Somany Ceramics Limited (531548) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Somany Ceramics Limited Q2 FY '21 Earnings Conference Call hosted by 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 from Asian Market Securities. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. We welcome you all to the Somany Ceramics 2Q FY '21 Earnings Con Call hosted by Asian Markets Securities. From the management side, we have Mr. Abhishek Somany, Managing Director; Mr. Kumar Sunit, AGM Finance; and Mr. Saikat Mukhopadhyay, CFO. I will hand over the call to Mr. Kumar Sunit for his opening remarks, and then we shall open the floor for the question and answer. Over to you, sir.

Thank you. This is Abhishek Somany here. Thank you for joining us for the earnings call for Q2 FY '21 for Somany Ceramics. As you've seen, we have done a very good Q2. We've been able to grow by approximately 3% in volumes in sales. While we were looking very tentative in July, not knowing when the lockdown will fully get over, we were looking at 85% achievement of last year Q2. But frankly, the market's opened up and also the team really worked hard to make sure that we at least achieve last year's revenue or even better earnings. In tiles, we've grown fairly well, approximately 4%. We've had a little bit of a decrease in Sanitaryware and Bath Fittings, that is due to basically nonavailability of materials. We lost some sales approximately INR 6 crore to INR 7 crores, nonavailability of material in both our Sanitaryware and Bath Fittings plants, owning to certain labor issues and also labor not coming back in time and also the monsoon season. But as we speak, both those plants are up and running completely at 100% capacity. That is from November onwards. I'm happy to report that we've been able to increase our EBITDA, both at the stand-alone level and the consol level. But more importantly, other than the revenue which you've seen and the EBITDA growth and the PAT growth which you've seen, what we are happy to report is the other parameters which we have been able to -- because of which the balance sheet has become much stronger. We've been able to reduce our debt at the consol level. Let me remind you, at the consol level, all the debt is in the JV's books, and there is no recourse to Somany, and there is no corporate guarantee or anything like that. All of that combined, the -- about INR 150 crores or INR 160 crores of debt is there in these various JVs. There are approximately 9 of them. A good portion, a good 75% of that is in a single JV, which is our brand new plant, Sudha Ceramics in the South. That's the newest plant, we started only 18 months ago. Happy to report that, that was the first plant to start post the pandemic. And currently, it is running at 100% capacity and also selling 100% capacity. So we're very comfortable on that plant. So the debt levels have come off by approximately a little more than INR 100 crores at the consol level, and at the stand-alone level, we are a net debt-free company. We've been able to unlock capital from 3 ways. We've been able to reduce our inventories very significantly, as they're down to 40 days now, and this is something which we'll be able to sustain maybe between 40 and 45 days. We've been able to bring our debtor days very substantially and also our trade payables are looking good. So from all those 3 angles, we've been able to reduce our working capital, which is what is the highlight of Q2. And the best part is that this is a sustainable Q2 -- a sustainable level. On top of that, we have a situation where we had INR 80 crore in the bank, which is surplus funds at the end of 30th of September. So the opening figure was INR 80 crores in the bank, which was invested in FDs and ultrashort funds, which means that we have 0 working capital currently. This figure over October has only improved. And the rest of the figures have also improved over October. On the other hand, we have increased our production to -- our production. The couple of plants, which were not at 100% last year -- last month, are now at 100%, which is again a highlight because generally, H1, September onwards, it becomes a very heavy sale, but in October, generally muted month. But this time, October was a decent start, and we're at 100% capacity in every single plant of ours. On the advertisement, we took -- we were going to go on air in October. But when we heard that the IPL has taken all eyeballs, we halted the advertisement currently, but we have gone very heavy on retail. You would have -- if any of you've flown in the recent past, we have very significant presence over airports and also significant presence in the retail. We've been able to increase the dealer footprint very substantially in Q2. And you will see the ATL activity happening soon after IPL finishes, where you will see a lot more of us on that front also. On the other hand, the cost, all raw material cost seems to be stable. Gas costs have increased by about INR 2 to INR 3 per standard cubic meter. But we feel that this is -- somewhere it will start getting leveled out, unless the crude reaches INR 45 to a dollar per barrel or the rupee dollar breaches INR 76, INR 77 rupee-dollar. If that doesn't happen, then I think these are sustainable levels. We probably will have a INR 1 increase in the next 2 months, but then over January, February, this trend should start again, going down by INR 0.50 to INR 1. So net-net, the gas prices at current levels are reasonably stable. We're looking forward to a good Q3. Like I mentioned, October was a good start. Plants are running 100%, so we would have operational leverage, and we're looking forward to a good Q3, hoping that there are no surprises from the point of view of another lockdown or partial lockdowns, et cetera. And we do hope that the building activity would continue the way it is continuing. And as and when the accounts keep opening up, that demand should keep continuing. On the export front, I think there's been a lot of news on the export front that Morbi has exported quite a bit and that's absolutely true. They are completely full with the export orders on 2 accounts. One is that there has been an antidumping duty levied from many countries on China. In those countries, namely Brazil, Indonesia, America, Mexico, et cetera, to name a few, they have started buying from India. And there are also a lot of -- host of other traders where there is no ban on China, but every trader wants to today hedge their bet against China. So I'm supposing that if they were buying 100 units from China, for example, they're now probably going to buy only 70 or 80 and hedge the balance 20, 30 units to either in India or Turkey or maybe other nations. So that's also giving us a tailwind in exports. Therefore, being Morbi being completely busy with the exports, we've been able to bring in more discipline in the Indian market in terms of payment terms and also in terms of holding on to our prices. So I would stop here and leave the floor open for question and answers. Thank you.

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

Sir, congratulations on a very decent set of numbers. Sir, firstly, on the South JV, can you just throw some light on the utilization rate at the moment and in Q2? And how has been the product mix so far?

So in Q2, the product mix was not optimal because, obviously, there was more down-trading as and when the economy opened. But in Q2, the Sudha Ceramics was running at approximately 90% capacity utilization -- sorry, 85% capacity utilization. Currently, if we see at the current product mix, it's at 100% capacity utilization. And September, we bettered the product mix. October, we bettered it even further. So we are hoping that this product mix will continue to get better.

Right. And sir, what kind of margins does this company enjoy at the moment or probably in Q2?

So it's about double-digit margin there. You can get the exact figures from my guys.

Sure. Okay. Right. And sir, secondly, on the gas prices, do you think these level of gas prices are sustainable for particularly with winter coming in?

So like I mentioned, there are 3 kinds of gas prices we're looking at. We're looking at the GSPC price, which is Morbi. We're looking at the LNG price, which is the Qatargas for the Kassar plants. And we're looking at the spot gas for the South plants. The spot gas has increased quite significantly. So in the South plant, we will be up by about INR 2, INR 2.5 per standard cubic meter. In Kassar, which is a North plant where we have the Qatargas, that is more predictable because it's on a 3-month moving average of the brand. There, we believe that there would be INR 1 increase maybe in November and January [Technical Difficulty] decrease or INR 0.50 decrease. So you can say it will be range bound between INR 0.50 to INR 1, up or down, but that's very hard to predict. And on the GSPC, that's an entirely separate animal as to why and how the price -- what they price. So currently, they've just reduced the price there by INR 2.5, and they generally have a practice not to increase or decrease it very quickly. So I would suppose that also will be range bound in INR 0.50 plus or minus going forward.

Sure. So that means your gross margins, which are lower in Q2, partly because of, say, product mix and partly because of, I think, lower utilization is not to do with margins. But more or less, with respect to your Sanitaryware operations not doing well and your commodity products being -- the share being higher, is it safe to assume that our gross margins would improve going forward in H2, and, hence, the EBITDA margins are likely to grow 12%, 12.5%?

Yes, I wouldn't want to make any forward-looking statements on what percentage. But yes, of course, the gross margins have been under pressure for 3 reasons in quarter 2. The number one reason you very rightly said was because of the operational leverages. That has been sorted because I just -- like I said, 90% of our plants minus Sanitaryware were 100% utilization in October. And the one Sanitaryware plant also has under 100% utilization from 1st of November, or let's say, first week of November. So that was number one. That problem has sorted. Number two, it was the issue of not selling enough Sanitaryware. Obviously, minus October, we will get enough Sanitaryware to sell now going forward in November and December. So that is also sorted. You will definitely see no degrowth in Sanitaryware in quarter 3. I'm not sure how much the growth will be, but there will definitely be comparing to the degrowth. That itself is a positive. And thirdly, when you talked about the gross margin improving or not improving because of the product mix, hard to say. There is still -- the dealers wanting to buy only that product, which is quick cash flow churn up. And frankly, we are only concentrating on that and not forcing down anything the dealer's net. We are trying to see if the dealer can bill every month or every 45 days rather than billing him a very expensive product and have him as a cycle rotating in 2, 2.5 months. So our clear focus today is to increase the dealer billing base with whatever material. We feel that if we can do that and gain market share, the other part is going to be simpler to do.

Okay. Sir, my sense was with the metros likely to open up possibly post Diwali, I think that in itself probably would address the issue as far as product mix is concerned to certain extent.

Not really. 75% of our sales is outside the metro. So to that extent, I think the entire product mix when the sentiments become better only, then it will happen. But I'm really not concerned with that. I'm currently concerned with -- and very happy, on a positive note -- the concern is on a positive note that we're running our plant at 100%. The kind of operational leverages that gives us, which is not seen in the open, but when the plants run 100%, there are so many things which get weeded out and so many problems also which come up, which get sorted out and the debt, that is far more beneficial than increasing in the current pandemic scenario than 1% of product mix because that, like I said, if things open up, obviously, people are more aspiration -- they are more aspirational. So they will go in towards a better material. It can't remain like this. So currently, the focus is run the plant at 100% level, run the plant at the current inventory levels or better inventory and run the plant or do sales at these better levels, which are lower than what it is today. That's the focus.

Next question is from the line of Saumil Mehta from BNP Paribas.

Sir, 2 questions from my side. First, at least some of the challenges especially in the South India, where we've been hearing that the unorganized has been impacted very badly. The absolute credit base available have come down sharply. In fact, many of the regions are actually going to cash sales. So in terms of our interactions with dealers, is something of that sort happening or it is in South or maybe any other part of the country where the credit available has come down very, very sharply?

So what's the question?

In terms of the industry, per se, is cash sales now happening wherein earlier 90, 120, 150 days of credit or whatever, that has come down for us? Or at least, we believe that, that still remains in -- the high credit availability of Morbi guys is still pretty much prevailed?

So there are 2, 3 things which have happened together. A, the Morbi guys have also realized that the cash sales versus the normal cash sales which they used to do, they are preferring the cash sale and they got a rude shock with the pandemic because the cash sale, whichever the debt, it came under question from a recoverability point of view. That, obviously, there were many questions around that. So that was one. And number two, when they went back to the banks to get refinanced or extra finance, which all of us did with the peer in April, they didn't get any money from the banks because they didn't have any balance sheet. So they're all wanting to make their balance sheet stronger or their profitability stronger. And thirdly, what has happened is that they are now exporting a lot. In export, there is no tax. So there is no question of [Foreign Language]. So from that point of view, they're requiring to do export. So what your -- gentleman have actually said that there is lesser number of credit and the dealers are preferring the other is correct. But the reason for that is a little incorrect. The reason -- let me explain as to why the dealer is preferring to deal with the brand and why this is going to be sustainable. A, there is definitely an upsurge in export. Now maybe this momentum is not going to be sustained to the current degree going forward, but it definitely will be a far better export focus than when it was earlier because a lot of people clearly have shunned China or want to hedge their bet against China, right? Number one. Number two, the dealer is saying that today the walk-in clients have become reduced. And this, I think, will be reduced until a vaccine comes out. So we're not looking at the short-term here. We're looking at the medium term, which is at least 12 to 18 months before the fear completely goes away that this particular COVID-19 is like a swine flu or something and you take a medicine and you're done. So from that point of view, a good 12 to 18 months is a long enough time to structurally change the industry. And what I mean by that is that the dealer today is saying when I go to a Morbi guy, he's no longer giving me the extra credit which he used to give me earlier, number one. Number two, he is no longer giving me a better price, which he used to do earlier for whatever reason. Number three, most importantly, if I pay the Morbi guy, let us say, INR 5 lakh for a particular material delivery, the Morbi guys are so shortsighted and unbranded -- they're so shortsighted, if there is another dealer or if there's an export order at even INR 0.25 per square feet extra, that order will get diverted. Now the dealer is in a dilemma to say that my footfall, if let's say, there were 100 customers coming in a week, today, there are only 30, 40 customers coming in a week. I definitely don't want to lose that conversion and my cash flow by telling the customer, "Sorry sir, this material is no longer available." So from that point of view, they are preferring the brand because our stocks are available on the SAP. There's a 24-hour lag. You can see the stock from the SAP. We can call our people, and we are not shortsighted. If we confirmed an order, even if somebody else is going to give me INR 2 extra, we're not going to take it. That's the power of the brand and that's the ethics of the brand, which is what the dealer is preferring. Therefore, in South, North, everywhere, there has been a conversion towards the branded sector for these reasons. And in fact, let me tell you South for whatever reason has been the worst to respond to this. North and East have responded even better. South is still sluggish. For whatever reason, the market there is still sluggish, especially in Kerala and also in Karnataka. These are the 2 places where markets continue to be sluggish. But from September, we've seen a very welcome change. So yes. So I've answered your question. So I agree with you partially, but not entirely as to why the shift has happened. And it's a very welcome shift because in 18 to 20 months, if this continues, there will be a structural change even in the dealer's mind.

Sure. Sure. That's encouraging. Second, and my last question is, it's a very commendable job on cutting down number of working capital days. At this number of working days and plus, we have a very soft base over the last 2 years, are we now confident that once recovery comes in, which I think should be somewhere in FY '22, FY '22 and '23, our volume growth can be [ a bigger number ]?

Let me assure you, sir, that [Foreign Language] so I think my marketing people are now very excited for this kind of discipline. They've realized the pluses of having a good check on receivables. Our plant people have realized that with smaller inventory, they're able to service the marketing people's demand by changing the designs on a daily basis rather than taking longer run. So I assure you that we -- in future, we are going to be more focused on our balance sheet and not focused on a quarter-on-quarter EBITDA, 0.5, 0.75 up or down. But clearly, you will see our balance sheet getting stronger and stronger. That is something I can forecast.

But sir, I mean, that's good enough. But in terms of -- I mean, is growth also going to be a very significant priority now while we were doing the right thing over the last 1.5 years, taking care of the balance sheet? But now I think balance sheet seems to be in a pretty good shape. So I mean, is it -- at this number of working days, we can grow aggressively, right, if this market opens up?

There's no reason for no growth to come. I gave you a perspective that last to last year, the total number of business dealers -- last year to last year, we had 1,700 number of dealers, we billed only 450. Last year, we had 1,900 or 2,000 dealers, we billed only 900. This year, we have 2,200, 2,300 dealers already, and we are billing about 1,500.

Next question is from the line of Archana Gude from IDBI Capital.

Two questions from my side. Firstly, what we should attribute to the healthy growth in this quarter? Is it just sort of pent-up demand from the last quarter? Or it's just fresh demand in the rural area?

A little bit of both, I would say. There has been some pent-up demand in the mini metros, the Tier 2 and also some of the Tier 1s, which have opened. I mean I can take an example of my own house. There was some tiling work which was required and we were delaying it, and we did it last month. So I'm sure there are many people like us. But otherwise, I must say that 80% of our demand is coming from Tier 3, 4, 5 towns. And that's where the growth is happening. And that's where the fear is also a little less of the pandemic. And people are permanently migrating or even if they've not permanently migrated, they are doing a lot of home improvement and also new homebuilding. So this, I believe, is not entirely pent-up demand. And thirdly, let's not forget that a lot of dealers are wanting to increase their shop share for the branded segments. So this year will be a little bit of an aberration here, will be where the brand -- where maybe we see the industry go by kind of x percentage of degrowth by an x percentage, we will see at the end of the year, but that number will be very different for the top 2, 3 players, where we definitely are getting more market share. And therefore, while both us and industry leaders were looking at 80%, 85% of last month -- of last year Q2 and we both have done a flat growth, which means that to some extent, even we were pleasantly surprised. And the only explanation to this is that the dealers are diverting a lot of sales towards the branded segment because we seem to be more consistent, ethical and more responsive. And this is not changing for the next 12 to 18 months at least, until there's a full-on vaccine which is there. So to that extent, the dealer will have lower walk-ins to his showrooms, for sure. It cannot be pre-COVID level. And if that means that there are more walk-ins, there will be people who don't want to go shop around. They want a conversion of sales right then and there. And that is a huge advantage to the brand because the top brands have 300, 400 exclusive showrooms. And when all of us are of a mindset that when we look at a good-looking store, we are somehow in our mind more comfortable that [Foreign Language] and we would rather walk in there. So I think that's the human psyche, which is playing up.

Right, sir. Right. So you spoke about in the opening comment that Morbi has been doing extremely well in terms of exports. So let's say, if that continues and its demand in the domestic market remains healthy, why should we expect some kind of price hike or maybe some product mix change that will support our sales as well as EBITDA growth going forward?

No, I wouldn't want to do a price hike right now at Shop the Market. Certainly, it would be over confident. It's too short a period while we have seen this kind of response from the market. I would rather continue to concentrate on running my plant 100%. Doing a sale, which is a very healthy sale and look at product mix change rather than a price increase.

Next question is from the line of Karan Bhatelia.

Sir, you mentioned that 80% of our sales is to Tier 3, Tier 4, Tier 5 cities. So what was this number, maybe 2 years back?

So 2 years ago, rather if we look at 70% sales coming from this tier -- 70% to 75% coming from Tier 2 and under. This time, 85% sale has come from Tier 2 and under. And of the 85%, 75% share has come from Tier 3 and under.

And sir, now that we are aggressively targeting these markets, sir, how is the dealer stickiness? How is the average ticket sale? And how are the trade policies in these markets compared to the Tier 1 and Tier 2?

I don't get your question, I'm sorry. Could you repeat that?

Sir, how is the dealer stickiness, trade policies and working capital cycle for Tier 3 and Tier 4 cities compared to the Tier 1?

There are no differences in our trade policy, it's identical. Of course, just a lots are much smaller in smaller towns. We buy in smaller quantities, and we also buy a larger portion of the mid-tier products and not the higher products. The lower product, any which ways we are not competitive, that's more a big job. We do sell a little bit of it, but very, very insignificant.

Correct. Correct. Got your point. Sir, on the previous call, you mentioned that we would like to take some benefit of the export opportunities, which has opened up lately. So we've seen good growth on the export end? And how much it is to the percent of top line?

Yes. So export has never been a serious focus for Somany because we do get a better brand premium in India. We maintain that. This year, to run the plant 100%, exports as a percentage of revenue will go up by 1% or 2%, but it can still be in the range of 5% to 7% of total revenue.

Correct. Correct. Correct. Sir, also lastly from my side, can you break up the Bathware division to Sanitaryware reported sales?

Yes. So we did Sanitaryware in FY '21, INR 24 crores and in Bath Fittings, we did INR 16 crores. So like I said, I didn't get material in Sanitaryware. So last year, FY '20, Q2 was INR 32 crores, and we are down to INR 24 crores. Bath Fittings last year was INR 16 crores, and this year is also INR 16 crores.

Okay. So whatever dip is mainly because of Sanitaryware division?

That's correct. Yes, that is because of nonavailability of Sanitaryware. Correct. That particular plant was running at only 25% of that since that issue and from 1st of November, it's up to 100%.

Next question is from the line of Ritesh Shah from Investec.

Sir, my first question is as usual that...

Sorry to interrupt you. Ritesh, I can't hear you. Can you speak a little louder?

Yes. Am I audible?

Little better, yes, go ahead.

Yes, yes, yes. Sir, what we hear is the export numbers from Morbi is INR 1,000 crores, INR 100 crores per month. Sir, is it possible if you could give a broad split over here, what is it like GVT, ceramics, PVT, soluble salt just to understand, if at all, there is fluctuation in export numbers, which particular segment could be hurt locally when it comes to pricing? That's the first question.

So you're right, the export has been approximately about INR 1,300 crores, INR 1,400 crores a month, if you look at May, June, July, August, September. And the split is remaining the same. GVT is the largest chunk of the market, followed by ceramics. PVT sales is extremely negligible. PVT only goes to certain nations, which don't produce PVT, which was the case even earlier, which is the case even going forward. GVT is the largest chunk of the market. So I would not have exact data. I think Morbi will be able to give you more -- better data. But if I can give you a flavor, if 100 to 120 square meters were sold in export, I would reckon approximately 60 square meters were sold in GVT and about 30 square meters were sold in ceramics volumes sold and about 10 square meters were sold in PVT. That's the kind of split, plus/minus 5%.

That's quite useful. Sir, my second question is, how is the inventory in the channel, right? Inventory days are reduced for us. I think we have done a phenomenal job as compared to even the peer set. But how should we look at the inventory in the channel?

So channel had restocked to an extent, obviously, after Q1, but there is not a very substantial amount of channel inventory. And I have 2 reasons to back that up. One is that everybody is still fearing kind of a partial lockdown or district magistrate-wise area lockdown for a week, 10 days. So people are only buying as much as they can chew. The number two reason to back it up is our cash discount sale is up to 50%, up from 21%. So nobody in a cash sale, rather a cash discount sale, stocks extra inventory. Only when you give them extra credit, they have the practice of selling -- stacking more inventory. So to that extent, also, we believe that our sales channels are not choked at all. And the proof of the pudding here is that we have -- earlier, we used to have, and as you must have heard me on the call, again, I don't want to sound extremely optimistic or extremely overconfident. But another barrier which we have been able to cross is that our month end sales have drastically reduced. So month end pressure has drastically reduced. Week 1, week 2, week 3, week 4 is much better than it used to be earlier. That, again, is a very good point to see that the channels are not choked, and they are buying regularly but smaller amounts, which is excellent because we are able to churn their cash flow much better.

That's quite useful and encouraging. And sir, last question. Do you see a scenario, so 6 months down the line, wherein there could be some supply issues, specifically on Sanitaryware? And if at all some color on faucetware as well? I'm saying more from an investor perspective.

I can't talk of the industry. But as far as we are concerned, I don't think we will have any supply constraint as far as Sanitaryware is concerned for the next 18 months, or for that matter of fittings. We have enough capacity.

Next question is from the line of Sneha Talreja from Edelweiss Financial Service.

Congratulations on very good set of numbers. Sir, in your comments, you've mentioned that, I mean, dealers are even preferring you because of 2 reasons. One is the credit period has become same now from Morbi players or you. And second, you said the pricing has also become similar. So of course, credit period is something that we understand. Can you explain about the pricing gap reduction? Has Morbi taken some kind of a price increase, too?

No, no. I didn't say there's been a pricing gap reduction. What I've mentioned is that whenever they went to Morbi, they looked at a better price. They did not get a better price. In fact, they got the same price as earlier. And why that happened is because Morbi is also under pressure. And initially, in the first 4, 5 months, there was no -- they were not running at 100%, so economies of scale were not there. Therefore, they were not giving them a better pricing. So when they didn't get a better price, they didn't get a better credit and also had question mark on availability and deliverability. We moved the orders to the branded players. So there's been no gap reduction in terms of price between Morbi and the branded players.

So the gap remains there, but availability, of course, is one thing where branded players have worked better?

Yes. Correct.

Right. Sir, my second question was related to balance sheet. We have seen phenomenal improvement there. Can you just let us know where the investments have increased? I've seen a substantial increase in your investment number in the current investment. So which are these investments?

I will ask Sunit to answer the question.

So Sneha, that's an investment which he was referring to that was surplus funds, which risen our working capital efficiency. So INR 79 crores was the fund which we put in surplus over this last 2 months. And as on 30th September, the number was INR 79 crores. Out of that INR 60 crore was in passed in the liquid fund and that is appearing in current investments and the balance in FDR, which is under cash and cash equivalent.

[Operator Instructions] Next question is from the line of Achal Lohade from JM Financial Limited.

Congratulations for the great numbers. My first question is with respect to the fuel cost, can you help us with the gas price for us for your North and the South plants?

Yes. So our North plant currently is at approximately INR 26 as we speak. In September, it was, of course, INR 25. It's now INR 26 a standard cubic meter. And the Kadi plant is INR 28 a standard cubic meter. It keeps fluctuating INR 0.40, INR 0.50 plus or minus every month. And the South plant it is at approximately INR 22 a standard cubic meter, which has gone up recently to about INR 24 a standard cubic meter.

And the INR 22, you're talking about the quarter or the September month, sir?

Quarter.

Okay. My second question is with respect to the employee cost. If you could help us understand, if I see even for the second quarter, our employee cost is still down 15%, 16% Y-o-Y, so how do we look at this employee cost in terms of going forward?

So employee cost, whatever we have reduced for the entire year, most of it will be retained. And next year, of course, will be a completely new year. But currently, the employee cost what has reduced will be mostly retained.

So you mean, basically, if I look at the -- for second quarter, it is about INR 36 crores. Do you think broadly, it will be similar? It will go back to that INR 40 crores to INR 43 crores run rate we earlier had. Is that fair?

That's true.

Okay. And how about subsidiaries for the JVs, because I see their employee cost has actually increased to INR 16 crores compared to first quarter INR 8 crores. So how do we look at that?

So Achal, actually, it's nothing but manufacturing wages. So obviously, once the plants ramped up and the production tonne will increase, obviously, the wage cost will increase. So it's by and large that waves in and nothing else because JV plants are actually a manufacturing facility. And where, I would say, 80%, 90% part of it is actually wage worker only. So it's in tandem to the production utilization and nothing else.

Understood. With respect to capacity utilization, as you said, you're already at 100%. So how do we look at -- if I have to look at it from a 3-year perspective, are we looking at new capacity? If yes, in what form, what kind of CapEx one should look at?

Too early to say. I would not want to sound overoptimistic. I think this particular question, it will be better if we address another good quarter if it goes smoothly, we should address this question maybe in February.

Understood. Sir, and just to understand from -- what would be the industry -- I know it's hard to say, but still, if you could give your opinion in terms of what has been the decline in the first half for the industry at the industry aggregate?

I wouldn't know Morbi, but otherwise, the top 2, 3 players have declined by 55% to 60% in the first quarter. And in the second quarter, 2 of us industry leaders, #1 and #2 in the country, we've done flat and slightly extra growth. The rest, we don't know yet. So I wouldn't know.

Right. Okay. Okay. But I mean I'm trying to figure out in terms of the industry growth, how do we look at from next couple of years perspective given we're looking at, on one hand, good inventory absorption or the sale of real estate properties, but on the other hand, we also see a lower number of launches? So how do we look at as...

To answer this question, I think answer is more -- a little more longer-term view. But in these 5 to 6 years, this industry will at least double.

Okay. And this is led by the residential, commercial, urban, rural...

We're a growth economy here. I mean so from that point of view, it's going to be everything. It's very hard to pinpoint what will come from Tier 2, 3, 4, what will come from commercial, what will come from real estate, residential. It depends if the government maintains the 2% stamp duty like they have done in Maharashtra and get some sense of collecting excise duty and finishing inventory and net, we would still earn more than what we're sitting on without any sales. So I don't know all of that, but that is -- a lot of government intervention is also required because currently, they have done nothing for the real estate sector.

Next question is from Siddharth Rajpurohit from JHP Securities.

Sir, can you give me our region-wise breakup? And also which region would have been relatively growing better?

So North has definitely performed better and North constitutes about 42%, 43% of our revenue, followed by South, which is about 30-something percent. South clearly has been under pressure because a larger part of the South is metros and mini metros and they're still being under the fear of lockdown. Example Trivandrum, Cochin, Chennai, Bangalore, et cetera, and even Hyderabad; they've been epicenter. And then it's followed by East and then the West. West, you all know, you were there in Bombay. Bombay, Pune have been the most severely affected of the lockdown.

Sir, what is institutional sales as a percentage of rural sales?

A large part of our sales has become retail. I don't have the exact figure, but I would reference north of 75% is retail, the balance is governments and corporates and hardly anything is now private builders. Whatever we are doing, whatever old builders we've been dealing with, all of them have been converted to making sure that we are -- our payments are secured and only then we are delivering, which means our share of the private builders have drastically reduced. And rightly so, because they don't even have the labor. In August, they didn't have the labor to do anything, any business. We'll see how this progresses in the Tier 1 towns.

Next question is from Tejas Mehta from Old Bridge Capital Management.

So number one question is, to what extent do you think this balance sheet improvement, especially the loan capital item could be durable? As into what extent do you -- would you be able to save these gains on the one company side over a 2- to 3-year period? I know it's a very short time within which you are being able to make this improvement, but how much do you think will you be able to retain?

So like I said, the debtor days are not going to become worse, it's only going to get better. As far as inventories are concerned, you will see inventory is fluctuating in the 5, 6 day range, plus or minus, depending on the month beginning and the month end and quarter beginning and the quarter end. On the debtor also on the absolute terms, absolute figure, obviously, when sales goes up, this absolute figure will go up a little bit. But in number of days, it's only going to keep coming down. So these are the 2 major items where we have our working capital.

So would you -- would it be fair to say that as your volumes start trending in the 5% to 10% growth region over the next few quarters, so the working capital will remain steady? Or would there be greater than increase in the working capital from where it is finished?

No, so on debtor days, number of days, it will only reduce. Inventory days, it will go up 4% to 5%.

Okay. Okay. Got it. Sir, the next question, which is I would like to get answered is, what would you do from this point onwards to increase your competitive advantage over Morbi players, so that even if they make a comeback sometime later, your balance sheet and your sales would still largely remain intact from where you are today?

Morbi's biggest competitiveness was their tax evasion. So our competitiveness is on increasing our footprint, and I think we will be able to keep increasing our footprint in the Tier 2, 3, 4, 5 towns. And that will always be the winner and always has [indiscernible].

Okay. So like you mentioned you have about 2,200 dealers today, right, across the country?

Yes, approximately.

Where would you like this number to be in the next couple of years?

So see, every year, in the last 2, 3 years, where we have -- we were with suffering issues with receivables, what was happening is that we were making about 250 to 300 new dealers in the past and we were losing about 125 to 150 dealers. So the net addition was always 125 to 150. This year, we are losing a lesser number of dealers, plus we will add about 200 new dealers within the year. And this is, mind you, a pandemic year where people are still not traveling like they used to earlier. Dealers are also wanting to -- especially if it's a new dealer, a new party, you would rather not have too many people visit a store currently. So from that point of view, if we can make 200 net dealers this year, I think that will be a fairly good number. And this will only increase next year. So you can safely say that from the last 2 years, we will have a net delta addition. A delta on the addition of 75 to 100 dealers, which in other times we used to lose those dealers because of payment terms, et cetera, et cetera.

And you also mentioned earlier in the call that you were billing only 400 dealers and now you're billing about 1,500-odd dealers, while your volume broadly remains flat. So you're basically doing less business per dealer and maybe that's because you got to do with the payment terms which you have brought in more stricter terms on the payment side. So you're trying to spread out your business across dealers. But at the same point of time, making sure that you're recovering faster. That seems to be the strategy. Would you like to see...

I want to say that the top 10 dealers are still doing great business. They have also grown and degrown in Q1 and Q2 as per industry standard. Q1 obviously was a washout. So the top 10 dealers -- top 15 dealers haven't deterred from their sales. But the other dealers, which have opened up, you can say that if they had not opened up, I don't think we would have had a 3% volume growth in this pandemic sales. We probably would have had a 15% degrowth. So if I stress the whole scenario, we're talking very positive currently because it's happened. But the other side of looking at it is that big dealers would have continued to perform the way it is because they're far more invested with Somany, but the lack of more number of dealers, which have started billing, it's very heartening because: a, their cash flows are becoming better, they're billing regularly with me, they're engaged with me regularly, unlike earlier where the [Foreign Language] dealers would buy once and then come back after -- come back to me, maybe 3 to 4 months later. The fact that he's buying on a daily basis, on a monthly basis or on a 45-day basis, it's very heartening to note. So I think the way to answer this question is, with a little caution, that if we hadn't done this, we would not have done our growth or be flat, for example.

[Operator Instructions] Next participant is Ashish Jain from Macquarie Group. [Operator Instructions] With no response, we move to the next participant. Next question is from [ Shanti Patel from Shanti Patel Investments ].

My question is, in the next few years, whatever cash is generated can either can go for expansion or can go for reduction in the debt. So what -- and our return on capital and return on capital and -- return on equity and return on capital employed will be same as we have seen in the previous year? And this extra cash, which will be generated, how are you going to use it?

So on one hand, I'm saying that the industry will double in the next 5 to 6 years. And at the current balance sheet level and at the current return on capital level, my first priority -- and considering that we don't have any substantial debt, with 0.1 on debt to equity, or 0.3 on consol level, so you can literally say that there's hardly any debt, we're virtually debt-free. So my first option would be to obviously look at expanding capacity with the self-generated funds and only next would be to further bring down the debt, any which way in the next couple of years will be virtually 0. So that, I hope, answers the question. So in our industry, we still have decent margins and ROIs to -- or ROCs to keep investing to make sure that we don't run out of liquidity.

Sorry, the question of consistency about the return on capital employed and return on equity will continue or it will increase?

I will have a focus on balance sheet. If you have a focus on balance sheet, if sales continue to be even in the single digits, very fairly speaking, obviously, all those metrics will keep improving.

Next question is from the line of Tejas Mehtha from Old Bridge Capital.

Sir, just to continue from my previous questions. What's the percentage of sales from the top 10 dealers?

Sorry?

What's the percentage volume sales from the top 10 dealers?

I wouldn't know that. I'll have to get back to you. But what I can tell you is about 60% of our sales come from our platinum and gold dealers. They are exclusive dealers, which are approximately 350.

Okay. Got it. And sir, one last question, which is, again, a slightly medium- to long-term question. And that is on -- would you focus more on building your branding and your distribution network from this point onward? Would you like to invest further or do further CapEx on the manufacturing side? If you could just help me understand that bit in some more detail?

Our single largest spend every year will remain to be branding. That goes without saying, there are only 2 properties which the company holds very clear and that is why we keep getting our premium, and that is why we've been able to do what we're able to do even in these tough times is the branding -- is the brand and the distribution. So we refuse to let -- get defocused from our branding activity and on our distribution activity. And if we keep generating the kind of cash we are, branding is an animal, unless you sustain the branding for the next 5, 10, 15 years, as we've seen in the case of the paint companies, this does not give you dividends. So branding is always a very long-term play. And the key over here is sustenance of your activities and that can only be maintained if your balance sheet is strong. So I think to answer your question, my focus number one will be remaining on our branding and on our distribution. Fortunately, we're in an industry which is always running at undercapacity. Therefore, we will have material available from Morbi at any given time. And every now and then, every 18 to 24 months, we will also keep doing our own CapEx or balancing equipment to increase productivity, quality, the value addition and quantity. So all of that, we will keep doing any which way like we've been doing in the past to keep us where the material shortage would not be felt more than a quarter, if at all.

Any approximate budget that you set aside for branding and distribution annually?

Yes, absolutely. So even this year, you will see our branding will be in the 3%, 3.5% of revenue range. Because this is a very moving target and a very volatile year, every month we are keeping on -- watching on when we're spending. So you will see a lot more of us on TV soon after the IPL. So do drop in a line if you see us and if you like it. So yes, very clearly, our branding spends are going to remain in the 3%, 3.5% of revenue range, whatever the revenue might be. Obviously, this year is going to be a lower revenue than last year. We don't know how much, but our branding will be probably 3% of that number.

Next question is from the line of Karan Bhatelia.

Sir, any update on the 2 write-offs, one on the Mentor Financial Services and other the employee fraud?

Yes. On the employee fraud, we have -- now we've put them to the wall. There is -- the costs are slow as you can well imagine in the pandemic, but some positive change should happen probably within the year. And on the Mentor Financial, we're still after him. There is no further progress on that. But the court cases are on and all of that is still happening. So on the Mentor, nothing. But on the employee fraud, we do have some good news, which, until it really comes through, I don't want to talk about it. But definitely, a lot -- a massive amount of progress has happened there. And we do believe that in Mentor also next year, probably there will be more progress.

Correct. And sir, the exposure to the NCDs, so how is the progress there?

NCDs, what do you mean?

NCDs on shares, has that number come up, or no?

Those 3 bonds are the way it is. Yes, those 3 bonds remain to be invested. There is no market for the bonds currently. But they are servicing their interest on their system. All 3 of them are servicing their interest bang on time.

So whatever exposure was there [Audio Gap] you will report that holds as of now?

Correct.

Okay. And sir, any CapEx number for maybe this year or maybe 2 years down the line?

Two years is too far out. This year will be the CapEx what we have mentioned earlier.

Sorry, sorry. How much?

This year, the CapEx will be what we mentioned earlier in the last call.

Thank you very much. As there are no further questions, I will now hand the conference over to Mr. Karan Bhatelia for closing remarks.

As far as any closing comments you would like to make, Abhishek, sir?

Yes. Thank you so much for joining us. We hope for a better quarter 3. And looking forward to, again, addressing everybody soon after the quarter 3 results. Thank you very much.

Thank you, ladies and gentlemen. With this, we end the conference call.

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