Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Q2 FY 2022 Earnings Conference Call of Cera Sanitaryware Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Vaswani of CDR India. Thank you, and over to you, sir.

Thank you, Lizanne. Good morning, everyone, and thank you for joining us on the earnings conference call for Cera Sanitaryware Limited for the Q2 FY 2022 earnings, which were announced yesterday. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; Mr. Rajesh B Shah, CFO and COO of the Company; and Mr. Mahesh Taparia, the Deputy CFO of Cera Sanitaryware. 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 conference call may be forward-looking in nature, and a detailed note in this regard is contained in the results documents that have been shared with all of you earlier. I would now 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. The earnings for the second quarter of the financial year 2021-2022 were adopted by the Board of Directors yesterday, 26th October 2021. The earnings documents have been released to the stock exchanges. During the second quarter, we saw the market fully open and accessible, economic activity rebound and consumers returning to markets. Data of primary sales of homes reflect this trend aided by enhanced disbursements of home loans at benign interest rates. The disruptions caused by the first and second wave are completely behind us now. We expect this trend of robust consumer demand to remain intact for the medium term. Secondly, sales of homes, home improvements and upgradation became a major theme to homeowners. The focus remains on monetizing this demand by first, maximizing throughput of technologically complex SKUs at our own manufacturing facilities; two, broad basing the vendor network in India; three, upgrading the capabilities and manufacturing infrastructure of our vendors; and fourth, using the pricing power of our brand to proactively lead the Sanitaryware and Faucetware markets. We have been consistent in our strategy. We rely on Cera's own manufacturing capabilities rather than opting for imports. This was a route taken by a few sanitaryware companies in India. The rise in single container cost from $600 to $6,000 in August 2021, and then $10,000 in September 2021, when they were almost unviable to import sanitaryware products from China. Since July or August 2021, we have seen many sanitaryware players unable to book orders for any deliveries before the next calendar year. This has opened a huge opportunity for us. We have acquired new customers and had gained from this [indiscernible]. The B2C front-end is contributing a higher share of revenue, leveraging all of its power brands that has demonstrated their pricing power and customer [ pool ] in retail markets. The B2B business is at a level that we are most comfortable with. Our core business of Sanitaryware and Faucetware offers tremendous growth, ability to innovate, opportunities to create new initiatives, and to expand some markets. Demand has been robust in both verticals. Sanitaryware contributed 52% of top line for the quarter and Faucetware 34%. Together, Sanitaryware and Faucetware contributed 86% of the top line. This composition has a direct bearing on the EBITDA margin, this is noticeably higher this quarter. On the production side, we have focused on execution, as well as we have operated our plants at high capacity utilization this quarter, which for the sanitaryware plant was 97% and for the faucetware plants was 90%. The plants are working optimally and as close to maximum capacity relation with labor are cordial and smooth. All efforts are being made to debottleneck specific process in the plant and automate any process which can either enhance production or make a difference in the quality of products or in cost reduction. This focus on ensuring optimum production as well as product availability will require us to carry higher inventories of raw materials as well as finished goods. As a result, we expect capital deployed and working capital to rise this fiscal. Given the adequate cash reserves of INR 485 crores on 30th September 2021, we are comfortably placed to do so. Getting product to market and product availability is a high priority for the Company as demand remains strong. In addition to complete availability of our manufacturing facility, our entire network comprising touch points such as the large formats Cera Style Studio, the medium-sized formats Cera Style Gallery, and the small formats Cera Style Center, as well as 4,000-plus dealers and over 11,000 retailers are back on stream and fully operational. Since August 2020 demand -- elasticity of demand has been completely redefined due to lower interest rates and reduced monthly home loan payments. The sector has witnessed the court registrations in Mumbai in September and several states and cities in the last 12 months, except a brief fall period secondly. Since July 2021 the overall demand has returned to a fairly positive trajectory similar to the August 2020 to March 2021 period. The sales number of homes from July 2021 to September 2021 bear out this phenomenon. And the other parts of working capital, there is a concerted effort on managing the DSOs within a comfortable range. And we have been encouraging customers who allow us to work with them on schedule, resulting in smaller dispatches of product more closely aligned to construction progress, enabling faster and smaller billing cycles and better receivables management. As we had shared before, we are also driving an increase in cash and carry component of the Tiles business, as in the Sanitaryware and Faucetware businesses it is already higher selling price essentially. Receivable management has traditionally been Cera's strength and we will continue to remain completely disciplined in that area, even as we focus our energy on higher production and throughputs. The other development would touch upon the overall inflationary environment. There has been an increase in prices of raw materials being witnessed across all industries this quarter. On the Sanitaryware side, key items like China clay, feldspar and Plaster of Paris, which constitute more than 95% of Sanitaryware's raw material mix has been stable during Q2. In the Sanitaryware business, only within the glazing recipe, which constitutes less than 1.5% of Sanitaryware's raw material mix has the key components moved up during Q2. Rate has gone up by 5%, adding to the total cost of materials. Due to availability of gas from isolated wells near our plants, the pricing of gas from GAIL continues to remain below market and will do so in the future. Price has moved up from INR 9.8 per cubic meter in September 2021 to INR 13.3 per cubic meter in October 2021. GAIL provides 59% of the gas requirement of the Sanitaryware business. Sabarmati pricing went up from INR 41 per cubic-INR 42 per cubic meter in September this year to INR 49 per cubic-INR 50 per cubic meter in October 2021, supplying around 41% of gas needs of the plant. The combined impact of both the price increases is INR 35 lakhs per month. There have also been price increases in some of the ancillary cost items like transportation cost and packaging. Cost of corrugated boxes has gone up by 15%, which will be effective from Q3 onwards. Our high reliance on renewable energy for over 2 decades has significantly benefited us given that 90% of our energy needs is made from wind as solar. As a result, we have been able to keep significant parts of our cost baskets stable. Sanitaryware vendors too have been provided a price hike as the cost of gas and labor has moved up. The range of change effective October and November 2021 will be 8.5% and 9% for Sanitaryware vendors, and around 5% to 6% for Faucetware vendors. Many of these contracts are under final discussion. For Faucetware we have witnessed a meaningful increase in the price of brass in Q2, which is up by 3%, which is an important raw material, and we have raised prices of Faucetware products in August. We drove price hikes to remain ahead of cost pressures. In Sanitaryware our last full price hikes were implemented in August 2020 of between 3% to 5% in February 2021 of between 5% to 7%. From 1st August 2021, we have implemented another price hike of 4%. In Faucetware the price hike was from 1st February 2021 of 8% to 10%. From August 2021 we have implemented a price hike of another 10%. In all Sanitaryware products, [ alike ] seat cover and polymer SKUs, a price hike of 8% to 12% has just been announced, which is effective from 15th November 2021. In that backdrop, we can go over the financials. Revenues in Q2 FY 2022 was INR 393 crores versus INR 318 crores in Q2 FY 2021. EBITDA excluding other income was INR 58 crores in Q2 versus INR 40 crores in Q2 FY 2021. The gross margin has improved by 50.6% in Q2 FY 2022 as against 47.5% in Q2 FY 2021. The EBITDA margin is higher by 200 basis points at 14.7% in Q2 FY 2022 versus 12.7% in Q2 FY 2021. Profit after tax was INR 42 crores in Q2 FY 2022 versus INR 26 crores in Q2 FY 2021, an increase of 60% Y-o-Y. EPS for Q2 was INR 32.36 versus 2021, in Q2 FY 2021. For Q2 FY 2022 52% of the top line was from Sanitaryware, 34% from Faucetware, Tiles represented 12% and wellness 2%. On a Y-o-Y basis, Sanitaryware revenues registered an increase of 27.8%. Faucetware revenues increased by 61.2%, whilst decreased by 25.9% and wellness decreased by 26.8%. The Sanitaryware and Faucetware verticals remained the backdrop of the business contribution of 86% to our overall revenues. We continue to witness encouraging demand for newly launched products. During the last 2 years, the new product development program contributed close to 20%, 21% of revenues. Inventory days in Q2 FY 2022 was 60 days compared to 51 days in Q2 FY 2021. Receivable days in Q2 FY 2022 was 31 days versus 55 days. Payable days in Q2 was 35 days, again 38 days in Q2 of FY 2021. Therefore, net working capital days in Q2 FY 2022 was 56 days versus 68 days in Q1 of FY 2021. As on 30th September 2021, our cash and cash equivalents increased to INR 485 crores compared to INR 362 crores on 30th September 2020. We see an increase in working capital going ahead and some portion of cash getting absorbed in increasing inventory days. After a fairly low CapEx year last year, during which we spent INR 9.84 crores against the CapEx budget of INR 21.82 crores. In the current year, the CapEx budget is INR 17.19 crores of which INR 6.69 crores is for Sanitaryware automation, INR 4.97 crores is for Faucetware, INR 5.53 crores is for logistics and information technology. In Q1 and Q2, the amount spend has been INR 4.9 crores for Sanitaryware automation, INR 1.19 crores for Faucetware automation, INR 1.69 crores for logistics and information technology. We continue to evaluate opportunities for accretive manufacturing capacity and even inorganic opportunities if a Sanitaryware plant was to be made available with quality standards that meet Cera's parameters. None of these various opportunities have reached a stage where they can be presented to the Board of Directors for further evaluation. A few additions in personnel have taken place. Mr. Anupam Gupta has joined us from Grasim Industries as Executive Director, Technical. Mr. Gupta has been with the Aditya Birla Group for more than 17 years, in various geographies in India and internationally, of which the last 8 years were in Halol, Gujarat. His breadth of manufacturing experience in ceramic technology is well-known in the industry circles. Mr. V Krishnamurthy joined us in 2021 from HSIL as President-Marketing with experience of 25 years at sanitaryware and faucetware marketing, promotion and product sourcing. Mr. Mahesh Taparia joined us as Deputy CFO and has a rich experience of 18 years with HDFC Bank. Mr. Ajay Jain has joined us as Vice President, Faucetware Production. He has Faucetware experience in HSIL and Kohler and metallurgical experience at Hindalco. Many of you would know these senior personnels from their previous roles. The tile industry is buoyant with an uptick in demand and pricing. Cera has been able to monetize its capital involvement in the tile manufacturing joint venture. An MoU between Cera Sanitaryware Limited and Anjani Vishnu Holdings Limited was signed on 17th August 2021 and definitive documents was signed on 25th August 2021. Regarding the transfer of preference shares and equity share by Cera to [ AVSA ]. Accordingly, the stage-wise payments aggregating to INR 28.69 crores [ considered ] to be received by Cera as envisaged in the agreement. The sourcing arrangement was as before, with Cera having no obligation to source from [ ATR ], but an option to buy tiles from [ ATR ] after evaluating it amongst its various sourcing partners. Related party transactions were INR 111 crores in FY 2021, which were all in the normal course of business and included purchases from the 4 joint venture companies Cera has. The same figure for half year ended FY 2021-FY 2022 was INR 61 crores. Post all divestment formalities being completed by 31st March 2023 in [ATR ] related party transactions will reduce dramatically in FY 2024. To conclude, we remain optimistic of the outlook given, robust indicators of demand with continued strength of affordable housing and the prevailing low interest rates for housing loans. Q2 witnessed satisfactory and encouraging performance on all parameters. We are making all attempts to build on that growth. If consumer is responding to setup products, marketing initiatives and brand positioning, allowing us to monetize all the efforts of the last many years. Demand that we have been seeing is not a pent-up temporary demand increase, but an all-round sustainable change in consumption patterns for building materials and the real-estate sector. Overall, we remain confident of the inherent strength of our company and believe we are well placed to grow further as the operating environment stabilizes. On that note, I will now request the moderator to open up the line for Q&A, and thank you very much.

Ladies and gentlemen, we will now begin with the question-and-answer session. [Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.

I have 3 questions. Firstly, a very strong player in the pipe segment has announced that they will enter into Sanitaryware and Faucetware segments, even the leading tile players are talking about increasing [ bathware ] revenue going forward. So how we should see the competition in the long term, particularly for the organized players?

We feel that any new player wanting to enter Sanitaryware and Faucetware is more than welcome, they'll end up expanding the market. So if the industry gets expanded, that's good for everyone. So we welcome them and a lot of tile companies have been making attempts not recently, but for the last 15 years to expand their Sanitaryware and Faucetware base, given that Sanitaryware and Faucetware is such a profitable industry. So these attempts have been going on, and it has helped the industry in many ways. The conversion of unorganized to organized has had even the largest players like Cera in Sanitaryware. And in Faucetware that full conveyor version is yet to take place with the increase in number of players, the unorganized sector of the industry will go down and the large players will benefit. So I think it's a welcome development.

Sir, secondly, in the last con call, if I recollect, you had spoken about one of the leading players in Sanitaryware and Faucetware facing some issues in production. So any comment on that? Like, you spoke about China, that China's import has almost stopped. So I'm just trying to understand if both the factors are at place, then maybe we will have more scope to grow in these 2 segments?

We had spoken about this trend for the last 4 years. Cera has continuously been talking about Make in India and create capabilities on manufacturing, own manufacturing facilities. And bulk of our CapEx over the last 6, 7 years has gone in that direction. Those players who wanted a quick fix by importing from China and selling in India because the import duties were only 11%, they tried. I'm sure they have had some success as well. But now from July, August of 2021, those markets are dry and Cera has been the biggest beneficiary as you can see from the numbers. Even now, those importers from China are unable to promise any quantity to dealers or projects for the next calendar year. Between now and the calendar year, the Chinese currency has gotten more expensive. The freight rates have gone up dramatically. And with onset of the Chinese New Year, we don't know when products availability from China for those players will resume. So we have no problem with those developments, we have gained. But we have these projects coming at least 3 years ago, and we have consistently been talking about it in every call.

And maybe lastly, if you can give some more color on how the institutional segment is doing for us? And maybe the retail segment, which is anyway doing very well, which part maybe the Tier 2, Tier 3, if you want to break down these segments, which is really helping us to grow at this faster space?

In any case, I'll just give you our breakup of sales on Tier 1, 2, 3. We had 2% of the top line as exports, 30% as sales from Tier 1 market, which is population centers above 25 lakhs; 3% of sales from Tier 2 markets, which is population center between 10 and 25 lakhs; and 3% of sales from population centers below 10 lakhs. That has been the normal composition of our sales. And all these markets are doing well. About 10 years ago, our sales to institution was 50% and retail was 50%, went up very slowly because creating a broad-based retail network and penetrating market is very time consuming and expensive, and now this quarter 68% of our top line is retail sales.

We'll move on to the next question that is from the line of Pritesh Chheda from Lucky Investments.

Sir, I missed the Sanitaryware and Faucetware growth for quarter 2, if you could help? And what would be the volume growth for us as a company in quarter 2, if you can help us on that?

Faucetware grew from INR 82.5 crores to INR 133.01 crores, so that's a growth of 61.23%, otherwise quarter 2 to quarter 2.

And Sanitaryware?

3%. And as far as volume is concerned, I'll give you the number of SKUs. Again, 5, 7 years ago, the number of SKUs was maybe 50 or 60. Now Sanitaryware has 466 SKUs and Faucetware has 919 SKUs. So volumes have become irrelevant, because the range has expanded so much. And again, 10 years ago, every SKUs could be made in the factory, now only the complicated SKUs which vendors cannot make is made in the factory. So given the changing dynamics and complexities of the business, now volumes is not the best way to look at the company.

Okay. You mentioned Sanitaryware growth rate for the quarter is 60%, right? And Faucet is 62%?

Sanitaryware was INR 19.65 crores in quarter 2 last year. This year, it is INR 203.97 crores, a growth of 27.7%. And Faucet 61.23%.

Is it possible to understand what will be then the price-led growth in the quarter for the company as a whole in the top line growth of 24% that we see. So you would have taken about 7%, 8% price hike blended looks like around February and then there is a price hike in August. So is it that the price-led growth in this 24% should be at least 8% to 10%? Is that a fair assumption?

Yes. 8%, 9% is a fair weighted average assumption.

And whatever pricing actions you had to take considering the raw material increase, which we saw in quarter 2, it has been done, right? Because you mentioned that there was no RM increase in case of Sanitaryware, and there was some RM increase in case of Faucetware and the major RM increase is gas. So whatever price increases you had to take you have taken on, there is a gap between overall price increase and RM increase.

In Sanitaryware 95% of the basket was stable. And the glazing recipe is only 1.5% of the Sanitaryware basket. Within the glazing...

Yes, I heard that comment. So considering that comment, is there any incremental need for pricing actions?

Given the factors of freight, glazing entity 1.5% and gas and other labor increases, we have announced a price increase effective 15th November as well, which is 8% to 12%. But there is no lag effect. So we have stated always take one step ahead of cost increases. So even the previous 2 increases in gas sounds like a very dramatic increase, but gas is 1.9% of the company's top line or 9%, there will be a 5 basis point, 10 basis point change. And in fact, for the overall company INR 35 lakhs a month for 6 months. So it will be around INR 2 crores for the year. And if you divide that by the top line, it will be less than 5 basis point, 7 basis points. Gas again is not material. We have stayed one step ahead of all cost increases. That's why it is our attempt to give you all the components of cost in as much detail as possible on these calls.

So you mentioned that you've taken another 8% increase and that's in Faucet only, right?

Only Sanitaryware, polymer, and cistern products, 8% to 12%.

And my last question is, you mentioned that -- you spoke that imports dependent model are facing a challenge, basically on the rising container cost today from Sanitaryware. So is it fair to assume that there will be a trend of accelerated growth for your company is on pace with industry growth rate? In any case the industry itself is seeing tailwind on account of the housing sales number, whether it is new housing sales or the resale number. So we would have a much faster growth rate versus the industry?

That is evident in the Q2 numbers. Industry over the last 3, 4 years was growing at single digits. This year, we can only estimate it might be growing at 10%, 12%. So that is evident from the numbers. And we cannot really make any kind of estimate on the freight rates for Chinese vendors, what they're doing, whether they'll have available quantity, which have not been diverted to other geographies. It's a very difficult call because that has too many moving parts. So when Chinese products will be available for our peer group from 3 months, 6 months or 12 months, that's a very difficult call to take right now.

The next question is from the line of Achal Lohade from JM Financial.

My first question is, can you help us with the market share for FY 2021 or for last 6 months in Sanitaryware and Faucetware and Tiles?

Achal, we don't get any kind of third-party consolidated data. So the information we get is anecdotal data from the dealers and our sales network. Based on that, we can say that Cera is the largest Sanitaryware company in the country and is the second largest Faucetware player in the country. But if you ask me for a technopack study or any other study, I don't have it. And there's no way of ascertaining that number.

My next question is, in the last call, you had indicated a possible top line of INR 1,460 crores with a 14% margins and thereabout. Now given the way that 2Q has played out and 3Q is appearing, would you keep the numbers same or you think it can be revised upward and if yes, to what an extent?

I only asked everyone to make their own guesstimates based on the run rate and that guesstimate worked out to INR 1,460 crore. It could go higher based on the price increases and it is in the race, the velocity of sales of real-estate has worked out for everybody. So it could go higher. So only section market, availability of products from vendors, [Technical Difficulty] on production and throughput, all of that. So Cera is still not a company that is large enough to be able to absolutely predict its top line 6 months later. So I think just we can make our own estimates based on the run rate. So it could go higher than INR 1,460. All these execution factors continue to be aligned.

Sir, my question is, you're saying that the demand is looking robust, and the competitive environment is also kind of providing the weather. So in that backdrop, in terms of the capacity expansion. So first, what is the utilization in the second quarter for own capacities for both Sanitaryware and Faucetware?

Sanitaryware is 97% and Faucetware was 90%, somewhat comparable with last year, Sanitaryware last year was 68%, Faucetware was 43% given the various disruptions that were going on at that point in time. And for the full year, also given the disruption, Sanitaryware was 49% and Faucetware was 54%. So 97 is -- and 90 is pretty much at the top end of utilization.

So in that case, where will growth curve come from, will it be more driven by the outsourcing? And if yes, would the vendors have a surplus capacity or they are also operating at full throttle?

In the very immediate term, yes, the outsourcing percentage can increase. But in the medium term, like we discussed in Q1 of last year, we had acquired on land adjacent to the Faucetware facility, on organic growth of the Faucetware plant. So that will continue to be available when plans are being discussed. In Sanitaryware there are no current concrete plans of either an acquisition or an inorganic play. So that is something that we have to consider and come back to you on concrete proposal. But yes, capacity increase is something that we all discuss and we are cognizant of the fact.

Right. So my question is, if the demand is so good and everything is so well in place, what is restraining or constraining us in terms of taking a call on adding capacity? Is that the location, land or something else?

Skills, most important in Sanitaryware is skills. It is not an automated business like tiles where you simply just have raw materials coming in from one end and finished goods and the printing and so on and others, at a brief scale there is human interference. And those skills will need to be developed over 10 years or they are found in 2 geographies in the country and some land there is that availability. So that metrics is something that only 2, 3 locations in the country qualified, [ nearness ] to raw material, et cetera. So based on that metric, a lot of things have been evaluated, nothing has been taken to the Board as yet, because nothing is at a stage where it could be discussed with the Board and with the concrete CapEx proposal. And this is the kind of SKU that can be made. This is a scale available on that. So if there is a inorganic opportunity with a plant with high-quality standards, we'll be very happy to look at it seriously.

Understood. And in terms of the margins, now you said that there isn't much cost inflation actually in the Sanitaryware, like 95% of the cost is fairly stable and just the leasing part of it has actually made a modest inflation. So how do we explain this 8% to 12% price hike, what is driving this price increase? And B, does it mean that the margins could see a significant change in the coming quarter itself?

The price hike is driven by vendors. See, vendors don't get gains as at 13.5%, 14% which we get. They are buying Gujarat Gas or any other sources at INR 45, INR 47, their general costs have gone up. So vendors have been discussing a price increase with us, it might be anything between 7% to 10% that is going to be finalized and implemented sometime in Q3 onwards. That is one driver. Freight is one driver. So these are the 2 very short-term and immediate drivers. Yes, the pricing power of the brand allow us to raise prices one step ahead of cost. So there has been margin expansion due to the last 2 price hikes, and we expect that to also play out with this price hikes. How much that will impact on a blended basis the 3 businesses? That is yet to be seen.

Perfect. And just last question, if I may. On the Tiles business, how do we look at this? I mean we are looking at the similar tailwind even in case of tiles, but we are still having a drop Y-o-Y. And I understand that even though we have broken the tie-up, you still can source. So what explains this decline in tiles? And how do we see this business actually in next 2, 3 years?

Now we have defined certain rules for the Tiles business, every transaction which will be largely a trading business will require a certain EBITDA margin. That's one. Receivable days has been reduced dramatically in Tiles. And the share of retail component, we want tiles to mirror the rest of the company, to mirror the connectiveness of the company. So the tiles had a larger component of B2B sales, we want a larger component of B2C as well. So that is a [ recheck ] in the tiles business and this is the best time to do it when the industry is buoyant.

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

So I actually had a question on the revenue growth. So if I look at the year-over-year number, it looks fairly good because of the base. So there's a 24% revenue growth. But if I compare it with the quarter 4 number of last year, which was at about INR 430 crores. From there on, we've had 8 to 10 kind of percent price increase and you're still 10% lower versus the quarter 4 number. So how should we look at that? Because are the volumes lower versus Q4 of last year, given the buoyancy in demand, it seems a bit odd?

Sorry about that, the line was disconnect.

No problem. Were you able to hear the entire question?

No.

I'll just quickly repeat it. So the year-over-year growth rate in revenues for the quarter is at 24%, which looks reasonable. But if I compare it with quarter 4 of last year, we had done about INR 430 crores, so we are down by about 10%. Despite an 8 to 10 kind of percent price impact. I was just trying to understand whether volumes this quarter lower, and it seems a bit odd given the buoyancy in the demand environment?

60%, 65% of any annual number is Q3 and Q4. And Q4 is always the highest because it's a culmination of a lot of trade schemes, which are monthly, quarterly and annual schemes. You'll find that phenomena for the last 10, 15 years in this company and most home improvement companies. So I'll request you to compare Q2 FY 2022 with the best Q2 of any year, which will probably be 2019-2020.

On that there is a 9% CAGR, I think if I take a 2-year number, which obviously is a fairly decent growth number. The other question that I had was the SKUs that you spoke about, which is 466 for Sanitaryware and 919 for Faucetware. Within that, what is the share of sort of value-added or complicated products that you typically make at the factory?

Okay. So we classify based on pricing, products into entry, mid and premium and I'll give you that number in Sanitaryware, entry was 34% of sales, mid was 11% of sales, premium was 55% of sales.

I lost you. So entry was 34%.

Mid was 11%. The premium was 55%. The same number last year in Q2 was 40%, 12% and 48%. Compared to where entry was 30%, mid was 47%, and premium of 23%. The same number last year was 31%, 16% and 53%.

And assuming that the demand buoyancy remains in the second half of the year and as we get into FY 2023, you don't see a risk of capacity being a constraint. That is what sort of Achal also asked earlier. So I just wanted to clarify on that, assuming there is a 15% to 18% growth in FY 2023, which is possible from a demand side, are we equipped to be able to supply that?

On the Faucetware side, we have some capacity both in-house and the Faucetware vendor base also has some capacity. In the Sanitaryware we have no additional capacity in-house, and we are working very closely with our vendors to move some SKUs that we produced into their facilities. That will create some capacity for us to create the most complicated products. And in just broad base our vendors, and broad base the number of SKUs we are buying from our vendors. So that process is currently on.

And you also spoke about some sort of good quality facilities being available? Are there enough in the country, which you can sort of acquire on an inorganic basis on the Sanitaryware side?

See, we are open to any such opportunity. We are not getting the kind of opportunity that fits our criteria of quality parameters and labor skills. So in Sanitaryware there are virtually no such facilities, but we'll be happy to explore it, some companies leaving the country and they have a small facility which they want to divest. If any such opportunity comes our way, we'd be happy to look at it seriously and evaluate it. On the Faucetware side, we already have adjacent lines which we acquired in Q1 of 2021. So it's a matter of time where the plans are formed up and then presented to the Board and then finally to our shareholders and investors for approval.

And lastly, blended, we have taken about between a 15% to 20% price hike, both on Sanitaryware and Faucetware, I'm including this November price hike. You think there is enough demand buoyancy to absorb this kind of a 20% price hike? And what has the competition done in a similar time frame in terms of pricing?

A few players who have good capacities in India, they are on the same level as Cera in terms of being able to supply products. And those who don't have adequate capacities of ability to make complicated SKUs in India, they have no products. Right now, it's just a question of getting product to market. Market runs completely, I know amongst, many do regular channel checks, we also do channel checks of a peer group of new geographies, all of that. Most markets are running completely dry.

The next question is from the line of Akhil Parekh from Elara Capital.

My first question is on the inventory level. How are they across the channel? Because in inflection environment, we usually see that distributors tend to increase their inventory stocking. Are we seeing such kind of a scenario at this point of time?

There is a lot of sales that dealers, distributors and retailers are seeing. This is probably the best year they had in the last 4, 5 years. So yes, they would like to stock products, but the companies don't have that kind of product to give them. And there is a rush at their counters, at their retail outlets, at the outlets that they service. So everybody is busy monetizing sales and asking for more product. That's a phenomena we have not seen for the longest time, we saw that only from the last 12 months to 15 months. So whatever can be produced needs to be produced, the vendor base needs to be enlarged, broad-based, the number of SKUs need to be moved to them so that you free up some of your own capacity and produce more, all that process is on whatever retail, the market is selling. 2, 3 major players are unable to get product to market because of China. So the balanced players are benefiting.

So there's abnormal increase in inventory level at the distributor side?

They are running dry, whatever is the companies are providing to them, including Cera, that is sold immediately.

On demand side, like in past couple of calls, you had highlighted, like next 10 quarters to 12 quarters, kind of look extremely good in terms of a visibility perspective. So does that remain same? And secondly, how is the demand across Tier 1, Tier 2, Tier 3 towns? And mainly, I want you to highlight how it is in commercial as well as in residential? If we have any color on that?

See, commercial, residential, all are part of our B2B business, that is 32% of sales. We'd like to keep it that ratio as a maximum ratio. We all want to increase share of retail. The B2B business is clamoring for product. But retail is where pricing power, brand expansion and all the benefits of promotions, advertising, social media can be monetized. So this is the time to increase that B2C share even from 68%, 70%, 72%. As far as commercial is concerned, yes, the consumption of raw material for Sanitaryware and Faucetware in commercial likely fits in much lower than residential spaces. But that's a very strong segment in any case.

And then primarily in Tier 3 town you are the first player. So how does that contribution in this quarter?

The reason more than 50% of -- [indiscernible]. Tier 3 towns were 60% last year. They are 53% this year. Tier 2 towns were 13% last year, they are 15% this year. Tier 1 towns were 26%, they are 30% this year, exports was 1%, they are 2% this year. And the reason Cera can do this, in Tier 3 towns brand stickiness is very high. The consumer will think 10x before changing a brand that he is used to see a brand that's in the last 10 years to 20 years and replacing a brand is a very tedious process. Brand loyalty is very high, the engagement with plumbing contractors, civil contractors is very high. So that stickiness is something that we always monetize. And that has been the general trend, if you look at the last 6, 7 years, that is the nature.

Sorry, I missed that, Tier 3 you said was 53% versus 60% last year and Tier 2 is almost...

Quarter was 15% versus 13% last year. Tier 1 was 30% this quarter versus 26% last year and exports 2% versus 1%.

And would you be able to share like how much it was in terms of manufacturing in-house versus outsourcing across the product segments?

Manufacturing at Sanitaryware was 41.2%, outsourcing was 58.8%. Manufacturing in Faucetware was 43.32%, outsourcing was 56.6%. Wellness was 100% outsourced and Tiles is also 100% outsourced.

Just 2 more questions on the ad spend, and how much you are expecting for the entire FY 2022 [Technical Difficulty]? And second is the current distribution reach across the product segments?

Normally, publicity is 4% of sales, this year -- this quarter it was INR 12 crores versus INR 9.4 crores last year quarter 2. But normally 4% on an annualized basis is the number.

And let's say same for a FY 2022. And the distribution reach, number of dealer network for the quarter?

So the dealer network as of 30th September 2021, Sanitaryware had 2,747, Faucetware had 2,133, Tile had 1,549.

How much we increased for the first half of this year versus last first half of the year? Total distribution units?

I can give you the same number on March. 2,640 for Sanitaryware; 2,045 for Faucetware, and Tileware 1,527.

The next question is from the line of Ashish Poddar from Systematix.

If you can again touch upon your CapEx spend for the current year? And also on the industry side, how do you see the industry dynamics different from the pre-pandemic levels? So maybe 3, 4 years ago, the kind of intensity and the response from leading players who were there earlier. How do you see it currently? Has the competitive intensity reduced significantly? And will this continue? Or you see that it will come back again once things normalize? So your comments on this.

The industry growth for the year 2016 to, let's say, 2019 were muted, but Cera doubled its sales between 2015 and 2019. So Cera has always beaten industry norms of growth, et cetera. What has changed post-pandemic is, real estate has come back, that is sales of primary homes. But home improvement as a theme, which is basically the B2C segment. That is even more important to us than the performance of the real-estate business. So home improvement has become a major theme post-pandemic, and people want to live in, of course, larger spaces and have higher specs, especially in their bathroom. So that has worked out very well for us. Then of course, low interest rates and all of those macro factors have done very well. And finally, lack of Chinese products in India has done extremely well for Cera. The companies who want to just import and dump it, Chinese products on Indian consumers, they were unable to do so for the last 2 quarters. That's worked out very well. I do not expect any of these macro or immediate factors to change for the next 24 months.

And the CapEx figure for this year, sir?

The proposed budget for 2021-2022 is INR 17.19 crores. Sanitaryware automation is INR 6.69 crores; Faucetware automation is INR 4.97 crores and logistics and IT is INR 5.53 crores. In this quarter of the INR 17.19 crores, we spent INR 4.49 crores. And if you want a break up, I can give you that INR 2.25 crores was for Sanitaryware automation; INR 1.19 crores was for Faucetware automation, INR 1.05 crores was for logistics and IT.

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

I just want you just help us understand the strategy in the tiles part of it, because that's a segment which has kind of seen some moderation. In fact, that's seen a decline. So can you just help us chart out the tile strategy here?

The Tiles margin is moving up. It is soon in a few quarters or in a few years will come closer to the overall blended EBITDA margin of the company. That is the aim. The second aim is to bring down the receivable days. In any case that has overall receivable days are very small. The tiles receivable days are much higher than Sanitaryware and Faucetware receivable days. Third, to increase the share of B2C sales in tiles. So given these 3 parameters, the tiles program took a short-term dip, maybe it takes another dip in Q3, we don't know we'll wait to see. But the outcome of all this will mean that tiles EBITDA goes up, receivable days go down and share of B2C sales become closer to Sanitaryware and Faucetware B2C sales. These are just 3 simple metrics on which we are operating. The flexibility that the tiles business has received is they have no obligation to buy from the joint ventures after divestment, but an option to buy. So even today there is no obligation to buy [indiscernible]. But there is option to buy, and it works out well for tiles given the high logistics cost to buy in Telangana and sell in surrounding areas from there. Trying to buy from other vendors for sales in North India and Western India. So given those flexibilities, now tiles business will perform much better.

So the way we should look at the Tiles businesses is going to be more of cash flow for you and not a top line business. Is that the way to look at it?

Just like any business, I mean, we evaluate it on ROC and capital deployed, working capital, what kind of risk the business is taking, what kind of inventory. In many cases, 2 years ago we moved to a zero inventory model in tiles. Our vendors are dispatching products directly from their factory to the consumers. So that has resulted in significant cost savings in freight. So the same criteria that was used to evaluate Sanitaryware and Faucetware is being used for tiles.

And the other thing is in Sanitaryware, if you look at it, you've broadly done about INR 200-odd crores of revenue in this current quarter. If I just go back in history and see a few quarters in FY 2019 also you had done that INR 200 crores, INR 210 crores of Sanitaryware revenues. But this is almost a 20% from that point of view. So is Sanitaryware's division, given the current inflation and given the kind of vendor regime do you have...

After you said that given the vendor arrangements you have, you voice was muffled after that. You said in 2018-2019 or 2019-2020 quarters of Sanitaryware were INR 200 crores. And given the vendor arrangements you have.

Okay. So, whereas coming from in the current quarter, we have done about INR 200 crores of Sanitaryware revenues, which is largely tracking the peak of the quarterly revenues in couple of quarters that you had done in FY 2019. But we have almost seen about at least a 20% inflation post November 15-year price hikes. So is the Sanitaryware division capable of doing a INR 250 crores kind of a revenue on a quarterly basis in peak utilizations after the price hikes?

I'm sure it can do that. Even if you look at quarter 4 of last year, I don't have the exact number in front of me, but it -- in fact I had the number.

That is INR 210 crores.

Yes, INR 209.58 crores. So yes, that number can be across an then there have been 2 price hikes. So that INR 209 crores becomes INR 225 crores in any case. Now it is just a question of availability, getting product to market. That will be the name of the game for the next 24 months.

And how should we look at the capital allocation because you're generating almost pre-CapEx and pre-working capital almost INR 200 crores of cash flow every year, you have a fair amount of cash on your books in excess of INR 450-odd crores. So how should one look at it from that perspective? If you can just help us understand that?

Currently, they are nothing concrete in terms of inorganic capacity expansion opportunities or plans, but those are being evaluated. And both on the Faucetware and Sanitaryware side capacity expansion will take place soon. And by soon, I mean, plans will be made soon. The Board will look at it soon, then the shareholders will look at it and we'll take it from there. Whether it will be inorganic or organic, that's tough to say. Everything is on the table right now. But in Faucetware the first step has been taken of buying adjacent land parcels.

And you think lead time of putting up a Faucet plant will be something like a 12 months? Is that a fair assumption?

Yes.

Just one last question from my side. In terms of industry, is industry able to develop new vendors for Sanitaryware? What are you seeing in the marketplace? Is that a very tough job?

For low-end products, it's possible. But for complicated products, we have found that the quality parameters are not up to the mark and the ability to make those complicated products are negligible. But that is also one barrier to entry for a new player, then there would be many players who would just want to make it a trading business and rely 100% on vendors. That has never been possible. So that is one of the barriers to entry.

And just one last question, given the overall pool in the market, in the demand and lesser supply. Is there any scope of changing any of the dealer discount or anything of that sort to improve the overall margin profile? Is that a [indiscernible]?

Yes, some moves on that effect has already taken place during Q2 and more moves on that front will be envisaged every quarter. And trade is also responding. They want product. So they are willing to sacrifice some margins to the company, at least in the case of Cera.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.

Thank you. I would like to thank everyone for attending this call and for showing interest in Cera Sanitaryware Limited. Cera remains positive with its strong positioning in the industry and improving the network would help us deliver steady and consistent growth going forward. With this, I hope I've been able to answer your questions satisfactorily. Would you need any further clarification or would like to know more all the company, please feel free to reach out to me or CDR India. Thank you once again for taking time to join the call, and see you all next quarter, and Happy Diwali.

Thank you. Ladies and gentlemen, on behalf of Cera Sanitaryware Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.