Somany Ceramics Limited (531548) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Somany Ceramics Limited Q3 FY '20 Earnings Conference Call by hosted Asian Markets Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Bhatelia. Thank you. And over to you, sir.

Thanks. A very warm afternoon, everyone. On behalf of Asian Markets, we welcome you all to the Q3 FY '20 Earnings Conference Call of Somany Ceramics Limited. We have with us today, Mr. Abhishek Somany, Managing Director; Mr. Kumar Sunit, Senior Manager, Finance; and Mr. Saikat Mukhopadhyay, CFO, representing the company. I would request senior management to take us through an overview of the quarterly sales, and then we can begin the Q&A session. Over to you, sir.

Welcome to the Q3 earnings call. Sorry for the 5-, 7-minute delay. The quarter has been quite a tough one in terms of sales, both in volume and value. However, we grew about 2.5% overall and 4% on volume. The quarter became sluggish during Diwali and also didn't pick up as expected post Diwali. Coupled with that, we had, in the NCR, the NGI -- the NGT lockdown due to pollution. So ever since the 1st of November right up to the end of December, there was virtually no construction activity allowed in the NCR region, spanning from Manesar to Faridabad and on the other side from Gurgaon to Noida. Having said that, we still grew a tad bit. The sales -- the realization, we did take a small dip due to pressure on pricing in GVT and also in the PVT segment, more so in the GVT segment. On the other hand, we had a capacity utilization at only 77% compared to 80-plus same time last year, due to which also the contribution in the margins had an effect of the underutilized capacity. On the positives were that we were quite happy with the running of the south plant. We're now close to 80-plus percent capacity utilization in the south plant, which is started in Tirupati, and now we are notching up the sales for value-added. You will see the difference coming up in the following quarters. On the other hand, we also lit up the kiln -- second kiln which was under renovation for the Sanitaryware plant, that is also now under production. So Sanitaryware is at 90% capacity as we speak. The Kadi kiln also, which was down for refurbishment and there was a lot of material of the -- of that plant, which we will not further produce, was sold in the month of November and December. That also has been lit up. And that's for the value-added wall tile. We have launched a brand-new size, which is 45 by 90. It has been extremely well received by the market. The launches are still continuing. The last 2 launches are this week. So we are very hopeful that, that particular size will give us a decent top line and bottom line from that particular plant, and also, it would enhance the dealer on the stickiness of the dealer because it's a unique size and it's a size where the dealer can easily earn a good margin. The other positives were the receivable days. The receivable days continue to come down. What you see is 75 is at the quarter end. But otherwise, we are trading anywhere between the 67, 68, and we are very sure that this would be well within check in the next 3 months as we go along. We are not losing the string. In fact, it is tightening further and further. So while -- to sum up, while we reduced the DSO days, we still grew volume by 4%. This quarter, the gas prices also went up overall because of the spike in the oil prices. And as you know, that we have a 3-month running average, so the gas prices went up by INR 2, but the issues which are now continuing across the world, where gas prices are again under pressure, we believe that within this quarter, our prices should remain flat and next quarter onwards, we should have some advantage in terms of gas prices. Advertising was, again, something which we did not pull back. We continue to advertise. It's still 3.3% of our top line. And we have been effectively advertising in airports and also multimedia channels from television to magazines to the web. So that continues. The brand building exercises continue. This quarter is the last quarter, and we believe that this quarter, from a raw material and the gas price point of view, there should not be any surprises. Now we are pushing for volumes as to how we can improve our volumes in this quarter, while we keep the DSO days under check or even better than what we were earlier. Thank you so much.

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

Sir, a couple of things. One, on the volume side. The volumes have been tepid despite the low base of last year, where do you see volumes panning out for the year? And probably, how do you see the New Year starting? Is there any positive vibes we are getting as far as volumes are concerned? That's one. And two, on the margin side. Again, the volatility has been there with us, so margins are again fallen off from Q1. Where do you see the normalized EBITDA margin shaping up for Q4 as well as for the next year?

So volume, I think there are no green shoots in the volume. All I can say is that it's not falling further. So Q3, again, we saw the same thing where there seems to be something or the other which keeps happening, which keeps us back from volume. So -- but on an overall front, in the real estate segment, there's nothing happening. It's all the retail push which we are doing and all the government and the corporate push which we are doing. As far as margin is concerned, at this -- this margin now, it's clearly directly related to the underutilized capacity. Had this capacity been at 4%, 5% more utilized and also a little bit of the Kadi stocks, which we sold at ridiculous prices, we would have been at the same margins or probably a tad bit better.

So what's the impact of that, the Kadi stock?

It's at about 2 lakh square meter, we -- 2, 2.5 lakh square meter we sold at virtually just about variable pricing because that material we are not going to produce in Kadi anymore.

Okay. And sir, where do you see your volume growth and margins for the next year, FY '21? I know it's difficult to gauge, but if you can help us with that.

Yes. So '21, obviously, looks better. A -- I'll give you 3 reasons which are under my control. One is the receivable days have become better than what we started off last year same time. So let's say, April 2020, we are better off on April '21. Actually, the Kadi plant is started. So Kadi plant had gone down in April itself. So Kadi plant is back in order. So obviously, that's going to throw up better quality material and better value-added material. And the south plant also will be at nothing less than 75% to 80% capacity utilization even in the first quarter. So these 3 things which are totally in our control, and Sanitaryware the kiln also we have started. So these 3 things which are in control, and if we can keep the DSOs under check, we should be able to do a decent growth next year. And it's hard to determine what it should be, but we should be -- I mean, an internal target, at least, should be a high-single digit, a good double-digit growth.

Right. And sir, on margins?

See, margins, again, it's a question of capacity utilization. If we run capacity utilization at 85%, nothing stops us from a consolidated EBITDA of 11% to 12%.

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

Sir, could you help us with respect to how has been the demand scenario with respect to retail/institutional, what is the mix? And how has been the growth for these 2 individual subsegments?

Institutional for us is divided into 3: one is corporate; one is government; one is the private builders, the private real estate. The private real estate remains to be extremely sluggish, only becoming more sluggish, where basically because we are putting a lot of pressure on receivable days, we are being extremely selective to give material to them. There's enough demand on that side, but we're just not providing them the material. On the government side, also, the kind of uptake, which we thought we would get, it doesn't seem to happen. Even they don't seem to be paying their contractors. So again, it's a question of receivable. Corporates are doing okay. And retail, the dealers which are not stuck with smaller projects or smaller government supplies, those retail outputs are doing well. So overall, I think the market currently, if you see the retail network is fairly destocked, so they are only waiting for some cues from the government where the restocking would happen, which would be extremely advantageous to the entire industry. So they are currently sitting on fairly lean stock, apart from the few dealers who are the very large one. But otherwise, the general retailer, the subdealer seems to be sitting on virtually 0 stock as we speak. So the Tier 2, Tier 3, we do see a lot of momentum happening. So people have -- are coming back to make or renovate their own houses. So there, we do see a take up, and that's how we're still able to sell 15 to 16 lakhs square feet a day.

The liquidity part what you mentioned with respect to the dealers, retailers, is it particularly for us? Or it's at the industry level you see?

Industry level. I think all the towns where -- which is a project-focused town, barring maybe Kerala, which is retail and still under pressure with receivables, but the -- all the towns which are project-focused, name it Bombay or Bangalore or, let's say, Noida, that's -- or Gurgaon, that's under pressure. But all the markets which are retail-focused, Tamil Nadu, the rest of the north, you can say also for that matter [Audio Gap] where there is a lot of clutter happening. Although Andhra, I must say, is the anomaly, there is a lot of activity happening in Andhra and Telangana as we speak. So traditionally, for across the industry, any project-related city is under pressure.

Right. Second question was with respect to the balance sheet. Could you help us in terms of the status of the case pertaining to Mentor Financial Services? And also, with respect to the other loans or other ICDs to -- there are 3, 4 other entities, has the money come back? To what extent it is outstanding? If you could clarify on the same, that would be...

Yes. So that specific money which was outstanding is at 50%, which is what has come out. And so a lot of it would come out now. We are also not pressing very hard to unnecessarily get the money out. But on Mentor, we have a note already, where there has -- it's status quo. We are pursuing as far as all legal recourses are concerned. As far as the rest of the ICDs are concerned, let me be very clear that there would be 100% 0 issue with that. All the receivables will come back. The -- while we are at the case, the other problem, which we had with the employee, the employee was under custody, and he has had to pay a INR 7 crore bail, which is going to come out in the next 7 -- he has been given 5 to 6 months by the court to pay that. So we are hugely hopeful that, that money would definitely be realized, if not now, definitely in the coming years.

Got it. And with respect to the pricing, given the situation in Morbi, do you see further pricing pressure? Is it particularly in case of GVT, where the capacity by the large guys, including us, got added, and it's creating a pricing pressure? Or it's in general, the GVT prices are declining?

No. I think it's a lot of -- a lot to do with added capacity in the GVT sector, and prices have come to a situation where in GVT, I don't know where -- how it can fall further. But overall, the prices have been under pressure in ceramic, GVT and PVT in Morbi, where they've not been able to utilize capacity and have resorted to reduced prices and selling material at any given time. And in this depressed market, the dealer is finding it easy to buy a cheap tile and sell it cheap rather than buying from a branded player, specifically because we are not giving credit.

Correct. And if I may ask last question with respect to, as you said, pricing. We do hear that some of the units are finding it severe crunch in Morbi, and the -- even their selling prices are actually declining. So in that case, would it -- I mean, from a capital allocation perspective, would it -- would you be looking at further capacities? Or would you be more relying on the outsourcing henceforth?

So we are not going to be adding any capacity for the next 18 to 24 months any which ways because there is enough and more capacity. Like I said, we are running at 77% overall, which is our JV plants and Somany's own plants. So there's enough capacity lying with us. What we would be doing next year like we did last year with Kadi, we would be refurbishing our own plants to make more value added. Those balancing equipment will keep happening. But that is not going to add any square meterage to the table, it will only add value addition.

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

Sir, you definitely mentioned about the realization, I mean, under pressure. Can you guide what sort of a realization drop that we have taken in the GVT segment?

Specifically, the GVT segment, I'm not sure, and I can take that off-line with you. That's, again, very sensitive information as to what our realization is between ceramic, GVT and PVT. So I can take that off-line with you.

Sure. And have we seen a cut in -- like you said PVT also we have seen a cut. So that's across the company, sir? Or are you specifically mentioning that you have taken a cut on the PVT prices also?

No. I'm talking about across the industry. The GVT has taken the maximum brunt of the price erosion; PVT, next; and ceramic, the least, because ceramic already happened a couple of quarters ago.

Okay. And most of it must have got realized or have you seen this kind of a pricing trend right beginning from Jan?

The industry is probably the only industry where there has been a price decline in the last 10 to 12 years. I don't think there's any building material industry where the price has declined. And it's purely to do with Morbi and their tax evasion, which continues even today. Even though coal has been banned, they still seem to find ways and means of doing tax evasion on a mass scale, and the major brunt of this is being faced by us, where they keep dropping prices and evading taxes even further.

Okay. And sir, what has been the gas prices during this particular quarter for us compared to last quarter?

It went up overall by about INR 2, INR 2.5 per standard cubic meter, and it's going to remain common -- it's going to remain the same in the quarter 4.

What would be the actual pricing, if at all, you have it available with you?

I'm sorry?

Do you have the actual -- the total price available of the gas per scmd?

It's about INR 35 a standard cubic meter. And overall gas price, if I blend all the other plants, it's about INR 31 a standard cubic meter.

Which has gone up by INR 2.5 Q-on-Q?

No, no. I'm giving you the value after adding the increase.

[Operator Instructions] The next question is from the line of Sonali Salgaonkar from Jefferies.

Sir, my questions are more so related to the industry. Sir firstly, in Q3, would we have any sense as to how was the broader domestic ceramic tile industry performance? I mean, from what we understand from channel check, it was weak, but if you could give us your estimates as to how weak it was.

So it's very difficult to pinpoint a figure because half the industry -- more than half the industry is unorganized, but we believe there's been a more than 5% volume dip in the market in the general. So between 5% and 10% is what we hear has been the volume dip -- an absolute volume dip in the ceramic tile industry.

I understand, sir. And how are the exports doing?

Exports are doing fine. In fact, exports, because of the question mark of the Saudi Arabian antidumping duty, there's been a huge amount of export. In fact, it's never peaked as much as it had in December. And I think now with the issue in China, I do believe that India would be a gainer in terms of exports. So one person's loss is always one person's gain.

Sure. Sir, on an average, would the export realizations -- how much would they be as compared to our domestic realizations for the industry?

I wouldn't know about the industry. As far as we are concerned, our domestic realization and export realization is more or less the same. In fact, in some cases, our export realization is even better.

Sure. Sir, secondly, you mentioned that urban real estate, et cetera, are not doing well. How much of a demand driver would you expect affordable housing to be going forward? And secondly, would there be any differential between the products that we supply to affordable housing and to the normal B2C clientele of ours?

We think affordable housing has been and will be only increasingly a large demand driver. But the issue currently is not of the demand, the issue is currently receivables. None of the builders are agreeable to pay in time, which makes us very uncomfortable, considering we're trying to lower our receivable days. So I think for us, the issue is that we want to be fairly selective about our receivable days rather than just be blind towards selling material.

Sure. Sir, and do you foresee the liquidity issue to kind of resolved by you, seeing any indication, say, up till the mid of Feb that we are in?

There are no green shoots. I mean, if you see the contractors, which are working for the government, they don't seem to be paid. On one hand, the government is penalizing industries not to pay MSME within 45 days, but on the other hand, they themselves are not paying any of the MSMEs within even 90 to 120 days. So I really wonder as to what they are doing to improve the liquidity. On the ground level, there seems to be 0 liquidity.

Okay. And sir, my last question. Sir, any updates on the NGT ban? I mean, what we understand, that's being implemented quite strictly. But any quantification as to how many units have been closed down, et cetera, to that extent?

I think about 40 to 50 units got closed down initially. Nothing else has happened ever since the NGT ban. And you are very right that the NGT ban is extremely strict, so everybody has moved to gas. The current scenario is because they move to gas, they are finding it very difficult to pay money, which, otherwise, they would pay in cash for buying coal. Therefore, they are also -- that's another reason why prices went down in the interim for them to keep the plants running to basically get some check money. So they were selling at any cost possible just to get any money in white from anybody. That's the nature of this beast. And -- but that, I think, will -- is now getting weeded out. Going forward, if the market continues to be under pressure the way it is, I do believe that another 40 to 50 units, if not more, will permanently shut down in Morbi.

Sure. Sir, on an average, what would be the quantum of price hikes, both in ceramic tiles and the vitrified post the implementation of this ban till now?

I mean, normally, we would have expected a price rise, but unfortunately, there has been no price rise. In fact, in the last quarter, we've seen prices going down because of the desperation shown by the Morbi industry.

The next question is from the line of Chintan Shah from Investec.

Sir, my first question is on working capital. You did indicate on the receivable days. Is it possible for you to quantify the inventory and payables as well?

Yes, inventory is about 35 days.

Inventory is about 25. And sir, payables?

3-5, 3-5, sorry.

Payable is 25. And sir, inventory?

No, no, inventory is 3-5, payable is 4-0.

35 and 40 is payables. Okay. Sir, second question is on Bathware division. We have been doing pretty decently over here, like 6%, 7% growth for Q3 and 9 months. Sir, where do we see this business, say, in 2 years down the lane or 3 years down the lane? What's the thought process over here?

So first of all, let me quantify at 7%, 8% growth at such a low base, we are absolutely not happy. In fact, in the current scenario, with a 2.5% of volume growth and tiles of 4%, I mean, it's an open call, I shouldn't be saying it, but we'll not really overly worried because the market has been under serious pressure. But on the Sanitaryware, we should have grown at 12% to 13%. Again, the question comes over there are receivables. But at 8% to 9%, this growth is not acceptable. Next year, we should -- we, again, want to look at 20% growth for Sanitaryware business.

Okay. And sir, how do we break up the current quarter's number between Sanitaryware and faucetware?

Yes. So the current quarter number is INR 47 crores, INR 31 crores came out of Sanitaryware and INR 16 crores came out of Bath Fitting.

Right. Sir, a couple of questions on the balance sheet. Sir, we still have unutilized proceeds from the QIP. Sir, in the earlier calls, you have indicated that our focus is to clean up the balance sheet. Sir, so how far we are -- like, March is not very far -- so how should we look at this?

So it is the unutilized proceeds of QIP, if you see and monitor Q-on-Q basis, it is declining on every quarter. And it is -- since it is invested temporarily in bond funds, debt funds and liquid funds, so we keep realizing it and putting into a working capital debt reduction. Like these are investors in long-term bonds as well, like SREI, NTPC, U P Power, Shriram Transport and all. So the moment we will keep redeeming it, most likely, a good part of it would be redeemed in March itself, the 1 tranche of 3. So whatever redemption is happening, it is going into debt reduction. So we are maintaining our guidance and our unmuted policy that no incremental treasury is going to happen, and we are not doing that. But liquidation would happen over the period, and we are trying to do it at our best.

Is it possible for you to provide some color on the quantum of working capital reduction that you are looking into March, given we have cash at hand, and it can be deployed towards working capital reduction?

See, it's difficult to say what is going to happen in March, but one thing I would like to reiterate that whatever liquidation is coming from the treasury investment, that is going in working capital only. If you see in this quarter itself, there is almost INR 6 crore, INR 7 crore we realized from investments, and we put into working capital. That announcement we do every quarter. And this December 31, unutilized proceeds number is INR 70 crore. Most likely if another money would come during this quarter, even bond redemption would happen during the quarter, that would again come into this.

Okay. A couple of questions for Abhishek, sir. Sir, there has been price declines for GVT, PVT and ceramic. Specific question on GVT, there were 2 new capacities, ours and Kajarias in Southern India. So sir, what percentage of it would you attribute to volume displacement? Like if you look at it from a macro point of view, how do you see the markets actually evolving? And how should one look at it from a pricing perspective?

So we haven't been -- we did not decrease prices in the south. It was the normal pressure of the industry where the entire price went down. Thank god for it that we started the south plant because in the today's scenario, where there is so much price volatility in the dealers mind and so much uncertainty, and more so, the dealer wants to destock because he doesn't know how quickly he'll be able to sell the material going forward. The south plant has really become a boon for them because they are now very insured in most of south a 24-hour delivery and Kerala, nothing more than a 48-hour delivery. So to that extent, I think the south plant is only going to benefit our sales and our growth, and more importantly, our dealer stickiness because he's more interested in today dealing with somebody where he does not need to stock and does not need to bother about the supplies. So south plant, overall, the price decrease was not because of south plant, and in the entire scheme of things, the price -- the volume addition in the south plant between Kajaria and me is approximately 8 million square meters. So it's not on an arm's length of which we were anyway selling 4 million in the south. Where we were buying this material from Morbi or transporting it from the north, we've had to improve our north and improve our western sales to that extent, but south has been a boon. Going forward, I think that's something if not anything else, it's definitely going to be a very good volume driver for us in the south.

Right. Sir, if I have to put this question the other way around, do you see price declines in western and northern region more because this volume displacement which was happening from west to south, that's not happening right now? And is that one of the reasons why probably prices in GVT still in western region are more depressed than south?

So let me give you a perspective. We have approximately 120 plants in GVT, which makes about 14,000 square meters. That 16 lakhs, 17 lakh square meters per day. The decrease of our offtake from Morbi for Kajaria, and I can't talk of Kajaria, but for me, the decrease in offtake from Morbi is 1.5 lakh square meters a month. So you can't actually do that to any price decrease or price rise. When somebody is producing 17 lakh square meters a day and my offtake from Morbi was only 1.5 lakh square meters per month, can I really attribute it to a price decrease because of that 1.5 lakhs? No, I can't.

Okay. That's helpful. Sir, last question, you did point about Saudi antidumping duty actually aiding export. Sir, can you please elaborate this a bit?

No. I didn't -- so -- oh, so I think you took it differently. What is -- see, the duty is subjective, it's going to come in the next couple of months, which meant that any exports which happened before that will not be subject to duty. So there's been an influx in this -- the material stocking in Saudi by the Saudi buyers. We don't export to Saudi, our export is absolutely 0 to Saudi. So I don't have any BI on it. But what I do know is hundreds and thousands of containers went from Morbi between November and December to Saudi.

Okay. And sir, just last question, sir, China exports around 900 million, have you seen any specific leads on the exports which could benefit Morbi and directly or indirectly to us? And the second question, there will be some raw material imports from China abrasives and other stuff, so has there been some disruption either for us or for Morbi on back of this?

No. So the raw material, the abrasives, the polishing abrasives and stuff like that, you are not only reliant on China. There are other parts of the world, which are producing. In fact, now we have certain Indian suppliers also for the same. So that will not disrupt -- get disrupted. What I do see getting disrupted is in the interim, certain machinery which we buy from China, so the upkeep of the machinery, the spare parts of the machinery, et cetera. As far as the other raw material is concerned, nothing comes from China. The export, where a lot of people, who are still going to China from various foreign countries, will obviously flock towards India because we are the next most competitive. So we are hoping that, that influx will happen, which is going to be a huge benefit for Morbi. As I said, Somany is not a very large export player and we never will be.

Okay. But sir, have we seen any leads, specifically, on the exports coming up because of the shipment from China would be blocked and it would impact, like, 60 days of ocean time, basically travel time. So has it already -- have you seen inquiries coming, specifically, on the export side?

No. I can't answer that question because we are not an export company. It's better we ask the Morbi guys for this kind of an answer.

The next question is from the line of Karan Bhatelia from Asian Markets Securities.

Sir, how has been the revenue mix in tiles, GVT, PVT contribution as a percentage of total? And how was it on a Y-o-Y basis?

So we've improved the GVT from 21% to 23%. And to that extent, the ceramic has come down from 43% to 41%. The balance remains to be PVT.

Right, right, right. And sir, with no major CapEx coming for next 2 years, what is the ballpark number that we can built in?

I'm sorry?

For CapEx, how are we estimating for next 2 years?

Between INR 35 crore and INR 40 crore year-on-year, which is balancing equipment and also upgradation of certain plants which are getting old.

So per year INR 35 crores, INR 40 crores or it's a rolling CapEx?

Per year, per year, per year.

That's for FY '21 and '22.

Correct, correct, correct. And what is the debt as on balance sheet -- gross debt as on December ending?

So there is no change in debt, Karan, as such. That is keep declining because some loan is getting amortized every quarter and working capital is also [indiscernible]. So since it is not a disclosed number, our balance sheet is not supposed to be published in December, I cannot disclose the number, but I can give you ballpark guidance.

So even for FY '20, how much of debt reduction are we seeing in comparison to FY '19 numbers?

See, working capital debt is a function of the business function. So it would be in tandem to the business only. As far as the external business is concerned, working capital deduction -- reduction should be there on external level, and term rate should also get reduced by almost INR 13-odd crore, and we are not raising any term loan.

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

Sir, in the previous -- maybe in the previous con call, you were mentioning that you were looking out for U.S. opportunity for exports. Can you highlight some developments, whether you've started exporting or are you still in the process of looking at that opportunity?

Yes, some amount is -- we've started exporting in a very small bit. Again, as we are not in export-focused market, the opportunity, which I had mentioned was that U.S. was putting an antidumping duty on China, which is anyway on the card. But as we speak, there's an antidumping any which ways, which is from the rest of the world for China. So U.S. is going to open up a large door for Morbi and for us. For us, it would be the higher end and for Morbi, it would be the lower end.

Okay. So even Morbi has started already exporting.

That's right.

The next question is from the line of Ritesh Shah from Investec.

One question, sir, how are we different in the marketplace as compared to our peers, like anything different that we are doing either on the marketing or distribution side, specifically for tiles and specifically for Bathware, sir?

So not much of a difference when we compare the top couple of brands in the country. What differentiates us from the rest of the pack, which is the top 2, 3 brands in the company -- in the country are that we produce pretty much everything from the lowest category product to the highest category product. So if you name an 8 by 12 tile, which is retailed at nothing more than INR 220 to INR 230 a square meter up to INR 150 to INR 200 a square meter for the very large-format tiles. So we are pretty -- I'm sorry, square feet -- sorry, INR 220 a square meter or INR 2,500 a square meter, we have the entire spectrum. There's not much of a difference as far as tile is concerned, the top 2 players. The differentiating factor, I think, in the tile industry has been and always will be, is the distribution, and we continue to strengthen our distribution. Having said that, if you want the number, we added a net of approximately 100 dealers in the last 9 months, which is a net of the dealers we lost in 9 months because there are some dealers which you lose and some dealers you make. So there's been a net addition of 100. And like my guidance was for every year, we would do a net addition of approximately 150-odd dealers per year. So further penetrating into gap terms, further penetrating into areas where we are underpenetrated.

Right. So sir, questions over here. When you say that we have each of the product basket, but sir, from an ROCE standpoint, sir, how do we look at it? And you did -- due to the fact that we have launched a new tile, which is a significant large size, I'm not sure whether it classifies under slab or not. If it falls under slab, how does the economics actually stacks up over here? And second question, sir, you did indicate upon dealer addition, but how should one look at the effectiveness of each dealer addition? Like, is it revenue per dealer? Is it the right metric? Or which is the right way to approach it?

Yes. So whenever we add a dealer, we track it for the next quarter to see what has been the incremental sales from the new dealer. Obviously, it depends on when he was made in the beginning of the quarter or the end of the quarter. So we do track the effectiveness of the dealer and the square meterage and the value he has provided to us. As far as the large size is concerned, it's a large-sized wall tile, which is a 1.5 feet by 3 feet wall tile. It's the largest wall tile in the Indian market. This does not classify as a slab because the slab we are talking about 1 meter by 2 meter. Here, it's a 1.5 feet by 3 feet tile. So from a slab perspective, it's fairly small, but from a wall tile perspective, it is extremely large.

Okay. Sir, is it possible you can put some numbers around this? So it is something which is unique, but when you look at it on a per square meter basis, how does the economics actually stack up?

So again, I would like to take this off-line because there is contribution margins also involved, and I wouldn't want to do it in local call. We'll share with you.

Okay. Okay. And sir, specifically, on the effectiveness of the dealers, you did indicate that we look at it on a per square meter sold per dealer or revenue per dealer. So do we have any numbers that we track or what you can share, basically, just to figure out how we are doing over here?

Yes. So on a ballpark, a 70-30 formula applies. 30% of the dealer gives us 70% of our sales. But if I go slightly more granular, we have about 350 exclusive showrooms. These 350 exclusive showrooms, which are dealer-owned showrooms give us approximately 40% of our revenue.

40% of revenues.

Yes. But mind you, the net dealer addition may or may not be exclusive. Some of them will be exclusive. But this is a 150 net dealer addition, which most of them would be multi-brand outlets.

Okay. Sir, last 2 questions. Sir, what is the mix on B2B, B2C? And secondly, if you can give some color on Tier 1 versus Tier 2, Tier 3 cities?

Tier 2 and under gives us 75% of revenue. As far as the -- what else did he ask, sorry?

B2B and B2C.

So 70% is retail, [ 3% ] export is included and the balance 30%, only 2% to 3% is corporate, which leaves us with more or less 25%, which is equally divided between government and private institutional builders.

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

I wanted to check, while talking about the gas price you mentioned INR 35 per SCM was the gas price for us for the stand-alone company, and at consol, it was INR 31 per SCM. Was that right understanding and it is clear?

Yes, correct. For last quarter, yes.

Yes. So what would be the price for Morbi? Is that substantially lower price compared to INR 35 for us?

Yes, it is. It's at about INR 27 -- INR 28, which I remember last, plus or minus INR 0.50, I am not sure of the exact pricing.

So this INR 28 is the landed cost, is that right?

Yes. Correct. I'm -- whatever figures I have given you is all landed costs.

That includes the taxes as well as the transport...

Yes, yes, yes.

So my question was, there is a substantial gap between us and them. So how do we look at this in terms of -- from a company perspective, we are at a fairly significant disadvantage compared to Morbi in that case.

Absolutely. And there is not much we can do because we are locked in a long-term agreement with GAIL. So any of the northern players, be it us, Kajaria or Orient for that matter and even the other players like Johnson and a couple of others, who have this 20-year agreement with GAIL, we're on a 3-month moving average. So if you look 10 years ago, Morbi was more expensive than what we were at that time.

Right. And this INR 28, how is it tracking now? Is there a price reduction/increase?

Now here is where the question mark will be. So the INR 28, we believe, will substantially go down by -- when I mean substantially a good INR 1 to INR 2 will go down coming April because they are being supplied Indian gas, RasGas and also spot gas. And like you know, because of the virus in China, the spot prices have fallen off the curve. So we do believe that there will be a further gap there. Simultaneously, the barrel also has gone down to $54 which was $67 just 5 weeks from today, which means that the Kassar pricing, the north pricing will also go down coming April from INR 35 to a good INR 31, INR 32, and Morbi would go down from INR 28 to maybe INR 25, INR 26.

Right. And how much would be the cost difference according to you this would have in terms of rupees per square meter or something for any type of tile?

So if the costs don't -- I mean, if the pricing doesn't fall more, which I'm hoping and I think there's not much scope, all of the decrease, which happen in the price from April onwards, and why I keep mentioning April onwards because we are all on a 3-month moving average, we will retain the advantage.

Right. But wouldn't that be logical that given the current demand scenario, the pressure Morbi has with respect to financials, wouldn't they just reduce the price and try and push more volumes and get...

So when there is a reduction of just INR 1 or INR 2, over time they don't react. When there's a major reduction at one shot, that's when they react. So hopefully, they will also be able to at least hold on to something. And this whole coal gas to gas transition, where they needed the white capital also would start getting evened out coming April. And with the e-billing happening, there should be further checks on Morbi hopefully -- e-invoicing, sorry, to keep a check on their evasions even further. So let's see, these are all hopes.

Right. Sorry to harp on this, sir, this INR 28, was there any change Q-on-Q? Or it was stable?

It was stable. Actually, I'm not sure. The INR 28, there may have been some changes, but nothing very significant, maybe INR 1.

Got it. And just a clarification. With respect to value-added tiles, what was the mix for the quarter and Y-o-Y?

I can't give you a breakup of within the segment. But otherwise, ceramics, last year, Q3 -- so if you take -- yes, it's 2% lower on ceramics and 2% higher on vitrified on GVT.

So is that a mix you're talking about, the value-added tiles, specifically?

Yes, yes. Ceramics went down by 2% in favor of GVT, which went up by 2%.

The next question is from the line of [ Divyesh Shah from Pragya Equities ].

Hello? Hello?

Yes, please.

Yes. Sir, my question is regarding present situation in China. You have just mentioned that since China is temporarily closing down and export market is open for India, so do you foresee that we will be the second source -- India as a tile industry will be a second source to the China because China being a large market and Morbi player or an organized player will be exporting more to -- replacing Chinese market?

They will not export to Chinese market, but they will export to all the countries where China was exporting. Yes, you're absolutely right, that will happen. And -- so Morbi is the main cost competitive after China.

And sir, what will be the effect of price? Suppose India exports large quantities in next 3 months, do you foresee price rise in the tile industries?

We can only hope for it. Let's see what happens. I can't -- I'm sorry, I won't be able to answer the question on what the export pricing will be. But logic would say that if a large portion gets exported, then there should be some kind of at least a price stabilization if not an increase in the Indian market.

But sir, do you see in last 10 days, any ground level realities of exports because the media reports says that tile export is increasing in last 10 days?

May have. But like I said, we are not an export-focused company. But the tile imports one should check, has it improved? Has it increased because of the China syndrome? Or has it increased because still the anticipated duty in Dubai is supposed to come -- sorry, not Dubai, Saudi Arabia is supposed to come, so maybe they're still stocking material for Saudi Arabia. So one needs to check that number.

The next question is from the line of Saurabh Jain from HSBC.

Most of my questions have been answered. I just wanted to have an understanding why you would not be focusing export as an opportunity if you have the similar realization that what you get in the domestic markets?

We have similar realizations because we not -- we do not export very much, and we export at our terms. Our total export is only about INR 80 crore. It will remain under 2%, 3% of our revenue. The minute we start pressurizing, A, they ask credit -- open credit, which we are not willing to give as a company. We always work on an LC or some kind of a bank guarantee. Secondly, the minute we open the larger markets, like the Middle East, the prices fall. So therefore, we are careful. And third and most importantly, the brand spend, which we do in India, we get a significant margin on the brand in India compared to Morbi. Whereas, when we go abroad, we're just another Made in India.

Okay. So -- okay, got it. And which countries are you currently exporting to?

We export to about 63 or 64 countries, for this 80 crore. So you can see how fragmented my export is.

No, but are the -- these markets similar to how the market is in the Middle East or you export only to the developed part of the world, like Europe or U.S. for that matter?

Yes. So Middle East, we do not export a very significant amount. And our total Middle East export would be maybe INR 10 crore, which includes all the UAE, Saudi, Bahrain, Kuwait, et cetera, et cetera. We export the balance INR 70 crores, INR 75 crores to rest of the world, some Southeast Asia, Europe, America, South America, Mexico, et cetera.

The next question is from the line of Ritesh Shah from Investec.

Last question. Sir, what are the margin variables that we have -- margin levers that we have, except for utilization levels? If one has to make a case that our margins will bump from, say, 5.5%, 6% to, say, 9%, so what are the variables, levers that you could target in, say, next 2 years, 3 years?

Biggest variable is, of course, capacity utilization. Second biggest variable is the -- within the capacity, what do we produce? Can we push value-added products? So for example, my GVT plant can produce anything from a 30 by 60, which is a 2 feet by 1 feet tile up to a 3 feet by 6 feet tile, even a 4 feet by 4 feet tile. Can I put more of the 3 feet, 6 feet, 4 feet, 4 feet because I have a significantly larger margin there? So within the category, I mentioned wall tile, which is 45 by 90, which is the 1.5 feet by 3 feet. Can I put excess of that for 45 by 90, I get extra margin there? So all of these are the -- within each category, PVT, GVT, ceramic, more so in GVT and ceramic, the lever is how much more I can sell as value-added. And third most important is how much more I can sell on Sanitaryware because Sanitaryware even today at a very subdued 7%, 8% growth is still giving me a 14%, 14.5% EBITDA level.

Right. Sir, for the second variable that you indicated to sell more value-added products, so do we have incentive schemes designed for the dealers, wherein if they sell more of this, actually, they get a higher discount?

Yes. We do. They are incentivized to sell the higher products more and more. But in the current market scenario, even they are resorting to buying whatever they can sell more easily rather than stocking a material because these are materials which you necessarily will have to stock and showcase to a consumer. It's not an easy sale item.

Okay. So it's an ongoing practice. Is it anything different that we will -- we're trying to do over here than the marketplace, which can actually help take our margins up?

Yes, we are doing that, and those are stuff which is work under progress within the company.

Okay. And sir, last question. For some reason, Morbi have survived all this years, partly it's a function of cash, but based on our checks, what we also understand is the thickness of the tiles has actually reduced, what used to be 12 is now 8 mm, 9 mm. Sir, how do you see this phenomena? Like, it's a big variable to actually maintain margins, as you save on a lot of stuff. So how do we look at this? So one is quality versus profitability, so what is the management's approach over here?

Yes, it's a good question. Beyond the point, that is something again which is -- we are always disadvantaged because being a branded player, I can't reduce my thickness beyond the point. But Morbi has reduced its thicknesses to an extent where, again, they are reaching a threshold level where if they reduce any further, they will land up into an issue of breakage or very brittle tile. So I think on all parameters over the last 2 years, ever since the vibrant Morbi that Gujarat Ceramics happened, prices have come under serious pressure. And all of these tactics have been applied by not one by every player, and more and more so with the increasing pressure of liquidity, increasing pressure of the real estate segment, increasing pressure of the overcapacity, et cetera, they've resorted to pretty much every possible formula in the game, and they're now getting exhausted as to what next. So it'll be interesting times in the next year as to what else will they be able to do or pull off which the branded segment is not able to and still not have an issue with breakages or quality complaints in such a large way, wherein the buyer would actually get shunned away by the Morbi products.

Sir, you said reaching a threshold level now, sir, just -- I'm just digging a bit more over here. Sir, can you quantify something specifically on GVT, PVT, DC, what the threshold level is? And like, say, if you can give a perspective, 3 years back what the thickness was? And what it is right now for the organized players, say, be it for Somany or be it for the organized guys versus where Morbi is? Just trying to understand how much of, basically, they can play on the cost structure incrementally through this variable.

Sure. So for example, if we take a standard PVT 2 feet by 2 feet or a GVT 2 feet by 2 feet tile, they used to be at a 10 millimeter -- 9.8- to 10-millimeter thickness with a water absorption of 0.05%. This has been compromised in Morbi from 9.8 to 10 millimeters down to 8 millimeters, even 7.8 millimeters. So let us say, 7.5 to 8 millimeters has been the thickness and water absorption has gone up by 0.05% to 0.8% to 0.9% to 1%. As far as the organized sector is concerned, 9.8 to 10 millimeter has come down to 9.2 millimeters, and the water absorption has remained at 0.05% water adoption. So they have compromised the tiles. And the threshold limit is, what I meant by that is that beyond 7.5%, if they have to lower the thickness any further, more than 0.1, 0.2 millimeters, they will have to put certain additives to keep the tile with the same kind of strength and same kind of parameter. The minute they put the additive, that becomes as expensive as reduction of thickness. So it's kind of balancing off or it's counterproductive. That's what I mean by reaching the threshold.

The last question is from the line of Ritesh Shah -- sorry, it's from Mr. Karan Bhatelia from Asian Markets Securities.

Sir, can you throw some light on our new product verticals like water heaters, how do we see our market share and how much of top line can it be next 5 to 6 years?

This is -- you are talking of what we've just launched?

Yes.

Yes. So for -- I'll give you a perspective. The Kadi used to produce from this line 230,000, 240,000 square meters per month. We shut that line last April -- April end and refurbished it and restarted the line somewhere in December this year. The line capacity has gone down from 240,000 to 180,000 standard -- sorry, meter square a day, in which this new product, we are hoping to sell about 75,000 to 80,000 square meters of the new product per month, which comes at a decent contribution increase over the normal products. And also, the 180,000 square meters, which we will produce now will be hugely positive in terms of contribution. Whereas, the 230,000, 240,000, which we used to produce earlier, we were barely covering our total cost.

Correct, correct, correct. Also, if you can throw some light on the water heater segment that we've recently entered? And how do we see our market size in next 5 to 6 years?

Too early to say. We're just trading. We're not manufacturing. We're just branding in -- getting in the best material possible. I think this year, we'll close at about INR 8 crore to INR 9 crore of revenue, primarily because we only started halfway through the winter. Next year, we should be approximately INR 14 crore to INR 15 crore of revenue, if not more. I would be in a better position to tell you where we are going maybe once we reach that number.

Correct, correct, correct. And sir, how has margin shift, I mean, the Bathware division, if I, like, say, separate the Sanitaryware, which you mentioned, 14%, 14.5% EBITDA level, how much that could be for the faucetware and the blended Bathware portfolio?

The faucetware is approximately 8%, 9%.

Okay, okay, okay. And we are seeing healthy double-digit growth in the Bathware vertical along with some vendors margin...

Last quarter -- we were double-digit for the last 2, 3 years. But last quarter, we dipped to 8%. Again, that was a result of basically the overall depressed market scenario, coupled with our increased focus on receivables.

So here, do we have the complete SKU product basket? Or how is it? If I compare that with the #1, #2 leader may that be Cera or HSIL, do we have the complete product basket? Can you share...

Yes. Okay. In Bathware, which is Sanitaryware, we have the complete product basket. As far as fitting is concerned, we are still far behind the large competitors like Jaguar and Kohler, et cetera, which is a bath faucet.

Right, right. And sir, any CapEx on fitting front? We were estimating 3x capacities over the next 2 years. How things are shaping out there?

Yes. So we've added capacity -- 2x capacity has started. We're not -- we're only at about 75% utilization. And the 3x capacity is literally at a fraction of a cost. It will not cost more than a couple of crores to go to 3x because most of the building and the equipment has already been installed for -- keeping in mind the 3x capacity.

Correct, correct. Sir, we are almost in 2 weeks of February, so have we like seen some green shoots in any of the regions where we are strong?

No. Not much.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you so much for joining us for the quarter 3 earnings call. We hope that this quarter will be a better quarter. And we are quite excited of the New Year, specifically because the south plant, we would get the entire 12 months of the south plant, entire 12 months of Kadi and also the entire 12 months of our Sanitaryware plant kicking. So hoping for the best, keeping our check on the receivables and keeping our head down to see that how we -- further we can improve that, so that next year we do not have any such issues to push the market. And we do believe, if not earlier, but until Diwali, the market should start turning as it's already been 5 years of depressed scenarios in the real estate industry. We shall now talk after the annual results. Thank you so much.

Thank you. On behalf of Asian Markets Securities Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.