Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Earnings Conference Call of Cera Sanitaryware Limited. [Operator Instructions] I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, Mr. Vaswani.

Thank you, Rujuta. Good morning, everyone, and thank you for joining us on the earnings call to discuss Cera Sanitaryware Limited's Q4 and FY '22 earnings, which were announced yesterday. We have with us today the management team comprising Mr. Ayush Bagla, Executive Director; and Mr. Rajesh B. Shah, CFO and COO of Cera Sanitaryware. We will start the call with brief opening remarks from the management team, 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. Thank you.

Good morning, everyone. The earnings for the fourth quarter and 12 months for the period ended 31st March, 2022, adopted by the Board of Directors yesterday, 10th May, 2022. The earnings documents have been released to the stock exchanges. We witnessed continued strong demand, as the need for and trend towards home upgradation and home improvement persists. Accelerating real estate demand due to vectors like low mortgage rates, traction in residential unit sales, strong salary and hiring growth in the IT/ITES sector has combined to contribute to an all-time high sales velocity, and an all-time high top line and an all-time high bottom line. For the fourth quarter of FY 2022, there are, in fact, 2 separate elements of impact that must be considered while evaluating revenue growth on a Y-o-Y basis. First, there is total income from operations from Anjani Tiles Limited, where definitive agreements to divest the stake was signed in Q3 FY '22. Anjani Tiles income from operations were included in the total income for the fourth quarter FY '21 on a line-by-line basis, contributing to a higher base effect and there is no corresponding income in the fourth quarter of FY '22 this year. Second, due to the application of Accounting Standard 105, all income recognized in FY '22 on a year-to-date basis. up to the effective date of sale of our stake in Anjani, has been reversed in the fourth quarter. As a result, income from operations stands reduced by INR 52.48 crores in Q4 of FY 2021/2022 to reverse the income recognized in the first 3 quarters of the financial year. If IndAS 105 would not have been applied, consolidated revenues would have been INR 462 crores in Q4 FY '20 compared to INR 410 crores that has been reported in the financial statements that are available to all. However, to enable an apple-to-apple comparison, I will provide all of you with revenues of the sanitaryware, faucetware verticals in Q4 this year compared to Q4 last year. At present, our manufacturing facility continues to function at high utilization levels. Capacity utilization for Q4 for sanitaryware was at 112%, and we endeavor to operate the plant at similar levels through FY '23. In faucetware, capacity utilization was at 117% during Q4 and further increases our ongoing in FY '23, even before the CapEx program commences. This has been achieved by productivity enhancement projects undertaken at the manufacturing plants. The initiatives undertaking as part of the productivity enhancement programs at the faucetware facility include; number one, identifying and improving the net running time of machines. Number two, increasing the brass casting production by way of higher throughput. Number two, this has been achieved through development of higher cavity tools. Number three, extensive study and related modifications to reduce the machining cycle time of equipment at the machine shop. Number 4, increase in recovery of Zamac-plated handles, resulting in better raw materials to finished product yields. Number 5, increase in production of brass plating. In addition to the above, we have introduced automatic peeling machines in the grinding and polishing section, which provides consistent contours, which are very crucial in high-end SKUs. All these initiatives have served to debottleneck the production lines at the shop floor. By aligning the capacities of various processes, we have been able to increase the overall production capacity of the existing plant and machinery. Importantly, all of the above-mentioned initiatives have been undertaken at minimal cost and well within the CapEx budget. The average production at the faucetware plant was 1.8 lakh SKUs per month up to September 2021. That is H1 financial year '22, which has in March '22, increased to an average of 2.5 lakh SKUs. Production will be ramped up further to 2.75 lakh SKUs per month during FY '23, which will set newer volume benchmarks enabling us to sweat our existing assets more extensively. This will also enable us to cater to the increased demand over the next 12 months. The surge in demand for Cera's faucet wear continues. We are already the second largest player in faucetware, and our growth rate is much higher than the rate of growth of the market size. As a result, our incremental market share is 1.5x our current market share. To cater to the rising demand and volumes, there is a need to increase manufacturing capacity, a detailed capacity expansion program has been proposed to the Board of Directors on 10th May yesterday, and after our deliberation, the Board has approved the capital expenditure program for the faucetware business. An expansion program has been approved, which will enhance capacity from 2.75 lakh SKUs per month to 4 lakh SKUs per month at a cost of INR 69 crores. Post commissioning of the added capacity, a review of market conditions demand and the performance of the business will be undertaken by the Board, after which further capacity enhancement will be considered. The capacity expansion would entail developing both horizontal and vertical physical infrastructure and the existing facility. The existing floorplate of 10,900 square meters will become 30,300 square meters. The expansion would include construction of new grinding, polishing and casting departments, as well as warehouse. There will be minimal increase in fixed costs and manufacturing other than the capital costs, since the bulk of the costs are variable in nature. With debottlenecking of capacity and automation of processes, there will now be greater agility in the manufacturing setup, to respond to dynamic changes in market demands and type of product. There will be uniqueness in technologies, with increase in automation and use of low-pressure die casting. We witnessed changes in the buying patterns of the consumer in the last few years, especially post-COVID. There is demand for color faucets, PVD, gold colored products and Z-Black painted products. The margin profile in each of these product categories are completely different than most chrome based products. In addition to the benefit of higher capacity, there will be significant manpower cost savings, and there will be an increased share of large-sized SKUs and complicated SKUs. Expansion will cost INR 69 crores and will take 12 months from June '22 to June '23. Q2 Financial year '24 will be the full revenue of the first phase of the expanded faucetware capacity. There will be no impact on outsourcing, as the outsourced SKUs are low tech and low value. During the expansion phase, no disruption to current manufacturing is envisaged, and a comprehensive risk mitigation model has been implemented, envisaging various scenarios to ensure that market needs for faucetware products are continuously met from the existing plant. For sanitaryware, the board deliberated on the need for additional capacity and passed a proposal for a greenfield manufacturing facility. The existing location does not have adequate surplus land for a meaningful expansion and a new greenfield plant within a radius of 100 kilometers from the current manufacturing plant is being planned. The size of the plant will be most likely 1 lakh SKUs per month, and it will deliver product in 24 to 30 months at a cost of INR 128 crores. The zero date will be firmed up after the purchase of land and approvals for construction and supply of gas. During FY '23, out of the total plant cost of INR 128 crores, a budget of INR 25 crores has been estimated for purchase of land. Since CapEx will commence post land acquisition, detailed plans for the phase-wise capital expenditure will be made available. Post commissioning of the plant, there will be an extensive review of the market of demand and the possibility of another round of expansion at the sanitaryware facility. Cash and cash equivalents as of 31st March '22 of INR 580 crores against INR 479 crores in March '21, an increase of 21%. Annual positive cash flow was in excess of INR 160 crores. So going forward, internal accruals will be used to fund the 2 CapEx programs, and we have the flexibility to use some part of the cash and cash equivalents, if required. No debt raising or equity dilution is planned or required for the entire capacity expense. The quarter continued to witness an increase in prices of raw materials in line with the secular inflation trend prevailing across all industries. The company undertook necessary price hikes to remain ahead of cost pressures. In sanitaryware we undertook a price hike of 5% to 7% in February '21, 4% in August '21 and 10% in November '21. The compounded impact of all this increases, is 21%. In faucetware, the price hike was 8% to 10% in February '21, another 10% in August '21 and 5.5% in December '21. The compounded impact of all these price increases was 26%. Another price hike from May '22 for both sanitaryware and faucetware is under finalization. Despite the external environment witnessing an increase in prices of input costs and raw materials, Cera has not seen a material impact in Q4 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 6%. In the sanitaryware business, within the glazing recipe, which constitutes less than 1% of the sanitaryware's raw material mix, key constituents have moved 20% during Q4. Due to availability of gas from isolated well near our plants, the pricing of gas from GAIL continue to remain below market, and will do so in the future. Price has remained stable at INR 13.26 per cubic meter in March 2022, which was INR 13.25 per cubic meter in December 2021. In Q4, GAIL provided 44% of the gas requirement of the sanitaryware business. Sabarmati, our second source of gas, which is a JV of BPCL and GSPC, the pricing went from INR 70.92 per cubic meter in December '21 to INR 75.01 per cubic meter in March '22, supplying 56% of the gas needs of the plant for Q4. The impact of Sabarmati Gas' price rise per month was INR 21 lakh, as and for the entire quarter was INR 63 lakhs. There have also been price increases in some ancillary cost items like transportation cost of 3%, cost of corrugated boxes have gone up by 15%. Our high reliance on renewable energy for over 2 decades has significantly benefited us, given that 70% of our energy requirements is made from wind and solar power sources. As a result, we have been able to keep significant parts of our cost basket stable. In that backdrop, we can go over the financials. Revenues in Q4 FY '22 were INR 439 crores versus INR 431 crores in Q4 FY '21. EBITDA excluding other income was INR 82 crores in Q4 versus INR 63 crores in Q4 FY '21. The gross margin has improved at 53.47% in Q4 FY '22 against 47.20% in Q4 FY '21. The EBITDA margin is higher by 406 basis points at 18.7% in Q4 FY '22 versus 14.6% in Q4 FY '21, a growth of 30%. PAT was INR 52 crores in Q4 FY '22 versus INR 43 crores in Q4 FY '21, an increase of 20.9% Y-o-Y. EPS for Q4 was INR 40.04 versus INR 33.07 in Q4 FY 2021. For Q4 FY '22, 54% of the top line was from sanitaryware, 33% from faucetware, tiles represented 11% and wellness 2%. On a Y-o-Y basis, sanitaryware revenues registered an increase of 13%, faucetware revenues increased by 11%, tiles decreased by 42% and wellness increased by 5%. The sanitaryware and faucetware verticals remained the backdrop of the business with contribution of 87% of our overall revenues. There has been a reduction in the revenues from tiles of INR 85 crores in Q4 FY '21 to INR 50 crores in the fourth quarter this year, along with the reversal of revenues from Anjani Tiles aggregating to INR 52 crores, these have served to optically deflate our revenue growth. If we compare revenues from the remaining business lines of sanitaryware, faucetware and wellness, these grew from INR 346 crores in Q4 FY '21 to INR 389 crores in Q4 FY '22 Y-o-Y, a growth of 12.43%. In comparison to Q3, FY '22 revenues from these 3 business lines grew by 12.10% on a Q-on-Q basis. This clearly indicates that the revenue momentum is intact, and we continue to witness encouraging demand for newly launched products. During the last 3 years, the new product development program contributed close to 23% of revenues. Inventory days in Q4 FY '22 was 73 days compared to 52 days in Q4 FY '21. Receivable days in Q4 FY '22 were 35 days versus 53 days. Payable days in Q4 were 49 days against 52 days in Q4 of FY '21. Therefore, net working capital days in Q4 FY '22 were 59 days versus 53 days in Q4 of FY '21. The company is at an inflection point, after having successfully broken the INR 1,250 crore top line barrier. It has achieved a top line of INR 1,442 crores, an increase of 20% Y-o-Y, whereas EBITDA excluding other income, has increased from INR 150 crores to INR 221 crores, an increase of 47% Y-o-Y. We have witnessed robust profit growth, as PAT has increased from INR 101 crores to INR 149 crores, an increase of 48%. The multiplier effect of INR 200 crores of additional sales is visible to all. So top line has increased by 20%, EBITDA has increased by 47%, and PAT has increased by 48%. We have indicated earlier that a high proportion of costs are variable in nature, and given the incremental increase in top line with limited rise in fixed costs, the delta and profitability has been sharp. Annual EBITDA margin expansion from 12.48% to 15.38% has already taken place and going forward, we believe there is more to come. During FY '22 as markets were robust and receptive of our initiatives, we took a detailed look at all the shop floor SOPs and undertook many yield improvement initiatives. Those have borne meaningful outcomes in terms of margin expansion. After a fairly low CapEx year of '21-'22 during which we spent INR 11.12 crores against a CapEx budget of INR 17.19 crores, of which INR 6.12 crores was spent on sanitaryware automation; INR 1.99 crores was spent on faucetware automation and INR 3.01 crores on logistics and IT. Other than the 2 expansion projects of INR 69 crores for faucetware and INR 129 crores for sanitaryware totaling INR 197 crores, which the Board of Directors have approved yesterday, the CapEx for financial year '22-'23 is INR 24.6 crores, which will be divided amongst sanitaryware automation at INR 7.7 crores, faucetware automation at INR 6.4 crores, land and building at INR 6.6 crores and IT and logistics at INR 3.9 crores. To conclude, I would like to mention that overall, the internal and external factors 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 metrices of profitability. Given our strong positioning in the industry for over 4 decades now, we at Cera, continue to remain excited to make most out of the positive evolving opportunities in our business. I would now request the moderator to open the line for Q&A.

[Operator Instructions] The first question is from the line of [ Puneet Khanna ] from [ BOB Investment ].

So I want to understand the breakdown of detail in project channel of sanitary and faucetware, that is my first question. The second is what is the next 2 to 3 years top line plan for the company overall? How the company is planning to grow in sanitary and faucetware?

See the project pipeline is very strong, and the project business is basically available for the taking, but we don't want that to become more than 30% or 33% of our overall top line, because the brand has been built to monetize maximum margins via the B2C sales. So B2C sales are at 67%, 68% currently. We want that near that -- between 68% and 72% number. It's very easy to increase project sales, and people have done it, including Cera has done it during the first periods of real estate, let's say between 2012 and 2016. But given the buoyancy in household demand, in home upgradation, there is a case to increase the D2C business. The project pipeline is very strong. We have built customers, whether it's in the public sector, private sector, the national developers, smaller developers, we have built these customers over 20 years, and we will retain these customers. So bulk of it is national customers, repeat orders, that's the nature of the pipeline. And if you wanted to get a peep into the future top line, you see this trajectory that we have displayed this year, that is the best indicator. It is 1.5 to 2x the size of the market growth. Market might be growing at 7% to 11%. We don't have that number because we don't have a third-party authenticated data on market size or market growth. And we are growing at 1.5x to 2x that number. So that is the trajectory we are talking about now. So based on even a higher base of [ INR 1,464 crores ], we might look at 18% to 20% growth going forward over the next 3 years. So if you see our previous commentary, we used to say that the company doubles its top line every 5 years, and every 5 years, the PAT goes up by 2.5x. So now we are looking at the company doubling itself every 3.5 years.

Understood. And one more area to take -- just a brief -- how much price increase you are planning in the current month?

The voice was not clear at all.

So what I want to understand, how much price increase we are planning in May month?

That number will be out very soon. That's a decision that the sales and marketing team takes, but that circular will be out to the market, dealers, and all our channel partners within the next 10 days.

The next question is from the line of Hrishikesh Bhagat from Kotak Asset Management.

Just want your sense, if I look at -- what is -- how much was the growth in sanitaryware and faucetware Y-o-Y basis in Q4?

In sanitaryware, just on a Q4 to Q4 comparison, the increase was 13% and in faucetware 11.3%.

Okay. So I just made one clarification, sir. If I look at it, especially from the last multiple quarters' commentary, we have been fairly consistent, talking about competitors facing challenges, because they have imported these? And secondly, if you look at it, the price hikes in both this category, I could be wrong here, but it has been fairly low double digit, if I'm not wrong. Now if I do a reverse calculation and plus your commentary on the real estate has been fairly bullish, regarding good inquiries and everything. Now if I combine all these things, the implied volume growth looks hardly low single digit or rather decline also, if the price hikes have been probably mid-double digit also. So how should we look at this, in the sense, are we facing some challenge in gaining the incremental side, despite these tailwinds?

We had 12 months working, but effectively, we got 1.5 months, 15 days in January was not working. And the first month of the financial year, April '21 was also not working. So these numbers, you have to look at it in that respect...

I'm talking specific about Q4. This has nothing to do with April -- specific to Q4?

Specific to Q4, 15 days of January was also -- the markets were not working. And as far as availability is concerned, you hit a very important point, availability over the last 2.5 years in sanitaryware, was a big issue. Now that issue, we did not face for the bulk of this year. The single reason for that was throughput at the factory increased dramatically. And that's also the reason you saw a slight buildup of inventory on 31st of March, which will, of course, get fully absorbed in Q1 of this financial year. But the throughput of the factory has really increased.

Sir, but that doesn't explain why the volume was low. I'm trying to understand why the implied volume looks lower. I mean how should I reconfirm this fact that your double-digit price hikes, but revenue growth is also low double digit, then implied volume growth is hardly anything, if I look at it. So how do I reconcile this against your commentary of bullish real estate and supply chain disruption?

The best way to reconcile it is to look at the 12-month numbers. In Sanitarywares of INR 581 crores to INR 758 crores and in Faucetware from INR 339 crores to INR 477 crores, so increase of 41% in Faucetware and 30% in Sanitarywares.

The next question is from the line of Eshit Sheth from Anvil.

I want to know your outlook on margins at what aims are you looking at for the margin for coming 3 years. That is my first question.

See the EBITDA margin, even without other income for the quarter hit 18.78%. Now this is a number that has never happened in the last 5, 6 years. And even though the year of 15.35% without other income, this is also a number which has not happened in the last 5, 6 years. So margin growth, we are on the trajectory of margin growth. Annually, 50 basis points to 75 basis points increase is definitely possible. And I'm giving a fairly conservative note.

Okay. That's helpful, sir. And sir, when you said sanitary 65% of sales and 33% Faucetware. So growth, when you say 13% growth, is there more of value driven, right as they increased prices around 70% quarter. So sir, can you give outlook on volume also how a market share like other players.

See, the sanitaryware business and the sanitaryware industry is a very tiny industry. The industry size is very, very small, which is why the protective industry has got a bill more around it and especially companies like Cera, they have never had to operate outside that mode. So hanging on to your profitability by securing raw material, by making distributed availability of products across the country, those are the severe challenges. You should look at the overall numbers, 31% increase in sanitaryware sales, some of it is volume, some of it is value. It should be the trajectory that we use going forward.

Sorry to interrupt you Ms. Eshit, may I request you to please rejoin the queue. We have participants waiting. [Operator Instructions] The next question is from the line of Suruchi Jain from Opportune Wealth Advisors Private Limited.

I think my question about top line growth and PAT vision for 5 years and 10 years has been answered. Just to confirm, you are expecting to double revenue in 5 years. And despite the industry growth and despite the industry being small, so just wanted to confirm that. And secondly, when you said the industry is small, what would you say is the industry size given both branded and unbranded as of today and how is that growing?

We just make our own estimates based on anecdotal data we get from our channel partners on industry side and the conversion that is happening from unorganized to organized, both in sanitaryware and faucetware. So this is not really data that is available from any association or any research group. So that data is just our internal estimates. That of course, I mean, I'm sure you'll be able to get it from many other research houses who make their own estimates, but this growth that is happening for Cera in faucetware. I will give you an example. Suppose the market is growing again at 7% to 10% and we have let's say, 10% market share, but our incremental market share is 16%, 17%. So we are capturing a much higher share of the growth and conversion that's taking place. That is the aim. That increase in incremental market share will lead to faster catch-up of market share to the incremental market share. And that is happening in sanitaryware as well. You see the jump from INR 581 crores to INR 758 crores. In faucetware, it was INR 338 crores to INR 477 crores, 41% increase.

Okay. Fair enough. And other than say doubling top line and PAT, what's a long-term vision next 20 years, where do you see Cera?

Right now, the best way to look at this company is the company is going to double its top line in 3.5 years. So the 6, 7 years is the best kind of outlook we can give you. 20, 30 years down the company might be the market leader in Sanitaryware, faucetware, large player in tiles and allied businesses. So there is no plan of entering any kind of unrelated diversification. So focus on capital employed, strict parameters on financial performance, those will continue to be the metrics on which you can evaluate the company as many years out.

Okay. Fair enough. So you wouldn't enter like Asian Paints has started offering services during start offering, say, bathroom decorating and because, I mean, that is the upcoming area. So why not to increase the revenue of the company? They are into some kind of services, allied services.

Those services are very manpower and service intensive. So we do have a taste of that and we have almost 300 technicians that service our faucetware customers across the country and we are the only company which has not outsourced this activity to third-party contractors. We have kept this in-house. So we have experience in that, but we have no plans of entering that as a service. This is part of our 15-year warranty program for faucetware and 10-year warranty program for sanitaryware. So there's no plan on entering both because you're getting into something completely different.

The next question is from the line of Jenish Karia from Antique Stock Broking.

Sir, firstly, so if I'm correct in my understanding, INR 53 crores impact on top line. If you could help us with the EBITDA and PAT level impact for the thing?

If you look at consolidated numbers, there were a lot of reversals because of accounting standards 105. So the line-by-line consolidation, which was taking place in the first 3 quarters were all reverse, which is why you're seeing a negative interest rate, a reduction in depreciation and a reduction in other expenses because tiles has a very high COGS. So my request would be to at least for this quarter and this financial year, if you concentrate on the stand-alone numbers that will give you a very accurate picture of the company's financials and its business. From next year onwards, the consolidation in stand-alone numbers will be very similar for 2, 3 reasons. First, we have a 51% packaging subsidiary and a polymer subsidiary, which sells 100% of its products to Cera and Cera sells it in the outside market. So their sales and Cera's purchases get canceled out and ultimately reflects Cera's [indiscernible]. And the third joint venture is a tile company called Milo, where Cera has only 26% stake. So line by line consolidation does not take place. Only 26% of the PAT is added to Cera's PAT. So next year, the differences between consolidation and stand-alone will be virtually nothing. And this is because of the 105, there has been addition in the first 3 quarters and not only not additions in the fourth quarter, but reversal of those charges in the fourth quarter. So you will not get a accurate picture.

Okay. Got it. So basically, stand-alone margins would continue going forward indicatively?

Yes. Standalone margins, I mean, for the many quarters, the financial community was always asking when will we cross 14%, when will we cross 15%. So without other income, we have crossed 15%. And for the quarter, we had crossed 18.78%. So the growth trajectory is just a INR 200 crore increase in top line changes in throughput at the shop floor have made all these differences. This is the best indicator of the future trajectory.

Got it, sir. Okay. And if you can also help us with full year segment-wise revenue bifurcation.

The voice was very muffled, so.

Hello. Is it better now?

Yes.

Yes. If you can help us with the full year revenue bifurcation segment-wise?

Yes, of course. Sanitaryware was INR 758 crores, 52.73% of sales. Faucetware was INR 477.77 crores, which was 33.22%. Tile was INR 175.25 crores, which was 12.18%. Wellness was INR 26.81 crores, which was 1.86% of sales.

Okay. Great. And just one last question. You mentioned that we are doing a greenfield expansion in Gujarat only in 100 kilometers radius. So why not greenfield only why don't diversify in different geography to benefit from freight cost or logistical diversification kind of a thing?

Still there are 2, 3 reasons. Gas availability is one major reason. Then the ecosystem of spares and the managerial inputs that are available at our factory using all of those in the greenfield venture. Those are the 3 reasons. And gas availability is there is very few parts of Southern India. We don't know if we'll find the requisite skilled labor in the same part of Southern India.

The next question is from the line of [ Falguni Dutta ] from Jet Age Securities.

Sir, what is the gas cost as a percentage of total cost in sanitaryware and faucetware?

Okay. I will just give you that number. Gas as a percentage of sales in Q4 FY '21-'22 is 2.94%.

Sir, as a percentage of cost, if you can give, sir.

Yes. Percentage of cost is 3.53%. And for the full year, as a percentage of sales is 2.43%, as a percentage of cost is 2.79%.

Okay. And sir, one more question on gas. How much gas do we source from Gujarat Gas?

We don't buy anything from Gujarat Gas. 44% of our requirement from gas authority and 56% from Sabarmati.

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

Congratulations on a great number. If you could just help us understand the CapEx plan. You mentioned that in all it is about INR 190 crores, INR 200-odd crores. But for the next year, what we are spending is a very small sum. So are you saying that the bulk of this will be back ended into FY '24? And if that is the case, when does the ramp-up happened both for faucetware and sanitaryware.

In faucetware, out of the INR 69 crores bulk of that will be spent during the year because we'll be commissioning by June 2023. So bulk of INR 69 crores will be spent during this financial year, and the benefits will start, of course, from June, July next year. In sanitaryware, because the land purchase is yet to happen, we have kept aside INR 25 crores for the land purchase. And post land purchase, there will be a application for construction approvals for gas pipeline approval and water usage approvals, which normally takes anything between 3 to 6 months. So that's why we don't expect that anything more will be spent on the ground in terms of physical infrastructure during this financial year. So INR 128 crores is the total expense, of which INR 25 crores we feel will be spent this year. If there's any change, we'll come back, of course, to the Board and to the entire financial community and discuss these changes. But the ramp-up, of course in sanitaryware because it's a greenfield venture will take 24 to 30 months, in faucetware, it's much sooner. So you'll get the benefit in financial year '24 for at least 9 months of the plant operating.

So the total CapEx for the year, including the automation of the 2 plants et cetera, how much do you envisage spending during, let's say, FY '23?

Okay. I'll give you that number. It is INR 69 crores plus INR 25 crores plus the regular CapEx number, I will just give you that number. INR 24.6 crores is the regular CapEx, which is divided into sanitaryware automation, INR 7.7 crores, faucetware INR 6.4 crores, land and building INR 6.6 crores and IT and logistics at INR 3.9 crores. So INR 24.6 crores plus INR 25 crores plus INR 69 crores.

So about INR 120 crores. Okay. That's very helpful and all the best.

The next question is from the line of Akhil from Centrum.

Ayush, many congratulations for a very good set of numbers. My first question is, we are...

Sorry to interrupt you Mr. Akhil, but your voice is not audible. It is very low.

Is it better now?

Sir, we cannot hear you loudly.

Is it better?

Please go ahead sir.

Ayush, my first question is we are targeting doubling of sales over the next 3.5 years while our capacities in sanitaryware are at 110% of utilization rate. So does that imply will it really kind of increase our outsourcing till the time the new capacity comes up?

That is you see the trend for the last many quarters, that is already happening. Outsourcing was always between 46%, 49%, about pre-COVID. Now outsourcing this quarter was 59% in sanitaryware and 53%, almost 54% in faucetware, so that trend has already taken place. And each year, the manufacturing capacity is earmarked for more and more complicated SKUs. So those products which can be subsequently made by newer vendors or existing vendors, either adding capacity or even adding capabilities, newer SKUs are passed on to them. This year, we added many new vendors. So broad-basing the vendor base is a very important theme in the company.

Okay. So what I'm taking is basically this percentage from vendors will kind of increase over the next 2 to 3 years, at least in case of sanitaryware.

That's right.

Okay. My second question is again on the guidance part, right? I mean EBITDA margin, I didn't quite get it, like we have achieved around 18%, 18.5% of stand-alone EBITDA margin for the quarter. So what you are hinting it, we will improve over that number over next 2 to 3 years.

See, on EBITDA margin, it's easier to calculate an annual number rather than a quarterly numbers because there are too many factors, seasonality, Jan-to-March quarter is the busiest April, May, June is the dullest quarter. So keeping those seasonalities in mind, I'm seeing the best number to look at is the annual number, which was always in that 12%, 13%. We wanted to cross 14%, but we crossed 15%. We have made it 15.35%. So 50 basis points to 75 basis point increase every year is definitely possible.

Okay. Got it. And third and last question on the tiles front. You mentioned annual run rate for this year was, I think, at around INR 180 crores, INR 190-odd crores basically. How should we forecast it for the next few years still going ahead?

See, last year, the tiles number was INR 250 crores. This year, it was INR 175 crores, a degrowth of INR 75 crores. Now it's a matter of time, whether it's 12 to 15 months, whether we go back to INR 250 crores because the product mix has completely been revamped. I'll give you some statistics to back that up. Only 4% to 6% of our sales right now is soluble salt. 30% of our sales is GVT, double charge and full body is 21% of sales, [indiscernible] tiles is 28% of sales. And others, including outdoor tiles, paving tiles are 9% of sales. So value-added sales are more than 90%. Even within this category, we have introduced third fire tiles, which are very expensive and full body double charts, which are also very expensive. So we are not talking about Cera becoming the largest tile company or even competing with the top 3, 4 tile companies. We want to be a niche tiles player with high margins. And that doesn't require a INR 500 crores, INR 800 crores or INR 1,000 crore tiles turnover. This INR 175 crores will become INR 250 crores, then about INR 300 crores, INR 350 crores, even the growth of INR 75 crores annually or INR 60 crores annually is a very good number for the kind of product we're talking about.

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

My first question would be...

Mr. Akshay, can you please speak little louder?

Hello.

Yes. Please go ahead, sir.

Yes. Sir, on this outsourcing for the faucetware sir, you did mention that it is currently at 54%. So once our capacity is ready in June 2023, so how do you see it going forward? I mean would we be transferring some of our outsourcing volume to our in-house manufacturing or overall volumes only we would be increasing. So how that would shape up? So that was the first question.

See, the plant that is being expanded, we want to make high-end products. So chrome-based products have a certain margin profile. We want to make these red-black products, color products, then of course red-black product, gold-plated products with all PVD products. The margin profile is completely different from chrome-based products. So we don't expect outsourcing to change in terms of numbers or value, but the percentage will go down because the new plant capacity will provide many new ranges and many new products at the top end.

Okay. And sir, what is the margin difference between our own manufacturing and outsourcing manufacturing, I mean the product that we outsource, I mean, is there any significant margin changes differently?

It depends on the product because in faucetware, bulk of the outsourcing activities are either components or low-end faucets. So there will be a slight difference in margin profile, but those vendors also have a lower cost of production because they are in the SME category with a lot of families running their business and lesser supervision, lesser managerial input. In fact, our QC teams help them with their QC processes. So the costs are lower, the selling price is also lower. But for the company, there's a significant added advantage in [indiscernible] when increasing outsourcing.

Okay. And the same holds true for sanitaryware also?

Yes. Those products, which are made by our outsourcing vendors, the company cannot make at its own plant because they are low end. And using this kind of plant with the kind of German skills and the technology we have for those products is not worth our while.

The next question is from the line of Akash Shah from UTI Asset Management.

I just had one question. So there is a 21% increase in employee cost on a Y-o-Y basis in Q4 FY '22. So would you kindly help us understand what is the reason behind that or are there any one-offs in that?

This is part of the annual employee wage agreements that are raised, I mean, the wage agreements are 4 years in nature, and that has a predefined escalations. So the new wage agreement was signed, let's say, in August '21 and one escalation kicked-in which has various formulas on DA, et cetera. And if you look at existing 21% in value terms, some of it is also linked to achievement of certain targets, the variable portion. And given the throughput increase at the factory level, lot of workers hit their targets.

And just would like to hear your thoughts on competition. How is the situation now on the ground and any comments on how our competitor, I mean, are they facing supply shortages or are they able to compete with us on the ground?

The Chinese vendors they whatever orders even companies like Cera placed on the Chinese vendors before the Chinese New Year in February were dispatched and availability was not an issue from China. Of course Chinese currency is appreciated. The rupee has not been very strong. And now again, this COVID wave has hit China in April. So it's an evolving situation and we'll see how the Chinese imports, imports from China behave. As far as the domestic vendor base is concerned, they are operating at full capacity, both in Sanitaryware and Faucetware. But they are limited by their abilities to supply complicated SKUs.

The next question comes from the line of Chirag Lodaya from Valuequest.

First question was on asset turnover. What we can expect from sanitaryware as well as faucetware CapEx?

Given the fact that faucetware capacity that has been enhanced, we'll be making those color coated, PVD, gold and zed black products where the selling price is 1.5 times to 2 times the current selling price. On additional 1 lakh SKUs per month, the turnover could increase by as high as INR 150 crores to INR 180 crores. So asset turnover turns will be close to 3%, 2.5% to 3%. And the same is sanitaryware, it will have a mix of all types of products, but it will tilt towards complicated SKUs. So the turnover will be again around INR 180 crores to INR 200 crores from sanitaryware as and when it is commissioned. So 1.5 times to 2 times, 1.75 times asset turns in the sanitaryware CapEx.

Mr. Chirag, does this answer your question? Mr. Chirag, we cannot hear you sir. There is no response from the line of the participant. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Ayush Bagla for closing comments.

Thank you very much. I would like to thank everyone for attending this call and for showing interest in Cera Sanitaryware Limited. Cera remains positive that a strong positioning in the industry will 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 so much.

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