Kajaria Ceramics Limited (500233) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Kajaria Ceramics Q3 FY '21 Results Conference Call hosted by UBS Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shaleen Kumar from UBS Securities. Thank you, and over to you, sir.

Thanks, Ayesha. Good evening, everyone, and thanks for joining this call. Today, we have from management Mr. Ashok Kajaria, Chairman and Managing Director; Mr. Chetan Kajaria; and Mr. Rishi Kajaria, Joint Managing Director; and Mr. Sanjeev Agarwal, Chief Financial Officer. I'll hand over the call now to management for their opening remarks. And following which, we will open the forum for Q&A. Over to you, sir. Thank you.

Thank you. Good evening, everybody. Ladies and gentlemen, first and foremost, I hope and wish that your family, friends and colleagues have been saved from COVID, and I pray that all of us get over this crisis safely and quickly. We started with con call post Q2 numbers last time. We intend to continue with the same on a quarterly basis. I have with me my sons, Chetan and Rishi, and Sanjeev, our CFO. The tile industry witnessed gradual demand pickup from the month of July onwards. Tile consumption has found its way into the smaller cities and retail markets as the heat of pandemic was felt much more in the urban markets at that point of time. Tier 2 and below markets, Tier 1, Tier 2, Tier 3, we believe will continue to thrive in the future as well, and metros have also come back to 70% of what they were doing before. In Q2 con call, we had estimated a flat quarter 3. However, to our positive surprise, Q3 has seen an all-around sharp recovery and higher capacity utilizations, strong volumes and significant traction in profitability. Kajaria has reported a double-digit volume growth in tiles in quarter 3, driven by good demand from Tier 1, 2, 3 cities and also from metro. Also, bigger cities have come back to 75% level, that's metros, level in terms of sales. Our plants have operated in an average capacity utilization of almost 100% during the quarter, except one plant that is Cosa, where one line is being converted to -- from PVT to GVT for exports. Tile subsidiaries have reported profit of INR 11 crores in quarter 3 '21 as compared to loss of INR 1 crore in the corresponding quarter. Revenue from Bathware business grew by 36% to INR 67 crores from INR 50 crores in quarter 3 '20. Revenue from Plywood business also grew to INR 13 crores in quarter 3 '21 from INR 8 crores in quarter 3 FY '20. Total turnover at consolidated level reached INR 838 crores in quarter 3 of '21 as compared to INR 741 crores in quarter 3 of '20, a growth of 13%. Absolute EBITDA operating margin increased to INR 182 crores as compared to INR 111 crores in quarter 3 of '20, led by higher capacity utilization, plant efficiency and improvement in subsidiaries. EBITDA margin for the quarter attained a new high of 21.68% as compared to 15% in the corresponding previous quarter, back in quarter 3 of '21 has increased to INR 118 crores as against INR 62 crores last year same quarter. Working capital increased by 5 days, mainly due to reduction in titers and higher advanced payment of tax. With this, I take this opportunity of thanking you for joining us today. Over to Shaleen.

Yes. Ayesha, I think we can open up the forum for Q&A.

[Operator Instructions] The first question is from the line of [ Sujit Jain from ASK Investments ].

Sir, what was the gas price for the quarter average for us versus Q3 last year and the same for 9 months? And what is the gas mix in terms of spot versus long term for us?

As far as the gas price is concerned, this year, the gas price have been cheaper as far as our Gailpur and Sikandrabad plants are concerned by almost INR 4.5 to INR 5 per SCM, which I have shared in quarter 2, if you recall. And for 9 months, it's almost the same scenario. April, May, nothing work. We started working from 1st of June. So that scenario is maintained more or less in the first 7 months of the year, leaving aside, April and May. What was the second point?

Yes. If you can quantify the gas price -- average price for us for the quarter?

This quarter average price -- average price for our plants in Northern India is about INR 26 -- INR 25.5 to INR 26 per SCM.

For Northern India, that will be spot price, right?

No, no, not spot price. This is a long-term price, spot price, combination or whatever we are taking.

This is the average price for the company, right?

Yes, yes. Average price for the company because we are taking some long term. We are taking some spot. We are taking some [indiscernible]. So it's a combination of everything, which is there for the company.

And versus 3Q last year, what was the price then?

The price went last year was between INR 30 to INR 31 per SCM.

And what is the mix of long term and short term?

That sir, depends on the plants. So it's different to quantify, but...

It would be around 60%, let's say, 50% would be long term and 50% combination...

It depends on the plant. Sikandrabad is 65% long term, 35% spot. In Gailpur, it's a combination of long term, spot and [indiscernible]

But at the company level, approximately?

If the data is not there, we will let you know.

Okay. The other thing is that, in the other segment, that is Bathware, Sanitaryware, everything put together, INR 80 crores of top line and 8% EBIT margin. Have we reached a scale -- a critical mass where now we can sustainably make decent margins in this segment?

As far as Bathware is concerned, Sanitaryware and Faucet, they have started making money from the quarter for last 3 months, and it will be very positive for the next 3 months and for the years ahead. Lot of developments have been made in those plants in the last few months.

So my question is what is the annual sales at which...

No, no. Don't mix both. Ply is concerned, we started that business in July '19. That -- right, this year, we'll be doing a turnover of close to INR 40 crores, next year we're targeting for INR 70 crores. That business is losing money. Next 2 years, it may still lose money. But after that, it will be workable because that's a new baby which we started, yes.

What I was coming at was that what is the annual sales at which it will sustainably make money? Is it 80 multiplied by 4? Have you reached that stage?

Which plant -- which division are you talking about?

Others, in segment, which is a combination of all of these things.

No, which division are you talking about? I already said that Bathware has already started making money, and they will be positive from here on. We have reached that critical mass. As far as Ply is concerned, it will take another 2 years.

And Sanitaryware?

Sanitaryware and Bathware is the same thing, same company. Both are making money.

The next question is from the line of Sonali Salgaonkar from Jefferies, India.

Congratulations for a great set of numbers. So my first question is regarding the demand scenario in Q3 and even right now as we speak in January. So is it possible to give us an approximate month-wise demand trend in terms of percentages as compared to last year for Q3 and also open housing versus room rent. I mean, what is the scenario that you are seeing right now?

Sonali, thanks. As far as the demand is concerned, it's positive. Every month is positive. That's how you could see the numbers of quarter 3. Quarter 4, as we are talking about, we are still early in the month of January, 21st of Jan. It is -- but it is going to be positive. I wish to share one more information, which you have not asked, but let me share with you. Next financial year, demand being positive in Tier 1, Tier 2, Tier 3. And the macros, we are looking at 20% to 25% volume growth in sales in next year.

That's FY '22?

FY '21, '22, yes.

Yes, 20% to 25% volume growth for the company. So that's slight increase.

Okay. For the tile division, because volume growth is tile division, other division will also grow that could -- or better. But as I already said, the other divisions will grow even slightly more, but tile division will have a 20% to 25% volume growth.

Great, sir. Sir, secondly, currently, what is our retail versus insti sales mix? And what is the value-added sales?

Retail sales is close to -- right now close to 80%. And 20%, I would call it, institutional sales. In institutional sales, you can see, out of 20%, 8% to 10% will be government sales where the payment is not an issue. But 10% is to the projects, large builders projects or small builders projects where still the payment problem is very tough. They are getting through. Things are better for the last 2 months, but still their problem persists of payments. So we have to be very cautious there. And with tier -- with metro being slow for the last few months and still at 75% of the capacity, Tier 2 -- Tier 1, Tier 2, Tier 3, the problem of payments is not there because, for your information, the dealers are also giving lesser credit to their buyers and paying us more in time. So that's a positive change which has happened in COVID.

Understand sir. Sir, and value-added sales right now? Last quarter, I believe it was 60%.

It's close to that. Nothing much has changed because now glazed vitrified has also come in full swing. The plants are operating at 100%. So it could be 60%. It could be 62%. But more or less, it's on same notes.

Understand, sir. Sir, my second question is regarding the exports from Morbi. So the last 2 quarters, we discussed that, that is kind of sustaining the pricing in the domestic markets. Any update on the exports? Has it continued with that kind of traction or probably it has decreased the pace?

Exports is a big game changer as far as Morbi is concerned. Till 31st of last year, the exports was close to about INR 9,000 crores, INR 9,500 crores. As you recall, in the months of April, May, June, there was hardly any business. No plants were running. As of December, we have already done exports of INR 7,300 crores. And in March, they will be doing exports of INR 11,000 crores to INR 11,500 crores. Because 2 things happened. One, anti-dumping has put by America on Chinese goods, Chinese types. A lot of countries have put anti-dumping duty on China. Also, with the sentiment of whatever is prevailing, anti-Chinese, lot of export business has come to India, more to model because they are closer to the port, you can say. And secondly, India is the second most competitive player in the world after China as far as production is concerned.

Understand, sir. So we are envisaging exports to grow at about 20% year-on-year from INR 9,000 crores to about INR 11,000 crores this year?

Next year, according to me, it will grow by another 25%, 30%, the way things are.

Understand. So it's a sustained thing?

Yes, yes, it's very much sustained.

Right. And sir, last question from my side, any update on CapEx? I mean, are we thinking of adding any more capacity? Or we are good to go as of now?

See, if we have to grow at 20%, 25% next year and after that 15% plus for the next 2 years, at least, that we were talking about a 3-year horizon, this year, the CapEx is close to about INR 50 crores. Next year, the CapEx is for INR 150 crores to INR 200 crores. That will not be next year. It will be for the year after because our CapEx [Foreign Language]. So looking at that, the CapEx will be close to INR 150 crores to INR 200 crores next year.

Understand. Sir, and just one last clarification. You mentioned that in FY '23 and '24, that's next 2 years after the next year, we are envisaging a growth of 15% in volume?

In volume terms.

Sure. I understand, sir. And all the best.

The next question is from the line of Saurabh Dugar from HDFC Securities.

This is [ Rajesh ] here from HDFC Securities.

Sir, your voice is not clear.

Congratulations on -- -- yes, just one second. Hello, is it better now?

Better, yes.

This is Rajesh from HDFC Securities. Congratulations on very good set of numbers. Sir, just wanted to -- in terms of your volume growth, as you said, that you have seen good growth for the whole of the quarter. We see that the outsourced volume is growing at a much faster pace. So this has been the same for last 2 years also. So what is the strategy there? Will you continue to be asset-light from that perspective when you're looking at 20%-odd plus volume growth in FY '22 and 10% to 15% thereafter? Would that largely be driven from outsourced volumes?

No, no, no. I just said to Sonali that next year we are at 20% to 25% volume growth. As you are aware, for the 3 plants, first 3 months of this year, nothing much happened. So all our plants have not operated at any capacity for the first 3 months. So most of it will come from our plants. Wherever outsourcing is required, we'll do outsourcing. Secondly, I said, we'll have a CapEx of INR 150 crores to INR 200 crores in the financial year '21, '22. So that's a capacity for '22, '23. And going forward, it will be like that. So it's a mix of your own production and our outsourcing, whatever is required at that situation.

We take a judicious call as we go on. All the options are open in front of us mostly.

Okay, okay. And sir, on the fuel pricing, gas pricing, you even mentioned the INR 26. What is the average price for you even as we talk today because of this surge in spot prices that we are seeing? What is the outlook?

As far as -- I have already answered that, but still I'll repeat. As far as the -- our 2 North plants are concerned, Gailpur and Sikandrabad. We have already covered our requirements. So there is not much of a change. There will be a slight price increase of about 3% to 4% in the quarter ahead. That is January-March quarter. As far as Morbi is concerned, whatever the price GSPC will charge, we have to pay. And as you are aware, they have increased the prices by INR 4 per SCM on 24th of December, 2020. There, there is no such thing as kind of long term, yes.

Okay. Great. And lastly, before I'll move back in queue, in terms of spot market now getting bound for India. Two things, first is like, for Morbi players fixing more on exports, what sort of tailwinds will that entail for domestic players like you? And also, secondly, are you targeting to increase your export sales rising on this sentiment gain that you are getting?

See, they will continue to do exports. As I said earlier, it's a 20%, 25%-plus growth for the next -- at least 2, 3 years for exports because of the Chinese vacating lot of area because of anti-dumping, Chinese -- anti-Chinese sentiment. India will be the biggest gainer as far as the -- and this will be mostly catered by the players for Morbi. As far as the organized players, including Kajaria, our focus is more on domestic market. We'll continue to do some exports. But as you know, export, there is very little margin. So if you are looking at the numbers of Kajaria, you will yourself say, please don't export.

[Operator Instructions] The next question is from the line of Madhav Marda from Fidelity Investments.

Sir, my question was basically on the EBITDA margin. So last time on the Q2 call, you said that you were expecting margins to go down, but you've actually done better which is really good move. But sir, if you could help us with what led to the good margins this quarter? And then what should we expect in sort of FY '22 in that sense?

See, as far as quarter 4 margins are concerned, there will be some pressure because of the increase in some gas. Some paper prices have gone up. That is for the boxes. And some raw material prices have also gone up like Feldspar and Quartz and Silica. The impact will be close to about 1.5%. But what we are trying to do instead of increasing our prices, the prices will harden. And there are 2 ways to do it. One is to increase prices. Second is to cut the discounts which we give to the dealers. So as we go forward, we'll take -- we hope to do that. As a result, the margins will not get affected much. It will be close to 20% as we move forward. I think we are looking at a scenario that we should be close to 20% as we go forward also. For the year-end also, we are looking at almost the same scenario.

Okay. Sir, because that's a meaningful sort of uptick from what Kajaria sort of -- we used to expect the 16%, 17% range for some time. So 20%, basically, is that very good demand/supply environment for tiles that's driving the positive centrally now on the margin side?

You are more aware of this than me. The building industry on a positive side. And every analyst is saying and every builder is saying that my future for the next 2, 3 years is positive. So whatever we are seeing in all building materials, including tiles, as a result of the scenario, that building industry is positive. And a building industry, as we all know, last 4, 5 years, was very, very tough. We have still survived, managed our affairs. So building industry is positive. The demand will be more, number one. And number two, the margins will be protected because lot of pressure was there from Morbi unfortunately since they are exporting and exporting a lot. That pressure has eased for all organized players in the domestic market.

Got it, sir. Understood, understood. Great, sir. All the best, sir.

The next question is from the line of Sneha Talreja from Edelweiss.

Congratulations on very good set of numbers. My question was an extension to the previous participant's question related to margins. So we have seen dynamic improvement pre-COVID versus now. So we were running at about 14% to 15% margins over a period of time. And now we have even crossed that 20% barrier since last 2 quarters, and we expect that to continue. How much of it would be because of the gas prices? And is there any sustainable cost-cutting measures that we have taken compared to last 2 years that we are looking at sustaining going ahead? And because of which the margin increase that we are targeting?

See, 2, 3 things have happened, if you see. One, the gas prices. They have been soft compared to '19/'20, 2021 has been lesser than this, the impact of that should be close to 2%, as far as margins are concerned. Secondly, from the month of July, we started our production post COVID, [Foreign Language] during COVID. And from the month of September, all the plants are running at full capacity, except Cosa, one line which, as we said -- I already said that's being converted from polished vitrified to glazed vitrified. In last year, if I tell you honestly, all the plants have not worked fully. Once in a while, we had to close a line here and there. So that's also efficiency. Thirdly, we have cut down on the budget this year from INR 45 crores -- from 100 [Foreign Language] last year, advertisement budget we have scaled down to almost 50% of what we spent last year. Going forward, I don't think we'll go with that. We'll slightly increase, but it will not be like before because things are much better. Markets are much better. And we should take [Foreign Language] in the year '19, '20, this year it will be close to 45. And next year, it will go up to 70. So that's a scenario.

I'll add one more thing, Sneha. Another reason for hardening, which has contributed to the margin strengthening, is an improvement in profitability of joint ventures. As Mr. Kajaria said in the opening statement, we reported a profit of INR 11 crores against a loss of INR 1 crore. And going forward, every quarter, you would see an improvement in subsidiaries, especially the Bathware which has been making losses and now started making profit and every quarter would be a better quarter, which will add to the overall margins.

Right. Sir, just 2 extension questions to it. That was helpful regarding Bathware. What is the sustainable change which has taken place now on Bathware? And what is the kind of run rate that we are looking at? And if it all you could mention the reason for such a big turnaround in the current year?

So what we've done -- this is Rishi Kajaria. What we've done in Bathware is we've -- one, we've introduced a lot of new products. Secondly, in the same time, we have strengthened our distribution network. And so that's why this quarter was very, very good. And going forward, we see that it's not going to go down. It's only going to go up. Things are -- people have accepted the product now well. And we're looking for a very positive scenario from here.

[Operator Instructions] The next question is from the line of Ritesh Shah from Investec.

Congratulations on a very good set of numbers. Sir, my first question is, we recorded double-digit volume growth. But how much would have been the market growth? I just wanted to understand, would we have gained market share and how much would that be?

See, we have to have market -- gain of market share for 2 reasons. A lot of market of Morbi players, which was there in the domestic, has switched over to exports. So market per se may not have grown very much. But last 3 months, the markets are also growing. And partly, we have taken a market share.

Okay. Sir, second question is on distribution reach, specifically for the tiles business. Earlier, you had indicated that our target is to reach all the constituencies in the country. So are we back on track given things are normalizing and numbers are actually coming very, very good. So how should one look at the distribution strategy over here going forward?

I'm glad you asked this question because, if you recall, last time I had said, we have still got about 175 Lok Sabha constituencies we have not been able to cover. In last 9 months, nothing much has been done due to COVID, but I can assure you that next financial year, if things get back to normal, which I hope it will, from April, we will be able to cover at least 100 to 150 Lok Sabha constituencies next year because that will be the next driver of growth.

Okay. That's useful, sir. I'll join back the queue, I have more questions. Good luck.

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

Congratulations for the great earnings. My first question is with respect to Bathware. Is there any change in the product pricing positioning? And what is the margin, if you could guide for the third quarter for Bathware?

So once we introduced a lot of value-added products in Sanitaryware, which is giving us higher realization, and we also increased prices in line with all the other people who have also done, so which has led to increase in margin. So this quarter was a good quarter for us, and we are very sure that we're going to sustain it from here on.

This quarter, the margin was in good double digit, let's say, around 13%, 14% against a single digit in the last year.

Right. And what is the extent of price increase just to cover that point, sir?

We have increased price to an extent of 6% to 9%.

That's great.

So a combination of price increase and value-added products is giving us this margin. And we feel that it is definitely sustainable from here on.

Understood, understood. And in terms of the mix for our tile division, how much would be like the top 10 cities make sense? Has that absolute number declined significantly, as you said, the metros are still at 70%, 75% of last year?

I think one of the very interesting questions that this mix has totally changed this financial year. This mix as total changed except few top people who are doing still very well, like our #1 dealer from Coimbatore, he is still #1 all the way. But lot of things -- #2 is from Faridabad, they are still there. But lot of numbers have changed because the -- as I said earlier, Tier 1, Tier 2, Tier 3 have performed very, very well. They have been doing 110% of what -- some of them were doing 110% of what they were doing last year. Metro started with 40%, 45% from July. They have come to the level of 70%, 75%. They are not fully up to 100% pre-COVID.

Getting a lot of positive response from places like Sikar, Lucknow, Varanasi -- the Tier 1, Tier 2, they are giving us -- the sales from these spaces are very, very good.

Interesting. And just last question, if I may. If I understand correctly, you said INR 50 crores for FY '21 in terms of CapEx and FY '22 CapEx would be INR 150-odd crores?

INR 150 crores to INR 200 crores.

INR 150 crores to INR 200 crores.

Yes.

Understood. So basically, if I have to ask you, in terms of the -- will it be a greenfield plant? Will it be a brownfield expansion? If yes, how much excess capacity or excess space do we have to add capacities in our location for, sir?

At least in '21, '22, we are not talking about the greenfield plant. In '21, '22, whatever CapEx we are talking about, we are going to expand our existing plants. I can share that informally with you that we are talking about expanding at Kajaria Tiles plant in Kalahasti. We are also going to modernize and some change -- increase the capacity at the Gailpur plant for ceramic. So all this will happen. There's no greenfield project in '21, '22 as of now.

Understood. This is very helpful. And what would be the approx capacity addition with that number, sir? Let's say, at INR 200 crores CapEx?

INR 200 crores CapEx will be about 10 million square meters.

Understood. That's very helpful, sir. Wish you all the best.

The next question is from the line of Girish Choudhary from Spark Capital.

Firstly, just harping on the volume growth, 11%, definitely is good. But then if I see your capacity utilization at your JVs, barring Cosa, every asset operated is at 100%, and also your own manufacturing capacities is operated at close to 95%. So my point is, was the growth constrained due to this capacity running at optimum level? And then let's say, if you had excess capacity available, would you have grown at a higher rate? I just want your views on this.

There's no excess capacity right now. You are forgetting one thing. We are in the COVID era, number one. Nothing worked for April, May, June. And only on 1st of June we started our small capacity at Gailpur, partly in Malutana on 20th of June, partly one plant of Jaxx. So what we are talking about is almost 3 months in this financial year, because of COVID nothing worked. And what we are showing -- what we are seeing, the numbers for quarter 2 and quarter 3, believe me, when we opened our offices on 4th of May, we never could dream that this will happen. So it's a positive scenario. Going forward, we are seeing a positive scenario because of the ground reality, which is happening, the feedback from the dealer, the update from the dealers. And we hope it will continue like that in the near future.

Okay. Sir and on the -- second question on the Bathware division, you did mention on the margin sustainability. Currently, you're doing INR 80 crore which is like roughly INR 320 crores, INR 330 crores annualized number. So what's the outlook here in terms of if one has to see this division from a 2 to 3 years perspective and also the related investments?

Yes. In spite of COVID, last year, this division did INR 186 crores, to be very precise. This year, we are looking at INR 210 crores, which is still a growth in terms of volume because of the division doing well. A lot of -- as Rishi said earlier, a lot of new products have been launched in both Bathware and Sanitaryware, the result of which is there you are seeing. Secondly, regarding the price increase, it has only happened from 1st of January. There was no price change because lot of raw material costs have gone up. Brass has gone up by 20%, 25%, as you are aware...

Please stay connected as the line for the management got disconnected. Ladies and gentlemen, thank you for patiently waiting. We have the management reconnected. Sir, you can go ahead, please. Mr. Agarwal? Yes, you can go ahead.

You can connect with the -- is there any question?

Yes, sir. We have the question from -- there was the current participant, Girish Choudhary.

Yes. Girish here. Sir, so I was just asking on the Bathware division just to give -- as in get a sense on the revenue outlook for the 2 -- from a 2- to 3-year perspective?

Yes. We are looking at -- last year, we did INR 186 crores in Bathware and Sanitaryware combined. This year, we -- in spite of 3 months no working, we are looking at a scenario where we should be doing INR 210 crores, which is still a positive growth. And next year, we are looking at anywhere around INR 280 crores, INR 290 crores of Bathware. As far as the cost of raw materials have gone up, for your information, nonferrous metals have gone up by 20%, 25%. We use brass for KBPL. Cost of transportation has gone up, transportation for raw materials. And looking at everything, some price increase has taken place, which is effective from 1st of January, 2021, as Rishi said, between 6% to 9%. And for your information, other competitors such as Serra and Jaguar have also increased their prices.

[Operator Instructions] The next question is from the line of Nehal Shah from ICICI Securities.

Congratulations, sir, for excellent set of numbers. Sir, a couple of questions. One on the GBT. Now GBT as a category, we've seen last 2 years under tremendous pressure. With the kind of exports lever Morbi has and particularly what we're seeing as GBT getting exported incrementally into territories like U.S., Europe and U.K., do you think there is a possibility of a price increase likely going forward? Is there a possibility of that happening, sir?

There are 2 things, price increase we'll see as we go along, but right now, we are -- first, we have to make sure we sell our complete volumes. Now with the Tirupati plant starting, we are getting a good revenue share in the south market. So we have to first make sure that we do all that. And then you'll see after 2, 3 months, whether we want to see a price increase or no. Secondly, for the exports market, as we discussed that, we are also converting our Cosa line to GVT so that we can cater to exports from there. So we have some fit in the thing there also.

Right. So the change in model in Cosa, will that fetch better realization and margin as compared to what we are doing earlier? And where would we be exporting to?

We would be exporting to all over. And see, since so much of exports happening for GVT from Morbi, we said -- and this line was an old line, we said, let's convert it into GVT and let's see what will -- how it will shape up, but the demand is a lot. So I'm sure we'll do some exports out of it. Where exactly we'll work on it? We are getting inquiries from everywhere, U.S., Gulf, Europe, everywhere inquiries are there. So this will keep you to that.

Sure. So the -- so exports will not actually lead to decline in margins for Cosa? That's what you're saying.

No, no. It will be used. If the capacity was idle, we'll be utilizing that capacity.

[Operator Instructions] The next question is from the line of Pulkit Patni from Goldman Sachs.

Sanjeev, you mentioned that you are expecting that export from Morbi will continue and that leaves a much bigger playing field for us in the domestic market. But if we go back a couple of years where Morbi was very aggressive, the price competition in the domestic market was very strong. Now given the fact that we'll be touching 20 -- we are already touching 20% margins in the domestic market, I just wanted to get a sense on why you feel confident that the domestic market is going to remain as profitable as it has been for us for the last couple of quarters. And the export, the company's focus on export are not likely to come back and focus on the domestic market? That would be my question number #1.

Let's answer question #1 first. See, as far as the predictability is concerned, I cannot say anything what will happen tomorrow. But what is the situation now and why it will happen, I can share with you. See, once you are out of the domestic market to come back in the domestic market is not easy, number one. Number two, not only Kajaria, all the organized players like Kajaria, Somany, Johnson, Asian Granito, they are making a strong foothold in the domestic market. And ultimately, when you have a dealer network, which is married to you, he will not go here and there, that has been the strength of Kajaria and many others. Exports is lucrative for them for 2 reasons. One, the export markets have opened up, the whole lot of export market have opened up for 2 reasons. One, the biggest market of exports today is U.S.A., not from India from the world also. China was doing very large exports. All of a sudden, the anti-dumping duties have been put on China to the extent of 250% to 325% on Chinese products. Secondly, there is anti-Chinese sentiment all over the world. This has resulted in lot of exports. Nobody asked me, but let me share this information with you, almost 50 to 60 new plants are coming, which somebody didn't ask, but let me share with you all. 50 to -- 50 to 60 new plants are coming in Morbi, out of which, I would say, close to 45 are for GVT, mainly for exports, mainly for exports. Next another thing I would like to add just for information, we have about 15 plants of large-format sites. All of you are aware, [Foreign Language] 1,200 by 2,400. In China, they are putting -- in China, there are as of today, about 5, 6, 10 lines. We are putting 100 lines in this financial year -- in the coming financial year -- in this calendar year. So that also will generate more exports, more growth will come. So basically, you take it that -- basically, Morbi will focus on exports. Some of the leading players like [indiscernible] they are in the domestic market as well, and they will continue to be so. And Asian Granito, of course, is a listed player. So it will be a balance of domestic and exports. They will focus on exports. We'll continue to focus on domestic markets.

Sure. That's very useful context. My second question would be, again, if I look at, say, 2-year time period, what is the kind of rough price increase that you think the industry could take over this period?

I can't answer that today. See, you have to understand one thing. Every meeting, you talk about a price increase. Please understand it's a COVID era. Things have not become normal in the country or in the world. So we are no exceptions that we can talk about the pricing. Rishi just shared a few minutes back that our first priorities that our plants are running at -- should run at 100%, number one. That's our first priority. Nothing else comes in between. And doing that, we have shown you the numbers for the quarter 3. Now we didn't expect these numbers, believe me. Quarter 2, when we talked after the results, we didn't expect. Going forward, we are also saying, I already made a statement to Sonali, that we are looking at 20% to 25% volume growth for the year ahead. Now for that, you have to do all kinds of things. But you can't think of a price increase. Gas prices have declined for which we got advantage from '19, '20 to 2021. We are doing all kinds of things because running your plants at full capacity also is a very great thing. Believe me, it reduces the cost in various ways. So let's not talk about the price increase. Let's talk about the focus on running your plants 100% and increasing your volumes as you go.

And Pulkit, we have not taken the price increase, but we have -- there is a hardening in the selling price in the Q3. There's been a 2% increase in the average selling price as compared to Q2. So we are reducing the discount, reducing the scheme, so that will automatically result in the improvement and hardening of the selling price, which will take care of some increase in cost due to gas or raw materials.

[Operator Instructions] The next question is from the line of Abhishek Ghosh from DSP Mutual Fund.

Sir, one of the reasons also why we see margin improvement is very good rationalization on the employee cost part of it. So how should one look at it? Is there a thought process of increasing more revenues with lesser increase in employee expenses? If you can just help us understand that aspect.

The first answer is we have reversed whatever -- reinstated the salary of the people for the quarter 3. That's number one. And whatever you are seeing, quarter 3 is after reinstating the salary part. When we are talking about the growth of next year and the 2 years ahead, basically, you take it that there will be no increase in manpower because manpower is there already. When the volumes increase, your cost of manpower as an organization comes down in terms of percentage. So basically, the manpower will not increase if the sale numbers go up. So automatically, that has lot of points which we are talking about.

Okay. That's helpful. Sir, the other question is, we've seen also a very sharp improvement in the JV profitability. Also, the gas prices are very soft. And also obviously with the increasing prices, some of it may get reversed. But if you can just help us understand your thoughts on the JV profitability? That's the only second thing.

JV, if you recall, last one year, we had -- one year before, we had lot of problems. We started correction. '19/'20 -- sorry, '20, '21 was a correction year. Actually, the correction started in '19, '20 itself. Now if you look at the JVs, I read that out again, they are -- number one, it is already in profit. Jaxx, already in profit. Cosa, we are making some losses because the one line has not been operating for the last 3, 4, 5 months. As a result, we are making some losses. But once it gets converted to glazed vitrified and export starts, it will also become profitable. Bathware has been very positive, both Sanitaryware and Faucets. Ply, we are making some losses because it's a new division we started in July 2019. And as I said earlier, for the next 2 years, the sales will go up from 40 -- this year, we are targeting at INR 40 crores. Next year, we're targeting at INR 70 crores. But in spite of that, there'll be some losses for the next 2 years because of the organization that you have to build in as you go along. And after that, it would be positive.

The next question is from the line of Shaleen Kumar from UBS Securities.

Yes. Sir, just one question from my side. I could see that you have given a good interim dividend of INR 10. So how should we see this, sir? Is it like a onetime thing? Or should we expect good dividend going forward as well, given we are talking about reasonably good scenario?

Shaleen, we also first declared our dividend policy at the Board meeting. We had a policy of giving 20% to 25% dividend of our net profit. That was our current policy, which we improved to 40% to 50% at the Board meeting today. So whatever we have done, keeping that in mind, we said we have an excess cash flow, which we are parking at the bank within 4% to 5%. Let it go back to investors. And that's why we declared an interim dividend of INR 10 per share.

The thing is that it is not required to report to stocks change about the policy there. So we have put our policy on our website. So many people may not have known this. So it is good that you asked this question. And I've been wondering, every time people would ask me, what you're going to do with the cash, what you're doing with the cash? And once we have taken it, nobody has asked the question, what we are -- how -- what we have done. So I...

The next question is from the line of Ashish Jain from Macquarie. [Operator Instructions] The next question is from the line of [ Omkar Kulkarni from Shree Investments ].

Yes, my question was regarding -- as you said, INR 150 crores to INR 200 crores CapEx for the next financial year. So how much free cash flow you are generating, say, like every quarter? And how much would be funded by the internal accruals from that and subsequently after 2 years?

We already have a cash flow of around INR 450 crores as of today. So going forward, every year, our CapEx would be lower than our internal accrual. But for the CapEx and dividend, we are not going to take any loan given we would be having sufficient good cash balance.

Okay. But the question is approximately how much free cash flow you are generating every quarter or say...

You can -- the profit -- you can add the profit with deficit, you would know how much cash I'm getting.

Correct, correct. So that would -- the CapEx would be around...

CapEx [Technical Difficulty] this year, suppose we are making a profit of INR 300 crores based on 3-month profitability. So assuming suppose we made a profit of INR 400 crores, so you add INR 150 crore -- INR 125 crores depreciation, to INR 525 crores. So deduct that dividend and the balance is sufficient, INR 200 crores, INR 250 crores is what we are guiding our CapEx.

INR 150 crores.

150 -- sorry, INR 150 crores to INR 200 crores.

Okay. The next question is regarding -- you have said that approximately, for the next 3 years, you would be growing at, say, 20% -- 20%, 25% for next year and around 15% for the next years. So around 20% growth you are expecting. So what gives you...

Hello. Don't mix. Yes, next year, we are talking about 20% to 25% volume growth. And for the next 2 years after that, 15%-plus volume growth. But don't mix and average out. Don't mix it, please.

[Operator Instructions] The next question is from the line of [ Farhan Amlani from SG Investment ].

Hello. I have a couple of questions. One is regarding the Plywood segment. In the Plywood segment, which is normally seen as a low-margin business, and there is a lot of competition from the unorganized and semi-organized manufacturers. So how would you like -- like how would you gain market share there? And the second question is we have...

Hello?

Yes. The return on equity in our business is decreasing. So if you can give any guidance regarding the same.

This is Chetan Kajaria and I will answer the first question. Plywood was a highly unorganized sector. It's a INR 16,000 crore industry, out of which, organized players only to Century and Green having a turnover of INR 1,000 crore reach. Rest are between INR 400 crore to INR 500 crore regional players, rest are all unorganized. With the GST coming in of 18%, this is helping us gain market share over the unorganized and the regional players. And we see this business growing forward because of the consolidation happening in this vertical due to the GST factor. For question number two, I'll just refer you to Mr. Sanjeev Agarwal, our CFO.

See the return equity is down because of its calculation. See, we are calculating the return on equity on the average of 31st March equity and 31st December '20 equity. And you know the first quarter we didn't make money. So that is why the equity is down. And another thing is that we -- now we have formed a policy of dividends. So there is -- lot of cash was accumulating at the network. So that is why the equity was down. So as we pay -- start paying the dividend, as we -- and we start making money going forward, the return equity will go up going forward.

Congrats for a good set of results.

That was the last question. I now hand the conference over to the management for closing comments.

I thank UBS for organizing -- Shaleen for organizing this conference. I'm thankful to all the participants who have been there today, listened to us patiently. And we'll be too happy to have any interaction, if anybody would like, from a level -- management level also at a later date. Thanks a lot for everybody for joining us today. Thank you.

Thank you.

Thank you.

On behalf of UBS Securities, that concludes this conference. Thanks for joining us, and you may now disconnect your lines.

Thank you.