Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us on the earnings conference call for Cera Sanitaryware Limited for the third quarter of FY '22. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; Mr. Rajesh B. Shah, CFO and CEO 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 shall 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 will now turn the call over to Mr. Ayush Bagla for his opening remarks.

Good morning, everyone. The earnings for the third quarter of the financial year 2021, '22 were adopted by the Board of Directors yesterday, 24th January 2022. The earnings documents have been released to the stock exchanges. I'm delighted to share that the demand from both retail and projects in Q3 FY '22 was robust, and we registered healthy growth across all markets and products. We witnessed continued strong demand as the trend towards home upgradation and home improvement persists, accelerating real estate demand due to vectors like low mortgage rates, slight traction in residential unit sales, strong salary and hiring growth in the IT and ITES sectors, continued work from home have all combined to contribute an all-time high sales velocity. The improving volumes, coupled with other government initiatives, we believe, are key drivers for increasing demand for Cera's products during the quarter gone by. We expect this trend of robust consumer demand to grow for the medium term. Primary and secondary sales of homes, home improvements and upgradation became a major theme with homeowners. The focus remains on monetizing this demand by; one, maximizing throughput of technologically complex SKUs at our own manufacturing facility; two, broad basing the product portfolio and the vendor network in India; and three, using the pricing power of the brand to proactively lead the Sanitaryware and Faucetware markets. We started 2022 with the third wave of COVID in India. At Cera, we have continued with necessary safety protocols at our Kadi factory to keep our operations running smoothly. At present, our factory continues to function normally and at a high utilization level. Capacity utilization for Q3 for Sanitaryware was at 103% and in January 2022, it continues to operate at similar levels. In Faucetware, capacity utilization was at 99%. Our dealerships and vendors are functioning well. We have been consistent in our choices. We have relied on Cera's own manufacturing capabilities rather than opting for imports. This has been a route taken by a few sanitaryware companies in India. The rise in single container cost from $600 per container to $6,000 in August 2021 and then $10,000 in September 2021 have disrupted imports. In January 2022, the freight rates are $7,000 per container, rendering it almost unviable to import sanitaryware products from China. Since July, August 2021, we have seen many sanitaryware players unable to book orders for any deliveries before 2022 in the expectation that freight rates will soften. This has opened a huge opportunity for us. We have acquired new customers and have gained from this vacuum. The B2C front end is contributing a higher share of revenue, leveraging off the power brand Cera, that has demonstrated pricing power and customer pull in retail markets. The B2B business is at a level that we are most comfortable with. Our core business of Sanitaryware and Faucetware offer tremendous growth, ability to innovate, opportunities to create newer niches and to expand submarkets. Demand has been robust in both verticals. Sanitaryware contributed 53% of top line for the quarter and Faucetware 35%. Together, Sanitaryware and Faucetware contributed 88% of top line during the quarter compared to 73% of top line contributed in Q3 last year. This composition has a direct bearing on the EBITDA margin which have achieved a higher range despite input cost inflation. Relations with labor are cordial and smooth. All efforts are being made to debottleneck specific processes in the plant, and automate any process which can either enhance production or make a difference in the quality of product or result in cost reduction. This focus on ensuring optimum production as well as product availability may require us to carry higher inventory levels of both raw materials as well as finished products. As we shared earlier, we are also rebuilding inventories across our network in order to be able to serve the demand, which is reflected in the rise in inventory days. As a result, capital deployed in working capital may rise over the next few quarters. Given the adequate cash reserves of INR 523 crores on 30th September 2021 -- given the adequate cash reserves of INR 523 crores on 30th December 2021, we are comfortably placed to do so. Getting product to market and product availability is a high priority for the company as markets remain strong. In addition to complete availability of our manufacturing facilities, our entire network comprising touch points such as 8 Cera Style Studios, around 150 Cera Style Galleries and around 375 Cera Style Centers as well as 4,000 dealers and about 11,000 retailers are fully operational. The other development to touch upon is the overall inflationary environment. The quarter was marked by an increase in prices of raw materials as being witnessed across all industries. The company took necessary price hikes to remain ahead of cost pressures. In Sanitaryware, we undertook a price hike of 3% to 5% in August 2020, a rise of 5% to 7% in February 2021, 4% in August 2021 and 10% in November 2021. The compounded impact of all these price increases is 26%. In Faucetware our price hike was 8% to 10% in February 2021, another 10% in August '21 and 5.5% in December '21. The compounded impact of all these price increase is 27%. Despite the external environment, witnessing an increase in prices of imports and raw materials, Cera has witnessed limited impact in Q3 FY '22. 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 had a combined impact of less than 1%. In the sanitaryware business, within the glazing recipe, which constitutes less than 1.5% of sanitaryware's raw material mix, the key constituents have moved 5% during Q3. The rate has been stable in Q3 due to availability of gas from isolated wells near our plant. The pricing of gas from GALE continues to remain below market prices and will do so in the future. Price from GALE has moved from INR 9.5 per cubic meter in September 2021 to INR 13.3 per cubic meter in October 2021. In Q3, GALE had provided 44% of the gas requirements of the sanitaryware business. Sabarmati, a JV of BPCL and GSPC, pricing went from INR 45 per cubic meter in September 21 to INR 70 per cubic meter in November 21, supplying 56% of the gas needs of the plant for Q3. The impact of both the price rises per month is INR 1.85 crores and for the entire quarter was INR 2.6 crores. There have also been price increases in some of the ancillary cost items like packaging. Cost of corrugated boxes have gone up by 3%, further increasing expenses in the current quarter. Our higher reliance on renewable energy for 2 decades has significantly benefited us given that 90% of our energy requirement is met from wind and solar power sources. As a result, we have been able to keep significant parts of our cost basket stable. Sanitaryware vendors too have been provided a price hike as their cost of gas and labor has moved upwards. The rate and range of change effective October, November 2021 is at in the 8.5% to 9% for sanitaryware vendors and 5% to 6% for faucetware vendors. For Faucetware we have witnessed no rise in prices of brass in Q3, which is an important raw material. And ancillary items like cartridge, washers, et cetera, have witnessed a price hike of 3%. In that backdrop, we can go over the financials. Revenues in Q3 FY '22 was INR 387 crores versus INR 310 crores in Q3 FY '21. EBITDA, excluding other income, was INR 61 crores in Q3 versus INR 40 crores in Q3 FY '21. The gross margin has improved at 52.48% in Q3 FY '22 against 41.88% in Q3 FY '21. The EBITDA margin is higher by 300 basis points at 15.8% in Q3 FY '22 versus 12.8% in FY '21. PAT was at INR 42 crores in Q3 FY '22 versus INR 29 crores in Q3 FY '21, an increase of 45.31% Y-o-Y. EPS for Q3 was INR 32.5 versus INR 22.37 in Q3 FY 2021. For Q3 FY '22, 53% of the top line was from Sanitaryware, 35% from Faucetware, Tiles represented 10% and Wellness 2%. On a Y-o-Y basis, Sanitaryware revenues registered an increase of 47.19%. Faucetware revenues increased by 51.97%, Tiles decreased by 46.33% and Wellness decreased by 3.94%. The Sanitaryware and Faucetware verticals remain the bedrock of the business with contribution of 88% 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% of revenues. Inventory days in Q3 FY '22 was 66.57 days compared to 53.88 days in Q3 FY '21. Receivable days in Q3 FY '22 were 29.67 days versus 53.93 days. Payable days in Q3 were 35.7 days against 46.25 days in Q3 of FY '21. Therefore, net working capital days in Q3 FY '22 was 60.54 days versus 61.56 days in Q3 of FY '21. As on September 30, our cash and cash equivalents were around INR 480 crores. As on 30th December, our cash and cash equivalents increased to INR 523 crores compared to INR 409 crores on 30th December 2020, an increase of 28%. After a fairly low CapEx year in 2021, which we spent INR 9.84 crores against the CapEx budget of INR 21.82 crores, there's only a slight increase in the current year. For '21, '22, 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 automation and 5.53% is for logistics and IT. In the first 3 quarters, the amount spend has been INR 5.63 crores for Sanitaryware automation, INR 1.45 crores for Faucetware automation and INR 2.25 crores for logistics and IT. We continue to evaluate opportunities for accretions to our manufacturing capability including inorganic opportunities and possibly even a greenfield capacity increase in Sanitaryware. In Faucetware the brownfield capacity expansion is possible. And as plans are made more concrete, it will be presented to the Board and also to the investment community. To conclude, I would like to mention that overall, the internal and external practice today bode well for Cera's future growth. We remain very enthusiastic and optimistic about the market opportunity. The efforts of the last 3, 4 years in new product development, productivity gains at the shop floor and deeper penetration of the brand provides a superb opportunity to scale up the business and enhance all matrices of profitability. The various supporting macro factors driving real estate demand and various other government initiatives, specifically for our building materials industry are some of the many positive aspects which we believe would provide necessary tailwinds to our business performance in the remaining part of 2022 and over the next 2 years. Given our strong positioning in the industry for over 4 decades now, we at Cera, continue to remain excited to make the most out of the positive evolving opportunities for our business. I would now request the moderator to open up the line for Q&A, and thank you very much.

[Operator Instructions] The first question is from the line of Hiral Desai from Anived Portfolio Managers.

Congrats on the quarter. Just had couple of questions. So one was in terms of the revenue growth, while the headline number at 25% looks strong, but we had an almost 20% kind of pricing impact. And plus Q3 last year, I think, still had that lingering impact of the employee unrest. So if I just look at that 20% price hike, then we are looking at a 4% to 5% volume growth, which looks a bit underwhelming given that the base quarter had that employee unrest issue. So just wanted your comments on that.

You're right. If you compare Q3 numbers with Q2 numbers, the Sanitaryware and Faucetware numbers are flat. But the price rise impact was for a very small portion of Q3. So the price...

I'm talking about the Y-o-Y numbers. So we have had 25% top-line growth. If I look at last 12 months, we would have broadly taken between 15% to 20% kind of price hike, because we started the price hike, I think, somewhere in August of 2020. So if I just net that off then we're looking at 4% to 5% kind of volume growth, which looks a bit underwhelming given that Q3 and the base quarter also had that employee unrest issue.

Yes, we had access to our vendors and all outsourcing products during that quarter. And we had quantified the lost sales in Q3 of 2021 at INR 65 crores across all businesses. So if you add that to that number, there is still an increase. And the price has impact on -- in that quarter -- since that quarter, the bulk of it has been from August of 2021. So till August, there was very little price hike. Post August, also though it was announced, all the old orders which were already punched and advances received, those had to be executed in the old pricing. So now the real benefits you'll see from, let's say, 15th of December of all that compounding impact of all the 3, 4 price hikes. But every quarter is a record quarter for us. So Q2 was a record Q2, both in top line, EBITDA, PAT. Q3 is a record, Q3 in top line, EBITDA, PAT, in the compression of working capital, in compression of all parameters of cash utilization. And obviously, there is a lot of room to grow. The industry has performed so well. In Sanitaryware the demand is huge. After many years that we are seeing supply constraints. So the capacity utilization in our own plant is 103%. Now the only way Sanitaryware grows is by increasing number of vendors and uptake from the current and newer vendors. So that process is on, that process definitely has a lag effect. In Faucetware, we're operating at 97%. So again, any increase in Faucetware sales will require newer vendors and increased throughput from current vendors. That has a slightly lesser lag effect. That process is also on.

And this new products which you developed over last 18 to 24 months, which now contribute about 20% of revenues, within that what would be the mix of what you would be manufacturing in-house versus outsourcing it through the vendors?

That, of course, we can dive deep into that data, get more granular and of course, share that in our next investor PowerPoint, which we'll put on our website and released to the exchanges. So we can split that 20% sales in-house and outsourcing. But it will be a reflection of the overall number. So outsourcing this quarter for Sanitaryware was 59.24%. Own manufacturing was 40.76%. So even within that 20% new product development portfolio, you'll find a very similar number. In Faucetware it was 55.51% and own manufacturing was 44.49%.

Got it. And lastly, assuming that the demand continues to remain fairly strong in the medium term, you have enough vendor's supply available to be able to fulfill that demand? You would not end up in a situation where you are unable to fulfill the demand that is there in the marketplace?

Vendor demand is of -- vendor availability is of many categories. And our quality standards reduce the universe of vendors available to a company like Cera by 80%, 90%. So -- especially in Sanitaryware and to a lesser extent, in Faucetware. And of course, in Tiles the differentiation is so little that even if you apply the highest quality parameters, the vendor ecosystem is still very large. But in Sanitaryware the ecosystem for Cera is limited to maximum of 20, 30 vendors.

Okay. But there will not be any shortfall in terms of supply?

Those vendors continue to make low-end and less complicated SKUs. And that has been our strategy from the beginning that complicated SKUs need to be made in our own factory. And you and I have been interacting for so many years now, we keep on stressing this point, development of capabilities has become very, very important. The factory has to be equipped to make very complicated SKUs and the throughput of those SKUs always need to rise. So those efforts made over the last 3, 4 years are all coming through now, which is why you're seeing the capacity utilization cross 100%. That was never the case earlier. And the list of SKUs being manufactured in the factory are purely the complicated ones which vendors cannot make, which is why you find in our peer group, they are forced to import from China. And I mean, we can talk about China. Yesterday, we were doing the math once again, a typical container from China costs between $18,000 to $22,000. If you add the freight of $7,000 to $10,000 on that, almost 1/3 of the landed cost of a container of Sanitaryware is freight. So it is just not possible to import from China, which is why you're seeing so much upheaval in the companies which don't have manufacturing capabilities.

The next question is from the line of Ritesh Shah from Investec.

Congratulations for the good set of numbers. Ayush, you indicated the vendor base cost inflation number. I think for Faucetware and Sanitaryware you indicated 8.5% and 9% and 6.7% to 7%, did I hear those numbers right?

Inflation to the vendors?

Yes, yes.

Yes. Within Sanitaryware, an average of about 8.5%, 9% and Faucetware a little less because in Q3, brass was more or less stable and Faucetware, the entire universe of own manufacturing and vendors is totally linked to brass price.

Right. So how should one look at the margin profile for our vendor base? Is it something that we have just given -- supply is definitely very tight in the market, where in Cera is benefiting out of it. So how are we taking care of our vendor base given incremental CapEx of growth, we are still yet to finalize that?

See vendor base and us, they're very transparent about their costs, and we have their cost sheets. So given that transparency, whenever there is an increase in labor wages or gas, we build that in and then that is a negotiated price. And you see some of these vendors, they have benefited greatly from partnering with Cera, their quality standards have been upgraded dramatically. So they can go and offer their products to many in peer group. So for them, there are a lot of advantages, and we get some part of that advantage as well. Now as far as our own capacity increase is concerned in Sanitaryware we have more or less maximized and optimized whatever there was to be done in the current facility. In Faucetware, we have acquired the land adjacent to our Faucetware facility. And exact plans on what kind of plant and what level of automation, those are currently on the drawing board, let them become little more concrete, then we'll be able to present it to the Board and post their views to the investment community. In Sanitaryware, of course, there are a lot of discussions and options being toyed with internally. One of them is, of course, the brownfield, then one is our greenfield in some other geography, one is the greenfield in the same state and a few acquisition opportunities have also come our way of acquiring vendors. So all those cost benefit analysis is currently on. So I would say it's a matter of time before the company finalizes 1 or 2 options and then gets everybody's feedback on that.

That's quite encouraging. Sir, my second question is one of the variables that we were looking at is tweaking the dealer discounts. I think given the might that the brand has and given the demand supply situation is also much in favor and actually, the company is taking proactive efforts on the inventory side as well. So is this a variable which is actually working in our favor? Have you seen some improvement over the last couple of quarters? And how should one look at it going forward?

Not just last few quarters, if you see our pricing with dealers, that has been continuously changing in the company's favor for the last many years. So the dealer margins are getting compressed but their volumes are increasing, their value is increasing. They are getting opportunities to bundle sales between Sanitaryware and Faucetware. So their overall take home is increasing. And the company is, of course, increasing its landed cost to dealers and compressing the price between MRP and the dealer-landed price.

That's quite encouraging. And sir, just one last question, if I may squeeze. Do we look at a policy wherein the dealers actually cannot sell at lower than the MRP? I think a few of the industry guys do that, given the might the brand has, can we look at a policy in that direction? Or is it something that we leave up to the dealer to determine his economics?

See, the dealer and retailer economics in this business have been very healthy and very chunky. And in many cases, the retailer shares some of those margins with the end consumer. And that is across all brands. Whether it's an Indian brand or an MNC brand or anyone in the low end, high end. Till the industry combines to lower retailer margins, this will be unlikely scenario where the retailer will not be passing on some of his margins to the consumer.

The next question is from the line of Abhishek Basumallick from Intelsense Capital.

First of all, congrats on a great set of numbers. I just wanted to understand your plan for the Tiles business and how do you look at growing that side of the business.

The Tiles business has always been around 15% business for us, 15% of sales. Now it has come down to about 10% -- 10.5% of sales. And you're seeing the impact of that in the blended EBITDA margins. It's got a lower margin profile than Sanitaryware and Faucetware. And from the start, as a company, Cera was very clear that it won't invest in any capacity on its balance sheet. So it's 100% outsourcing business, and that remains. So there's a lot of flexibility on how to push the pedal and accelerate the top line and slam the brakes as and when required. So we have a stake in 2 manufacturing JVs, one of which we are exiting and getting our capital back. The other one is also a smaller JV. So we almost had Tiles sales last year of close to INR 270 crores, INR 280 crores. And both the JVs together contributed about INR 100 crores of that product. The rest INR 180 crores came purely from third-party vendors. And that philosophy will not change. At 10% of top line in a growing top line, so this year, if you see the run rate, et cetera, Tiles is still going to be a sizable business, but with a very expanded EBITDA margin. For example, the low-end soluble salt, it's now only 6%, 7% of our Tile's top line and high-end GVT, double charge, volatile, et cetera, are now 93% of sales. So those are the shifts being planned and already taken place in the Tiles business. So growing Tiles top line was not an objective, growing Tiles bottom line was the objective. And within the Tiles business, we have done a lot of work in increasing payable days, reducing receivable days. So we are very close to the market leader on those parameters. Now the only parameter where we want to get close to the market leader is on the EBITDA margin front.

Great. So one last question on the Sanitaryware side. Right now, you said you're operating at around 103% capacity utilization. And so what that would probably mean that, you will have to depend on your vendors for incremental growth. So does it mean that most of your incremental growth will come from lower-end segment? Because you're probably doing the manufacturing for the higher-end segment yourselves and you are sort of flat out on that in terms of capacity?

That is what would appear intuitively, but the best way to look at it is the list of SKUs made in the factory each year is a very dynamic list. So SKUs, which were considered complex today, are given to vendors the next year to make and more complex SKUs are made in the factory. So that list is a very dynamic list. And some vendors who have the ability to make a few wall hung WCs or rimless sinks, et cetera, which were considered complicated SKUs. Those products are also being considered to be made by them. So that number of percentage from own manufacturing should stay in that 40%, 42% region in value term. The number of SKUs and number of products in volume from vendors will increase dramatically, yes.

And your margins in the Sanitaryware segment would remain more or less where it is today?

The margins in both Sanitaryware and Faucetware are a little higher than the blended number that you are seeing. So yes, they will remain. The only advantage you'll get with increased sales and the increasing top line is the fixed cost, 20% of our overall costs, which are fixed in nature will get spread over a higher base.

The next question is from the line of Akshay Chheda from Canara Robeco.

Just I wanted -- I wanted your color -- your views on the guidance, like how should we see the top line, et cetera, going forward? So because what I recollect is, you were guiding for around 14% to 17% kind of a top line growth for the next 2, 3 years, considering the demand that is there and even the price hike that we have taken. So just wanted to understand your guidance for the next 2, 3 years on the top line. And even on the gross margin side because that I see has become a little volatile. So we were doing around 47%, 48% in FY '21. And then in FY '22, now we are doing north of around 50%. So some guidance that side and even on the EBITDA margin because 14.5%, 15% is what you were looking -- I mean you were guiding for, but now in this quarter, we have done a phenomenal good number of around 15.8%. So should we look at 15.5% as the new base? Or how should we look at it? So your comments on these 3 things.

See, if we are adding INR 400 crores of top line this quarter, that's a good number to estimate for Q4 or slightly a little higher number because Q4 is the culmination of monthly, quarterly and annual targets for the trade. And going forward, we could easily, I mean it's not a guidance, it's just a guesstimate at this level because company is still too small to give out a guidance. But adding INR 250 crores, INR 300 crores of sales annually for the next 2 years is very possible and very real. So that's the number that I would work with. And on the EBITDA front anything above 14.5%, 15% is a very good number, a very healthy number, and it's a leadership number in the industry. So those are the 2 numbers that I would just look at right now, but again, we don't want to make anything forward-looking because the company should attain at least INR 2,000 crores in sales before it can predict earnings and top line with a lot of accuracy.

[Operator Instructions] The next question is from the line of Sujit Jain from ASK Investment Managers.

If I add back the INR 60 crores, INR 65 crores sales in the base quarter, then the growth Y-o-Y actually comes at 6%. What would be, in your opinion, the industry growth in terms of volumes and versus our growth in volumes both in Q3 and in 9 months?

So we have always looked at value growth rather than volume growth simply because the number of SKUs is Sanitaryware are 350 and 850 in Faucetware. So looking at any kind of volume will not give you a good picture on either the market or the company. On value terms, adding 15%, 17% to top line or even close to 20% in top line is definitely possible. And the industry so far was growing at 7%. This year, we expect the industry to grow at between 9.5% and 11%. So we want to grow at at least 1.5x the overall industry growth.

If I add back the sales of INR 65 crores in base quarter and for 9 months, basically and look at increase in sales for 9 months FY '22, then that is 22% increase versus what you have reported, which is 32%. And so in effect, you said is that the industry has grown 11%, you have grown even after adjusting the base 9 months, you've grown at 21%. That is the correct understanding, right?

Right.

Right. And in terms of CapEx, if one looks at the commentary of other players who are becoming very aggressive in Sanitaryware, Kajaria has announced, I think, INR 80 crore CapEx. Asian Paints has been very aggressive with ESS brand. We have been very conservative in terms of our CapEx. Will that not eventually limit your growth for you to be able to reach at size eventually to INR 2,000 crores from currently INR 1,200 crores, INR 1,300 crores?

So Sanitaryware, you see we already were given the largest plant in the country. We already started with the largest plant in the country. So we had huge advantages there. We were never close to 100% capacity utilization over the last 3 years. We were sometimes 91%, 92%, 93%. In a few quarters, we slipped below 90%. So we had a lot of headroom. So we have now come to the point where we are at 103%. Now looking at a new CapEx for a brownfield, greenfield or an acquisition or a strategic alliance with the vendors, those things make sense. The companies you are speaking about did not have a legacy large Sanitaryware installed base of capacity. So they were relying completely on vendors. And their products were going only in projects in B2B which is a price dominated sector. Despite their strong brands, there was no acceptance by the consumer, the end consumer, so their B2C sales are very low, which is why you'll see in those cases, the discounting factor. A lot of Tile companies have entered Sanitaryware. But the discounting factor to the trade is very, very high, and composition of sales is all B2B, which is why they don't give that split. In our case, the situation is very reverse. 70%, 72% has been our historic B2C number. And this year, it's 68% because there is a surge in demand in the B2B business. We are trying to limit that demand because we know the margin profile in B2B and B2C is completely different. Now is the time for the company to look at an expansion. If we had done that earlier, not utilize the strength and the trained labor and the other historical advantages, low gas, et cetera, of the current facility, then our cost structure and OpEx would have gone completely out of whack.

B2C meaning through centers and galleries, is that the understanding, correct?

And dealers.

Okay. And one last quick question is your management. You've had attrition in the very highest level. How have you dealt with that in terms of filling up the positions?

Yes. So I'll just go one by one. Mr. Atul Sanghvi, who was the Executive Director. His primary responsibility was manufacturing operations, that has been taken over by Mr. Anupam Gupta, who has joined the company immediately around September from Grasim Industries. He was looking after manufacturing facilities of their ceramic insulator business, which is a more complicated ceramic technology than sanitaryware. So he's joined not only our board but is Executive Director, Technical in charge of all manufacturing activity. Then the CFO, Mr. Rajesh Shah is now with us from [indiscernible] Bank. One year ago, Mr. Mahesh Taparia joined us, who's completed one year from HDFC Bank -- having spent 18 years in HDFC Bank. Then from HSIL, Mr. V. Krishnamurthy joined us as Head of Marketing and Procurement, who was with HSIL for more than 25 years. And Mr. Parthiv Dave, who was with Cera for about 12, 13 years and then became CEO of a multinational company, has joined us back as Head of Sales. So those are the -- and before that, Mr. Rahul Jain joined us as Vice President, Marketing and Head of New Product Development from Parry, which is also owned by Roca of Spain. So these were the management additions. And other than Mr. Sanghvi, most of the people who left had reached their retirement age. Mr. Sanghvi was 6 months away from the Cera retirement age.

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

My first question was in terms of the demand. You said the demand was robust across the pockets, B2B, B2C. But if you can give any qualitative commentary in terms of Q-o-Q, if there is any material improvement in terms of demand or improvement or kind of moderation from demand in metro as well as non-metros?

See, the best way to look at it is to look at some of the numbers in distribution of Tier 1, 2, 3 sales. So historically, our Tier 1 sales have been around 27%. This year it's 30%. Tier 2 has historically been 14%, this year it's 15%. And Tier 3, which is population centers below 10 lacs has been 58%, which is now 54%. That is the only material change. So that will give you a slightly direction on where the demand is headed, though, the urban centers and Tier 1 cities were the ones most hit by COVID, the recovery in them has also been faster. So that was a learning for us this year as compared to 2021. But we don't see any impact. There's so much talk in the media about interest rate changes and will home loans get more expensive, et cetera. We are not seeing any impact in terms of offtake or consumer behavior.

Understood. If you can just comment in terms of the margins. So is it fair to think the highest margins would be in Faucets followed by Sanitary and then the Tiles or it could Sanitaryware, Faucets and Tiles in terms of the margin?

Sanitaryware and Faucetware are very similar within 150 basis points of each other, I won't be able to share which one is higher because that will give the peer group a pricing picture of our products, but both are higher than the blended EBITDA margin.

Understood. And in a comment, you said that the vendors get the opportunity to sell the products to other companies. So I just wanted to check in terms of the vendors for our Sanitary and Faucet, a percentage of them how many are exclusive to us or 100% of them are multi-brand or nonexclusive vendors for us.

Almost 100% will be multi-brand because the B and C category of the products that they make in terms of quality, those don't reach the Cera standard of quality. And we don't want to stop them from monetizing those products.

Okay. Okay. Understood. And just last color.

Mr. Lohade so sorry to interrupt, but for any follow-up, may we request you to rejoin the queue, please. We have other participants waiting for their turn. The next question is from the line of Alisha Mahawla from Envision Capital.

Sir, firstly, I just wanted to know what is the breakup between in-house manufacturing and outsourcing in the Sanitaryware and Faucet segment currently?

In Sanitaryware, own manufacturing is 40.76%, outsourcing is 59.24%. And Faucetware, own manufacturing is 44.49% and outsourcing is 55.51%. And Tiles is 100% outsourcing.

Understood. And with respect to the CapEx that we are talking about, when are we expecting this to come on stream, the expanded capacity in Sanitaryware? I think you're spending INR 6 crores, INR 7 crores?

No, this is all debottlenecking activities in the current facility. So this is not -- this does not require any plant shutdown or any new build. So it's not a new plant at a new location. This is all at our current -- specific machinery at -- specific processes within the current facility.

So by when do we expect this debottlenecking activity to occur?

These are all ongoing. So they would take -- just the time it takes to put up a foundation, maximum of 30 to 45 days in each case. We don't require any disruption in current manufacturing.

Okay. So maybe by end of this year, we can have some of the debottleneck capacity coming on stream?

And during the year as well, even during the year.

Okay. Sir, one more thing that I wanted to understand is if you see for the last 2 quarters, we are at about a quarterly run rate of INR 400-odd crores, and you were mentioning to an earlier participate that, that is sort of maybe how we can also end the year with. But if we are seeing such strong demand and there is scope for outsourcing for us to do volume growth and full impact of the price hike that we took in November will also be coming, isn't there scope too for better growth?

There is scope to increase Tiles top-line in any way that our company would like, but we are very careful because for us, any Tiles top-line increase requires a threshold EBITDA margin number to be met, which is why you're seeing the Tiles number reducing. Now once the renewed Tiles profile of products, et cetera, is reintroduced in the market, it will be at dramatically high EBITDA numbers. In Sanitaryware, yes, the market is very responsive, very open to new products and even current products. There is a constraint in terms of capacity and products. And bulk of the vendor ecospace does not meet our quality standard. So there is only one constraint in Sanitaryware. In Faucetware the constraints are slightly less. The throughput in our own manufacturing facility is being increased. And the vendor ecosystem is slightly larger than the Sanitaryware ecosystem. The quality standards, we are able to upgrade in our vendor ecosystem. So that is being maximized. You're seeing the change in Faucetware top-line, it could end the year with almost a 50% increase over last year. So you're seeing monetization of exactly what you mentioned. In Faucetware we are able to do that. And in Sanitaryware there is a lag effect. We'll also be able to do that in Sanitaryware with a slight lag effect.

The next question is from the line of Rahul Agarwal from InCred Capital.

Ayush, 2 questions. Firstly, in terms of sales breakdown, one bookkeeping question, if you could help me with entry, mid and premium level product sales for 3Q and 9 months, please?

Yes, that I can do. In Sanitaryware in the quarter, 29% of our sales were entry level, 13% mid-level and 57% premium. In Faucetware, 30% of our sales were entry-level, 47% mid-level and 23% premium. So I can give you the blended number as well its 30% entry, 28% mid, 43% premium.

43% premium blended, right?

Blended, yes, for the quarter.

Okay. Got it. Possible for 9 months?

Yes. For 9 months, Sanitaryware 32% is entry, 13% is mid, 56% is premium. Faucetware 30% entry, 40% mid and 30% premium. And blended for 9 months, 31% entry, 24% mid and 45% premium.

Got it. And second question essentially was on the new hires. I still cannot see [indiscernible] team there. Any thoughts on how you want to have long-term retention and incentivizing for better than expected performance.

Bulk of the management personnel and talent in the company has been retained for a minimum of 20, 30 years. So even someone who leaves, leaves closer to retirement, where you might see some runway for another 5, 7 years. So the company has always retained people for very, very long durations. And that is the current trend. Our current Head of Sales left the company, became a CEO of an MNC company, where he had a stake and has rejoined the company as Head of Sales. So if you ask anyone in the company, and I'm sure you know a lot of people in the company, they'll give you the same feedback. Nobody leaves here before 20 years.

Got it. So even for, let's say, a new hire within this [indiscernible] Cera earlier. In terms of any ESOP scheme there is nothing as planned as of now, is that correct?

Yes. Currently, there is no ESOP scheme and nothing on the drawing board either.

Got it. And any plans on the analyst meet with promoter family sharing your long-term thoughts or strategy for Cera this year?

Can you repeat that please?

Any plans for an analyst meet with some of the family sharing their long-term thoughts for strategies?

We can plan as soon as there's a slight easing of COVID norms. We can definitely plan one.

Okay. Perfect. So if you would take that as a suggestion, it would really help us in terms of getting some traction with us.

Yes. We always like to do that. And even a factory visit, we can plan and arrange as soon as COVID norms ease.

The next question is from the line of Rajesh Ravi from HDFC Securities.

Could you share the revenue breakup? I missed that if you said earlier.

Yes. Of course, 53.28% of sales of the quarter was from Sanitaryware, 34.52% for the quarter was from Faucetware, 10.36% from Tiles and 1.84% from Wellness.

Okay. And the same number for the -- okay, I'll get the numbers for the other quarters separately. My second question pertains to this crisis of freight rate crisis what the industry is witnessing while it is hitting imports from China and all. Would that the same be also be the case for most of the Morvi players and other exporters from India? So how is that helping domestic players like you who have a large component of outsourced volumes?

Our outsourced volumes are all from Indian vendors, only 5% of our total sales have ever been from Chinese imports.

No, no. My question is like with the most of the domestic producers would be facing export headwinds. Is that helping you source their product at a competitive price?

See, I will have to divide that question into Sanitaryware, Faucetware and tiles. In Sanitaryware very few of our vendor ecobase were in 2 exports, very, very few. So there has been no change. In Faucetware also very few of our vendor ecobase is into exports and the freight doesn't apply in Faucetware because it's a high-value item, which takes a very small space in the container. So freight changes get diluted in case of Faucetware. And similarly, in Tiles export, it's item that takes up very little space. So of course, the value of the tiles in a container is much more than the $20,000 to $22,000 that I mentioned earlier, which is the case in Sanitaryware. So Sanitaryware, both domestically and in container imports faces the brunt of changes in freight.

Okay. But Tiles is less impacted from a freight perspective?

That's right.

Okay. So is it more because of the nonavailability of containers that is hitting export market?

See that you'll have to ask the relevant exporters because my interaction with freight agencies is limited to China import and getting feedback on pricing over there.

Okay. And sir, what would be your margin, any tentative in the Tiles segment?

Our margins in Titles is definitely lower than the blended number, and there is a lot of headroom to grow, which is why we are making changes in the Tiles business and we'll be back with double-digit margins in the Tiles business and try and reach and then cross the same INR 280 crore number that we had last year.

You're already making double-digit margin? Or do you expect that?

We aspire to make double-digit margins very soon in Tiles.

The next question is from the line of Amit Zade from Antique Stockbroking.

My question is on the potential on revenue side, considering the fact that we have taken price hike and in Sanitary in own manufacturing, you're already at 100%. So sir, what could be the peak revenue potential for quarter in the existing vendor base plus own manufacturing? Is it closer to INR 500 crore or [indiscernible] or any color on that side?

That answer has too many moving parts in Tiles, Faucetware, Sanitaryware. So if you look at the current base, increase in vendors can add INR 100 crores, INR 150 crores per quarter easily. And then once Tiles, again, comes back to its old revenue trajectory, then another INR 70 crores can be added per quarter.

Per quarter?

Yes.

Ladies and gentlemen, we take that as the last question. I would now like to hand the conference over to the management for their closing comments. Over to you, sir.

Thank you. I would like to thank everyone for attending this call and for showing interest in Cera Sanitaryware Limited. Cera remains positive that its strong positioning in the industry, improving macros would help it deliver steady and consistent growth going forward. Should you need any further clarification or would like to know more about the company, please feel free to reach out to me or CDR India. Thank you once again for taking time to join the call and see you all next quarter.

Thank you. Ladies and gentlemen, on behalf of Cera Sanitaryware Limited...