Orient Bell Limited (ORIENTBELL.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Orient Bell Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Suyash Samant from Stellar IR Advisors. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us today. We have with us today the senior management of Orient Bell Limited, Mr. Aditya Gupta, Chief Executive Officer; and Mr. Anuj Arora, Chief Financial Officer, who will present Orient Bell Limited on the call. The management will be sharing the key operating and financial highlights for the quarter and half year ended September 30, 2023, followed by a question-and-answer session. This call may contain some of the forward-looking statements, which are completely based upon the company's beliefs, opinions and expectations as of today. These statements are not a guarantee of the company's future performance and involve unforeseen risks and uncertainties. The company also undertakes no obligation to update any forward-looking statements to reflect developments that occur after the statement is made. I now hand over the conference to Mr. Aditya Gupta. Thank you, and over to you, sir.

Thank you. Good evening, ladies and gentlemen, and welcome to our quarter 2 FY '26 earnings call. In the building materials sector, cement and steel, which are the first stage of construction activity have shown good signs of revival. This is a positive development, which will have trickled down effect on the tiles sector. Tiles exports are up 6% year-on-year versus 12-month FY '25 average. With no new capacity expected to be added, this should lead to a reduction in domestic market oversupply. We maintain as per our previous commentary that government projects execution gas costs, geopolitical environment and tariff wars continue as decisive factors impacting demand across the building and construction industry. At Orient Bell, we are steadfast in our focus on our mission to make tiles buying easier for the end consumer. Our AI-based visualization tool has been welcomed warmly by the dealers, cementing our position in unique tech to deliver a superior buying experience. Continuing on our brand campaign, we have added TV ads in more regional languages like Bengali in addition to Hindi and Kannada ads. Building brand recall will continue to be a focus area for us. On ground engagement with influencers is scaling up. Continued focus on adding new products from our units and our trading partners has also helped in keeping up with changing customer demands. Learning and development remains a key focus at Orient Bell, aimed at empowering employees to embrace customer delight and sales process. The focus on customer experience and brand building continues to help drive vitrified mix in our total sales. Vitrified tiles now are at 58% of sales in H1 FY '26, while GVT is about 41% in H1 FY '26. This is now broadly similar to the industry. All these have helped us deliver revenue growth of 3% over last year despite a soft market. Coupled with a very successful cost management, we have achieved a 250 basis point improvement over quarter 2 last year in our gross margin, taking it up to 39%. To summarize, our investments towards building a better product portfolio driven by higher brand awareness and unique digital tools, along with our historic strength on cost management are showing us better results. With this, I would like to hand over to our CFO, Mr. Anuj Arora, to take the quarterly update forward. Thank you.

Thank you, Aditya. Good evening, ladies and gentlemen. We continue to monitor the market closely. Encouragingly, we are beginning to see positive signs of recovery in both the cement and steel sector, which gives us optimism for a stronger performance in the second half of the year. Our sustained focus on operational efficiencies has resulted in a 3.7% reduction in manufacturing cost on a like-for-like basis after adjusting for the impact of product mix and energy prices. Gross margins have improved both sequentially and year-on-year and remains among the best in the industry. On a consolidated basis, Q2 EBITDA stood at INR 9.8 crores, representing a 22.5% increase over the last year. PBT is at INR 3.9 crores, up from INR 80 lakhs last year. For H1, EBITDA was at INR 15.4 crores, a gain of 19% over last year and PBT is at INR 3.3 crores, a strong turnaround from a loss of INR 1.2 crores last year. This effectively offset the losses incurred in Q1, marking a solid recovery in Q2. On the balance sheet side, despite a moderate increase in inventory to support sales, we have maintained a healthy working capital cycle of 26 days, consistent with March '25 levels and an improvement of 7 days versus September '24. We have also initiated repayment of our long-term debt and our net debt position remains comfortable at INR 3.6 crores. With robust cash balances, this underscores our strong balance sheet, healthy liquidity and solid cash flow situation. With this, I'll request moderator to open the floor for Q&A.

[Operator Instructions]. Our first question comes from the line of Gunit Singh, who is an investor.

My name is Guneet Singh. I'm from Counter Cyclical PMS. Sir, if we look at our margins, operating margins, they have been around 3% to 4% for the last 2 financial years, whereas historically, they have ranged between around 8% to 10%. The last 2 financial years also coincidentally, were years where real estate performed considerably well in its cycle. In your best judgment and from your experience, I mean, where do we see ourselves in this cycle? Because ours is a cyclical business, so at what point do we see ourselves in the cycle? By when or do we see any signs of improvement in terms of, say, the market dynamics? Even if we look at in terms of total installed capacity as well as any plant shutdowns. Can you please give us an overview of the market in that sense as well?

See, you're right, the listed tile companies in FY '24-FY '25 have not done well on top line growth and which obviously put pressure on profitability, but we see some green shoots of improvement. I see informal checks tell us that significantly large number of units in Morbi have decided to close down permanently. Exports this year, as I said earlier, is averaging about INR 1,500 crores to INR 1,600 crores every month, which is about 5%, 6% more than what it was last financial year, 12 month average. This, along with the closure of some units in Morbi and no new capacity -- no new significant capacity coming up in Morbi, means that now demand has a chance of catching up with supply, which for the last 2, 3 years, supply has been consistently ahead of demand. With respect to our margins, we had a 6% EBITDA margin this year. In our size of business, we are very -- the operating leverage plays an extremely critical role. The good thing is that at almost 39% of gross margin, I think we would be somewhere the best in the industry. As we get our revenues growing faster with all the initiatives, I think you'll see some repair work on the EBITDA margin. Quarter 2 was better than quarter 1, clearly. Historically, you will find that H1 is weak. Actually, quarter 2 is better than quarter 1, quarter 3 is better than quarter 2 and quarter 4 is better is the best. I see a positive -- as far as Oriental Bell is concerned, I see a positive trend.

In terms of operational efficiency, what is the current capacity utilization on a consolidated level? I mean, by when or are you hopeful of any considerable volume growth this year? Or looking at the current market scenario, does it give you any green shoots in terms of more uptick currently as compared to, say, last year or the previous 2 years? By when can we ramp up to full utilization in your judgment? Also, if we look at the competition -- competitive intensity, so our margins have been subdued, if you talk about the operating margins, they have been subdued as compared to players like Kajaria and Somany, which are operating around 15% to 20% operating margin, whereas ours is around 6% to 8%. Is it such that we are not able to premiumize our products or our products are more considered as commoditized?

You are asking some 10 different questions, so it's very difficult to kind of pick and choose what to answer. The first thing is you need to correct your facts. One of the names that you took earlier had 14% EBITDA margin in my memory over the last 8 years. I think you need to cross check your figures of the other listed peers. That's number one. I've already answered your question on EBITDA margins, how they look. I really don't know what is the new question that you're kind of -- okay, you asked me a question on capacity and all, we don't give out volume numbers. Our volume growth, our 3% growth in quarter 2 has been led by volume growth and not by a growth in ASP. That would give you a direction which the company is moving. Other questions, I think I've already answered. If you have a specific question, maybe you can just ask that question, and I'll answer that, please?

[Operator Instructions]. Our next question comes from the line of from Ashwath, who is from Arihant Capital.

I have a few questions. One of them is what is our gas cost blended for this quarter, if you could help me with that, sit?

Ashvath, our blended gas cost is similar to last quarter is in the range of INR 44 slightly less, I think 1 per cubic meter less than what it was in September of last year. Something in that range.

Sir, there seems to be some disturbance from your line from the management. Let me just quickly reconnect you to the call. The participants will have trouble hearing your voice. Just a moment, sir. Participants, please stay on hold while we reconnect the management. Ladies and gentlemen, the management is connected again. Mr. Ashvath, we can continue with your question again now.

Yes. My question was on the gas cost. I couldn't really hear the management said. Could you reiterate that?

Ashvath, in this quarter, our average gas cost was around INR 43.3 per MCM and it is in line with the previous quarter, which was INR 44.5. So slightly, it has reduced.

Could you help me with the project retail split? Also, if you could help me with what is our trajectory going forward? Do we expect some improvement on the project front?

You're talking about project retail split?

Yes. this quarter.

Ashvath, on the project retail split, we take, as always, projects which have a volume of more than 3,000 square meters as a project, everything else we count as retail consistently. We have about an 80% of projects and 20% of retail -- sorry, 80% of retail and 20% of projects. We have been -- the dependence on retail has been going up. The salience of retail has been going up, while projects have been a little lower compared to, say, about a year back.

On this adhesive front that we have started in this quarter, what are our views on this? How do we see this business running out the pilot project that we started? I know it's very in its nascent stage, but still, if you could just help us with what kind of CapEx are we doing?

Ashvath, you're talking about the adhesive business, right?

Yes, adhesives.

We started this sometime in July end, so very early days yet on this. We are not envisaging any CapEx as of now. The nature of the business is that you can effectively -- cost effectively supply in, say, about 300 kilometer, 350 kilometer kind of a radius, so we will keep on adding partners. Depending on how the business does, we look at CapEx or own manufacturing next year. It's not a very big CapEx, but this is something which we are not considering in this financial year. The reason for getting into this business was that with more-and-more vitrified ceramic tiles being replaced by vitrified tiles with larger size of tiles, there is a need for tile adhesives. What earlier was getting done with cement is no longer good enough, so this market is growing actually faster than the tile market.

Another question is, sir, on the utilization levels, if you could help us with that? Also specifically on our Dora plant, what are utilization if you could quantify this?

Ashvath, your line is not very clear, so I think we're talking about utilization level. Our utilization levels have improved when compared with quarter 1. They've also improved compared with on a year-on-year basis. Sikandrabad, which is our mother plant has done very well. The South, South and Dora plant and Hoskote plant are a little lower.

If you could help me with the percentage on each of these plants and also the blended?

We have planned, done about 68% capacity utilization for manufacturing in this quarter.

The industry is taking some protective measures when it comes to safeguarding the margins, especially some of our peers. Are we doing something in line with the industry to protect our margins? What are our measures to do the same? Just wanted to understand.

Ashvath, we always had healthy gross margins. I think quarter 2, our gross margin was about 39%, which in itself are significantly better than what they were in quarter 2 of FY '25. If you see the last 5, 6 years, you will see that on gross margin, the company has always been in the top 2 or maximum top 3 of the companies. So far as gross margin is not really a concern, we are good at that. We need to build up an operating leverage. We need to -- we are extremely sensitive to that. That is somewhere where our focus has been. As I said in the last question, we have had growth this quarter has been a volume-led growth, not an ASP led growth, and we intend to kind of continue with that.

One last question from my end is, what is our target for H2 top line margins? Also if you could help us with FY '27, some numbers on the same?

Aditya, we don't give forward guidance. You know that. As I said earlier, H2 for our industry and for most of Orient Bell is always in terms of both top line and margins, much better than H1. I hope to continue with that trend.

[Operator Instructions] Our next question comes from the line of Kush Mehta, who is an individual investor.

I have a couple of questions. As recently, Ashvath talked about the adhesive business segment. I'd like to have a little bit more information about that. How are the margins in that segment in our adhesive business?

Ashvath, I think it's too early for us to give you a sense on margins. As I said, we have just started this at July end. We just started with one plant and business is still in a few millions a month. Overall, the margins -- the gross margins, I think will be attractive, but maybe a bit too soon. I think we'll be able to give you a clear picture by the end of quarter 3 on this. As I said earlier also, we are not encouraging -- we are not incurring any CapEx. We are leveraging a lot of our existing manpower and other assets. We hope to make a decent gross margin on this, but more about this in quarter 3 when we have at least 3, 4 months of experience, then we can talk to you more about margins.

Sir, also on the similar line, as we have recently entered this market, but there have been other players who are already doing this. If we see from a price point of view and from a quality point of view, where do we stand? Are we at a premium or are we at a similar level? How is it, and In quality-wise as well?

Quality-wise, what we have done is we have taken -- we have looked at the best products which are available in the country. From a quality perspective, we have benchmarked ourselves to those products. Whatever qualitative tests and quality tests are there, our product either matches or does better than the industry leaders on this. So that's been our philosophy on quality. In terms of pricing, this industry again has a very large number of players, but what I can tell you is that we are priced at a premium to the other manufacturers who do adhesives. We are clear. We are at a slight discount to the leaders in this industry, but compared to the tile companies, we are at a significant.

Also, we have, I guess, around 3 to 4 different types of adhesives that I've seen on the website. Are we planning to add further because on the website, you also mentioned that your R&D team has cracked this. Is there more products in the pipeline or anything like that?

Yes, we are now working on epoxy route and all, which is something which we would launch in the coming months, so that whole range would still get completed.

Also, sir, if we talk about our marketing expense, you have been doing TV advertisements and all. We have been doing Instagram advertisement as well, and we have been actively working on the page. What's the response from the market? Have we started winning the market in the North and the West side? How do you look on this?

Kush, I think that has been a good story for us. I mentioned in response to, I think Ashvath's question that our retail salience has been strengthening. It has been going up. That is, I think a lot of it has been driven by our increased visibility. We are not just advertising in Hindi, we are advertising in quarter 2, we are advertising in Kannada, we are advertising in Bengali. We have added 2 more languages in quarter 3. 2 more states we are doing regional language ads. This is something we are consistently working on. This is something we are consistently investing on to build brand awareness and brand recall. The increase in retail sale is telling us that it's working.