Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Cera Sanitaryware Limited Q4 and FY '20 Earnings Conference Call. [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, Vikram. Good morning, everyone, and thank you for joining us on the Q4 and FY '20 earnings conference call of Cera Sanitaryware Limited. We have With us today from the management team 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 question and answer session. Before we begin, I would like to state that some of the statements made in today's conference call may be forward-looking in nature and a disclaimer in this regard is available in the results documents that have been shared with all of you earlier. I will now hand over the floor to Mr. Ayush Bagla for his opening remarks.

Good morning, everyone, and thank you for taking time to join us all. The earnings for the fourth quarter and 12 months for the period ending 31/3/2020 were adopted by the Board of Directors yesterday, June 30, 2020. The earning documents have been released to the stock exchange. We began Q4 with the expectation of improving momentum in sales, positive traction for new products by consumers and segmentation implemented in recent quarters. Demand in Tier 3 centers and beyond was improving due to improving prospects for rural and semi-urban parts of the economy. In Q4, the company achieved an overall profitable quarter with positive cash flow despite the material development in the external environment. March is a crucial month for Cera each year with the highest sales of any month. The disruption during the most crucial fortnight of the year has materially impacted revenues. The end of the year is a period of heightened activity as dealers rush to complete targets, promotions and schemes are implemented, and there is an enhanced traction of high-value products. The lost revenues have a high margin component, as fixed costs have already been incurred, impacting the quarter's profitability. As we sensed the concerns around rise of the pandemic, we undertook swift action to ensure unhindered operations. While the plant discontinued operations following imposition of the lockdown on 25th March as per direction of Ministry of Health Affairs, Government of India, our teams rapidly set up facilities for employees to work from home, took steps to ensure data security and reached out to our trade partners and customers, while ensuring tracking of goods in transit. Once we received permissions to resume operations at the plant on 5th May, we executed the enhanced SOP. Migrant labor was not an issue for Cera, as out of the total labor working in the plant, 60% live in and around the manufacturing facility for many years. In Mehsana district and Kadi town where the factory is situated, the COVID-19 impact was lesser than urban areas such as Ahmedabad. Over the last seven years, manufacturing capabilities at own facilities have been significantly upgraded with the introduction of fully automated pressure casting of sanitaryware products, an industry first, robotic, anti-bacterial glazing of sanitaryware, automated grinding, polishing, threading and electroplating for Faucetware. Some of these processes have assumed greater importance in view of COVID-19. As we have discussed with stakeholders at every opportunity, sanitaryware manufacturing is a complex process where training of labor and even standardization of automation takes a long time to develop. Another delicate aspect is the ratio of in-house manufacturing and outsourcing, as neither outsourcing -- full outsourcing nor fully in-house manufacturing has worked for any player striving to be competitive. At Cera, we have been able to balance the products made in-house, and those that need to be outsourced along capabilities. We believe our facilities are best used for complex products such as wall-hung WCs, table top basins and one piece floor-standing WCs. In addition, our capacities are focused towards higher margin products. Our domestic outsourcing strategy is for lower technology products which do not require sophisticated robotics and can be produced competitively by our supply chain partners. We have chosen to always develop in-house manufacturing capabilities and never had a need to rely on Chinese imports. This has set us apart from the rest of the industry where a high percentage of sales are from Chinese imports. And the industry has dependence for many complex products. The consumer is now in a position to call out those brands and ask for a Made in India certification. We welcome this change in consumer behavior. We are in the process of working on an effective communicating -- communication strategy on Cera's Make in India and Atmanirbhar Bharat strategy. Next point, low CapEx model. CapEx over the last few years has never exceeded the band of INR 55 crore to INR 70 crore, even though annual cash flow was between INR 125 crore to INR 145 crore each year. CapEx was normally maintained within a band of 40% to 45% of cash flow. We believe an overall conservative approach to financial decisions and emphasis on solidifying our balance sheet has placed us well to withstand volatility in the macroeconomic environment. We continue to hold no long term debt and continue to be AA rated. In terms of working capital, we have sanctioned limits which are leveraged at various points during the year up to 25% of sanctioned amounts, which is about 11% of our combined inventories and receivables. As a result, we have never had to dip into our liquid reserves of INR 230 crore, which have increased every quarter till 31st March, 2020. As a result of the low CapEx and prudent financial management in the Company, the mark-to-market value of cash and cash equivalents has risen to INR 230 crore on 31st March, 2020. This is the highest level in the company's history. In each quarter through the years, and through the year -- financial year '19/'20, the liquidity balance continued to grow. Even after the COVID impact from mid-March 2020, there was no depletion or need to dip into these funds. In April 2020, during the lockdown, collections were sufficient to meet expenses and there was no need to use any portion of these funds. Inventory strategy. We monitor the inventory very closely, and in a few cases have opted for just-in-time vendor arrangements. And at most, geographies have localized warehousing allowing us to keep ready availability of products at local markets. Just-in-time inventory management and similar offer to project customers. We encourage our project linked customers to allow us to work with them to schedule smaller dispatches of products as and when their sites need them, rather than try to save costs on logistics via large deliveries, which take time to fit out and start the billing cycle earlier than required. This is a step towards faster and smaller billing cycles and receivable management as well. A quick word on our cost lines. Raw materials. Many of our raw materials are trending downwards in pricing. Savings have been made during financial year '19/'20. Prices of clay are 5% lower than before, prices of zinc are 5% lower than before, zirconium pricing is 5% lower than before, brass is 2% lower in Q4 and 10% lower in FY '19/'20. Vendor negotiations. We are in negotiations with vendors to assess scope for reduction in costs. So based on changing market dynamics, newer pricing and quality parameters are being built into contracts with vendors. Fixed costs. Rents for warehouses, offices and company-owned customer touch-points have been negotiated, and fresh contracts are being signed during financial year 2021. For Q4 FY '20, revenue for the quarter stood at INR 293 crore, versus INR 413 crore in Q4 FY '19, registering 29% Y-o-Y decline. For Q4, 49% of the top-line was from sanitaryware, 27% from faucetware, tiles represented 21% and wellness 3%. On the Y-o-Y basis, sanitaryware revenues registered a decline of 30.7%, faucetware revenues declined 23.1%, tiles declined by 31% and wellness declined by 39%. EBITDA, excluding other income for Q4 FY '20 was INR 42.40 crore, versus INR 63.79 crore in Q4 FY '19. The EBITDA margin for Q4 FY '20 stood at INR 14.5 crore, lower by 90 basis points. Profit after tax of Q4 FY '20 was INR 38.47 crore against a Y-o-Y number of INR 38.04 crore. PAT margin was higher by 113 basis points. EPS for Q4 was INR 29.58 versus INR 29.25 in financial year '18/'19. For financial year '19/'20, revenue was INR 1,209 crore versus INR 1,344 crore, a decline of 10%; sanitaryware revenues were 49%; faucetware, 26%; tiles, 22%; and wellness, 3%. On a 12-month comparison; sanitaryware revenues registered a decline of 16.8%; faucetware declined by 2.5%; tiles declined by 3.1%; and wellness by 2.7%. EBITDA, excluding other income for financial year '19/'20 was INR 162.12 crore against INR 190.6 crore in FY '18/'19, a decline of 14.9%. EBITDA margins for financial year '19/'20 is 13.4% against 14.2% in financial year '18/'19, lower by 80 basis points. Profit after tax or FY '19/'20 was INR 115.94 crore against INR 115.05 crore in financial year '18/'19. PAT margin was higher by 100 basis points. EPS for FY '19/'20 was INR 89.15 against INR 88.46 in financial year '18/'19. Inventory days in Q4 FY '20 was 62.01 days compared to 48.84 days in Q4 FY '19. Receivable days in Q4 FY '20 was 56.78 days versus 68.57 days in Q4 FY '19. Payable days in Q4 were 44.36 days against 38 days in Q4 of FY '19. Therefore, net working capital days in Q4 FY '20 was 74.43 days versus 79.41 days in Q4 FY '19. We have launched eight new SKUs in Q4 of FY '19/'20, and 765 new SKUs in financial year '19/'20. Touch-free products and antibacterial glazing. We have a total of 6 touch-free faucets. We have developed a unique anti-bacterial glazing process called nano glazing, which provides stain resistant water repellent surfaces. We have enhanced our customer touch points with 44 additional touch points in Q4. As the numbers indicate, we have built a resilient model where a large proportion of our costs are variable. The EBITDA margin and profitability have held up even in times of subdued demand. Sanitaryware and faucetware businesses remain the core focus area for us, and we are confident of the prospects on a sustained basis. The Tile segment is growing according to business plan, with close to zero inventory days. On that note, I would now like the moderator to open up the line for Q&A. Thank you very much.

[Operator Instructions] We have a first question from the line of Archana Gude, IDBI Capital.

Congrats on a decent quarter amidst these challenging times. I have two questions. Sir, how the quarter would have been looked in the absence of COVID-19? I know last March was really strong for us, but still some color on that?

Okay, see, the March month is very important for the company because the trade partners rush to meet their monthly, quarterly and annual incentives. So the last 15 days of the month, which were lost in sales is the reason there is a 10% decline in sales, otherwise we would have been very close to, if not equal to, last year's numbers. And these are products which have much higher margin than the overall annual average. So that is the only difference. On the flip side, of course. Our receivable days also decreased and receivable amount has also decreased, so total debtors instead of INR 297 crore were INR 220 crore, a decline of INR 77 crore.

Okay. Sir, secondly, how is the demand from April onwards an? Is there any pricing pressure, particularly in the low and mid-price products?

April was a month that was completely lost. And there were a lot of goods which were stuck in inter-state borders etc., at the end of March. So, all that got released in early parts of May. On 5th May, we restarted the factory. So by the time that goods reached our localized depots and warehouses and even dealers, it was almost 10th, 15th May. So sales have just started trickling in May. Dealers have started opening up in non-containment non-red zones. So we'll see the impact more in the month of end May and June. And then we'll be able to make a realistic assessment of how Q2 and Q3 of this current financial year will pan out. But rather than make any guesstimate about those numbers, we will wait for things to develop. As far as pricing pressure is concerned, in any case, 70% of the new product launches are in affordable housing, and we have bulk of our products addressing that segment. This is not to say they are only cheap products, because affordable housing projects which like to advertise the kind of products they are using, try to use Cera as one of the unique selling points in their projects. So they are also customers for high-end products. And finally pricing, you see, as a company we have negotiated pricing for our project customers, which is now 20% to 23% of our sales. But for our dealership customers, it's a fixed price. And dealers are free to sacrifice some of their margins with their customers, which is something that they do sometimes, sometimes they don't.

And sir, another question, if I can squeeze in. Like last time you said the price hike will be taken from the 1st of April, I am sure now even that will get postponed. So when should we expect price hike for this year FY '21?

The last price hike we took was between 3% and 5% across all products in May '19. And the next price hike was scheduled from 1st April, 2020, which has now been postponed to August '20 of between 3% and 5% across all products. Now -- but you have to see this price hike in relation to the declining RM environment, the declining gas costs. So I'll give you flavor on -- see, as I mentioned clay has declined by 5%; zinc, zirconium by 5%; brass by 10% during the year. And I will give you some flavor on the gas costs. For the year average we paid INR 22.58 per cubic meter, and our GAIL rate was INR 14.58, our Sabarmati rate was INR 34.15. In June, the rate has further declined. GAIL at INR 11.75 and Sabarmati has increased to INR 36.37. But the overall sentiment of gas consumers has been subdued, so our mix which was normally 50:50, in Q4, we consumed 63% from GAIL and 37% from Sabarmati. And for the year, we consumed 59% from GAIL and 40% -- 41% from Sabarmati.

Sir, you spoke about maybe the increase in price hike by August. But let's say, hypothetically, the demand doesn't pick up, will you go ahead with this price hike or will you further postpone it to, let's say, Q3?

See, it is an evolving situation. If raw material prices decline by another 10%, then that would be as good as a price hike for us.

Correct, correct correct. Yes, that was my question. Like we already are saving in terms of raw materials, so -- and considering the current scenario wherein demand looks muted, so we may postpone further is what my understanding was. Correct me if I am wrong, sir.

It's an evolving situation. We'll only know once Q2 pans out, we are still 2, 2.5 months away from August.

We have next question from the line of Sonali Salgaonkar from Jefferies India.

Apologies, I joined the call a bit late so missed your initial comments. Sir, but my question is on the resumption activity. I mean, in terms of demand I understand that April was negligible, but how are the demand trends in May and June versus sales of last year? And also, what is the current capacity utilization that we are working at? And also the channel inventories, the status of that, I mean, have we managed to liquidate them or they are yet to be liquidated?

See, when we resumed our factory on 5th May, we started with one shift operations because we didn't have a migrant labor problem so we were just assessing the demand environment and the inventory at the localized depot and warehousing level. Now, other than the Tier-1 metros where the demand is still not back to where we would like it to be, markets in Tier-3 towns are getting back. So, the bulk of the liquidation of inventory at the depots is currently taking place and there was a lot of goods in transit when the lockdown happened. All that has reached its final destination and that will be liquidated. So we are still operating on one shift in the factory currently. And as and when there is a demand uptick, we will take that up.

Understand. Sir, so if we look at June. I mean, June sales very approximately were how much percentage of our June 2019 sales?

That number is not currently out yet.

Understand. Sir, and currently the utilization of your capacities on an average would be?

One shift only. So I can give you the Q4 capacity utilization numbers if you -- if that Interests you, that number, I mean. For Q4 FY '20, faucetware was utilized at 72%, sanitaryware was utilized at 73%. And for the 12 months faucetware was at 70% and sanitaryware was at 86%.

Okay. Sir, my second question is on the pricing action over the past 2, 3 months. With the COVID disruption coming in, have you seen any rationalization of competition from the unorganized, smaller players, especially in your Tiles division? And secondly, has there been any pricing action to push demand?

See, the unorganized business in Tiles, we'll talk about first and then about Sanitaryware for faucetware. As far as Tiles is concerned, we keep on hearing about 800 or 900 plants in Morbi. But when we go for project or retail orders, we are competing with the top 10, 12 brands, because most of these 800, 900 plants are becoming vendors to these top 10, 12 brands. So the unorganized segment neither has the marketing infrastructure nor the capability of selling, marketing, localized Warehousing and supplying credit to their customers, which the top 10, 12 brands have. Which is why despite whatever is happening in the Tiles business in terms of overcapacity, Cera's Tiles business has performed. We are close to 0 inventory days, and we find ourselves competing with only the top players. Now, in this environment where our vendors are reducing prices that they charge us and the prices we charge our customers are more or less stable with a slight downward trend maybe. The market is going to shift. Only 60% of the Morbi capacity has come back on-stream over the last two and a half months. So you will see a huge shakeout in the excess capacity of the vendor base. And we do not find ourselves competing with them, so our vendors do not reach our customers. Now similarly in sanitaryware, our products have a 10-year warranty. We have a huge sales team, after sales team. We have a servicing team, we have a spare parts team, we have 24-hour call center, then customer touch points where the consumer can walk-in and get -- register complaints or after-sales service requests. He has an app through which a consumer can reach the company and in most cases between 24 to 48 hours is the lead time between someone reaching their home. So those are the benefits for the product which has a lifespan of 20 years and maybe a price difference of INR 500 to INR 1,500. So again, in sanitaryware, you will find that unorganized players have restricted them to maybe projects of Swachh Bharat etc. but do not compete with the same consumers with a company like Cera.

Okay. Sir, and have you encountered any plants being shut down in Morbi over the past 2, 3 months? Since you mentioned only 60% of capacity of the 800 900 plants are back.

Yes. In any case, Morbi, over the last 1, 1.5 years has had significant cash flow problems. And bulk of those plants, because of lack of scale or lack of product differentiation was not profitable. Add to that the migrant labor problem in Morbi is the reason less than 60% of the capacity has come back on-stream, and that, too, not at 75%. So even though capacity which has come back on stream is maybe one shift.

Okay. Sir, my last question is regarding the construction or real estate activity. We understand that it is not looking at a very good pace in the urban or Tier-1 Cities, but what about the Tier-2, Tier-3 cities? Are you seeing any heightened activity over there? And in which [indiscernible], I mean, affordable or own construction?

We are seeing activity where there are large national EPC contractors involved. So, wherever there is a Shapoorji or L&T or those kind of contractors involved, we are seeing resumption of activity. And we are also seeing some activity in small projects, the G+3, G+4 projects in any case are very quick to start and finish. So we are seeing resumption of activity there.

We have next question from the line of Achal Lohade from JM Financial.

First, I wanted to know...

Sir, I'm sorry, we're not able to hear you well.

Is it better now?

Much better. Please go ahead.

Okay. I wanted to check first in terms of the gross margin improvement. How do we Explain that, what has driven the gross margin improvement, especially when the price increase hasn't really been that significant?

Yes, two specific items stand out. Let's say, in publicity we stopped our mass communication activities in the middle of the year, sensing that the year was slowing down. And then of course, the pandemic was fully in place in March. So there was about INR 10 crore saving in publicity cost. Then there was a sales and marketing expenses which were clamped down and the trade partners also did not get themselves entitled to their full quarterly, monthly and annual targets, so there was a saving of INR 18 crore there. Freight and forwarding and logistics, there was a lot of saving on that because we did a lot of AI based freight saving cost, that was INR 6 core. And finally at the EBITDA level, the Ind AS 116 adjustment resulted in a INR 7 core benefit.

And this is for the fourth quarter you are talking about or for the full year?

For the full year.

And for the fourth quarter if you could?

For the same number, publicity difference in fourth quarter is about INR 7 crore; in sales and marketing, it's about INR 8 crore; in freight, it's about INR 4.5 crore; and Ind AS adjustment is about INR 1.6 crore.

And what about the gross margin improvement? We saw a 280 bps improvement Y-o-Y, is it due to -- like the inventory evaluation or is it to do with the product mix or [indiscernible].

You see, we started austerity measures in the middle of Q2 last year and the full benefits of that were available in Q3 and Q4. So on every front on fixed and variable costs we gained. Then the raw material prices were trending downwards across the board, and we took advantage of that. Now these are raw material suppliers who have been with the company for more than 20 years. So they are quite happy to negotiate contracts with us on an ongoing basis.

And with respect to the distribution mix, would you be able to give some sense about how -- what is the contribution we have in terms of the top 20 cities, how much do they contribute to our total revenues?

I think the line is not audible.

Can you hear me now?

Yes.

Okay. Just wanted to check the contribution of the top 20 cities for us or If any breakup in terms of metro Tier-1 Tier-2 kind of?

Yes, yes, of course. So, I will give you for Q4 and also for the 12 months. Exports and -- exports for the quarter and for the year were about 1.2% of top-line. Tier-1 sales were 31% of top-line; Tier-2 sales were 12% of top-line; and Tier-3 and below sales were 55% of top-line. Then sales to top 100 dealers were 36% of top-line; and sales to top 500 dealers were 66% of top-line. Then if you want geographic spread, I have that as well. North was 30% of top-line; east was 10%; west was 17%; and south was 42%; and export was 1%.

Can you please repeat once again. I couldn't hear it properly. North is 30%.

North is 30%; east is 10%; west is 17%; and south is 42% and export is 1%.

The full year you are talking about?

Yes.

And even the Tier-1, Tier-2 thing as well full year, right?

Yes.

Okay, sounds great. Just in terms of the project of 22 23...

Sir, I'm sorry to interrupt, we can't hear you very well.

Is it better now? Sorry for the biased line.

Yes. Please go ahead.

In terms of the projects, you had said 22%, 23% of revenues are from projects. That's directly for us or this includes the dealer sales?

So that is direct billing. So we only count project sales where we are comfortable in direct billing.

Sir, at an aggregate level, I mean, I know it's tough to guess how much a dealer would be selling to project, or broadly would it be like 50:50 in terms of projects in retail or could it be even higher for project?

See, we are extremely in a beneficial position if dealers sell to projects, because we don't have to take our credit calls nor do we have to negotiate prices. So if a dealer can find his inroad into a project, that's the best case scenario for us because we haven't sacrificed margins nor do we have to have a direct credit assessment of the customer.

Got it. This is helpful. And just last question if I may, with respect to commercial versus residential, would you have any sense as to how much would be the mix for us in terms of the commercial specifically, which is probably looking a little weak now going forward?

Commercial is negligible. It always has been negligible. Because the amount of [ toilet ] material required on a per square feet basis in commercial, IT parts etc., is very, very small.

We have next question from the line of Manish Poddar from Nippon AIF.

So first is would you be able to help, let's say, how is the sales performance in January, February and March on a Y-o-Y basis?

In January?