Kajaria Ceramics Limited (500233) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kajaria Ceramics Limited Q2 FY '23 Conference Call hosted by InCred Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Agarwal from InCred Equities. Thank you, and over to you.

Thank you, Mike, and good evening, ladies and gentlemen. Season greetings to everybody at Kajaria and to everybody on the call today. We welcome you to the discussion call for Kajaria Ceramics Limited's Second Quarter FY '23 results. We have with us the promoter and the senior management of the company, led by Mr. Ashok Kajaria, the Chairman and Managing Director; Mr. Chetan and Mr. Rishi Kajaria, Joint Managing Directors; and Mr. Sanjeev Agarwal, Chief Financial Officer. We would like to thank the management and the Investor Relations team at Kajaria for giving us an opportunity to host the call. I now hand over to Ashokji to start the proceedings, and we'll take questions after that from participants. Over to you, Ashokji.

Thank you, Rahul. A very good evening to everyone. It gives me great pleasure to welcome you to the quarter 2 F '23 and second half FY '23 Earnings Conference Call of Kajaria Ceramics Limited. . Joining me on this conference call are my sons, Chetan and Rishi; our CFO, Sanjeev; and Pallavi Bhalla from Investor Relations. The second quarter saw flattish volume growth but a decent revenue growth of 11%, considering the inflationary environment and softening in demand, which impacted our sales volume in the second quarter. I can say that the second quarter was one of the toughest quarters in terms of subdued demand scenarios and disruptions in natural gas supply, followed by unprecedented increase in cost of gas. This dampened our margins in quarter 2 FY '23 as we were only able to take a 2% price hike each in the month of May and September '22. But now one can say that the worst seems to be over as far as gas is concerned. I believe that margins have hit its low and are expected to improve hereon, mainly due to relaxation in the gas price. Also, we have started using alternate fuel, that is LPG from the month of November onwards at our Srikalahasti, Morbi and Gailpur plants, which will further help reducing the fuel costs going forward. The industry may witness gradual demand pickup for specific reasons, adoption of work-from-home models in the IT and services sectors, increased aspirations are giving good growth in the housing sector across cities. Strong consumer confidence is also being witnessed, including in home buying in and inflationary and unstable domestic economic environment. Stickiness of our company has been witnessed in the form -- of our economy is being witnessed in the form of consistent GST collections of our INR 1.4 lakh crores for the past 8 consecutive months with INR 1.5 lakh crores crossed in the month of October for the second time since inception of GST. However, persistent high inflation and RBI's interest rate increase to combat the same is a matter of concern going forward. Export momentum has improved in Morbi after being impacted for a couple of months, and we anticipate that the export will touch INR 18,000 crores in fiscal year '22, '23. Now for this quarter's financial performance. In quarter 2 FY '23, consolidated revenue from operations increased by 11% year-on-year to INR 1,078 crores from INR 974 crores in quarter 2 FY '22, mainly because of increase in valuation and some change in product mix. Revenue from the Bathware segment was flattish through quarter 2 to INR 74 crores as compared to corresponding quarter previous year. Revenue from Plywood segment grew by 17% from INR 17 crores to INR 19 crores in quarter 2. EBITDA margin for this quarter stood at 12.01% as compared to 18.54% in the corresponding quarter of the previous year. A sharp decline in margin was mainly because of the increase in gas costs by 70% from INR 37 to INR 62 per SCM and increase in advertisement cost by 40%. Consolidated PAT in quarter 2 FY '23 is INR 70 crores. As on 30th of September 22, working capital days increased by 5 days to 62 days as compared to 57 days as of 30th of June 22, mainly due to reduction in creditors and liabilities. And we hope by end of December, it should be back to 57 days. Let me now quickly talk about our expansion plans. We are adding 3 million square meters bigger size GVT capacity at our existing plant in Sikandrabad at UP with a total investment of INR 80 crores, which is expected to be commissioned by September '23. Also, we are setting up a manufacturing facility outside India in Nepal through joint venture. We plan to add 8 million square meters of GVT and ceramic tiles capacity with a total investment of INR 250 crores, out of which our share will be INR 125 crores, that is a 50% of the total project cost. The project cost is expected to be commissioned by March '24. With this, I take this opportunity of thanking you for joining us today. Over to you for Q&A please.

[Operator Instructions] We have the first question from the line of Sonali Salgaonkar from Jefferies.

Sir, my first question is regarding the demand scenario right now. You did mention some softness. Can we understand whether the softness is coming more from the urban or the rural? And secondly, what is the kind of inventory level in the channel currently?

See, 2 things are happening. The demand has not yet picked up. If you recall, July was very tough. September is slightly improved, but August -- October also because of holidays of Puja and Diwali. It is not as good as what it should be. We are looking forward for a better situation, but I can tell you that we have a very cautious approach as far as the demand is concerned right now. And when you ask the question whether it is urban or second tier or rural, I think overall it's same scenario because people are still getting off the holidays. They are getting back to the system. So I think we'll wait and see then how things are.

Understood. Sir, my second question is that I missed some of your initial remarks, sorry, if I'm repeating, what is the average gas price that we saw in Q2? And what is it right now? And you also did mention the alternative fuel LPG. So what is the kind of pricing differential or gas cost differential between LPG and the natural gas?

See, the cost in quarter 2 was roughly about INR 61 per SCM. In quarter 3, with all the combinations right now, we are looking at around INR 55 per SCM. In our Gailpur plant, in our Morbi plants in Kalahasti, we are already using LPG partly. Kalahasti is full LPG and some gas. Morbi will be again some LPG and some [indiscernible]. And Gailpur is very little of LPG right now and gas. So average price should come down to about INR 55. And LPG prices currently are at about INR 53 to INR 55 per SCM depending on where the location is.

Got it. Sir, thirdly, on the price hike, you did mention 2% price hike in tiles. Is there any price hike we took in either bathware on Sanitaryware.

Bathware, price hike currently has not been taken because if you recall last year, as far as the Sanitaryware was concerned, the gas prices went up in Morbi on 4th of October, 1st of November. So major hike was on 1st of November. And then we took some price hike on 1st of April. But as far as Bathware, the key component is brass. Brass prices have been slightly coming down. So there is no question of any price hike at this stage. The last price hike in brass was taken on 1st of May this year.

Got it. Sir, and my last question, would you like to reiterate your guidance that you had been giving earlier on the volume and revenue of FY '24? And any sense on the margins in Q3 and Q4?

See, we will continue to put our efforts and looking at a scenario where we are close to 15% volume growth. But as I said, it's a cautious approach. We are seeing how the market is behaving. And we put our best efforts. That's all I can tell you today as far as the volumes are concerned. As far as margins are concerned, going forward, it will definitely be better than what we have seen in Q2. And at least, I would say, 2 percentage points plus will be better quarter 3 and quarter 4. Definitely it should be 14% plus in quarter 3 and quarter 4.

We have the next question on the line of Girish Choudhary from Spark Capital.

So firstly, if I look at the volume, the absolute volumes for the last 5 quarters, the range is more or less 24 to 25 million square meters. Is there any reason...

[indiscernible]

Is it better now, sir? .

Better.

Yes. So what -- so if I look at the volumes, the absolute volumes last 5 quarters, they are in this more or less in the 24 million to 25 million square meters so which is stuck there. So any reason is it to do with market share or market demand or any other constraints which is limiting these volumes. And also, when do you see this revenue moving higher?

Girish, your voice is not clear. Are you asking that the volume is in the range of 24 million to 25 million square meters. And are we gaining market share or how we are pushing the volume....

Yes. Why is this -- the range is more or less stuck. If you could move [indiscernible] market share or market demand is weak or any other constraints which is making the volume...

[Operator Instructions]

Is this better? .

Yes. Much better. .

So sir, I was just asking about this volume range of 24 million to 25 million square meters, so which seems stuck for the last 4 to 5 quarters. So just the reasons for this? And when do you see this range moving up higher?

See, we can put our efforts, and we are putting our best efforts, we know that in spite of Morbi taking the plant shutdown from 10th of August to 10th of September, if the market had been good, why would we take a shutdown. So July has been very, very tough. September has been slightly better, again, October because of the festivities have ended. And I said we are putting our best efforts to see if we are close to getting -- trying to do 15% volume. Definitely, it will be 25-plus every quarter in the quarter 3 and quarter 4. So that's all we can share at this stage. But I can't say that no, no, I'll do it. That's the one thing we can't say at this stage. We put our best efforts. That's all I can tell you at this stage. And one of the big challenges, which was the gas price has narrowed down. So that's a positive thing because quarter 2, the gas was an issue. The price hike went up crazy. There was a gas cut. If you recall, at the last investor conference, I said I don't want to talk about anything because gas was a serious issue. But fortunately, that issue has subsided and we're getting gas and the prices also slightly come down because of combination of gas and our petrol.

Got it. Sir, secondly, on the Nepal entry, if you could give some more rational on why Nepal, any color on the market size and the margin and return profile from this?

See, Nepal is positive for 2 reasons. Already, they have exports of INR 500 crores from India. It's a market of about 25 million square meters per annum currently. And there is an import duty at Nepal on Indian products because that's where the exports are there. It's in the range of almost 45%. And production there once we do it, I think we'll be able to capture part of the market share. Currently, we are doing INR 25 crores of sales over there. And very shortly, we are meeting the government to talk about them that how we can get these benefits, what kind of benefit we are giving. I think it should -- or Nepal is just like putting a plant in Chennai or Bangalore like Nepal is next door neighbor, so it should not be the issue on that front.

Okay. And any color on margin and return profile from this.

Margin will definitely be better because right now, as I said there is a 45% import duty. And the prices, what I'm selling at INR 50, there after everything is INR 80. The difference is almost INR 30 per square feet. So whatever -- if you produce locally, whatever benefit you will get, you will get much more than that.

So my last question, this quarter, we have seen other expenses [indiscernible] line item has seen a sharp inflation [ 27% ] growth, any reason or any of the one-off...

That was mainly because of advertisements.

And advertisement went up...

Last 6 months, the advertisement was close to about INR 21 crores. And this first half, the advertisement has been to the extent of INR 50 crores. Last year, overall, we spent about INR 80 crores. This year, we are planning to spend about INR 100 crores.

We have the next question from the line of Shrenik Jain from LIC AMC.

Sir, first, I wanted to understand that the JV realizations have fallen 22% quarter-on-quarter. So what is the key reason for this? .

JV realization has...

JV realization .

Have fallen by 22% quarter-on-quarter.

What do you mean the realization has fallen? The value?

The realization per sqm.

No, in Morbi also our plants were shut because Morbi lot of plants were shut [indiscernible] that line was also shut.

Realization is from INR 330 to INR 324, it's 1.5% -- minus [ 1.74%], is that what we are you saying. .

Okay. So can you just help me understand that gross margins have fallen by 300 bps quarter-on-quarter versus 1Q while our power and fuel cost have reduced?

Only power and fuel and some expenses [indiscernible]. Yes, advertisement. If you look at the scenario, the price increase has been -- overall price impact has been close to about 10% to 11% that's how we have been able to be there because if you compare quarter 2 last year to quarter 2 this year, the impact is 2% to 10% because of the price hike. Revenue has been 11% more, volumes have been flat. So that means the price hike has been close to about 10% to 11%. Whatever we took last year is there plus, we took some price hike in May and September, September of course the month, but May price has been there. So overall impact has been close to 10% to 11%.

Okay, sir. And sir, if I'm reading the data correctly, the Q2 '22 data for the production volume and revenue for own and JV has been revised. So could you throw some light on why the base data has been revised?

Which data you're talking about?

Q2 '22, tile production volume and revenues for own and JV, 2Q FY '22.

Yes, it slightly got revised because of the change. The thing is we have acquired South Asia right now. And earlier, we used to outsource from South Asia, Ceramic Limited. Now it is a part of a subsidiary, joint venture. So one change is this, and the rest is more or less same.

We have the next question of from the line of Onkar Ghugardare from Shree Investments.

As far as the gas problems is concerned, what are the long-term solutions you are taking so that this doesn't cost the revenue. Is there some refreshment from...?

Mr. Onkar, your voice is not very clear. [Operator Instructions]

Is it clear.

Yes.

Yes.

I was asking what is the long-term solution for this gas issue? What are the steps you are taking for that?

Long-term solution is the gas, gas, gas. But short-term solution is a combination of various sectors, like, we are using partly LPG, but you see gas prices cannot sustain what it was for the year '22, '23. The prices have to come down and all indications are that going forward, starting from April next year, the prices will come down. So ultimate solution is gas, gas, gas. But right now, just to -- because gas is an issue right now, quantity is also an issue. So to do that, we have done a combination of gas and LPG.

As far as the real estate sales are concerned, they are quite buoyant. So the issue, what's the exact cash flow? Is it the inflation or like what is the exact issue? .

[Foreign Language] Can you be more clear in the voice?

I was asking about the pressure you're seeing on the margin, is it only because of the gas issue? Or is there something else also? And as far as the demand is -- or there is there something problematic in terms of demand also.

2 things you have to understand. One, you asked firstly pressure on margins. Pressure on margin is strictly because of gas price. I have given you a second number that the impact of quarter 2 versus quarter 2 this year is something like INR 110 crores. So that's point number one. Number two, as far as the demand is concerned, I also said that demand has been very, very sluggish. July has been very tough. September slightly, again, October is because of festivities, it is tough. So we are having a cautious approach. We have shown about 15% volume growth. We are putting our best efforts to do it. But we can only put efforts. We can't see anything beyond that at this stage.

We have the next question from the line of Sneha Talreja from Edelweiss.

2 questions from my end, sir. Sir, firstly, I just wanted to understand with you how has been the product mix for us? Is it that we have sold good amount of ceramic tiles versus GVT this particular quarter? We can get some sense on quarter-on-quarter this product mix change, that would be really helpful.

Okay. Okay. So first question, are you asking as far as the volume mix is concerned. Ceramics is 46%, polished vitrified is 26% and GVT is 28%. As far as the revenue mix is concerned, Ceramic is 40%. PVT is 27% and GVT is 33% for quarter 2.

Sure. Got that. And sir, this was -- the same was how much in, let's say, last year same quarter?.

Revenue last year of quarter 2 was 38% ceramics, 31% polished vitrified and 31% GVT.

Understood, sir. That was helpful. And my second question is related to our CapEx for this Nepal plant coming up and this new expansion, which you're doing at Sikandrabad. How much would be the revised CapEx coming for this year as well as the coming 2 years?

The total CapEx is INR 250 crores for Nepal.

Sikandrabad.

Sorry, Sikandrabad is INR 80 crores. .

INR 80 crores?

yes. Out of this, this year should be close to about INR 50 crores and next year, it could be next -- first half of next year, it will be about INR 30 crores.

Sure. And same thing with Nepal would we largely spend everything next year?

Nepal this year should be close to about INR 30 crores, financial year and next year it should be INR 95 crores.

Understood sir. And sir when you mentioned Sikandrabad large slabs flat, it that we are adding those large slab tiles, which we have recently launched in the South and which are doing very well. Is my understanding correct? Or is it just the larger size...

This is Rishi Kajaria. You're absolutely right. The same -- we are putting the same technology plant, which we put in Kalahasti in May. That same technology we're going to put in Sikandrabad by next year. And we're the only plant in both South and North India to have this technology. All the other plants are only in the west of India in Morbi. We are the only plant in South and North to have this technology.

Sure. And one more thing. So we are also basically outsourcing this large slab from western units for the other markets, right? Is my understanding correct?

No, no, we're not outsourcing our big slabs from Western markets.

We thought so, but then we saw -- we said that own plant is sufficing for everywhere. We're not outsourcing the big slabs at all.

Not at all. Okay. Understood.

We have the next question from the line of Achal Lohade from JM Financial.

My question was if you look at the gas cost, in the first quarter FY '23, which is the previous quarter, it was INR 55. And you said for the second quarter, the blended cost is INR 62 per SCM. .

Right.

But if I look at the rupees per square meter in terms of the power and fuel cost and the production volume, it seems to have gone down 16% Q-o-Q. Can you help us understand about this?

See, 2 things happened. Numbers you gave is absolutely correct. First quarter, the gas price was INR 55 SCM. Second quarter was INR 62. Also I said there was a gas cut. GAIL has cut gas to the extent of 30%. So there was a production cut also. So that also impacted. And going forward in the next quarter, that is the third quarter, it will be around same as quarter 1, that is about INR 55 with the combination of gas and LPG.

Okay. So you mean, basically, you've substituted because I don't see a significant impact on the production numbers. So that means we started using the alternate fuel in the second quarter itself.

Yes, yes, we have started using in third quarter, only from the month of November. Kalahasti started in the month of October. And Morbi and Gailpur in the month -- we'll start in the month of November.

Okay. Maybe I'll take it off-line. But the second question I had with respect to gross margins here, gross margins, I'm looking at basically the sales minus the RM cost. I see that the gross margins have come up by 480 bps Q-o-Q, quarter-over-quarter. Is there anything to do with the product mix? Is it to do with....

For this quarter?

no. Any one-offs? Anything to explain the gross margin reduction here.

Which quarter to which quarter?

First quarter to second quarter, sir? .

Okay. First quarter to second quarter.

Can you repeat your question, Achal?

So if you look at the first quarter, the gross margin was 62.9%. I'm doing sales minus the RM cost, including closing stock, et cetera, adjustment. And that has come down to 58.1% in the second quarter. .

That's right.

This could be possible if there was higher outsourcing. But if I look at the owned mix -- actually, owned plus JV, it is higher Q-o-Q. Can you help us understand this gross margin contraction because that has driven the reduction in the EBITDA margins as well, while the fuel cost has come down?

See, the thing is if you see it separately, then you have to separately see the revenue and the raw material costs. So if you take the revenue of only JV and your own manufacturing. And substract the raw material costs, there will be a decline. It's mainly because of the increase in raw material costs. But if you do a total revenue and then deduct only raw material -- only the raw material used in own and JV, then the calculation number will be a little heavy. So just if you just go back and do it, you have the revenue data for own and JV as well. And then deduct only the raw material, you will get the correct number.

And I'm doing at a consolidated level, Pallavi. So would that change anything? And looking at consol numbers only when I'm talking about these numbers?

Yes, yes, it will change because you will see your outsourcing number has gone down from 6.4 -- sorry. I'm talking Y-o-Y, but outsourcing number has gone down. So if you...

Finally, it should lead to margin increase because the cost pertaining to own manufacturing are coming below that raw material costs, right, especially the sale cost and...

Raw material cost has also gone up. If you see per square meter, we can take it separately because...

Sure, Pallavi. We'll do that. just last question, if I may, with respect to Bathware in terms of the Y-o-Y growth, it is kind of flattish. The run rate in the last 3, 4 quarters has been between INR 70 crores to INR 80 crores. How do you see this -- where are we in terms of the SKU distribution, et cetera, the plants for the next couple of years .

Last year, we did INR 275 crores. And this year, we'll add up close to INR 370 crores but -- in next 2 quarters, you will see a good turnaround.

Okay. So there we are talking about a 30%, 40% kind of a jump in the second half? .

Yes.

And what is driving that, sir? If the overall -- there is sluggishness in the real estate, can you help us out?

Overall if you see, quarter 2 was sluggish [indiscernible]. So things are becoming better. And as I said, we will try to do whatever the numbers we are talking about.

We have the next question from the line of Amit Tinde from Morgan Stanley.

I wanted to understand that you have been increasing the capacity of [indiscernible] on the own side? And also, in one of your [indiscernible] accounts, you have mentioned that one of the subsidiary is also [indiscernible] from ceramic -- PVT too, or GVT. So more and more conversions is happening towards GVT, owned and subsidiary. So would it mean that on the outsourcing side, you would have ceramic more and the pricing trend and realization trend [indiscernible] GVT products would go down in the future. And there will be a sharp decrease on the owned and subsidiary realizations.

Your voice is not clear. Can you come again, please?

So my question was, you are adding capacity in GVT. One of the subsidiary is converting manufacturing capacity to GVT. So [indiscernible] strategy is changing because which is more ceramics towards [indiscernible] higher value products in the own manufacturing. So does that imply that in future pricing -- price in the owned and subsidiary would be higher, and there would be a slowdown or a downtick in the prices in the JV realization?

This is the operator. Can you hear us at the management end?

There is no strategy as such. Right now, what we are doing, we have been talking a long time for exports. So we are changing one of our units, JV also Ceramics at Morbi from PVT to GVT to look at the export market. So that's the only thing which we are doing. Nothing else has changed.

We have the next question from the line of Sujit Jain from ASK Investments.

Sir, if I wanted to look at your power cost as a percentage of sales coming at 25% and 70% jump in terms of your gas cost Y-o-Y. Is that the reason -- so that accounts for then close to 7% increase in the realization you should have done, but you ended up doing something like 10% or 11%. And to that extent, the drop in margins is mainly because of that increased gas cost has not been -- you've not been able to pass it on basically That is the main reason, right? .

Yes.

That is one. And second thing is, typically, you have added 12 million to 13 million square meters every year in line with your aspiration of growing your volumes of at 13% to 15%. I just want to know, FY '23, how much you would have added. You would have added...

FY '23, we already 12 million already sometime in the middle of May. And we also will add some volume by outsourcing. That was the whole idea. So that's how the idea was to add 50 million square meters roughly. And then we have now added South Asia, which is about 4.75 million square meters. And we have let go one plant, Jaxx 1, which was about 2.4 million square meters -- 3.1 million square meters.

So net addition would be 12 million square meter in FY '23.

Net addition, capacity-wise, net addition will be about 13 million plus as far as FY '23 is concerned, and some outsourcing, which depends on how the situation is because outsourcing is open. If the demand is right, the outsourcing -- because the demand is not right you see less outsourcing.

And the 3 million already announced when the Nepal capacity will get commissioned in FY '24. To that extent, you'll have 11 million square meters?

FY '24 will be commissioned, you will get the benefit only in '24, '25.

That is okay, but I'm saying directionally, you will be adding a similar capacity, 12 million to 13 million square meters FY '24.

We will try to do that. Let's see the situation. Situation on the ground is very tough. See aspiration is one thing and to do it is also another. So we will balance that, that much I can assure you. If the situation improves, we will definitely work on that.

Right. And to support this aspiration, eventually, in the long run, 14%, 15% kind of a volume growth, what is the kind of distribution growth that you are envisaging? And what is the kind of yield per distributor growth that you are envisaging to support this 15% kind of growth.

I think you missed out last -- when I said that in the next 3 years, we'll add close to 400, 450 dealers. And this year, we should be adding about 200 dealers across India. And next 2 years, every year, we should add about 125 dealers across India. So we are looking at a scenario where 450 dealers should be added in our basket in the next few years. Otherwise these volumes cannot come.

Can you repeat these numbers, I'm sorry.

What I said last time, I repeat again that in the next 3 years, Kajaria should add 450 dealers across India. In the year '22 '23, we will add 200 dealers. Year going forward, we should add a minimum of 125 every year for the next 2 years. And just for your information, we have already added 75 dealers in the first 6 months of this financial year.

And yield per dealer, is that something that you are working on?

The?

Return from dealer.

Return from dealer is not the point. The point is, whenever you make a dealer within 2 to 3 months or 4 months, you have to make good showrooms for this. See, once the showroom is made, it's need is met because [Foreign Language]. So the moment that showroom is laid right now, he may be running a shop, he may be running a distribution network of somebody else. The movement a good showroom is made, his job is done as far as he is concerned is sale is secured. I give you a small example. Other day on 26th of September, I opened a showroom at Rewari. 12,000 square feet on 1 floor. Now can you margin in a place like Rewari, which is a small area, you -- somebody will make a 12,000 square feet showroom. If you see that showroom, you will not believe it is a tile showroom, it is better than a car showroom.

And one last question, what is your current base of dealers?

1,700 dealers across India. That was on 31st of March. We have added another 75 dealers in the first 6 months, and we should add at least another 125 to 140 dealers in the next 6 months.

We have the next question from the line of Keshav from HDFC Securities.

I just want to understand, as per our market assessment, Kajaria took price hike in September, while the industry has not taken a hike. So what was the idea behind that? And in terms of H1, how has Kajaria taken total price hike versus the industry?

Price hike related to [Foreign Language] see the gas costs have gone through the roof as we have said, the price hike [Foreign Language], of course, it's a calculated one, going very gradually. I left to us, we should have taken more, but we can't because of the market situation. And as you rightly put it, if others have not taken it, we had no choice because the cost of gas has gone up. And as I said, second quarter is one of the toughest that we have seen over a period of time where gas prices went through the roof, gas was cut. So looking at that, that was done. And I'm happy to tell you that all the price hike which has been taken since 1st of April '21, till date has been absorbed in the market.

Sir, as you have only taken the price hike and now you have done 20% growth in H1. So you sort of made 10% growth in H2 [indiscernible] guidance, so I think this is a fair assumption like your volume guidance is intact, it might be 15% growth this year. And also next year, you will be doing 15%. As of now, no nothing worry on this .

You see first quarter -- first quarter last year, financial year was a COVID period. So if you look at the first quarter number and merge it with #2 and say that, no, no, I have done a good job, believe me, it's not a good job because July through September has been very, very tough. So we are having a cautious approach. We are putting our best efforts to achieve whatever we have assured. And I can sincerely tell you on behalf of the company and all our people, we'll put our best efforts. But let's see how things shape up. It's a cautious approach that we are taking because we don't want to make any mistake, also that's for heck of it that I have to make certain norms. I think that's not necessary. As the market demands, I can assure you that we'll fulfill the requirement of the market. Okay.

Understood. One last question from my side. So how is the channel inventory now? .

Channel inventory, people are not keeping much. See, on an average, a dealer keeps about 30 to 40 days of inventory because of the range of products. Today, Kajaria by itself has almost 2,800 to 3,000 products. At least he has to keep almost 25%, 30% of that ratio to satisfy the customer. He doesn't keep more than that. But at least 500, 600 to 700 depending on the dealer size, he has to keep that inventory.

We have the next question from the line of Ritesh Shah from Investec.

A couple of questions. Sir, first question is, can you give some details on the regional gas prices. Usually, you do indicate on Northwest and South, if you can help with those numbers, that would be great.

So for quarter 2 FY '23, the north is roughly about INR 60 SCM. South is about INR 69 SCM. West is about INR 69 and the cumulative is about INR 62 per SCM. Am I clear?

You just indicated that the LPG price was around INR 53 to INR 55. Now if we look at the numbers what you have indicated, it is higher than the LPG price. So sir, how should one understand our competitiveness versus other players who are purely on LPG. Is that the right way to look at?

LPG has just started. So this impact will come in this quarter. Last quarter, we hardly had any impact. From this quarter, we should start getting the impact of LPG.

Sir, my question is, how should we look at our competitive positioning on the cost curve versus the peer set, which is entirely on LPG. So one can contest that the number of players who are on LPG are very few, probably that number might increase by a few hundred units going forward, might not really impact us more. But if one had to look at it from a cost curve positioning, how should one understand this? .

So we understand that we are at Morbi, shifting only to propane, but we've also taken a shutdown of the plants because they were not able to sell, and we are expensive. And as we go forward, our costs will go down as well. We are working on our grid, and it will go down as we go along.

Okay. So we are betting on a higher consumption of LPG even for us, which will bring us back to parity or make us as competitive as the peers.

No, that's one point temporarily. But as I said earlier in one of my points that people are expecting by April, the gas prices will also come down.

Sure. That's very helpful. Sir, my second question is on export trends. If you could give some numbers on monthly exports out of Gujarat, I think that would be quite useful. And earlier, you had given the number on a full year basis, would be still [indiscernible] of around INR 15,000, INR 16,000 crores?

Yes. So I think it still feels that, yes, by the end of financial year Gujarat will export almost about INR 17,000 crores to INR 18,000 crores of materials. And exports is going on pretty big from there.

That's useful. And sir, last question, we have been adding capacities. Can you indicate the amount of cost savings that we'll have probably from logistics or operational ads like employee cost, marketing, how should we look at that specific variable?

No manpower addition?

Yes. So we're not increasing any manpower in the company. And we are looking at how the numbers are. We also look at aggregation costs very judiciously. We will not -- we'll make sure that there's no -- any extra further cost, extra additional costs.

Correct. I'm trying to quantify what sort of impact we will have. So we are very competitive given a good part of our additions are coming in, we are not adding any headcount. That might be an element of logistic cost savings given we are getting into Nepal. So just trying to quantify what -- is there a number that we are looking at that we are targeting? .

See, Nepal is completely separate. So don't attach that to it, but right now, we can't quantify. It's very difficult to quantify. As we go along, we'll definitely get an impact for Sure.

We have the next question of the line of Lavanya from UBS.

Most of my questions were answered, but I just wanted to check. So because of shift to propane LPG, usually, this needs some additional CapEx for the plant. So we are shifting a portion of our North and South plants, so will this add CapEx here?

This is Chetan Kajaria. So the CapEx is minimal. There's literally no CapEx in shifting from gas to propane. We are using LPG currently.

Okay. So that would need only minimal use of CapEx, not much at all.

Correct.

Okay. Got it. And also on the Bathware, can you help me with the capacity utilization at this point of time. And I understand that the new capacity which we are planning, that is likely to come in this month or next month. So what is our utilization at this point in quarter 2?

Our quarter 2 utilization is almost about 85%. And the capacity expansion in faucet will be -- it's a very small investment, which we are doing so that we are looking at -- it will come by January. And the Sanitaryware plant will only come by next year by March '24. We're going to start working it from January and it's going to only come after 15 months.

Okay. Got it. And I just missed the advertising expense this quarter and first half. [indiscernible].

So in the first half, we spent roughly INR 50 crores in this financial year '22, '23. And we're looking at a similar number going forward for the remaining 6 months.

Okay. So for the quarter 2 expenses?

The quarter 2 was INR 31 crores, quarter 2.

We have the next question from the line of Achal Lohade from JM Financial.

My questions got answered.

We have the next question from the line of Manish Mahawar from Antique Stock Broking.

Yes. Sir, just in terms of the domestic market, what's our expectation for this FY '23 growth or market size?

The market size should be roughly INR 21,000 crores for the year ending '22 and around INR 22,000 crores for year ending '23.

Okay. We are expecting 5% growth for the domestic industry for this year, right, around? .

And we will grow around maybe -- anyway you guided for 15% volume growth will definitely revenue growth will be better than the volume growth rate for this year? Correct. Okay. And in terms of the second quarter, I think a couple of times you indicated the quarter in terms of July and September month. So just wanted to understand, and we are hoping for a better second half and recovery from November onward because October, you already highlighted, I think because of festival there was a slowdown. So what was the specific reason for this slowdown or tough quarter in July and September, particularly the second quarter?

See, as you know, the entire building sector has seen a slowdown. Siemens results are with you, Evers results are with you. So I don't have to explain that much, it was a tough quarter. Demand was sluggish. And cost of everybody had gone up in Siemens, cost of coal and fuels that were using went up. In our case, gas prices went up. So that was the scenario. Things are stabilizing as far as India is concerned. And going forward, everybody is positive. I think we should also look at the positive scenario.

Okay. And in terms of export, I think you were already highlighted INR 17,000 to INR 18,000 crores for export this year, right? So any specific reason export should pick up or any particular geography where we see the market is seeing the demand?

We are very competitive as a country. And the biggest exporter was China, of course, because of its capacity. And as we all know, there is a lockdown because of COVID. That's exports went up over there. So today, India has become one of the key players as far as the export market is concerned. And last -- first 6 months of this year, the exports has been close to about INR 7,500 crores. Next 6 months, we are looking at a scenario where it would be about close to about INR 10,500 crores. We are -- as a country, we are very competitive and that credit goes to Morbi because they are doing good exports on there. They are literally selling to almost 90 to 95 countries across the world.

Okay. All right. And there is some benefit of Europe also, right? Europe because higher energy cost has some impact. So that has also supported the Indian export market?

You have said the right word, Europe will be a big market. Europe is looking at -- just to share with everybody, Europe was looking at putting antidumping. The initial studies, they have put antidumping of only 10% on India, more or less and 48% on Turkey. So that market will open up in a big way for India in the next month or so.

Okay. Understood. And lastly, sir, just in terms of LPG propane or gas, right? I think you already said that our future is in terms of its gas, right? LPG and propane are even more pretty, I think, in terms of a spread available, so that is a temporary opportunity for industry as such, right, sir?

Yes, that's what I said. I also shared that by April onwards, because companies are looking at a scenario, they're already talking about it. And by April, the gas prices should come down. If they come down, then you don't require LPG, you don't require propane. This is all a stop /gap arrangement, which you have no [indiscernible].

We have the next question from the line of [indiscernible] from B&K Securities.

I wanted to understand with regards to our Nepal expansion. How well would be secured on the raw material availability and gas supply arrangements, if you can throw some light there, please? .

So there's already a plant running in Nepal. We are not the first one to experiment. So raw materials already there in abundance. Thus, we will also experiment partly in abundance -- partly being imported from India. And what was the second question?

Yes. And the gas supply availability.

The fuel out there will be the coal, what we'll be using.

Okay. And since we would be importing some materials from India, so any import duty based on the raw materials.

Yes, there is some import duty on the raw materials. That is why the cost is high on imports, and that will get a benefit of producing locally.

No, I was more asking on the -- from the raw material front.

There will be some duty, but we will talk to the government and see what benefits we can get out of that. But the duty is not that big -- it's not very big. It's not very huge.

Marginal duty.

Sure. Sure. And any plans to cater to the northern or the Northeastern markets from this plant, any pre-trade agreement that we would enjoy, any...

I would say Nepal production, Nepal itself. Kathmandu is a big market, we'll try to sell the entire production there itself.

We have the next question from the line of Rahul Agarwal.

Sir, one question on the background of the joint venture partner there in Nepal. How is the group balance sheet strength? I mean, what do they do? And how comfortable are you doing business with them? .

So we have done all the background check on them. It's a solid group. They also own cement companies. They are also involved -- it's a big group, and we've done all the due diligence and we have talked to everyone. We've only done everything after doing the due diligence of the group.

Okay. And secondly, on the non-tile business, it generally Bathware and Plywood, the EBIT, there is pretty low, it's almost 0. Any particular reasons or the growth in Sanitaryware being flat, Is that the only reason there? .

Yes. Because of the growth in Sanitaryware is flat that's why the EBITDA margin is way less. And as the volume increases, this division has made good numbers earlier. As the volumes increase, the numbers will definitely come.

The ad expenses were also high for that division as well, is it?

A little bit, not that high a little bit high. But we need to build brand otherwise to gain -- to grow at about 30% year-on-year, we need to have a bit of branding strategy so that the people have confidence in buying the Sanitaryware products.

Sure. And lastly, on the revenue breakdown, given in the investor presentation, I saw adjustive revenue added of INR 10 crores for the quarter and about INR 17 crores second half. Anything major we are doing here? Or is just going to be a small number going forward?

Anything we were doing. Now, as I said we want to go in a gradually in a faster manner because the bigger the tiles, they reduce the tension of the cement.

So we are looking at taking this vertical seriously and hiring [indiscernible] on the industry. Last year, we did -- this year we're targeting around INR 50 crores of turnover in adhesive division. And next year, we should also grow in a similar high expansion growth in this entire vertical.

This is purely restricted to adhesive use for tiles, or is there anything else .

There are some cleaners also, but it's mainly for tiles, [indiscernible] adhesives.

We have the next question from the line of Amit [indiscernible] from Morgan Stanley.

I wanted to understand what the optimal level of lending that you can do on LPG and the gas that we are using right now.

You're not audible. I don't hear you properly.

So can you hear me now? Is it better?

Yes.

[Operator Instructions]

So I just wanted to understand what is the optimal level of blending that you can achieve with LPG gas and any plans for the next 6 months [indiscernible] 10%, 20%, how much blending would you be targeting.

Still not clear.

We couldn't understand your question.

How much percentage of blending of LPG are you looking at for the next 6 months?

No, no. See, right now, what we are talking about, wherever we can fit in LPG, we'll fit in LPG. It's installation itself takes about 30 to 45 days. And whatever we are doing, I think it will be more or less finished by end of the financial year '23. And looking as I kept on saying it, scenario says that by April next year, gas prices should come down. So it's a very small thing that we are talking about right now.

We have the next question from the line of Rajesh Ravi from HDFC Securities.

I have a few questions. First, on the demand front. Second quarter, as you mentioned, has been a tough one, has been flattish and even October has been a festive month. So -- and second, if I look at export numbers so far, the momentum is still subdued. And not be hearing this plastic pipes company talking about that because of the demand slowdown in the U.S. market, the resin demand has come off also because U.S. is a big market for Indian tiles industry and in Europe where we are getting advantage on the cost front for sure. But amid all this war and inflation, are you changing the exports outlook may remain subdued. And that may impact the volume growth for the industry as a whole. .

Industry, as I said, was in built one market. There are 90 to 95 countries where India is exporting number one. Number two, you are as a country, very, very competitive. Please make a note of that and that is why the exports will pick up. And I am seeing a figure of INR 18,000 crores for this year, next year, this figure could go as high as INR 20,0000 crores, INR 25,000 crores because we, as a country, have become very competitive.

Okay. And domestic, what triggers you're looking at, sir, for healthy volume growth at least this financial year.

Market should start looking better if the number goes -- there are no triggers. There is no such word as trigger.

Okay. And second, on the Nepal expansion, I think earlier you mentioned the market size is around 25 million square meters, Nepal?

Yes. Market is about 25 million square meters.

And like would you be capturing a sizable market share? I mean, retargeting everything into Nepal and by what time frame, do you look at full 8 MSM sales in Nepal?

So yes, the market share is about 25 million, which is growing. And we are putting a 8 million square meter plant. We do plan to capture a large share in the market. And we plan -- right now, the plan is to sell locally in Kathmandu only, Nepal only. So there's a lot of -- most of the building materials is already going there, with our production there and without any duty impact, I think we would capture large size of the market.

Okay. I mean production can be achieved over the next 2 to 3 -- I mean FY '25, FY '26 itself?

[indiscernible] square meters. For first year, maybe a little less. The second year -- by second year, we should definitely [indiscernible] production.

Last question, this LPG propane. What percentage of the total fuel mix, energy power mix would be coming through this propane in Q3 approximately any...

I think I have already answered that, cumulative combination should be around INR 55.

No, INR 55 you mentioned, which is at almost -- already a 10% fall. I'm seeing on a percentage of your total [indiscernible]

It's very hard to share at this moment. It will be close to about 15% to 18% only.

That was the last question. I would now like to hand it over to the management for closing comments.

Thank you, Rahul. I think it was a good interaction, wonderful questions asked of the people. I thank you very much for them for participating in this. And on behalf of myself and my entire team, I thank you, everything for the organization. Thanks a lot.

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