Cera Sanitaryware Limited (532443) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the 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. Devrishi Singh from CDR India. Thank you, and over to you, sir.

Thank you, Neeraj. Good morning, everyone, and thank you for joining us on the Earnings Conference Call for Cera Sanitaryware Limited for Q1 FY '27 earnings, which were announced yesterday. We have with us today the management team comprising Mr. Vikas Kothari, CFO; and Mr. Deepak Chaudhary, VP Finance and Investor Relations 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 document that have been shared with all of you earlier. I would now turn the call over to the management for their opening remarks. Thank you, and over to you, Deepak.

Thank you, Devrishi. Good morning, everyone, and a warm welcome to all of you for joining us on Cera Sanitaryware Limited Q1 FY '27 Earnings Conference Call. I will begin by sharing a brief overview of the operational and strategic developments during the quarter, following which our CFO, Mr. Vikas Kothari, will take you through the financial performance in greater detail. Cera has made a strong start to FY '27, with revenues growing by 19.5% year-on-year during the quarter. Both our sanitaryware and Faucetware business developed a robust performance, contributing 47% and 40% of our revenues respectively. The quarter witnessed strong momentum across our core businesses, with growth being predominantly volume-driven. We continue to see healthy traction in the project segment, while the retail business carried forward the gradual improvement witnessed over the last couple of quarters. Importantly, the growth during the quarter was broad-based, with both our retail and project businesses continuing to perform well. This reinforces our confidence in improving demand environment and the underlying growth opportunities across our key product categories. The demand environment continued to evolve positively during the quarter, supported by improving consumer sentiment in retail and sustained momentum in the project segment. Backed by a strong market positioning across the mass and mid-premium segments, diversified product portfolio, and extensive distribution network, we believe Cera remains well-positioned to capitalize on the significant growth opportunities within our core businesses. While the industry continued to witness elevated input cost pressures during the quarter, Cera remained relatively better placed than several industry participants, supported by its established sourcing arrangements and strong in-house manufacturing capabilities. Following the pricing revisions undertaken during March and May 2026, cumulative price increases now stand at approximately 12% in sanitaryware and 16% in Faucetware. We are pleased to note that these pricing actions have been well-absorbed by the market. Alongside these pricing initiatives, we continue to focus on operational efficiencies to mitigate cost pressures. This will enable us to protect margins while ensuring that we remain competitive in the marketplace. On the brand front, we recently launched a new integrated campaign, Your Moment of Cera, featuring Kriti Sanon as our new brand ambassador. Her aspirational image and wide appeal across demographics make her a natural fit for the Cera brand. We believe that the campaign marks an exciting new chapter in our brand journey as we continue to strengthen Cera's premium positioning and deepen our connect with consumers. The campaign has been rolled out across television, digital, and other media platforms. We are confident it will further strengthen consumer engagement, enhance brand visibility, and reinforce Cera's leadership position. One of the key developments during the quarter has been the extension of our dealer management system to the retailer loyalty program, marking another important milestone in Cera's digital transformation journey. The platform will strengthen our engagement with the channel partners by providing better visibility into secondary sales, inventory movement, and channel engagement. It will also enable a simpler and more transparent loyalty program while providing richer market insights for faster and better decision-making. We believe that the extension of DMS to the retailer loyalty program will become an important enabler of improved execution, stronger channel relationships, and enhanced operational efficiency. We remain committed to adopting digital capabilities that strengthen our competitive positioning and support our long-term growth ambitions. While the Cera brand will continue to remain the principal driver of our growth, we will continue to invest in strengthening our newer brands, recognizing that building enduring consumer brands require sustained and consistent effort over several years before they establish a meaningful presence in their respective segments. This is particularly true in the premium category, where consumer trust and brand preference are built progressively over a considerable period of time. Therefore, our focus at this stage remains on strengthening the underlying fundamentals of our newer brands with a long-term perspective, rather than evaluating the performance over shorter term horizons. We remain confident that the investments we are making today will create meaningful long-term value as these brands progressively scale over the coming years. From an industry perspective, the challenges across the operating landscape are creating a differentiated environment with larger, more established players being able to leverage their scale and set up to deliver more efficient operations. Backed by established sourcing arrangements, strong manufacturing capabilities and efficient supply chain, Cera has been better placed to manage many disruptions across the landscape while continuing to service its customers seamlessly. For the last few weeks and months, we have progressively reduced our dependence on the Morbi cluster by internalizing several key SKUs. This has further strengthened our ability to ensure consistent product availability and cater to consumer demand effectively. These industry developments have also created opportunities for us to strengthen customer relationships and expand our presence across markets. Our ability to ensure consistent product availability and reliable execution has enabled us to respond effectively to challenging market conditions. We remain focused on capitalizing on these opportunities while maintaining a disciplined approach to growth. Building on the launch of our new brand campaign, we are entering into the next phase of our brand-building journey. During FY '27, we plan to invest approximately INR 85 crores towards brand-building and marketing initiatives. These initiatives will span television, digital, social media and on-ground activations to further strengthen consumer engagement and enhance brand visibility. Our focus will remain on deepening consumer connect and reinforcing Cera's position across key markets. Overall, we have made a strong start to FY '27 and believe that the company is well-positioned to build on this momentum. Supported by improving demand conditions, a strong balance sheet, continued investments in strengthening digital and channel capabilities, we remain confident of sustaining our growth momentum and maintaining our FY '27 revenue growth guidance of 18% to 20%. Our focus will continue to remain on disciplined execution, strengthening our market leadership, and creating sustainable long-term value for all our stakeholders. With this, I would now like to hand over the call to Mr. Vikas Kothari to take you through the financial performance of the quarter.

Thank you, Deepak. A very good morning to everyone. I will now take you through a brief overview of the company's financial performance for the quarter ending June 30, 2026. Revenue from operations for the quarter stood at INR 486 crores as compared to INR 407 crores in Q1 FY '25. Before I proceed further, I would like to highlight a change in the presentation of our financial statements. Turnover discounts, which were earlier reported as an expense, are now presented as a deduction from revenue from operations. Accordingly, the reported revenue for the current quarter has been reduced by 2.5%, and the revenue for the corresponding quarter of the previous year has been reduced by 3%. The previous quarter's revenues have been restated to be comparable in line with the current quarter's disclosure. It's important to note that this change has been driven by the evolution of certain dealer incentive schemes. For the current scheme structure, presenting the eligible incentives as a reduction from revenue better reflects the substance of these arrangements. Accordingly, as per the requirements of Ind AS, we have realigned the presentation. This reduces the turnover, but does not have any impact on absolute profitability or cash flows of the company. EBITDA excluding other income for the quarter stood at INR 49.2 crores as compared to INR 53.1 crores in the corresponding quarter of the previous year. EBITDA margins stood at 10.1% in Q1 FY '27 as compared to 13.1% in Q1 FY '26. The moderation in EBITDA margins during the quarter was primarily due to certain one-time and transitional factors that are not expected to recur beyond Q2. These included a one-time provision towards the long-term settlement of the company's workers pertaining to the previous period, September '25 to March '26. Lower absorption of fixed costs due to reduced production amid temporary gas supply uncertainty. Additionally, while input costs increased significantly, Price hikes have so far been reflected mainly in the retail business, with project contracts expected to transition to revised pricing post Q2, supporting the margin recovery in the subsequent quarters. Gas cost during the quarter remained elevated, with the weighted average cost at INR 48.43 per cubic meter in Q1 FY '27 as compared to INR 33.17 per cubic meter in Q1 FY '26. During the quarter, gas consumption was sourced 69% from GAIL and 31% from Sabarmati. Overall, gas cost accounts for approximately 3.3% of the revenue during the quarter. Input costs, particularly brass, continued to remain elevated during the quarter. In response to these sustained cost pressures, we implemented calibrated price revisions across our sanitaryware and Faucetware portfolio over the last two quarters. These pricing actions have helped offset a part of the increase in the input cost while enabling us to maintain our competitive positioning. While the retail segment reflected these pricing actions, the project business remained relatively insulated due to the nature of pre-booked orders. Going forward, we remain focused on protecting margins while maintaining our competitive positioning. The revenue mix for the quarter was broadly as follows: Sanitaryware accounted for 47%, Faucetware 40%, tiles 11%, and wellness 2% of the total revenue. On a Y-o-Y basis, sanitaryware revenue grew by 14%, Faucetware by 25%, tiles by 22%, and wellness declined by 7%. Our core categories, sanitaryware and Faucetware together accounted for 87% of the total revenues. Capacity utilization during the quarter stood at 61% for sanitaryware and 96% for Faucetware. For a product mix perspective, 44% of the sales were from the premium segment, 37% from mid segment, and 19% from entry-level products. Geographically, tier 3 and tier 1 cities accounted for 38% each, followed by tier 2 at 24% of sales. Profit after tax stood at INR 45 crores as compared to INR 47 crores in the corresponding quarter of the previous year. Earnings per share for the quarter stood at INR 35.15 as compared to INR 36.08 in Q1 FY '26. On the working capital front, we delivered a significant improvement during the quarter through continuous focus on inventory management and overall working capital discipline. Inventory days decreased from 80 days to 68 days. Receivables reduced from 38 days to 30 days, while payables increased from 43 days to 48 days. Consequently, our net working capital cycle improved from 75 days to 50 days on a Y-o-Y basis. This is another lever we are pushing to drive greater overall efficiency in a challenging landscape. As of June 30, 2026, our cash and cash equivalents stood at INR 943 crores. For FY '27, we have planned a capital expenditure outlay of approximately INR 43 crores. The investments will primarily be directed towards our Faucetware brownfield capacity expansion, manufacturing efficiencies, digital initiatives, and strengthening our operational infrastructure. Alongside these investments, we also have a comprehensive brand building and promotional program planned during the year to further strengthen consumer engagement and support our long-term growth ambitions. We will continue to follow a disciplined capital allocation approach while investing in initiatives that strengthen both our manufacturing capabilities and our brands. Overall, our financial positions remain strong, supported by a healthy balance sheet, prudent financial management, and efficient working capital practices. Backed by improving demand conditions and our strong market position, we remain confident of executing our long-term growth strategy while continuing to create sustainable value for all our shareholders. With this, I would like to go to the moderator for opening the lines for Q&A.

[Operator Instructions] First question is from the line of Praveen Sahay from PL Capital.

My first question is on the growth of 19.5%, and especially in the major two segments, which are 14% and 25%. Can you give a color on the volume growth as well? Because I understand 12%, 16% price hike, there which is a mix of institution and the retail there would be different. How has been the volume growth for these two major segments in the first quarter?

Thank you, Praveen. Regarding the growth part, especially when we talk about the last few quarters. The growth which is coming, it is a volume-driven growth, which is continuing month on month. If I have to make a breakup of the total growth, in case of sanitaryware, the 14% growth was there, and this 14% was largely driven by volume, which contributed around 10%, and price contributed around 2%. Since we have taken the price increase in May, effectively, the impact of price increase will be reflecting in the coming quarters. In Q1 it was 2% impact of price, and the mix has a favorable impact of 2%. This has constituted the overall growth of 14% in case of sanitaryware. In case of Faucetware, we have shown a substantial growth of 25%, which is further broken down into volume. Again, it's volume led. 18% was on account of volume, 4% was the impact of price, and a favorable mix of 3%. This way, I think the overall growth of 14% and 25% has been constituted, and the similar patterns we are seeing in the coming months also.

Good to hear that. Second question related to this is, if you can give some color on the Sanitare and the Polyplus, because those numbers are also included in these 10% and 18% of volume growth. Can you give some color on that as well? Is that the product mix changes because of Sanitare's contribution rising?

Just to give you an overall understanding with respect to Sanitare and Polyplus. Our overall approach will remain unchanged as far as Sanitare and Polyplus is concerned, since these are the new initiatives. Right now, talking about the numbers in terms of volume growth or mix, it's difficult to tell. But the overall projections, what we have given during the year, so those projections will be there. Right now, these businesses are still in the build-up phase, and therefore, what we believe is that it is more appropriate to evaluate their progress over a longer time period horizon, rather than updating on the quarter-on-quarter basis.

Right, sir. Last question, sir, related to the accounting change. Basically, whatever the discount in the expenses now you are booking in the sales, and ultimately, that's actually improving your margin profile. The guidance of 13.5% to 14%, adjusting for these changes, what you had made margin guidance.

The impact on absolute terms would be not there, because once you are taking an expense and reducing it from the revenues, your EBITDA margin remains the same in absolute terms. There would be a very slight impact on the EBITDA margin percentage because your turnover is reducing and the profits are remaining the same. Assuming that the reduction would be in the range of 2.5% to 3%. Earlier, if you're talking about 13.5% to 14% on INR 100, now you'll be talking about 13.5% to 14% on INR 97. That small change will be there, but apart from that, we remain on the guidance that we have given, 13.5% to 14%. You can adjust it for the slight change.

No. The percentage terms guidance is intact. Absolute number will vary.

Correct. That will be impacted. If I'm talking about the 14% on INR 100 earlier, now I'll be talking about 14 on 97, let's say. 14 divided by 97 comes to something like 14.4%.

[Operator Instructions] Next question is from the line of Ritesh Shah from Investec India. Due to no response, we move on to the next participant. Next question is from the line of Varun Julasaria from 361 Capital.

I just wanted to understand, how much was the one-time settlement in the staff costs that you booked, and what is the nature of it, the settlement?

What happens is, for the company's own workers, there is a wage agreement which is negotiated with the unions every four years. Like for the staff, you'll find that the merit increase keeps on happening on a yearly basis. That typically averages in the range of 10% to 11%. For the workers, you'll find that the increase has not been the same manner as the staff. Typically, every four years, a settlement is entered into with the union, and that prevails for a period of four years. Let's say we have an increase of something like 15% to 20% every four years. That happens once at the end of the fourth year, or the beginning of the first year, once the four years has ended. Suppose we have a 20% increase, it will be remaining constant for the next four years. Effectively for the next 4 years, the wage for the staff would remain at, if it was earlier INR 100, it will remain at INR 120. There will be no further increases apart from another 2% to 3% kind of increase, which happens on a regular basis, inflationary kind of a thing. As of now, you can expect something like 15%, 20% kind of an impact on the basic wages. On an overall basis, we'll find a 15%, 20% increases. The impact for a year-on-year basis would be 5%, but as of now, it will be an increase of 20% over the wage which was being paid to the workers earlier. The negotiations are still going on. It is more or less been settled in May, and the kind of increase that we are envisaging would be in the range of INR 1 crore per month. INR 6.3 crores was the effect which has come in for the previous period because the last wage agreement had ended in the month of September '25. That we are giving effect on a retrospective basis, it will be INR 6.3 crores from the period of September '25 to March '26, which has been given effect in the current quarter. INR 6.3 crores was for the previous period, and INR 3 crores was for the current period. For the current year, we anticipate that the wage cost would be going up by something like INR 12 crores for the full year for this particular period. Because INR 6.3 crores has been affected for the previous period, the total impact in the profit and loss of the year would be INR 18.3 crores.

I mean, just to understand this quarterly run rate would now be the similar one which is in 1Q, excluding the INR 6 crore, which was a one-time settlement, right?

You're talking about the margins?

No, no, I'm saying for the staff cost, this would be around INR 72 crores kind of a quarterly run rate.

Correct. If you're talking about the staff cost, if you exclude INR 6.3 crores, you can expect the same to be replicated for the remaining three quarters. Apart from the fact that in certain quarters there would be incentive coming in for the staff. On an overall basis, if you take the previous year, increase it by mostly 8% to 10% kind of a thing, 10%, because staff is increased by a certain percentage, wage is not increased by the same percentage. Effectively, it will be in the range of 8% to 9% for the whole year. Add INR 18.3 onto that. That will give you the whole year projection kind of a thing. We believe it will be coming in the range of INR 300 crores for the current year.

Okay. Understood, sir. Sir, on the......

Sorry to interrupt you, Varun. Can I request you to come back for a follow-up, please? [Operator Instructions] Next question is from the line of [ Shubhi Gupta from Trinity ] Asset Managers.

My first question is that we are internalizing some SKUs that we were outsourcing, as you mentioned. If you could just talk a bit more about that. My second question is that how many, I think our target for flagship stores this year is about 60, if I am not wrong. If you could just update me on the progress on that as well.

You are right. We have been talking about internalizing certain SKUs. Typically, both for, in the case of sanitaryware, as well in the case of faucets, we manufacture most of the complex SKUs in-house, and the simpler ones are outsourced. In case of sanitaryware, recently there have been some issues in the context of Morbi being not operating up to its full efficiency. Availabilities in case of Morbi, we were initially in Q1 facing some challenges, and it was anticipated that the challenges may happen in the Q2 onwards also. On an overall basis, we have been quite comfortable in respect of the kind of SKUs that we have, volumes that we have been able to get from Morbi, from our outsourcing partners. As of now, we are quite comfortable in respect of abilities, both in context of Q2 as well as for the entire year. We do not see too much of a challenge. As an anticipation that there could be challenges, we had already taken the process of internalizing some of the higher selling SKUs from these outsourcing partners to make them internally within our manufacturing plant. We are already undertaking that exercise, and in case we are having problems from the outsourcing arrangement, we are now well geared up to produce these SKUs in-house.

Sure, sir. The second question about the flagship stores.

Stores, as we have already given a guidance as you're talking in respect of Sanitare, we have given a guidance that we'll be going up from 35 to something like 50 stores by the end of the current year. We are in line with that. We'll continue to scale up these stores, and we should end up with something like 50 by the end of the current financial year.

Okay. Sir, this internalization, do we need some additional investment for this or no?

Small amount of investments are required because the kind of casting lines which are required are different for different kind of SKUs. So kind of INR 2 crores, INR 3 crores of investment or small investments which are a part of the routine also. We do that on a regular basis also. That kind of investment is required, but we don't require massive investment in terms of setting up manufacturing capabilities or getting additional machineries. The current facility by itself with some change in the lines which are required for specific SKUs, that needs to be done.

Next question is from the line of Ritesh Shah from Investec India.

Two questions. First is with respect to the change in management, the KMP recently. Who's going to take over the responsibilities with respect to Sanitare and Polyplus? Could you just refresh us with both those initiatives with a short-term and longer-term view?

Thank you, Ritesh. Regarding the recent resignation of Mr. Baliga, just to update that he is leaving due to his personal reasons. His responsibilities were limited to the Sanitare and the Polyplus new initiatives what we have started one and a half years back. Now we have identified our existing national head under the succession plan to lead these businesses going forward. However, Mr. Baliga will continue to support the company till September 30 to ensure the smooth transition. Overall, we do not see any sort of major challenges as far as his exit is concerned since both the businesses have dedicated operating teams, the established business processes, and a strong second line of management. As such, we do not expect this transition to have any impact on our execution. We are moving or progressing in the same way that we were doing earlier, now it will be led by the existing national head.

Sir, on the targets?

On the targets also, like I told, the targets remain intact, what we have given initially for Sanitare and Polyplus. However, on quarter-on-quarter basis, it is difficult to give the numbers because still these are young initiatives, we are moving in a right direction, and we see that the targets what we have given are approachable.

Sure. Sir, my second question is, you did indicate about taking certain SKUs in-house given the issues that were involved because of external reasons. Sir, how should we look at this with a longer-term time frame? Like is this something which is a change in strategy wherein we are looking to increase the insourcing part and reduce outsourcing? How should we look at it?

That is a continuous process. On a continuous basis, we keep on trying to see because the SKU profile also keeps on changing on a regular basis. Now if you see the recent past, you'll find that happens on a very frequent basis. Like earlier if you had a certain set of SKUs, which used to have extremely long life cycle. Now you'll find that the life cycle of the SKUs have also started coming down. It's a continuous process. If you talk about the kind of mix which is there, typically on a long-term basis, the idea is always that the plant should be manufacturing more complex pieces and the simpler pieces should be outsourced. Whenever the need arises that you have a situation like the current situation which had developed in the recent past in respect of the war situation. It is always possible for us to internalize the outsourcing SKUs in-house, like we did in the current situation. To answer your question, on a long-term basis, more complex SKUs would be in-house but whenever the need arises, we can make it a slight shift in the overall mix as required.