Kajaria Ceramics Limited (500233) Earnings Call Transcript & Summary

Good evening, everyone. On behalf of ICICI Securities, I welcome you all to the conference call of Kajaria Ceramics Limited to discuss the Q2 FY '21 results performance and the way forward. From the management, we have Mr. Ashok Kajaria, the Chairman and the Managing Director; Mr. Chetan Kajaria; and Mr. Rishi Kajaria, Joint Managing Directors; and Mr. Sanjeev Agarwal, the CFO of the company. I would now request Mr. Ashok Kajaria to start the call with his opening remarks, post which we can then proceed with the Q&A session. Over to you, sir.

Thank you, Nehal. Good evening, ladies and gentlemen. First and foremost, I hope and wish that your family, friends and colleagues have been safe from COVID, and I pay that all of us get over this crisis safely and quickly. We are doing this conference call as we could not do our annual analyst meet, which we do post our annual results. We intend to continue with the same on half yearly basis. I have with me my sons, Chetan and Rishi, who are running the day-to-day show; Sanjeev, our CFO; and Pallavi, Investor Relations. The tile industry witnessed gradual demand pickup from the month of July onwards. Tile consumption has found its way into smaller cities and retail markets as the heat of pandemic was felt much more in the other markets at that point in time. Tier 2 and below markets, we believe, will continue to thrive in future as well. As we know, Q1 was significantly impacted owing to COVID-19 situation, pandemic. However, to our positive surprise, Q2 has been an all-around sharp recovery in higher CapEx utilizations, strong volumes, reduced working capital, robust cash collections and significant traction in profitability. Kajaria reported a marginal volume growth in tiles in quarter 2, driven by good demand from Tier 2, 3, 4 cities and smaller towns. GVT category has also grown higher due to the south plant. Our plants have operated at an average capacity utilization of 90% during the quarter. Tiles subsidiaries have reported profit of INR 5.36 crore in quarter 2 as compared to losses in the past. Whatever actions we did in the past are yielding results now. Revenue from barter business grew by 25% to INR 53 crores in quarter 2 F '21 from INR 43 crores in quarter 2 F '20. For the first time, our barter business has reported a net profit of INR 2.04 crores in this quarter. Revenue from plywood business grew by 23% to INR 9 crores in quarter 2, from INR 7 crores in quarter 2 FY '20. The segment reported a loss of INR 2.61 crores in the current quarter due to initial setup, team building and branding expenses. Total turnover at consolidated level reached to INR 713 crores in quarter 2 F '21 as compared to INR 715 crores in quarter 2 F '20. Absolute EBITDA, EBITDA increased to INR 144 crores as compared to INR 105 crores in quarter 2 F '20, led by sharp gas prices and reduction in fixed overhead, like salaries, wages and brand spends. EBITDA margin for the quarter improved sharply by 545 basis points, touching the peak of 20.17%. PBT in quarter 2 FY '21 has increased to INR 119 crores as against INR 81 crores in quarter 2 F '20. However, PAT in quarter 2 was slightly higher than the current quarter because of reversal of net deferred tax liability due to corporate tax rate cut in that quarter by Government of India. Working capital witnessed a sharp decline in quarter 2 by 24 days, led by reduction in inventory by 18 days and receivables by 7 days. With this, I take this opportunity of thanking you for joining us today. Stay safe and stay blessed. Over to you for questions, please.

[Operator Instructions] The first question is from the line of Saurabh Jain from HSBC.

Congrats for surprisingly good numbers.

Sorry to interrupt. Saurabh, we would request you to speak a little louder, please?

Yes. So congrats for these numbers, which are better than expected. And my question is that we see that there is a softer personnel expense and also lower other [Technical Difficulty] the trend going forward or maybe a quarter or 2 in the line, we can see these numbers going back to what it has been in, say, last year or in line with the historical trends. Would you see these trends -- these expenses to maintain at the levels here or going back to the higher levels that used to be, say, last year FY '20?

Thank you. You see, the margin was higher in quarter 2 '21, mainly because of soft oil prices, reduction in some of the overheads like salary reduction, advertisement, traveling, et cetera. Some savings would sustain like traveling because in COVID-19, nobody is much traveling, conveyance, sales meet, dealers meet, et cetera, going forward. However, in October, we have revised the salary cost, whatever it was before COVID is being done for all the people in the company, including the plants, including the head office and sales. The advertisement cost will also go up based on that. Margin going forward may contract by 150 to 200 basis points going forward. Because with the capacity utilization, which we are having, you see, if you look at the numbers which I shared, in July, we started our plants in a phased manner. And by the end of July, all the plants were running at -- almost at full capacity except Cosa, which was at 61% due to some technical upgradation. Now all the plants as we speak today are running full except Cosa, of course. And if you look at that, the margins are very much in place, but definitely, expenses will go up. And going forward, we see that the margins will -- may contract by 150 to 200 basis points.

Okay. And my second question is that the pricing -- on the pricing front, are the prices stable for now?

Yes, the prices are stable. We have changed the product mix to make sure that the volumes -- we maintain the volumes, but there's been no reduction in prices. The prices have been stable. And we see the same thing going forward as well.

[Operator Instructions] The next question is from the line of Sneha Talreja from Edelweiss Securities.

Congratulations for a very good set of numbers. So basically, just wanted to understand regarding the demand scenario. I mean, some -- as you -- I mean, you mentioned in your opening remarks that you saw healthy demand from Tier 1 and Tier 3 cities. But do you think any of this was pent-up demand? Or what is the scenario right now? What's your outlook for the year ahead?

This is Chetan Kajaria. So the pent-up demand situation happened in July. August, September was slow and steady, normal sales which we saw. And going forward also, we expect the same constant sales to come through. Does that answer your question?

That's done. But are you in the sense -- I mean, thanks Chetan for that, but are you expecting growth from the coming months like October onwards? Have you already started seeing the growth outlook? Or is it on a steady scale basis that you will be seeing from pre-COVID levels now?

You see our first quarter results were out on August 7 when we said on TV,that we are looking at a scenario of second quarter at 80% plus. Because in the month of July, we sold about 85%. In August, sales were 100%. And September, the sales were 115% of what we did last year last quarter. So as we speak, on 20th of this month, same situation prevails today, scenario is very positive on the ground level.

That was really helpful, like 115% of number. So also the second question from my end would be, as you rightly mentioned that you've reversed the cost. So I mean, you of course, gave a sense that salary costs have been reversed along with some kind of advertisement spend. But what kind of a overall cost savings do we presume for the H2 in that sense? Like, I mean, some amount of your stores and sales and those kind of expenses would have called back to a 150 to 200 bps sort of a margin decline. So can we assume 18% sort of a margin for H2, which itself will be very healthy is my question?

You see, as I said, some expenses will go up, like traveling will be contained. Salaries will go up. Advertisement will also go up. But looking at the current scenario, you can safely assume that Kajaria should do 18%-plus EBITDA.

So that's a strong margin. And you guided even for the next year because of the current scenario looks very favorable?

See pandemic is still going on in the country. You can't expect us to guide right now. I'm not ready to guide even for the fourth quarter. But with the ground scenario, what it looks like I'm happy to say that things are positive on the ground level. I'm not giving any guidance for the quarter 4. But I can tell you that ground level is positive and things are better. But as we go along with the pandemic, which is there in full swing right now in the country, we are all aware, and you are the worst affected -- Maharashtra is worst affected. So keeping that in mind, the first thing is to stay safe and work well.

Right, sir. So that itself is an amazing guidance, 18%-plus margin. So congratulations on that and we'd get back in the queue, sir.

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

Sir, just couple of questions. When talking about this demand, is it industry only coming back to growth? Or are we gaining market share given from Morbi or the unorganized, sir. If you can throw some light on it, it will be helpful?

This is Rishi Kajaria. So I would say we are -- the market is not growing, but we are taking more of the share of the other people's market. What we also did last year, we made a lot of showrooms. Our Kajaria exclusive showrooms in Tier 2, Tier 3, Tier 4 cities, which are actually giving us great results now. As we mentioned, COVID is more prevalent in the Tier 1, and that is where the issues are, the sales are less. But Tier 2, 3, 4, where we did a lot of work last year -- last couple of years, that is giving us good results now. And so we see that this is where the demand is coming from.

Okay. Okay. That's helpful. And sir, also in terms of the power and fuel cost, whatever we've reported for the current quarter, this is sustainable going forward in terms of whatever gas price reduction is already reflected in the P&L?

See, power is constant. There is not much change in power cost. As far as gas prices are concerned, on the basis of information from GAIL, the gas prices will be soft until March -- at least till March '21, and we don't see any much change. There may be a minor 2%, 3%, 4% change from 25%, which was the average of first 4 months to 25.5% to 26%, but nothing beyond that.

Okay. Okay. And sir, just couple of questions more in terms of sanitary, where if you look at it, this is the highest ever quarterly revenues that you have done of almost about INR 53-odd crores. So if you can just throw some light, is it again the industry or is it we doing -- Kerovit doing much better? If you can just help us understand that?

Yes. So I'll explain to you, Karovit has done better for 2 reasons. One, we have strengthened our dealer network. We have made a lot of showrooms. And secondly, we have just recently launched a new series, a new collection called the Autumn Collection, which we'll be calling it the Autumn Collection. This is the high-end colored range, which other manufacturers already have. So we reduced this range in very competitive price, which has been very well accepted by the market. So this increase in revenue and profit is also because of that, which will -- going forward, we see we are expecting good results from there.

Okay. Great. And sir, just one thing. In terms of the demand, are we seeing more demand coming in from GVT, PVT ceramics? If you can just help us understand in terms of the marketplace? Is it more towards -- which product category is it more?

All equally. All equally. All the divisions are doing very well, and all the divisions are getting good demand.

The next question is from the line of Nitesh from Birla Mutual Fund.

So Mr. Kajaria, just a couple of questions from my side. Can you talk about the competitive intensity in the tiles industry domestically? Now the context of this question is basically 2 things. One is because of the pandemic itself, some of the smaller unorganized guys had really a tough time. And working capital issues or some funding or liquidity problem, number one. And number two, there is a theory going on that India is actually gaining some market share from the Chinese producer in the export market whereby the Gujarat-based or the Morbi-based producers are exporting more and more living space for the domestic branded player. So can you just explain how is it the competitive intensity, say, last year and now, is it a much better situation now or these are like not realistic, which I told just now?

This is Chetan here. So last year, the tile market was roughly INR 30,000 crore, out of which INR 7,000 crore to INR 8,000 crore was exports from Morbi. This year, we are expecting the market has contracted to around INR 25,000 crore, but the exports are still going strong, around INR 7,000 crore to INR 8,000 crore, which we expect in this financial year to go also based on the last 3 months exports data, which has led to less pressure in the domestic market, which is why the organized sector players are doing much better. And the competitive intensity has reduced a little bit because of more exports due to anti-China sentiment, especially from the U.S. market, which has imposed a 200-plus antidumping duty on the Chinese products.

Yes. Okay. Essentially, would you believe that the large players like Kajaria it could be easier whenever there is some cost increase because of global input prices that you would be able to pass on more easily than in the past?

At this stage, increasing prices is a very difficult thing. How the realizations will go up tomorrow or day after will be by product mix only because you see raising prices is not a solution because your costs are going down because the gas prices are down. At this stage, to talk about raising prices is not a viable option.

Sure, sir. And lastly, at any point in time in future will Kalaria Ceramics look into the export market, if this trend become even more powerful, the anti-China sentiment and all that?

Kajaria exports -- Kajaria Ceramics is also doing exports. It's not that we are not doing exports. But exports is not a priority for the reason that here in domestic, Kajaria is #1 brand in the country. When you go to exports, it is just one of the brands. Secondly, just for information of all of you, most of the European American manufacturers, they want their products and their own brand. It is not a brand of Kajaria or Somany or Johnson or anybody. They are getting it, in fact, in their own branch. So the brand has no value as far as exports are concerned. We will do some exports going forward, which is about 2% to 3%, 4% of our production -- of our turnover. But basically, Kajaria is more focus on domestic market where our value realization is more, the numbers which we are talking about, which we are talking about, you will see, the moment our focus is exports, you will not see these numbers.

The next question is from the line of Rishab Gupta from Goldman Sachs.

Sorry, sir, this is Pulkit from Goldman. Good numbers. Sir, few questions from my side. I think, first, coming back to the demand part. I mean, it's clearly a surprise that you've actually been able to meet what you did last year in terms of overall volume. Now if I just put this into perspective of, say, what we are seeing in Bombay, clearly, I think most of us are not even stepping out of the house. So what I'm trying to understand is, can you highlight if this is basically not only pent-up demand but basically more inventory going into the channel right now, which basically did not receive much inventory in Q1, and that is a mechanism that has sort of fructified in Q2. Because what I'm trying to understand is, can we do a similar number going forward given that, that end market, particularly real estate, et cetera, still have not shown any meaningful signs of new activity. Sir, if you could just talk about the demand drivers per se of what would get us through in the second half of demand, sir?

Pulkit, as we mentioned before, yes, you're sitting in Bombay understanding all this is a little tough. But as we said, the Tier 2, Tier 3, Tier 4, we're getting tremendous response. And it is not that we are pushing inventory to these people because that is also shown in our working capital, right? We are getting -- our cash flows are excellent. So even the -- our dealers, they are selling in cash. They are getting money, and they are paying us faster. So there are -- it's not a pent-up, it's a regular demand which is coming. And I think also -- now people have -- the trust in the brand has also increased or whatever it is that they are pressing our brand. So that is why we are getting the numbers. And even going forward, we see the same things. I mean, we don't see anything going down. At this stage, the numbers are happening. I don't think so there is no reason why it should go down.

Pulkit one more thing. When we hoped in July, 80%-plus and what has happened now in the quarter, it's also a surprise for us, not only for you, it's a surprise for us also.

Fair point, sir. And I understand there is definitely some market share gain in this also. Sir, my second question would be on advertisement cost. I mean, historically, we used to look at between INR 100 crores and INR 110 crores per annum of advertisement costs. Should we expect that next year, we get back to the same run rate in terms of ad spend?

Going forward, we definitely will step up our advertising budget and promotional spend because we believe that, that is the key to sustaining a brand image and equity in the market also. So we'll definitely step up the expenses going forward in the next financial year. And the second half of this financial year also.

Fair point. And my last question would be on Morbi as the previous participant also asked that if you see the exporters out of Morbi basically start looking inward again, nobody knows how geopolitics plays out. In that case, could one see that realizations could again come back under pressure? Or we think that given that everybody has suffered in first quarter, probably pricing in the sector should hold up? That would be my last question.

You have answered the question yourself. Since everybody has suffered in the first quarter, I don't think anybody is ready for a price cut or anything. Also, I would like to add, since you put Morbi again, we had a con call meeting with the Morbi people because Chetan was the President of the -- Chairman of the ICCTAS organization, which we have just till a few days back for 2 years. And they have also tightened up their payment loans. Just for the information of everybody, they said at the meeting, we have also tightened up their payment norms, and nobody is talking about a price cut because everybody has suffered very much in quarter 1.

Fair point, sir. Good and really happening numbers.

The next question is from the line of Madhav Marda from Fidelity Investments.

I just wanted to clarify on one aspect, which was discussed couple of times already, but the market share gains that we are seeing that basically because Morbi players are focusing more on the export market versus the domestic market. Is that the right understanding to have?

No -- yes, go ahead. Go ahead.

Basically, it's a mix of both. There are some plants in Morbi, which are shut also. And quite a few of them are still not on 100% capacity, maybe 50%, 40%, 60%, plus they are exporting also. So it's a combination of both the factors. Entire Morbi is not up and running. Plus whoever is running, their focus is more on exports currently. It's a combination of both the factors.

Okay. And something that we understood from our channel section was that like capacity utilization would be for the players who are operating right now is very healthy. Is it fair to say that demand is fairly strong and whatever supply is there, it's completely sold out? Is that a right way to think?

Yes, their capacity utilization has definitely gone up in the last 2 months because of exports. And it has reached a healthy level of production. Correct.

See, what has happened due to COVID-19, China -- in case of China, lot of anti-dumping has come from various countries, including America, where the duty has been put to the extent of 220% to 350%. All that market share is now coming to India because they are not -- they cannot buy from China, so Indians have penetrated to the fullest there. So that's why the exports have gone up in spite of anti-dumping duty by Arab world where Saudi Arabia and all these countries potentially dumping duty on India. In spite of that, the exports are to the extent of INR 1,000 crores per month from August onwards. So that's a scenario.

Got it. Got it, sir. Understood. And sir, just the second question was on the capital allocation. So Kajaria has a healthy balance sheet with good cash flow begin in a year like this. Anything that you would like to update us on the buyback or would that be discussion for the next, sir?

I'll let Sanjeev answer that.

We definitely have more money than what we were having in the March. In May, when we opened the office, we were not expecting that kind of cash flow, and we were even thinking of having a line of credit. But fortunately, the cash was solo, but that we have a cash -- net cash of around INR 350 crore, INR 360 crore. So we will use this cash flow going forward for some expansion as we are already working at optimum capacity. So maybe some capacity addition will be there next year. And if we continue to add more cash to the kitty, then that will be used in the best interest of the shareholder, especially the minority shareholders. It could be in terms of higher dividend or it could be in terms of maybe buyback, whatever will suit at that point of time, whatever the Board will decide. But we are very clear, either we will use the money in a productive manner or we will think of returning back to the shareholder.

The next question is from the line of Aadesh Mehta from Motilal Oswal Asset Management. Mr. Aadesh Mehta, we would request you to please unmute yourself if muted from the handset.

Congratulations, sir, on a great set of numbers. My question is again on Morbi. How do you think about the sustainability of this market share gain, which is happening from Morbi? Because even in the past, we have seen that there are events like this where larger guys like us gain market share. But within a few months, they come back to take some market share again. Just wanted to know your views on how permanent this market share gain is?

I think you missed out the point which Rishi said earlier. You see, after introduction of GST, what Kajaria has done. What Kajaria has done, they have opened number of showrooms for the people in Tier 2, Tier 3 and Tier 4, which is only the results which we are looking at today. As a result, those people are able to sell more. [Foreign Language] So that's a scenario. And as a result, the market share which we are gaining today is there to stay. And as I have always said in all the meetings earlier since GST has come, the biggest change is not Morbi or anything. The biggest change is GST. What was happening before, there was a play on taxation, which we are all aware. With the introduction of GST, it started with 28%. Then on 15th of November 2017, it came down to 18%. It's a level playing field for everybody. The impact of that is a showroom, which is showing a good number of products is able to sell more than a smaller showroom, which is a limited number of products. So as a result, people have grown -- those who are bigger, they have made more showrooms, they have grown, like #1 retailer of Kajaria who's from Coimbatore, he has now opened 12 showrooms. He has 12 showrooms. He started 10 years back or 0 years -- 10 years back at 1 or 2 showrooms, today has 12 showrooms, because he is a hard-core retailer. With GST introduction, his sales are gradually going up. Last year on 24th of November, he opened a showroom of 40,000 square feet at Coimbatore, where we already have 2 existing showrooms. One was 3,500 foot and another was 20,000 square feet. He has opened another showroom of 40,000 square feet. The question is why? The simple question is, retails are picking up and because of the level playing field imposed by GST. So what we are talking about is not a short-term scenario, it's a long-term scenario. For a simple reason, for a simple answer that a lot of showrooms have been made as pandemic gets over -- in the first 6 months of this year, let me honestly tell you, not much of the headway has been made in making new showrooms because people cannot travel. As pandemic will gets over, Kajaria will be back in that stream, as Chetan just said, we'll be spending much more on advertisement, brand-building, making of showings of the dealers because that's the strength of Kajaria. And that is a strength which nobody can take.

Got it, sir. Wish you all the best, sir.

[Operator Instructions] The next question is from the line of at Achal Lohade from JM Financial.

Congratulations for the great numbers. If you could help us in terms of the mix of ceramic, GVT, PVT for the quarter and the last year same quarter, please?

See, all are selling, but I can give you rough numbers. Roughly as far as the -- when you talk about revenue, ceramics is close to about 40%, PBT is about 30%, and GVT is about 30%. So that's a scenario, overall scenario. GVT started late in the month of July. So it gradually picked up. Going forward, it will pick up by another 2 points, as I can see.

Right. Just sir, question on the realization. If I see the realization for own tile seems to be very volatile if I look at the fourth quarter and first quarter and the second quarter realization, is it possible to give some color in terms of what is driving this thing?

First of all, there is no volatility. As Rishi said earlier, price per se has not changed. What happens during a month, like we started in July, nobody knew what will happen in July. So you give some extra incentive to the dealer to make sure that he lifts. Or -- that is a thing which will keep on happening, depending on the market scenario. Price-wise, there is no fluctuation. If you see the overall numbers, in ceramic, there is hardly any change; in PBT, there is hardly any change; in GVT, the numbers have gone down by about 5%, 6%, because of the product mix because you have to sell what the market demands. I can't send high value-added material if the market wants a normal material. So it is like that. That is the combination.

And also with the opening of our south plant, the volumes have increased. We opened a plant in Tirupati last year. And now we can say it has come into full force. So with that also, we've got some improvement in the volumes.

Understood. Understood. And just a clarification on the CapEx part, you -- I think Sanjeevji talked about provable CapEx in FY '22, some capacity will come in. Is it possible to elaborate a bit in terms of how are we looking at the capacity addition, given the -- if there is enough of volumes available from Morbi in terms of outsourcing. So how do you look at the outsourcing mix vis-à-vis own manufacturing, if you could give Tamar couple of years or so?

See, Kajaria's vision is to grow at 15% volume terms from here on. As things are gradually settling in and as far as -- because I always have said for the last 3 years that GST is a game changer. With GST settling in, government tightening up the norms now, GST will be the game changer as we go forward. Kajaria's vision is that it should grow at 15% volume terms for the next 3 to 5 years. That's the vision Kajaria is carrying. Coming to CapEx, if we have to hit the north and east market, we have to put a plant here in North. That's what we would like to do because that's what we have been doing. If you have to feed the western and southern markets, you have an option to feed it from Morbi. Or like in southern, we have already booked up a plant, Kajaria Tiles. As situation comes, after some time, we will double it because there's plenty of space to do that. So that's how it's going to work as far as Kajaria is concerned.

So to answer your question, the volumes are not a problem. 15 -- as the Chairman said, 15% plus volumes is what we are expecting. And that will be a mix of both outsourcing and some CapEx as and when the requirement happens. We have all the options available with us. We take the right call at the right time.

And as we speak, we are evaluating the additional capacity. Is that understanding right?

Not right now. But yes, we have options open, so we can always look into that. But any of our plants will not be more than a CapEx of INR 100 crores to INR 150 crores maximum.

See in any year, the total CapEx would always be lower than the cash flow we'll be generating. So like this year, our CapEx is going to be in double digit. And the next year, whatever capacity we plan would not be more than INR 100 crore to INR 150 crore.

Got it. Got it. And just a clarification. I think Chetan mentioned about the domestic, which would export the market size, INR 25,000 crore, INR 30,000 crore number, does that number include exports or is that excluding exports?

No, that is including exports.

So you said INR 30,000 crore is declining to INR 25,000 crore. And given that the exports have increased, I missed that number from INR 7,000 crores, INR 8,000 crores to how much you were saying?

I said last year, the market was roughly INR 30,000 crore out of which it INR 7000 crores to INR 8,000 crores was exports, remaining was domestic. This year, the market has contracted to INR 25,000 crore, with exports remaining stable to INR 7,000 crores to INR 8,000 crores, and the domestic market shrinking to around INR 16,000 crores to INR 17,000 crores.

So we are talking about domestic actually contracting almost 20%, 25%?

Three months everything was closed.

I'm not talking from an annual perspective, actually, I would imagine that whatever was close kind of got covered -- still getting covered actually.

Those numbers cannot come back because April, May, June is a gone situation. And as Chetan rightly said, with the no production in April, May, June, almost in entire India, we -- the capacity would shrink, the market would shrink, the domestic market has shrunk. We also thought that exports will also come down, but with the anti-dumping duty imposed by America on China in May 2020, the exports have shot up. And currently, they have taken away lot of market share of China to America.

The next question is from the line of Ritesh Badjatya from Asian Market Securities.

Congratulations for the good set of numbers. Sir, in your initial remarks, you are talking about, there is a very good ground view. So just wanted to understand the where from this confidence is coming, means, want to understand this good do is coming from the dealer's side or actually the demand from the IHD side or from the real estate side? First question is that. And second is the -- since you are talking about 18% in the second half in the terms of margin, so does that higher-margin also have the element of getting the new dealers at the better terms and conditions given many smaller players may be going out of the business? Yes. So these 2 questions.

So when we said the ground reality is positive, the demand for us is coming 90% from retail and only 10% from projects because projects are still in a bad shape with lot of outstandings and payment problems. So our focus is mainly on retail right now. And what was the second part? Going forward, the margins will remain inter at 18%-plus, as the Chairman said. Does that answer your question completely?

So sir, just wanted to understand, are we getting the new dealers at the better terms and conditions and in the recent last 3, 4 months after the lockdown, have we had a good amount of the dealers in again Tier 2, 3, 4 cities? Or is there any chance on that particular part in the terms of dealer expansion or in the setting of the new geographies?

No. So right now, we are not expanding our dealer network because we are getting our sales from our regular dealers, the dealers which we already have. We are not expanding them right now. They are fulfilling our sales. And as we said that projects of sales are still very, very less. You know the situation of the real estate in the country. As we go forward, when the real estate improves, the builders -- and we are very, very cautious about the payment as well. We are not taking any chances. Wherever we are not getting the right payment, we are not supplying to them. And so going forward, we also hope that the project market improves in India. If that happens, we'll definitely gain more market share as well. So to answer the question, yes, the market -- we can sustain the numbers going forward.

Okay. And sir, lastly, on the raw material side, are the raw material vendors are able to supply our requirement or do we face any kind of supply-chain related...

No issue from day 1. No issue from day 1.

The next question is from the line of Bajrang Bafna from Sunidhi Securities.

Congratulations for a good set of numbers. Sir, broadly, I would like to understand from a strategic point of view, like you pointed out that because of this anti-dumping duties in U.S. and anti-China segment across the globe, the Indian Morbi players have got the advantage here on the export side. And the current numbers, which are ruling is around INR 1,000 crore on a monthly basis. So if that run rate continues, we are talking about for the next 12 months, the number will be somewhere around 50% higher than the historic trend. So -- and again, on the strategy front, that if that trend continues and we are going to see this kind of demand because as we know that the U.S. people, they take much longer time for the plant audits and their quality norms and everything, which are much, much stringent as compared to this part of the world. So if that also fortifies over the next couple of months and they start looking as a strategic point, because if I understand it correctly, the China contributes maximum portion of the U.S. market. And now since the anti-dumping duty, the demand from the Indian and the other countries will be significantly higher than what we can think of. So broadly from a strategic point of view, what kind of guidance, because that puts a lot of impetus for the domestic market, because if Morbi doesn't come to the domestic side and the continuously contribute to the export side, then probably the domestic players like us, the branded players will have much more say strategically going forward. So if you guide in that sense will be really helpful, sir. I know it is just 4, 5 months of experience, but since you people are more in touch with the markets and the international market, it will be really helpful?

See, America is one of the large markets as far as exports are concerned. China was doing a lot of exports. Out of 200 million square meter of tiles which America was importing, almost 38 million or 37 million was going from China. With anti-dumping duty at 220% to 350% you see what -- when anti-dumping is put, initially it was put in November '19 and finally put in May '20 because there is a 6-month leave period. So from November itself, the exports started going -- slowing down from China and India as you rightly said, it took time for them to approval, get more approvals. And from June, July, the exports have picked up. So as far as America market is concerned, the market is there, and it is the biggest market. India has taken -- India will take most of the market share of China because India is be also a very competitive player in the world. Don't forget that. India is a very competitive player in the world and so is Morbi for that matter. So looking at that, this scenario should continue in all possibility. Rest, we will see as we go forward.

The next question is from the line of Rajat Setiya from VRDDHI Capital.

Sir, on the export side, did you also mention that the exports could basically have also remained in the similar range? Or you just mentioned about the total export?

GCC exports have slightly come down not much because there are 6 countries in GCC, Saudi Arabia, Bahrain, Qatar, UAE, Kuwait and Muscat. Now this anti-dumping duty is supposed to be in all the 6 countries. Just for information, Saudi Arabia and Bahrain has imposed anti-dumping duty, the other 4 countries have not pushed anti-dumping duty at all. So exports have come down slightly, but not much because of that.

Understood. And sir, given the slowdown still persisting in the project sales, do we -- what kind of -- actually, what kind of bad debts do you expect in the receivables on that side?

Kajaria has no bad debts. Because sometime in the month of May, when we started our operations, we took a conscious call that 90% will be retail and 10% will be institutional sales. When you talk about 90% retail means dealer -- sale through dealers. When you talk about institutional sales, it is about 3% to 4% government sales, where there is no problem of any bad debt. And about 5% to 6% of private builder sales. And as Rishi said earlier, we are very cautious in dealing with that because the problem still persists. Let me be very honest. The problem still persists. And we are all aware, since you are sitting at Bombay, with the Kamath Committee, they have a restructuring exercise of almost INR 2.4 lakh crores of this builder's loans. So looking at that, as rightly said by Rishi, the moment that situation becomes better, we will get some market share and more projects will come in the market.

You won't believe we got -- we get a lot of project inquiries, but we take up conscious call that when [Foreign Language] or where they say that, we'll pay after 60 to 90 days, we don't take those projects. So we have been very careful and watchful to make sure that we don't make any mistake and [Foreign Language].

Sure. This is helpful. The other question was on the value-added tiles. So what exactly -- how exactly do you define what are value-added tiles? And in terms of numbers, what percentage of sales has it contributed to in financial year -- let's say, last financial year? And what was that number 5, 6 years back?

Telling will be very difficult. The bigger tiles, the value-adding tiles, roughly at Kajaria almost since it's a #1 brand in the country, we are close to selling 60% of value-added tiles in all the 3 divisions, be it ceramic, be it polished vitrified, be it JBT. And going forward, there is not much going to be much change because we have reached that peak of value addition because the bigger tiles are value addition -- adding tiles. Normal tiles like 2x2 are, you can say, normal tiles.

See, we are honestly looking at more volumes. Value addition is there, but our focus is more on getting -- on doing volumes and gaining market share. See, value added will always be very little as compared to the overall number. So I think our main focus is more on volumes, volumes and volumes.

Next question is from the line of Girish Choudhary from Spark Capital.

My question is on the Sanitary Ware and Bath Fitting segment. So obviously, this quarter was very good despite a tough macro. But last 2 years, we have been around this INR 180 crore to INR 200 crore of revenues from this segment. So how should one look at this segment over a 3-year view? Have they reached the inflection point wherein now we can expect a 25% to 30% growth consistently? And also what is your view on the margins in the segment?

See, our target is more than that. So I think our -- we are very positive about our bathware business, and our target is INR 500 crores in the next 3 to 4 years. That's our target with the team, our internal target. And if yes -- if the revenue happens, the margin will obviously be good.

Okay. So what sort of margins you're looking at assuming you reach INR 500 crores of revenues?

I'll be honest, it's too early to predict that. [Foreign Language] Let us enjoy that. I think let us sustain that. See, if the numbers happen, margins will automatically come. I think the first point is that our revenue should be -- revenue should happen. If revenue happens, profit will be definitely there. It will be good only.

Okay. Just a follow-up on this, what will drive this INR 500 crores revenue? Is it new SKUs or capacities or dealer investments, if you say?

It'll be a combination of all the 3. We have enough capacities in our plant. We can -- both our faucet plant and sanitary ware plants are equipped to expand. So we don't have to look for a new premises. And yes, with capacity expansion, we'll have to add more dealers. See, we are still a baby. We are still only 3, 4 years old. We are only -- I mean, we are talking about INR 200 crores, INR 250 crores -- INR 220 crores this year. We have a long way to go. [Foreign Language] we just started.

And I'll add one more thing here. I think we have the manpower -- enough power, which is needed to reach to that level what Mr. Rishi Kajaria is talking about for the next 2 years. So every -- and when the plant -- both the plans earn at full capacity, the expenses will not go up. So every quarter as we move towards higher capacity utilization, the margin will improve.

And just to add to that, our capacity expansion, when we do, the cost will be very less because our basic infrastructure is done. So now for the -- it will be much lesser, the expenses. Capacity CapEx.

Got it. Sir, my second question is on the capital deployment for growth. So basically, currently, we have a net cash of INR 350 crores and incrementally, assuming you will be generating INR 300 crore to INR 350 crore each year and if your CapEx level remains at below INR 150 crores. The point is the cash pile will continue to ingest significantly. So are you looking at any acquisitions maybe in sanitary ware or any other new businesses with similar distribution setup? So how are you thinking on these lines?

See, we have a lot of cash. And as you rightly said, we will be having more cash. So what we will do, I cannot tell you as of today. As I mentioned earlier, the Board will take a call, whether to use for capacity addition in the core business or to return it back by way of dividend or maybe buyback, whatever. But one thing I can do, what we will not do. So we will not go for any unrelated acquisition or big CapEx. So that much we can -- I can tell you now.

The next question is from the line of Arun Baid from BOB Capital.

Sir, just you mentioned earlier that in the second half, you're expecting about 18% margins. So that's on a premise that cash cost is going to be lower. I understand that. Sir but what is the kind of sales you're looking at? Because as you mentioned very correctly that we don't know how Q4 is going to pan out. And luckily, last year, Q2 was tough for us. Q2, we just did 1% volume growth and last time in Q3, our volume growth was just 0.5%. So what I want to understand is, sir, when you're seeing 18% margins, what kind of growth are you looking at when you're building that numbers?

See, as of today, we are looking at a scenario that quarter 2, quarter 3, we should meet what we did in quarter 3 last year. Quarter 4 will definitely be more than 110% because, as you know, March was a mess because of lockdown in the country. So looking at that scenario, I don't see any problem in 18%-plus.

Okay. So with 10% growth in Q4 and flattish Q3, we'd still be at 18%. Am I correct, sir?

No, no. I said quarter 3 will be like what we are looking at, quarter 3 will be like quarter 3 of last year. July, September '20. As far as quarter 4 is concerned, it will be 10% better because in the month of March, nothing much happened. So looking at that scenario, quarter 4 should be 10% better than last quarter of at '19/'20.

Okay. And sir, just one more clarification. You mentioned that this growth which -- or rather, we didn't have any degrowth in this quarter, came because of good presence in Tier 2, Tier 3 cities? Sir, just one thing because we had the similar presence last year also because there was no expansion in showrooms in post March, obviously. So what I'm going to understand is, sir, what happens to a dramatic change that in this particular quarter, we are seeing such a big bump up from Tier 2 cities unlike what we have seen earlier in the last 1, 1.5 years. It hasn't come through.

First of all, let me put a question back to you. Are you not aware that '19/'20 was a mess as far as this country was concerned? That's my first question to you and your answer. Second, as we discuss throughout the meeting for one hour, Morbi players are doing 40% of their production is exports. This was not there before. There is no anti-dumping of America -- China had no anti-dumping in America. Lot of market share has been garnered by them. Today, they are doing 30% to 40% of their production as exports. As a result, not much is coming in the market, not much will be coming in the market very soon because the entire world is affected by COVID, they are very much disturbed by China, and lot of that market share is coming to India. For a simple reason that India is the second most competitive producer in the world after China.

But effectively, what has happened is the -- if you look at the total value which was mentioned by Chetanji, the INR 7,000 crores or INR 8,000 crores. The number is still the same. I do appreciate it's moved from Middle East to U.S. from that number...

[Foreign Language] Let me repeat that number for you. Last year, the market was INR 30,000 crores. Out of which, what Chetan said, the exports was INR 7,500 crores. So what was the domestic market, INR 22,500 crore. This year, the number has come down, total industry size has come down to INR 25,000 crores. The export will still be INR 8,000 crores. So that means the domestic market has shrunk to INR 17,000 crore where the capacity is not enough to feed that, that's why the organized players, not only Kajaria, maybe other results will follow shortly, Kajaria is the first one to come, you will see all others gaining some market share in the organized sector because the sole reason being the level playing field as far as taxes are concerned, that's where GST comes in.

That was the last question. I would now like to hand the conference over to management for any further closing remarks.

I thank everybody who has participated in today's conference. We at Kajaria are honored by this kind of a response. We thank you very much for being with us today. And thanks a lot for ICCI Securities to organizing this event. Thanks a lot.

Thank you. On behalf of ICICI...