Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 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 of CDR India. Thank you, and over to you, Mr. Vaswani.

Thank you, Janice. Good morning, everyone, and thank you for joining us on the earnings conference call for Cera Sanitaryware Limited for the Q3 and 9 months of FY '21. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; and Mr. Rajesh V. Shah, CFO and COO of the company. We will start with brief opening remarks from the management, following which we will open the call for Q&A. A quick disclaimer before we begin. Some of the statements made in today's call may be forward-looking in nature. And a note in this regard is contained in the results documents that have been shared with all of you earlier and have also been uploaded on the stock exchange websites. I would now turn the call over to Mr. Ayush Bagla for his opening remarks.

Good morning, everyone, and thank you for taking the time to join our call. The earnings for the third quarter and 9 months ended December 31, 2020, were adopted by the Board of Directors yesterday, 2nd February 2021. The earnings documents have been released to the stock exchanges. As we indicated during the last quarter, the overall demand backdrop was robust, and we witnessed strong traction across all markets and products, especially from Tier 2 and below towns and cities. The home improvement theme has been resonating with consumers. Savings and disposable income for consumers due to restrictions on travel, entertainment found its way to upgradation and renovation of homes. The limited impact of COVID in Tier 3 and below centers has allowed civil contractors, plumbing contractors and the interior home designers to reengage with the consumer. Project types, which gradually opened up during Q2, were, in most cases, fully operational. The impact of reduced interest rates for home loans at 7% and below has been the single most important factor for the surge in interest for new home purchases. We truly experienced the elasticity of demand in relation to cost of capital in real estate. Stamp duty reduction in a few geographies for a limited period made consumers bring forward their new home buying decisions. This resulted in a reduction in inventory at the company level. As the challenges posed by COVID-19 steadily reduced, we started witnessing a notable improvement in our performance. I'm happy to share that the positive rebound in demand we witnessed in Q2 FY '21 from our most profitable vertical, that is Sanitaryware and Faucetware businesses ,continued to sustain into the third quarter as well. As we had shared, the Sanitaryware business has exhibited signs of returning to growth, while the Faucetware business continued with its positive trajectory of growth of the last many quarters pre-COVID. The media campaign on staycation at home, which was unfurled by the company from September 2019, directly connected with consumers post lockdown. The company, however, could not take complete advantage and monetize the uptick in demand due to the partial disruption witnessed at the manufacturing facility. As intimated to the exchanges periodically during the quarter, a group of workers remained unauthorizedly absent from their duties with effect from 29th September 2020. Following this, on 16th October 2020, the labor department of the government of Gujarat declared the disruption as illegal and directed the group of workers to resume their duties. The High Court supported this position and issued further directive, following which all workers have completely resumed their manufacturing activities from 22nd December '20. Restoring the overall normalcy introduction took longer than expected, and therefore, Cera Sanitaryware's production, and consequently, performance for this quarter was impacted materially. The production of Faucetware had been impacted marginally. Consistent efforts undertaken in the past to drive automation largely enabled the company to run its factory with the help of the available skeletal staff. To elaborate a bit further on this aspect, there have been several enhancements which we have undertaken at the manufacturing, infrastructure at the plant. Processes such as special casting in Sanitaryware and grinding, polishing, electroplating in Faucetware has been automated to enhance efficiency, consistency and finishing. There has been a strategy to develop agile infrastructure by leveraging a mix of in-house and outsourced facilities to enable us to rapidly respond to circumstances. This provided highly -- this proved highly beneficial in the backdrop of the partial disruption as we were able to increase volumes from our vendors to cater to the improved demand. The normal percentage of outsourcing in Sanitaryware is 50% to 55%. And this quarter, it grows to 77%. In Faucetware, the normal percentage of outsourcing is 50% to 55%, which rose to 59%. Certain high complexity products which are manufactured in-house were impacted since this could not be outsourced. The production cycle for newer products at the vendor base involves mold making, establishing quality parameters and thus take 3 to 4 months. We estimate the partial disruption has led to lost sales of INR 65 crores and reduced EBITDA by INR 10 crores in Q3. Coming to our numbers. Revenues in Q3 FY '21 were INR 310 crores, lower by 2.5% on a sequential quarter basis. EBITDA including other income was INR 48 crores in Q3 from INR 44.4 crores reported in Q2 this year. The EBITDA margin has gone up to 15.14% versus 13.8% in Q2 FY '21, an increase of 134 basis points. PAT was INR 29 crores in Q3 FY '21 versus INR 26.29 crores in Q2 FY '21. Due to the sharp rebound in performance, the performance in Q3 this year has nearly reached parity when compared to Q3 last year despite the challenging backdrop due to the partial disruption at the manufacturing facility. For Q3 FY '21, the revenue for the quarter stood at INR 310 crores versus INR 321 crores in Q3 FY '20, which is down by only 3.4% on a Y-o-Y basis. On a Y-o-Y basis, EBITDA, excluding other income for Q3 FY '21 was INR 40 crores versus INR 43 crores in Q3 FY '20. The EBITDA margin for Q3 FY '21 stood at 12.8% lower by 53 basis points. Profit after tax for Q3 FY '21 is INR 29 crores against Y-o-Y number of INR 28 crores. EPS for Q3 was INR 22.37 versus 21.81% in Q3 FY '19, '20. For Q3, FY '21, 45% of the top line was from Sanitaryware, 28% from Faucetware, Tiles represented 24% and Wellness 3%. On a Y-o-Y basis, Sanitaryware revenues registered a decrease of 5%, Faucetware revenues increased by 7.7%, Tiles declined by 6.6% and Wellness declined by 37.1%. Contribution from Sanitaryware was impacted in Q3 due to the one-off disruption. However, there are ability to tap into its vendor ecosystem led to increased outsourcing. And with the continued growth from Faucetware, these 2 verticals remain the bedrock of the business with contribution of 7% to 8% to revenues. Inventory days in Q3 FY '21 were 53.88 days compared to 52.83 days in Q3 FY '20. Receivable days in Q3 FY '21 were 53.93 days versus 58.34 days. Payable days in Q3 were 46.25 days against 39 days in Q3 FY '20. Therefore, net working capital days in Q3 FY '21 was 61.56 days versus 72.17 days in Q3 of FY '20. Those of you closely tracking Cera are aware that this has been a focus area for the company, which has required considerable effort over the last few quarters. Initiatives such as digitization and established localized warehousing have enabled us to offer just-in-time inventory to trade partners and large customers. This has enabled debottlenecking at the dealer locations and customer sites leading to faster and smaller billing cycles for Cera, enabling better receivable management. The company was able to further increase its liquidity position to INR 409 crores as on 31st December 2020 from INR 362 crores as on 30th September 2020. To conclude, overall, the sector fundamentals are strong, and the domestic demand continues to grow at a steady pace. As we look ahead, we continue to see an immense potential for our products. Healthy demand, coupled with our strong positioning in the industry should enable sustained traction. On the whole, we are confident of the future growth potential and opportunities across our markets over the medium to long term. 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 Omkar Kulkarni, individual investor.

So I wanted to know how the current scenario is panning out? And now the disruption at the facility is over. So how do you think your growth can be, like, say, next couple of quarters?

See the first and most glaring thing about the demand scenario is there was demand much in excess of available products and in excess of supply. So not only in Q3, but going forward for at least the next 2, 3 quarters, our estimate is demand is way ahead of our ability to supply, even though we are back on a 3-shift basis from 22nd December, and our outsourcing partners in India and abroad are working on a full steam basis. So given the sudden surge in demand from projects and retail customers for the foreseeable future, there is going to be no drop of demand. Inventory, both at the dealer level and at the company level is going to be as close to 0 as possible and tactical across a vast number of products. So demand has proven to be very, very elastic. The single largest factor, of course, is the interest rate scenario. We've always talked about the interest rate-sensitive sectors behave, but we have never tested this theory with a sub-7% below home loan regime. So given that the home loan regime will stay below 7%, which is the most likely scenario, demand will outstrip supply for the next few quarters. And that is reflective, not only in the shortage of projects -- products in Q3, but the surge in numbers post reopening on 22nd December. So January was a fantastic month, and all indications for the balance 2 months of Q4 are very strong and at least for the next 2, 3 quarters.

So the capacity utilization was 100%?

You see, our capacity utilization, I'll give you the numbers. We had only 9 full working days in the quarter in the Sanitaryware facility because of the partial disruption, which we kept on informing our stakeholders from time to time. So on a 90-day basis, Sanitaryware was at a capacity utilization of 20%. And Faucetware was at a capacity utilization of 58%. But our trade partners and vendors were operating as close to full capacity as possible. And from 22nd December, we have been working 3 shifts. It's taken us some time for the molds of Plaster of Paris to be remade, et cetera. So from January is when full supply lines have been restored.

Okay. So excluding this unforeseen scenario, you would have grown by around 13%, 14% on the top line, I guess?

Yes, we estimate that we lost sales of about INR 65 crores, and these lost sales of INR 65 crores are all high-end complicated products, which are made in our own manufacturing facility. So they couldn't have been substituted by products from our vendors. So other than the INR 65 crores, which is, in our mind, a one-off event, Q4 onwards, you'll see normalcy in production, sales, and all efforts will be made to best monetize available demand scenario.

So whatever you are saying, at least double-digit growth can be seen, right?

See, we'll be really careful about making any kind of prediction about Q4 and beyond in terms of numerical. We'll wait for that scenario to actually take place and then take a view from them.

All right. My second question is on the liquidity position. I mean, you are sitting comfortably on quite a huge amount of cash. I would like to how you would be deploying or rewarding investor now that even dividend distribution tax has been abolished. And what has been your dividend policy of say, around giving back -- how much you have -- I mean, what is the percentage of, say, 30%, 40% of the total cash? So what is being your policy of dividend?

See our past policy has been 15% to 18% of PAT has normally been given out as dividend if you look at the last 6 years. But on a face value of INR 5, we have normally given out last 3 years, INR 13. So that's 260% on face value. So that, of course, the Board will take the call as and when the year closes. And yes, we understand the point that liquidity has been growing in every quarter. Even in Q1, where we got less than 45 days of actual working and in Q2 where bulk of our project customers continue to remain closed, liquidity was enhanced. Even in Q3 where our factory was as good as disrupted and partially closed for 82 days out of 90 days, we increased our cash. So that is the outcome of very careful working capital management, inventory management, receivable management and increasing the payable days. Going forward, if working capital were to expand because we might want to stock up on a little higher inventory, et cetera, we may not see this kind of addition to cash going forward. And currently, there are no real concrete plans in front of the Board of utilizing the cash, whether in the form of a buyback or dividend or any kind of CapEx. So the normal CapEx program continues. Now I'll give you just some figures on the normal CapEx program. At the beginning of the year, we had indicated that the CapEx program for this year is INR 21.82 crores. But out of that, only INR 5.96 crores have been spent. And in Q4, only another INR 6 crores are being planned to be spent. So a total of INR 12 crores is being spent this year out of our allocated budget of INR 21.82 crores. So CapEx is also low, and we have developed the ecosystem where we have agile infrastructure on that capacity. So in most of the products, especially in the low-end noncomplicated products, we have been able to use this agile infrastructure. The vendors cannot have the same level of skill and sophistication in the factory that the company has. So which is why the disruption hit us to the extent of INR 65 crores.

Okay. Just the -- like the cash we have been sitting, so it would be beneficial for the shareholders if you increase the payout ratio from 15% to 18% to around 25%, 30%.

Well, all those various options, I'm sure, will be considered by the Board before a final decision is taken and once the 12-month numbers are available.

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

Yes. Sir, I missed the commentary on a couple of things. If you could clarify: One, you mentioned that the Sanitaryware growth in the quarter was minus 7%, and whereas, Faucet grew. That's how you put it -- and Tiles and Wellness declined. That's how you put the numbers?

I'll just repeat the numbers on a Y-o-Y basis, Sanitaryware declined by 5% and Faucetware went up by 7.66%, tiles went down by 6.5% and Wellness, at very small base of 7 crores, went down by INR 37 crores.

So what grew in the quarter was basically Faucet at 8%.

Yes. In Sanitaryware, we would have been close to INR 200 crores, [indiscernible] had the factory not had that onetime disruption.

And what was the loss of days of production in case of Sanitaryware?

82 days out of 90 days, we're operating at below 20% capacity.

Okay. So adjusting for the two, it seems that you would have grown about 14%, 15% for the quarter. A lot of the products in the building material space, whatever commentary that we are hearing, are indicating towards a double-digit -- comfortably double-digit growth rate -- high double-digit growth rate in the forthcoming quarters. So do you ascribe to the same opinion, especially in the fact that you would have taken about 4%, 5% price hike, both in Sanitaryware and Faucetware, if I recall in the last quarter, plus there is this value mix possibility? So some percentage outlook, if you would share? And if you could share the outlook on the costing on the RMC side, if any pressure, or if you want, is there in the business?

Okay. So I'll just come to price hike and RMC and then go to the demand scenario. Sanitaryware, our last price hike was in August 2020, which is 3% to 5%. And next increase is on February -- 1st February of 5% to 7%...

Mr. Chheda, I'm so sorry to interrupt, but may I please request you to mute your line as there's a lot of disturbance from your audio. Sir, you may please proceed.

In Faucetware, again, the price increases from first February of 8% to 10%. And now coming to the raw material scenario, 50% of raw material is China clay in Sanitaryware, there has been no change. 45% again is feldspars where there's been no change, both in price and availability. In color and glaze, again no change. Zinc, which is 1% of Sanitaryware raw material is up by 10% in 9 months. Plaster of Paris, again, which is a little more than 1% of Sanitaryware RM, is up 7% in 9 months. What is up is the freight element in all of this. The freight element is up significantly. As far as Faucetware is concerned, brass is very volatile, and brass plus the cartridge and washers are 55%, 60% of the cost of production. Brass, which is let's say 90% of that 55%, 60% is up by 12% in 9 months. And [ zamak ] which is 10% of raw material Faucetware, is up by 23%. As far as Wellness is concerned, ABS-based products, such as health faucet, showers have gone up by 160%. Stainless steel, which is used in towels racks, shower arms and other accessories is up by 25%. So all this will be negated by the 1st February price hike that we have taken off 5% to 7% in Sanitaryware and 8% to 10% in Faucetware. Now coming to the demand scenario. 10% plus demand is easily achievable. That's a very conservative number. You can tell from our top line of INR 318 crores that if we missed out on INR 65 crores of sales, the additional sales would have been more than 20% -- 18% to 20% of Y-o-Y Q3 last year. So going forward, the next 2, 3 quarters and maybe even beyond if interest rates are here to stay below 7% for home loans, demand for both new launches, projects in the last stage of completion and home improvements is here to stay. So demand will not be a problem for companies like Cera and brands like Cera, which have established products and lines of distribution. Now just feeding that demand will require all our energies.

You took what price hike in Faucetware in August?

No, there was no price hike in Faucetware in August.

So there is a cost hike of 10%, [ recruitment ].

Yes. Before that, it was an April review, the numbers we shared in the previous call.

The next question is from the line of Aashiesh Agarwaal from Pareto Capital.

Congratulations on good set of performance in these trying circumstances. So actually, I had a couple of questions. First, a small clarification. You mentioned that due to the production disruption, we lost about INR 65 crores of sales and INR 10 crores in EBITDA. Is that correct?

Yes.

So my confusion over here is that typically, when your -- your gross margins are about 50%, though this quarter is a bit higher. And one would normally expect that all the expenses below the gross margin should be normally -- should be a clean pass-through. So how should we read this? I mean, do we assume that the gross margins on the lost production, the lost sales are lower?

In fact, the lost sales constitute 65% of factory-made products where the gross margin is the highest. So Sanitaryware, in any case, is the highest grossing business. After which is Faucetware, then comes the blended average and then comes Tiles. But we have, for calculation's sake, taken 15% or INR 65 crores because that is the best number to estimate the previous historical EBITDA margins. So we had said that based on INR 65 crores of top line losses, INR 10 crores would have been the impact on EBITDA.

You're going by the historical EBITDA margin trend to estimate the EBITDA loss?

Yes.

Got it. Sir, second thing that I have noticed is that gross margin has gone up. So I did miss part of your commentary on the previous question on how to grasp on the cost elements. But I see your gross margin has inched up in this quarter vis-a-vis the previous quarter.

Right.

So then if we're expecting that Sanitaryware would be having a still higher margin, so should we -- would we be safe enough to assume that margins can actually inch further up from here?

See, we have not seen this kind of demand scenario after 2012. After 8 years, we are still now witnessing a scenario where it's difficult to meet the demand. So in that scenario, every company is only focusing at production and sourcing and somehow monetizing this demand. So similarly, Cera also doing that. So in Q4, you will see the benefits of that. And going forward, you will see substantial inroads being made into the market because of this trend. So 2, 3 philosophies that we have been talking about last 8 quarters like nonreliance on Chinese imports. All those things are now becoming important. So for example, now Sanitaryware has a 10% import duty on Sanitaryware, and 15% in Faucetware. So those things, it's a matter of time before they rise, just like they are rising in most of the sectors. And our dependence on total imports are less than 5% of top line versus our peer group, which has between 25% to 40% of complicated products being imported. So all those things are now going to be important for the company.

Got it. That's helpful. Sir, other question that I have is, I mean, you mentioned about a very strong demand and that you're running at 3 shifts, and despite, unable to meet the demand. So I was seeing in March 2019, you had a gross turnover of INR 417-odd crores. So I mean, were there some one-off in that number? Or given that you are producing more at full capacity, how can I compare myself with the March 2019 quarter if I can?

See, we had INR 418 crores of top line, which was also a great number despite the fact that we lost INR 120 crores of top line due to the last 10 days of March.

I'm sorry, you're saying about March 2019?

March '19. We had INR 297 crores of top line versus INR 418 crores the previous year. and the difference was INR 120 crores of top line loss due to last 10 days of March.

No, actually, my question was a little different. I'll just rephrase it. So in March 2019, we clocked about INR 417 crores and then our product basket has become wider. And I'm pretty sure we've also added more partnerships on the sourcing side. And currently, as you mentioned, that we are running at 3 shifts and all our production chain is completely occupied. So given that, would it be fair to say that our revenues can actually exceed the INR 420 crores that we got in March 2019 by a healthy margin.

When all efforts are in that direction, but I'll be careful before putting a numerical value to it. If you look at the trends of January, yes, they are definitely possible. January was -- were 20% higher than the previous year. January '21 was 20% higher than the previous year.

That's helpful. Just one final question before I get back in the queue. Due to the production disruption, I mean, how much working capital change you would have seen? And where do you see that get back to now that you've resumed normal production?