Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 earnings conference call of Cera Sanitaryware Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, sir.

Thank you, Janice. Good morning, everyone, and thank you for joining us on the Q1 FY '21 earnings conference call for Cera Sanitaryware Limited. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; and Mr. Rajesh B. Shah, CFO and CEO of the company. We will start with brief opening remarks from the management, following which we will open the call for Q&A. Before we begin, I would like to mention that some of the statements made in today's conference call may be forward-looking in nature, and a disclaimer in this regard has been placed in the results 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 first quarter of financial year 2020/'21 were adopted by the Board of Directors yesterday, 5th August 2020. The earnings documents have been released to the stock exchanges. We commenced Q1 in the midst of the nationwide lockdown from March 25. In the early days of the lockdown, efforts are focused on safety and well-being of employees, ensuring business continuity and a seamless transition to the work-from-home mode for various departments of the organization. Simultaneously, there was emphasis on securing goods and transit, safety of assets and inventory at our plants and warehouses, and ensuring that all our business partners, distributors, vendors, service providers were safe and in a stable position. Upon partial easing of lockdown restrictions, we resumed operations at our plant at Kadi on 5th May 2020, which was 35 days into the quarter. In the first few days of resumption, we operated a single shift of 8 hours at the plant despite requisite labor at our sanitaryware and faucetware facility, post-implementation of revised SOPs, which were spelled out in detail in an earlier communication to the stock exchanges. Due to this, the effective utilization in May 2020 even after restarting of operations was around 30%. In June, the authorities permitted ramping up of shifts from one 8-hour shift to one 12-hour shift. Along with a slight increase in employees on the shop floor, the increase in duration of the shift led to increase in utilization to 60% for the month of June. From the month of July, we were permitted to revert to our earlier structure of 3 shifts of 8 hours each, and this has enabled utilization to improve further to 80% for most of our facilities. The tile manufacturing JV, which is called ATL, at Andhra Pradesh is to recommence production in August. Even as we are currently at 80% of pre-COVID activity, the shutdown and process to ramp-up has significantly impacted activity in Q1. Effective working days in the quarter were 91 minus 35, which was 56 days. And given the suboptimal utilization up to early June, we had meaningful operations only for 20 to 25 days in the entire quarter. We believe that the inherent resilience of the business has shown through this quarter. Even as production was impacted to the tune of 70%, we have witnessed reduced sales of only 46%, which was largely serviced through inventory of finished goods. The silver lining has been the exponential growth that we have witnessed in products like touch-free sensor-based, hands-free products, water-saving products and nano-coated antimicrobial products that offer enhanced safety and hygiene. Cera has launched additional elbow-operated and foot-operated faucets this quarter, along with sensor-based faucets. We have introduced plug-and-play type of smart installation of sanitaryware products for consumers who choose to adopt do-it-yourself installation procedures, from volumes of approximately 100 faucets per month of touch-free products in the pre-COVID period to about 6,000 faucets monthly currently. Requisite external certification for sanitaryware by APMO India for faucetware by WEP-I and for sanitaryware and faucetware the globally used CE certification. In that backdrop, I will walk you through the financial performance. For Q1 FY '21, the revenue for the quarter stood at INR 143 crores versus INR 267 crores in Q1 FY '20. Though not comparable, registering a 46% Y-o-Y decline. For Q1 FY '21, 51% of the top line was from sanitaryware, 29% from faucetware, tiles presented 17% and wellness 3%. On a Y-o-Y basis, sanitaryware revenues registered a decline of 47%, faucetware revenues declined by 39%, tiles declined by 53% and wellness declined by 58%. EBITDA excluding other income for Q1 FY '21 was 6.46 -- INR 6.64 crores versus INR 35.2 crores in Q1 FY '20. The EBITDA margin for Q1 FY '21 stood at 4.66%, lower by 851 basis points. Profit after tax for Q1 FY '21, INR 2.9 crores against Y-o-Y number of INR 19.1 crores. EPS for Q1 was INR 2.24 versus INR 14.67 in Q1 FY '19/'20. Inventory days in Q1 FY '21 were 59.83 days compared to 52.85 days in Q1 FY '20. Receivable days in Q1 FY '21 was 51.36 days versus 55.45 days. Payable days in Q1 was 31.79 days against 25.56 days in Q1 of FY '20. Therefore, net working capital days in Q1 FY '21 was 79.40 days versus 82.74 days in Q1 of FY '20. As India is prepared for lockdown 2.0, industry expects a gradual rebound [indiscernible] ongoing tussle with COVID-19. Our business fundamentals remain intact, and we are cautiously optimistic about our prospects once the macroeconomic environment stabilizes. Our confidence is predicated on 5 pillars: [indiscernible] our #1, manufacturing excellence. Over the last 7 years, manufacturing capabilities at our owned facilities has been significantly upgraded with the introduction of a, fully automated pressure casting of sanitaryware products, industry first; b, robotic antibacterial glazing of sanitaryware; c, automated grinding, polishing, [ threading ] and electroplating of faucetware. Some of these processes have assumed greater importance in view of COVID-19. Over the years, we have judiciously developed the right balance of outsourcing and in-house manufacturing. We believe our facilities are best used for complex products, such as wall hung WCs, table-top basins and one piece floor-standing WCs. We leverage our facilities for higher value products and have consciously avoided reliance on Chinese imports. Point #2, judicious use of capital. Over the last few years, annual CapEx has been contained within a band of INR 55 crores to INR 70 crores despite annual cash flow of between INR 125 crores to between -- and INR 145 crores each year. This year, our planned CapEx is INR 21.82 crores [Technical Difficulty] model. This has enabled us to solidify our financial position each year, enabling us to incrementally enhance our liquid cash flow, which now stands at INR 268 crores as on June 2020. Point #3, clean and efficient operations. We have opted for just-in-time arrangement with vendors and adhered to payment schedules to maximize cash discounts and other regular incentives for on time payments. Further, we have established localized warehouses across locations to rapidly serve the markets and efficiently manage finished goods inventory. There is a concerted focus on managing receivables within a comfortable range, and we encourage our customers to allow us to work with them on schedules, which are smaller dispatches of products, closely aligned to the assignments, enabling faster and smaller billing cycles, and receivable management as well as a wide and expanding collection of touch-free products, antibacterial glaze products as shared in detail earlier. Fourth, higher demand from replacement and retrofitting market. We are well progressed to benefit from [ that ] in the replacement market of faucets, products which are easy to install and touch-free to operate. Hospitality products are ready to retrofit entire hotels with touch-free products and Cera is working on these themes. Sanitaryware and faucets remain our core focus area, and we are confident of the prospects on a sustained basis. The tile business is more of an outsourced business with less capital employed on production than on working capital. However, with reduced capacity available in tiles across the industry, we are witnessing early signs of pricing power beginning to return to the business. On that note, I would now like the moderator to open up the line for Q&A. Thank you very much.

[Operator Instructions] We take the first question from the line of Achal Lohade from JM Financial.

My first question was with respect to the gross margins. We see that the gross margins have come off by almost 5 percentage point Y-o-Y. Can you please explain as to what has driven this gross margin reduction? Is there any adjustment with respect to the discounts? Or is it just a product mix?

You see 20% of our total costs are fixed cost and 80% are variable cost. So that 20% was spread over a smaller sales base, that number became 30% this quarter. That was the only reason for change in operating margin.

No. Actually, I was asking about the gross margin. I suppose the fixed cost will have impact on the inventory valuation rather than really the manufactured product sales. Is that the outsourcing mix was higher in this quarter or the lower margin -- relatively lower margin product mix was higher?

I can give you the product mix, 1 second. I've the data with us. For sanitaryware, we had 41% of our sales of entry-level products, 13% of mid-level and 46% of premium. So this is slightly different from what you would have seen in the last 4 quarters because that same number was 37%, 12% and 50% in the last 4 quarters. And for faucetware, 32% of sales were entry-level, 15% mid-level and 53% was premium for the last...

Can you repeat -- sorry, I'm not able to hear you clearly, sir. Could you please repeat the faucet mix?

Faucet was entry-level product 32% of sales, mid-level was 15% and premium was 53%. If you compare that to the previous 4 quarters, that number was 32%, 19% and 49%. And if you combine sanitaryware and faucetware on a weighted average basis, 37% of the products were entry-level, 14% were mid-level and 49% were premium level compared to 35%, 15% and 50% of the previous 4 quarters.

So is it that the gross margin for the entry-level is substantially lower than the premium? Because I see just the mix -- only 2 percentage point change in that mix?

It's not substantially lower but [indiscernible] cost based -- slightly is in the cost base. If you see the breakup of other expenses compare it Y-o-Y, the decline has not been in the same percentage as a decline in sales on some of the items.

I guess that explains the operating margin, the EBITDA margin part. But the gross margin part, is it to do with the mix in the outsourcing versus in-house? Would you have that mix handy?

Yes, I have that mix. For sanitaryware, outsourcing was 53%, manufactured was 47%. Faucetware outsourcing was 50.64% and domestic was -- sorry, own manufactured was 49.36%.

This is for 1Q FY '20 you're talking about for sanitaryware?

That's right.

Okay. And how about faucet?

Faucet was also in Q1 2021, 50.64% was outsourced, 49.6% was own manufactured. And if you want to compare that to last year, I'll give you the number...

Excuse me, sir, does that answer your question?

No. For the same period, outsourced was 51.55% and manufactured was 49.33%, and faucetware manufactured -- outsourced was 55.41%, manufactured was 44.59%.

55.41% is for the current quarter, 1Q FY '21?

The same period last year.

Okay. Okay. Got it. And my second question was, we see that the other income seems to have jumped on a Q-o-Q basis or Y-o-Y basis. Is there any exceptional items here we need to be...

It is just as per Ind AS guidelines on M2M of the cash and cash equivalents portfolio. So if you look at our portfolio, there will be -- some of them are in SBI FDs, some in NHAI bonds, PFC bonds AAA rated and a lot of them are in AAA liquid funds. So there was an M2M gain on the AAA liquid funds. So according to Ind AS guidelines, we have done M2M marking at the end of every quarter.

Got it. And with respect to -- we see there is significant variation in the gross margin on a quarterly basis given the variables with respect to mix or the product mix, et cetera. If I were to ask, theoretically, if we were like 80% or 90% level of last year, would we look at the gross -- the EBITDA margin similar? Or do you think there is a significant risk to the operating margin?

See here we have basically incurred costs for 90 days and revenues for 20, 25 days is what has happened in this quarter. And only in July, have we reached 80% of last year's production and about 90%, 95% of last year's sales. So we know in Q2, if that persists, and we reach 100% of sales and production reaches 95% or 100%, so we'll know the difference in this quarter.

Understood. But let's say, theoretically, if this 90%, 95% level to be sustained for rest of the year, would the operating margin be in a similar range of 13%, 14% what we have been having for last...

Operating margin should improve because all the raw material prices have declined, gas prices have declined. There has been renegotiation of contracts for rentals of warehouses, for our display centers. Fixed costs over the year will decline at least INR 10 crores just on the rental and renegotiation of rental contracts.

[Operator Instructions] The next question is from the line of Dhananjay Mishra from Sunidhi Securities.

Sir, you said we have 53% outsourced from sanitaryware. So these numbers are similar in last few years or it has been increased significantly because I guess, it was about 30%, 35%?

Last 6 quarters has been between 47% and 52%.

Okay. So otherwise, in the past years FY '19/'20, how it has been?

Similar, around 50%.

Okay. And also, what is your sales and advertising expenses in this quarter and what is the outlook for the rest of the year because it has been around 9% for the -- on sales numbers? So how -- what is your strategy for this year?

Normally, we split that 9.5% into 2 heads. So publicity is normally 4% of top line. Last year, that number was INR 10.75 crores. This year, that number was INR 4.18 crores. And then the balance 5.5% is sales and marketing expenses, which includes a lot of dealer schemes, foreign trips, incentives, et cetera. Last year, that number was INR 19.91 crores. This year, that number was INR 10.8 crores. So normally, at any given 12-month period, you will find that number is 9.5% split into these 2 heads. But currently, obviously, given the slow sales, et cetera, we had curtailed that expenses, especially on the publicity side. We are yet to take a full call on whether we'll be using that 4% budget for the year.

So what was your absolute number you said publicity for this quarter?

INR 4.18 crores.

INR 4.18 crore versus last year same quarter?

INR 10.75 crore.

6-point?

10.

INR 10.75 crore. And sales, this incentive is INR 10.8 crore?

Versus INR 19.91 crore.

INR 19.91 crore. Okay, sir. And also, if you could give some -- I mean, what was the region wise breakup and how you see the number like Tier 1, Tier 2 cities? And I think in the interview, you said that we have 70% -- more than 70% revenue coming from Tier 3 and below cities this time. So how you see going forward these numbers, if you can give that breakup?

Normally, our Tier 1 sales are about 23.5% -- sorry, 32% to 35%. This quarter, it was 23.59%. Tier 2 is normally 13% to 15%. This time, it was 10.21%. And Tier 3 is 52% to 55%. This time, it was 64% to 65%.

Okay. So how do you see the rest of the year relatively...

See Tier 1 markets were pretty much shut for the entire quarter. So those markets were really nonoperational. Even now there have been sporadic opening and re-shutting, et cetera. Tier 3 markets had the least impact of COVID-19, and Tier 3 markets don't depend on external financing projects. And our penetration and our dealers' penetration in these markets have been traditionally the highest. Our influencers who are in regular contact with our dealers, our plumbing contractors, all have made deep inroads in these markets traditionally. So -- and these markets are also buyers of high-end products. So we concentrate a lot of activities in Tier 3 markets. Going forward, we'll be happy to maintain any number above 55%.

Sir, Mumbai dealers are still not operating because I checked most of the dealers are still closed. So is it...

Yes, Pune dealers had opened sometime in July, then they shut down, again. Similarly, Bombay, some dealers have opened for a few days and they shut down again. So they were having problems of getting requisite staff to attend their showrooms.

And what about Delhi and Chennai region?

Delhi and Chennai region, I won't be able to give you anecdotal information. Delhi again, had opened for a period in time. Our sales in Delhi and Chennai are not so significant.

The next question is from the line of Jaspreet Singh Arora from Equentis PMS.

Just carrying on with the previous data you gave. So Tier 3s gone up -- contribution to revenue has gone up from 53% to 63%, right?

Right.

So can that be also a factor to a drop in gross margin, would -- because I presume the purchasing power, the margins that you might get in a Bombay, Delhi, Chennai, maybe better? Is that correct or no?

No. In fact, there is lesser price negotiation in Tier 3 markets. And in Tier 3 markets, the company is represented via dealers, not through direct sales offices. Only where the company's sales offices are present is there scope for any price negotiation. The dealers may negotiate prices with consumers or with projects by sacrificing their own margins.

Okay. So when you sell via dealers, it's better for you, you're saying in terms of margins?

Yes, in terms of margins, and Tier 3 markets are not buyers only of affordable housing products. They are buyers of all sorts of premium and luxury products.

So that means that our Tier 3 segment should fetch you better margins in terms of gross margins if one were to take it, right?

Not only better margins, but less competition because there are -- most MNCs are not present in Tier 3 markets, and all MNCs are present in all Tier 1 markets.

Got it. Got it. Got it. So this is largely -- the jump has happened by largely a function of the fact that the number of shops and establishments were opened far higher in percentage terms in 3, right, and not necessarily -- and also the fact that COVID was not as much disrupting there, right?

That's right. That's correct.

Sure. Sure. Okay. The next question, sir, is in terms of -- I understand May was -- sorry, April was a washout. How was -- and I'm sorry, if you have to repeat this, I missed the initial 2 minutes of your opening remarks. So April was a washout, right? So how was May and June, if you could break it up in terms of...

May, the production levels in the factory operating in terms of capacity was 30% of last year. And June got up to 80%.

And July, did you mention 90% to...

Sales in May were about 55% to 60% of last year. Sales in June were about 85% of last year, and July is about 95% of sales. And July, in any case, all 3 shifts of 8 hours have been permitted by local authorities.

Okay. Okay. So when you say 95%, it means the 95% of a regular run rate or for July last year?

That's right.

Okay. Okay. And in terms of the institutional sales that we do, which is either to -- and this is directly or indirectly, to real estate as well as the institutions like hospitals and hotels, et cetera, would that still be a low 20%, 25%?

For this quarter, retail is 75% and project is 22% because export is 3%. And the same period last year, retail was 69%, project was 29% and export 2%.

Export is 2%. Okay. So it's also the project sales which is also taking a hit, right, at least temporarily in the 1Q?

This is a conscious effort. If you see the commentary of the last many quarters, it's a conscious effort to increase the retail percentage because project prices are negotiated prices. So it's a conscious effort to increase this mix and skew it towards retail.

Sure. Sure. But do you see this stabilizing, the retail at 75% and project at 22%? Do you think this is how it might pan out for the rest of the year?

It all depends on how the replacement market behaves and how quickly the project sites resume their normal construction activity.

So you meant -- okay. Midway, you mentioned that the replacement market was far better in terms of demand versus the new sales, so that's also a function, that's also led to this.

And that is increasing. You see, as the market is recovering, this touch-free products was never a huge businesses for any company, and for Cera, it was 100 SKUs a month. Now the current demand is 6,000 SKUs a month. And typical faucet at the low end starts at INR 2,500 and INR 3,000. The touchless faucet starts at INR 9,500, INR 10,000 goes up to INR 25,000 per piece.

So this touchless trend is more related to faucets, right, which is picking up, you're saying?

Yes. And as far as sanitaryware is concerned, I mean, the best you can do is install either a touchless sensor-based faucet or for hospitals, we had this elbow-operated faucet; for factories, we have a foot-operated faucet, which were recent launches.

Okay. Okay. Okay. And in terms of our marketing or communication, our -- because some of the other building material or -- including the ply companies are using virus-free materials and all of that. Is that something also now that we are trying to build in even for tiles and sanitaryware? Or is there some segment -- separate segment? Or are you using that commonly for...

Some products of sanitaryware traditionally had this antimicrobial nano glazing. So we have a robotic glazing arm which is completely automated, which is again, one of the first in the sanitaryware industry. So it closes whatever micropores there are on the surface of a sanitaryware product. The life is 15 years, and it's scratch resistant, bacteria resistant. So those products are slightly more expensive, but they are marketed differently. They have different catalogs. They are sold on completely different themes. Those have become more important. Similarly even the WC seats has antimicrobial, antibacterial coating on those seats.

So this segment is witnessing better offtake, better demand in the recent months?

Yes, substantially higher offtake and demand at again, a substantially higher margin.

[Operator Instructions] The next question is from the line of Abhishek Ghosh from DSP Mutual Fund.

Just a couple of questions. In terms of how is the competitive scenario coming out both from the organized and the semi organized [indiscernible] lot of the parallel categories we are hearing semi-organized get weaker, so if you can just help us understand the layout here?

2, 3 things have happened globally. Chinese companies, there's a huge anti-China sentiment because of the U.S. trade wars, et cetera. And then of course, there's episode between China and India as well. So Chinese companies used to send a lot of sanitaryware products to most manufacturers in India. We have always disclosed our Chinese imports number. They were between 4% and 5% of our top line. There are many in our peer group where that number is between 55% and 60%. So those products now will shift to any other countries or 2 Indian domestic manufacturing vendors. Again, vendors don't have the capabilities of making either wall-mounted WCs or tabletop thin rimmed things or single piece, no-joint WCs. These are all capabilities we've created in our factory. So vendors don't have this capability. So vendors in India are quite interested and capable of making mass production of basic items. But their capacity has still not ramped up. So the labor issue and the migration of labor issue for them has been much more severe than organized player. So there is already a capacity constraint for companies who are totally dependent either on vendors or on Chinese imports. Now that's the situation as far as sanitaryware is concerned. Sanitaryware exports, which was always a single-digit number for all companies and for Cera, is suddenly becoming very important because there's a whole lot of inquiries from all over the world. Similar trends are also being witnessed in tiles. So for the last 6, 8 months, we heard of G8 countries importing -- imposing antidumping duty on Indian tiles, but they were importing from China. All that has stopped. Now Indian tile and generic tile manufacturers from Morbi are finding huge export markets globally.

Okay. So at present, the imports that the competition does as far as the Chinese sanitaryware is concerned, it does not attract any import duty. Is that understanding correct?

[Technical Difficulty]

Sir, I'm so sorry to interrupt, but your audio is not very clear at time, sir.

Mine?

Yes, sir. [Operator Instructions] Over to you, sir.

Yes, Abhishek, I just got one part of your sentence.

Yes. So I guess what I was asking is that sanitaryware, these imports that they do, is there an import duty element to that?

Yes, there is an import duty element.

How much would that be? And is there a risk on that getting increased? Is the kind of -- is there a -- is that understanding...

That I think is between 5% and 10%. For us, imports were never a focus area because the products that are majorly imported from the Chinese companies by our competitors of peer group, those are all made in our factories. The peer group may not have had that capability of making these 3 types of products in their factories, but we have always had that. So -- and we have always given out our Chinese import numbers. We have stated it publicly. Now currently, we are finding that a lot of our project customers insist on Made in India certification. So we provide that not only in our sample pieces, but in our cardboard packaging, and then we are quite happy to additionally provide Made in India certificate. That is a trend we are seeing.

And is there any pricing this thing that is happening at the marketplace in terms of any decline/increase, anything that you're seeing given short supply in imports not happening, any kind of pricing in there happening in sanitaryware and faucets?

We are seeing strong demand, especially after the end of the first quarter because the vendor base is still not alive and fully operational. So we are seeing a scramble by manufacturers to try and secure their supply chains.

Could that mean some pricing increase that could happen in the system for all the players?

We took a last price increase in May 2019 of 3% to 5%. And we are planning to take one in this month of 3% to 5% across sanitaryware product. And this is in an environment where zirconium has declined by 10%, the zinc has declined by 10%, PA has declined by 5%, and in faucetware, our brass prices have declined by 10%. So again, in faucetware, we are the only company who have never used any brass scrap, we only use brass ingots. And brass price -- the faucetware pricing is a little more dynamic than sanitaryware pricing and mirror brass pricing.

Sure. Okay. Maybe just 1 last question from my side. Last year, we had another expense of almost about INR 300 odd crores. Given the initiatives that you spoke about lesser power and fuel, lesser rental and also some cost rationalization, what can be the percentage increase on a very -- so now you have broadly come to that 95% of last year's sales level, so assuming similar sales, what can that other expenses as a percentage look lower because of the initiatives?

See on fixed cost, we have negotiated rentals down by INR 10 crores. Then I can give you some color on power and fuel. Our weighted average cost of gas was INR 22.58 last year. That same weighted average for Q1 was INR 12.48 and for the same quarter last year was INR 21.09.

The next question is from the line of Vikrant Kashyap from Kedia Securities.

Just 1 question. Since we have faced a lot of problem post-COVID situation in India, do you see the worst is behind us and this should improve from here?

Well that is the expectation, that is the reality on the ground, that is the empirical data on a month by month basis. And all this is a flight to quality. Investors are flying to quality, consumers are flying to quality, employees are flying to quality. So the flight to quality, consolidation all that is happening. Now to give you example our CRISIL has reiterated our A1+ rating for our CP program in December 2019 where bulk of the slowdown had already kicked in. CARE in July 2019 gave us AA rating. Those ratings are completely unchanged. We have never used the rating because we have zero long-term debt. We have lines of about INR 40 crore of working capital. We use INR 10 crores, INR 12 crores, INR 15 crores for a few months in the year. We have INR 268 crores of cash and cash equivalents. So to those investors who always ask what we plan on doing with cash, we always said that the company traditionally has been very financially conservative. And now all the same investors come and tell us that, that has been the correct strategy because in our peer group there are companies with very high levels of debt, very, very high levels of debt and there are also companies which have good operational parameters but very high levels of CapEx, and as a result, zero cash flow at the end of the year.

Right. Sir, do we see the recovery broad-based in our all 3 segments? Or do you think there is a lag in recovery in any of these?

We are expecting not only an increase in demand, and that is brought out by the empirical data of July. But we are also seeing, after many years, a shortage of supply because all national and international brands depends on a vendor base. So this vendor base has not been able to get this act together in terms of reaching the required requisite capacity utilization.

The next question is from the line of Dhruv Jain from Ambit Capital.

Just 1 question from my end. Sir, you mentioned about the competitive intensity in sanitaryware. If you could just throw some light on the size as well, given you mentioned in your opening remarks about the possible increasing bargaining power for organized tiles players?

See, out of -- I mean, we keep hearing about 800 to 900 plants in Morbi. Now what we hear is only 50% to 60% of those plants are currently operational at a capacity utilization of 60%. That has never been the case in the last 5 to 10 years. At the same time, because of this anti-Chinese sentiment globally, generic tiles manufacturers never found such a large opening of markets and availability of customers globally. As far as tiles companies is concerned, there are just 10 to 12, maximum of 15 national brands, which compete for large project orders. So when Cera competes, they are competing with the top 5 to 10 tiles companies for individual orders. Their price discounting does not go down beyond a certain level. That gives us the confidence that tiles, which had become very generic and very price-driven, is now changing. Then within tiles, Cera has launched slabs and larger value and larger size products where the pricing and margin profile is completely different. And third, the entire industry has moved to GVT. So soluble salt is less than 10%, 12% of Cera's sales, and GVT has now become the industry standard. These are the developments which gives us the confidence for the tiles industry.

Okay. So just 1 question from my end on this. So have we just seen some sort of initial price hikes that you guys have taken here? Or has that the blended realization because of mix improved for you guys at least in July?

See tiles, there is currently a consolidation in the vendor base, and that process is currently on. What we are pushing is a higher percentage of sales of GVT, that is our focus. So GVT for us is 23% to 25% of sales and double-charged wall tiles, paving tiles is altogether 86% of sales. Soluble salt this quarter is only 14% of sales. The same number for 12 months of last year was 18%.

The next question is from the line of Saurabh Shroff from QRC Investment.

Can you hear me?

Yes, please.

Can you maybe elaborate a little bit on our distribution between Tier 1, 2, 3? How that has maybe evolved over the last couple of years as we have tried to move, like you said, to Tier 3? And what the plan is there going ahead? And then I'll ask my next question.

The first is, of course, there is always a sales concentration with high-value dealers. So I'll give you a statistic. Our top 100 dealers constitute 23% of sales in this quarter, and top 500 constitute 79% of sales. Now I'll give you another statistic. As on June '20, we had the 3,631 dealers. That same number in June '19 was 3,086 dealers. And another statistic that might interest you is 22% of dealers have been added in the last 5 years, which bring in 10% additional sales. So dealer concentration will always be there. These top 500 dealers have been the ones to invest in infrastructure, whether it's showroom, salespeople, 3-wheelers, 4-wheelers, they have established lines of credit with banks. They have the ability to provide credit to their consumers. They share some of their margins with their consumers. In Cera's case, because of the deep inroads in Tier 3 markets, we have dealers who are doing between INR 5 crore and INR 10 crore sales in very small places like Nagpur, Kolhapur and many other Tier 3 towns. And that we feel is the avenue for growth because that is the place where MNCs are not present and their entire focus is on Tier 1 markets and large projects of national builders in luxury markets. MNCs also compete amongst themselves for these luxury projects and undercut price to such an extent that it doesn't make sense for them. But for them, it's an India entry strategy. So we don't want to participate in that battle of attrition. Hence, our strategy traditionally has been Tier 3 markets and you can see that in the numbers as a percentage of sales and on all parameters.

Sure. [Technical Difficulty]

Mr. Shroff, I am sorry to interrupt, but your audio is not clearly audible, sir.

[Technical Difficulty]

We proceed to the next question. This is the last question from the line of Akhil Kalluri from Franklin Templeton.

Ayush, a couple of questions. So first on the demand again. You indicated that July was at 95% of last year's sales levels. That's quite positive. What I wanted to understand was more qualitatively based on your interactions with, say, dealers or builders, how much of this do you think could be pent-up demand to gauge the sustainability of the recovery?

This pent-up demand, we are not really calling it pent-up demand because construction activity in April and May was completely halted. Even in June, except the national developers and national EPC companies like Shapoorji or L&T, we see sites in Tier 1 markets still not fully recovered. So national developers, let's say, Mahindra or L&T, have the resources capability and the manpower resources to restart their sites. But the other end of sites restarting is all in Tier 3 markets. So that -- we wouldn't call that pent-up demand. We'll just call that a race for project completion.

Sure. Sure. But in case some of these Tier 3 markets, while there is this race for project completion which is happening at this point, can you throw some light on new project starts on your housing starts as well which would probably be critical from maybe a 6 to 9 months perspective in terms of how demand plays out?

In any case, 70% of the WIP in real estate is affordable housing. Now we are getting a lot of data that even during the pandemic, apartments in affordable housing were being sold and given that these are all [ interest rate sensitive ] sectors. Home loans are at 6.85%, 6.95%, which is the lowest they have been in 20 years. Affordable housing projects, the velocity is coming back. So any project that is 6 months away from completion, which will, therefore, be eligible for GST exemption and these home loan rates sub-7%, we are seeing velocity. And our role only kicks in once these projects are 6 months away from completion. So that's the data we track. There, we are not finding as much of issue in sale.

Fair enough. Fair point. The second bit was on the pricing and margin front. You indicated that there have been cost reductions in which sales momentum almost back to last year's levels. There could be some margin boost as well, right, going forward. In such an environment, I just wanted to understand your thought process on thinking about the price hike instead of maybe just offering higher discount to dealers, maybe certain better working capitals, given a center of our balance sheet just to gain market share. How do you -- how are you evaluating the pros and cons of the two?

See, we are traditionally -- you know the company, you know the philosophy behind conservative financial management and the receivable days. So I'll give you that number. Receivable days as on June 20 was 51.36 days versus 56.78 days last year, and ex-tiles that number was a 39.80 days versus 39.31 days. This is against the -- again, the lowest in the industry. We have seen too many instances of companies trying to pump prime their sales by offering additional credit. So we just want to steer clear of those experiments. We have seen just too many cases where things have not worked out for anybody.

That's fair, Ayush, and that's commendable. But just in terms of the pricing as well I think during one of the participant’s earlier questions, you had highlighted you're thinking of a 3% to 5% price increase, given how things are at this point. So I just wanted to understand, so what do you think by probably offering higher discounts to dealers, higher incentives? Can we gain market share at this point instead of thinking about the price hike?

See if gaining market share is the objective, and that is always the objective, then new product introduction is the way to go, and differentiating your own product with the peer group product in terms of technology. And that a bulk of our efforts are engaged in that direction. In fact, we have always been tinkering with the dealer lending price. So even during this period, we have been tinkering for -- with this FY '20/'21 dealer lending price, and we are trying to increase the dealer lending price and the MRP. And dealers have welcomed the move. Normally, you would find that trades resisting such a move. Because there we are offering them newer products, more SKUs, so they are quite happy to allow the company to tinker or increase the dealer lending price.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Thank you. I would like to thank everyone for attending this call and for showing interest in Cera Sanitaryware Limited. Cera is optimistic that is strong positioning in the industry and improving macros will help it deliver steady and consistent growth going forward. With this, I hope I have been able to answer your question satisfactorily. However, should you need any further clarification or would like to know more about the company, please feel free to reach out to me or CDR India. Thank you once again for taking the time to join the call and see you all next quarter. Thank you very much.

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