to continue on a longer-term basis? And secondly, you also mentioned that B2B sales have -- B2C sales have increased to 75%. So what is it that is not working out for us to improve our margins sequentially 9 months FY '18, '19, '20 on a longer-term basis?

See, margin expansion will kick in once sales expansion also kicks in. So it's a matter of time. And that will happen in the sanitaryware business the way it's happening in the faucetware business. So we expect that to happen anytime. That's the easiest way to look at it because not more than 20% of our total costs are fixed costs. And that includes the employee cost, which is fixed; finance cost; depreciation; and the share of other expenses, which is fixed. All constitute 20% of our total costs. With little bit of sales expansion, we'll see margin expansion.

Okay. But going by your commentary, what I'm trying to understand is, since you were saying affordable housing is going to be the driver, and we don't know when the premium real estate starts moving, so then how are we going to get that improvement, right? Because you're -- I don't think the affordable housing will have a product mix improvement in that sense, right?

So affordable housing is also a buyer of premium products. And if you increase your [indiscernible] and value in affordable housing, your margins, both on an absolute number and on a percentage basis, will expand.

The next question is from the line of Abhishek Ghosh from DSP Mutual Fund.

Sir, just a couple of things. Faucets has seen healthy revenue growth, and that would be largely on account of market share. So now and -- in the meantime, your sanityware has kind of seen decline. So given this backdrop, what would be the current faucets margins? How will they be different from the company's overall margin that you report?