Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Ladies and gentlemen, Good day, and welcome to the Q2 FY '21 Earnings Conference Call of Cera Sanitaryware Limited. [Operator Instructions] Please note 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, Mr. Vaswani.

Thank you, Janice. Good morning, everyone, and thank you for joining us on the Q2 and H1 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 Shah, CFO and COO of the company. We will begin with brief opening remarks from the management, following which we will open the call for a Q&A session. Before we begin, I would like to mention that some of the statements made in today's 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 like to turn the call over to Mr. Ayush Bagla for his opening remarks.

Good morning, everyone, and thank you for taking time to join our call. I hope all of you are safe and well. The earnings for the second quarter and for the half year ended 30th September 2020 were adopted by the Board of Directors yesterday, 10th November 2020. The earnings documents have been released to the stock exchanges. As you all know, we started the fiscal year with significant disruption in the business due to the lockdown and restrictions on activity, which began to ease by the latter half of the first quarter. During quarter 2, we have witnessed a sharp recovery in demand resulting in a rebound in financial performance. This has been driven by the performance of the Sanitaryware and Faucetware business, which are our core businesses and the most profitable verticals in our fold. The Sanitaryware business, which had not performed to expectations in recent quarters, has recovered strongly in Q2 of this year and the Faucetware business, which has been delivering robust growth for several quarters has returned to its positive trajectory. Another positive development during the second quarter has been the robust demand from our end consumers. The earlier estimates of replacement demand have proved to be conservative given the absorption witnessed some markets categorize at Tier 3 and beyond. Despite slow progress in projects across the country, there was a sharp rise in volume for Sanitaryware and Faucetware products in the second quarter, indicating strong underlying demand in the home improvement category. On the operational side, we had stabilized operations towards the end of first quarter, as we shared in our prior call, the normal structure of 3 shifts of 8-hour each has resumed in July itself. Thus effective working days and hours were substantially higher this quarter compared to Q1. Our subsidiary joint venture with tiles company, Anjani, which resumed operations on 5th August, as indicated, has quickly ramped up to 95% utilization. In October, capacity utilization was 100%. Through a concerted focus on manufacturing excellence, we have automated processes such as pressure casting, antibacterial glazing as well as grinding, polishing and electroplating. The emphasis on agile infrastructure with a mix of in-house and outsourced facilities has allowed us to rapidly respond to shifts in demand. This keeps operations agile and flexible, providing the company with on-tap capacity and resilience, which enabled it to rebound strongly in Q2. Coming to our numbers. Revenues in Q2 FY '21 were INR 317.90 crores versus INR 142.59 crores in Q1 of FY '21, higher by 123%. EBITDA was INR 44.4 crores in Q2, bouncing back from INR 13.52 crores reported in Q1 this year. The EBITDA margin has firmed up to 13.97%, an increase of 49 basis points. PAT was INR 26.29 crores, nearly 803% higher than in Q1. Due to the sharp rebound in performance, the performance in Q2 this year has nearly reached parity when compared to Q2 of last year despite the challenging backdrop. For Q2 FY '21, the revenue for the quarter stood at INR 317.90 crores versus INR 327.23 crores in Q2 FY '20, which is down by 2.85% on a Y-o-Y basis. To reiterate, our performance during the quarter was driven by the core businesses of Sanitaryware and Faucetware, essentially from our well-established presence in Tier 3 markets. This was supported by the increased traction in contactless and touchless products. For Q2 FY '21, 50% of the top line was from Sanitaryware, 26% from Faucetware, Tiles presented 21% and Wellness 3%. On a Y-o-Y basis, Sanitaryware revenues registered an increase of 0.78%, Faucetware revenues increased by 3.68%, Tiles declined by 11.76% and Wellness declined by 28.52%. Sanitaryware has bounced back strongly in Q2, both from an absolute number and from a growth trajectory standpoint. Faucetware, which has delivered consistent growth historically since inception, the 2 core verticals of the business now contribute 76% of revenues once again. EBITDA, excluding other income for FY '21 Q2 was INR 40.46 crores versus INR 41.59 crores in Q2 FY '20. The EBITDA margin for Q2 FY '21 stood at 12.7% at the same level of that of Q2 FY '20. Profit before tax for Q2 FY '21 is INR 35.13 crores against PBT of Q2 FY' 20 of INR 36.70 crores, a decline of 4.3%. Tax expense for Q2 FY '21 is INR 8.84 crores against INR 6.67 crores in Q2 FY '20, an increase of 32.5%. Profit after tax for Q2 FY '21 is INR 26.29 crores against a Y-o-Y number of INR 30 crores. EPS for Q2 was INR 20.2 versus INR 23.1 in Q2 FY '19-'20. Inventory days in Q2 FY '21 was 51 days compared to 52 days in Q2 FY '20. Receivable days in Q2 FY '21 were 55 days versus 60 days. Payable days in Q2 were 38 days against 28 days in Q2 FY '20. Therefore, net working capital days in Q2 FY '21 was 68 days versus 84 days in Q2 of FY '20. This has been a focus area for the company. and the efforts in the last few years towards digitization and establishing localized warehousing have enabled us to offer just in time inventory solution in finished goods to trade partners and large customers. This enables declogging at the respective locations and sites, which leads to faster and smaller billing cycles for Cera, enabling better receivable management. Through judicious capital management, the company was able to increase its already high liquidity position to INR 362 crores as on 30th September 2020, from INR 268 crores as on 30th June 2020. Going ahead, Cera will maintain disciplined credit policies while sustaining the prudent CapEx outlay to further elevate its robust financial position. 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 Archana Gude from IDBI Capital.

Two questions from my side. Sir, firstly, in the press release, it is mentioned that the Kadi manufacturing has been disrupted due to some employee-related issues. So what is the status on that as of now?

Archana, we have given out 3 communications to the stock exchange on this topic. And what we said is that some of the workers of the Sanitaryware unit were demanding higher fixed pay. So we have a system of fixed and variable pay, and as any management, it's always our attempt to incentivize the workers and pay a higher portion of variable pay. So one of the union leaders wanted an increase in fixed pay and there was a slight disruption and we approached the Labor Department, Government of Gujarat, which on 16th October, issued a directive, prohibiting the disruption. So now we are engaging with the union leader and the labor to come back to normalcy in production. Meanwhile, the adjacent factory of Faucetware is almost unaffected. And thirdly and most importantly, more than 53% of products in Sanitaryware are now being sourced from outsourcing partners even in Q2. So all attempts have been made to make sure there is no impact in the marketplace and all our trade partners, whether it's dealers, or project customers continue to receive all products well in time.

Sir, is that my understanding correct that the issue, what is happening there is not yet resolved?

It's an ongoing situation. Yes, we have not come back to the same capacity utilization that we had in end of Q1 and bulk of Q2. So yes, there is a slight disruption, but these are ongoing discussions. We did get some outside temporary workforce. So all attempts are being made to go back to that 80%-plus of capacity utilization.

And secondly, during this lockdown, I'm sure that many unorganized players might had faced the situation wherein there is a production disruption. Sir, have we gained the market share in the sanitaryware and faucet because of that and how we should look at H2 FY '21, is it that the pent-up demand has really helped us to force such robust sales growth for Q2? Or how we should look at H2 FY '21, sir?

See, both in Q1 of this year and even in some part of Q2 of this year, bulk of the project sites were not fully operational, but there was a surge in demand. So I won't call this pent-up demand. I would say that all estimates made by companies, including us on end consumer replacement demand were very conservative. So the end consumer demand is actually much higher as a percentage of total industry than we used to estimate and that was evident because most project sites were closed. So that's what you see. And we have anecdotal information from our frontline dealers and sales force that a lot of households had disposable income because there were no other avenues like travel, entertainment and other things to spend on, so home improvement became a focus area for a lot of households.

Sir, just to follow up on that, given the Tier 3, Tier 4 and the smaller towns are really doing well. So is it fair to assume that as and when the metros and the Tier 1 cities will come up, we will be able to maybe surpass the growth we have shown in Q2?

We'll wait for those trends to actually take place before taking a view on them. But yes, the Q2 trends have been very encouraging month-on-month and as a quarter and Sanitaryware growth is back on track. Faucetware growth has been on track and continues to be on track. And you can see the impact on working capital, the drastic reduction in working capital in Cera. We were always a category leader in the lowest working capital, we had the lowest receivable days, but that's further going down. So which shows that a lot of business is now cash-and-carry.

The next question is from the line of Pritesh Chheda From Lucky Investment.

Sir, just wanted to understand a couple of things. One, when we were at the end of the quarter 1 call, we were looking at overall growth. So considering what was happening in faucets, the import restrictions or challenges in sanitaryware. But considering that the quarter 2 is a largely flattish performance. So just wanted to take your update on how do you see it incrementally and what would have been the reason for a deviation vis-a-vis the Q1 commentary. My second question is a lot of reports are suggesting changes in market share in sanitaryware. So if you have any comment of any change in market share or any for us as well as largely at the industry level, if you could give some comments, sir?

First, on the imports, the Indian consumer is now preferring, made in India products, and we've been talking about that for a number of years, and we have built domestic capabilities in manufacturing. So we are not one of the China import-dependent company. So that's a welcome development. As far as restrictions on import is concerned, there was only a marginal import duty of 5% to 10%. So other than that, there are no barriers to import. So other companies, I'm sure, continue to import from China, and it's a matter of time before a certificate of origin will become mandatory as it has become mandatory in all e-commerce sales. So that is one. As far as top line is concerned, we are quite happy to have this top line with both the core segments firing very well. So both Sanitaryware growth and Faucetware growth are back on track, working capital is reduced. Inventory levels are low, receivable levels are very low. On all parameters, we have done very well. We have increased our cash position by almost INR 95 crores during the quarter. And all this is being achieved on an annual CapEx budget only of INR 21 crores. So on all parameters, yes, is there scope for growth, of course, there's always scope for growth by introducing new SKUs, further segmenting the market, that is always our attempt. And as far as market share is concerned, we get numbers, of course, of our peer group and ourselves, but these are not authenticated by a third-party research agency. So we can't really say who's gained and who's lost, but we are a category leader in sanitaryware, we are most profitable in sanitaryware, the highest margins and lowest receivable days, lowest working capital, highest cash position. So on all parameters and on every parameter, we are a category leader.

But do you see any market share changes for you or the market share is largely intact? Because I think you said sanitaryware growth rate is flat, right, in quarter 2 and faucet is 3%, right?

That is for the company. As an industry, we don't get any third-party data. But if you see for the last few quarters, our sanitaryware business, because it was operating from a very high base we were not getting Q-on-Q or even Y-o-Y increase in top line for the sanitaryware vertical, which we have come back to. That was the major achievement.

And lastly, do you see the growth rate now, here on the growth rate incrementally converting into a double-digit growth rate, do you see that kind of movement at the ground?

You see this is a -- housing is a highly interest rate-sensitive sector. And now home loans at 6.75, then the Awas Yojana has been a huge success. Low-cost and mid-income housing, the velocity -- whoever we speak to the velocity is very, very strong. So based on those parameters, and we are squarely in that market, 70% of WIP of the real estate is mid-income housing and below. So Cera as a brand is firmly squarely positioned to capture that market. So going forward, if not double digit, at least high single digit is definitely possible.

The next question is from the line of Shanti Patel from SP Investment.

Sir, my first question is what is our PAT in terms of percentage, and do you think in future it will increase? And secondly, what is our return on capital employed and return on equity today, and what do you think about the future?

PAT for Q2 FY '21 is 8.17%. Last year the same number was 9.06%.

Fine. But do you think there is probability of increasing that in the next 1 or 2 years?

Yes, if you see the comparison between Q1 and Q2, even though Q1 was not a normal quarter. There has been a substantial increase. We are almost at the same level of last year. That is one. PBT is even closer than PAT from between last year on a Y-o-Y basis because there was INR 2.5 crore extra tax payment. That's the difference you see in the PAT. That's one. Going forward, you see we have built up our cash position during the quarter, of INR 95 crores, besides being a debt-free company. And what was your last question?

Return on capital employed and return on equity?

So ROCE, we calculate at the end of the year. So for 31st March '20, without treasury it was 25%, with treasury it was 20%.

Is it return on capital employed.

That's right.

And what about return on equity? I think it will be same because there is no debt.

No, it won't be same because of a very high tax incidence.

So how much it comes to?

I'll give you the number of last year. Siddharth, can you just give the number of last year, 12 months ROE?

20%.

Okay. It was 20%. And now the last question is because our government has got a policy to increase the income of the farmers substantially. Now if that happens, what will be the demand from rural area as far as the industry is concerned and what about our company?

So first, I'll just give you some very interesting data on our sales from Tier 1, 2 and 3 markets. So for the quarter, 26% of our top line was from Tier 1 markets with population about 25 lakhs. For the same quarter, 13% of our sales were from Tier 2 markets with population of between 10 lakhs to 25 lakhs. And 60% of our sales were from Tier 3 and below market with populations of 10 lakhs and below. So we are squarely positioned to take advantage of the rural demand, the increase in farmer's income and the short gestation projects in rural and semiurban and small towns. So these were our very short gestation.

But sir, I think we don't have that capacity expansion plan as on today, if I'm not wrong, which can cater to the substantial increase in the demand from that area. So what about that?

Sir, we have on-tap capacity available with our contracting vendors and partners. So again I will give you a statistic for the quarter; 58.8% of our Sanitaryware sales were from these outsourcing partners and 53.73% of our sales in Faucetware were from outsourcing partners. So this on-tap capacity does not require the company to make heavy CapEx on its own books. And we use our own dedicated capacity for complicated and high-end products. So that is the strategy, and that's why we get this ROCE.

No. But then it will not impact our margin if we get this done through contractors?

In fact, the cost of manufacture in most of the contractors is lower than any companies because they have lower overheads, very high volumes and they know how to contain costs, they don't have an R&D department, sales and marketing department and other typical overheads that a company has. So we have found that buying from these outsourcing partners increases our margin, and these are all incremental sales. So what you have suggested is correct, rural and semi-urban market, Tier 3 and below markets, that is squarely where we are focused, affordable housing, mid-income housing, which is 70% of the current WIP. That's exactly where we are focused, and that's where the future market lies.

So I think in future, our growth should be in double-digit, correct?

Well we wait for that to happen before giving any guidance to that effect. So we'll wait for that to take place.

No, I mean, your opinion. I'm just from the circumstances prevalent today and the government policy I mean you are the best person to judge because you are in the industry. I'm not telling you to give guidance, but what you gut feeling?

For us, we'll wait for those events to unfold before taking a view on them.

[Operator Instructions] The next question is from the line of Hiral Desai from Anived PMS.

I had a couple of questions. So one was on the working capital, which you sort of alluded to earlier in the call. We've seen a significant improvement versus even March of this year, which was a significant improvement versus the prior reporting period. And if I look at the operating cash flow for H1, we are at about INR 143 crores versus an EBITDA of about INR 50 crores. So how sustainable are some of the just-in-time inventory and some of the initiatives that you've spoken about. And a related question to that is given that there is a significant amount of cash pile-up now happening, I mean what is the thought on the payout or sort of any M&A in the pipeline?

Thanks, Hiral. Many happy returns about Diwali as well. But most important is payable days. You see out of the 3 components of working capital, our payable days have been historically in the 20s. So because the company was cash rich, we always used to pay well before the contracted period and try and extract any financial concessions. Now what has happened is in discussions with our suppliers, those financial concessions are also available, and we have been able to increase the payable days from 28 to almost 38. So that is the biggest component of the change in working capital. And the receivable days, a lot of new businesses is being done on cash-and-carry. So especially Tiles, which is the lowest margin business of all 3, almost all sales are being done on cash-and-carry. We have been able to increase our tile selling price by 3% during the quarter and from credit sales, we are trying to reduce it to about 80%, 85% of cash-and-carry. So those are the 2 components, how sustainable they are? Yes, if we are willing to take a slower growth trajectory in Tiles, but are definitely more profitable and less risky one, that is definitely sustainable.

And this move towards cash-and-carry would be true for the industry as a whole? Or this is much more specific to Cera?

It is specific to Cera. The Industry is moving in the other direction of somehow lubricating sales by extending credit. So that has been a phenomena that we have seen in the industry, but you know Cera and you know how conservatively it is managed from a financial standpoint, so they will never do something like that. And That also answers your last question on the cash. The cash number has now crossed INR 360 crores and INR 94 crores was added during the quarter where most companies were burning cash. Currently, there is no M&A activity or massive increase in CapEx. In fact, CapEx for this year has gone down from a normal number of INR 50 crores, INR 55 crores to INR 21 crores. So whether there will be a payout in the form of a special dividend or a buyback, that is something that I think the shareholders and Board will take a collective call at a later date. But currently, there is no proposal in front of the board to consider any of these activities of either M&A or a special payout or buyback.

Okay. And my second question was on the gross margin. So if I look at it sequentially also, there is about 150 basis points deterioration in the gross margin. Now this is despite higher sales, lower raw material prices and the fact that I think you were likely to take a price increase in July. So just wanted to understand the gross margin.

The price increase took place of around 3% in August in Sanitaryware. And in Faucetware the pricing is much more dynamic linked to brass pricing, so brass was down by 3%, 4%. So there was no need to take a price hike at the same time, but in any case, it's much more dynamic. But the share of entry level of products in Sanitaryware did increase from 38% to 40% Y-o-Y. So I'll again give you the 3 numbers; entry level from 38% to 40%, mid-level from 12% to 12% and premium from 49% to 48%, in Sanitaryware. In Faucetware, entry level from 32% to 31%, mid-level from 19% to 16% and premium from 49% to 53%.

But last time, I think on the call, you had mentioned that there is not too much of margin differential between the entry-level products versus the premium products and the move that you are talking about year-over-year is not a very large move per se.

Right.

So that I am still not very clear on this 150 basis points sequential decline in the gross margin.

And I'll give you 1 more reason. I just look at the gas prices for you. Again, not comparable, but Q1, we paid an average -- weighted average 12.4 in Q2, we paid 19.22. Last year, we paid 24.23. So the only other item that remains is basically discounts and sales incentives.

The next question is from the line of Abhisar Jain from Monarch AIF.

Sir, in the Q1 call, you had mentioned that there will be tightening on the other expenses, and we had also negotiated some of the rentals down. So what would be the overall reduction that, sir, you are looking at for this year because there could have been renegotiations on that front. Are we on track for the reduction that we had mentioned in Q1?

Yes, the guidance on that front was INR 10 crores of fixed cost expenses in rentals and other fixed cost contracts to be negotiated downwards, INR 10 crores per annum. So that number remains.

Okay. Okay. Understood. And sir, in terms of the capacity utilization across Faucetware and Sanitaryware, right now in Q3, what would be the level that we will be operating at?

Sanitaryware for Q2 FY '21 was 68%, and Faucetware was 46%.

Okay. And sir, would there be some improvement from this now in Q3?

Yes. Yes. We are expecting improvement. But in any case, this is not a reflection on sales because outsourcing partners are meeting the current demand. And whatever disruption there was for a period and a slight disruption that continues is limited only to the Sanitaryware facility. So the Faucetware facility's low capacity utilization numbers are not related to any disruption, but the kind of products that they make and the demand for those products.