Somany Ceramics Limited (531548) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Somany Ceramics Limited Q4 and FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agrawal, Head, Institutional Equities at SKP Securities Limited. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. On behalf of all of us at SKP Securities, it is my pleasure and privilege to welcome you to this financial results conference of Somany Ceramics Limited. We have with us Mr. Abhishek Somany, Managing Director; along with Mr. Mukhopadhyay, CFO; Mr. Sunit Kumar, AGM, Finance. We will have the opening remarks from Mr. Somany, followed by a Q&A session. Thank you, and over to you, Mr. Somany, for the opening remarks.

Thank you so much. Welcome, everybody, to the earnings call for our quarter 4 and also year ending of Somany Ceramics. It's been an unprecedented year, as we all know. We almost lost 4 months of sale at the beginning of the year between April and June -- or July. We only resumed operation in July. Since then, the 100% capacity utilization of tile was attained somewhere in October. It was not a market issue. It was more of a labor-oriented issue. And the sanitaryware plant only started a month after that for 100% capacity utilization. So in effect, we can say that from November onwards -- October, November onwards, the plants run -- all our plants ran at 100% capacity. As a result of that, obviously, the growth was also muted, although at the beginning of the pandemic, we were not sure whether we will get this much or not. But very happy with the kind of bounce back which the economy had, and especially for our sector, which encouraged us to push the pedal and we then landed up with a 3% growth overall in terms of volume in -- and value in terms of -- from last year. The quarter also did well. Quarter 3 had become already better. Quarter 4 was a full quarter, which we got, except the last few days of March, which had some effects of the pandemic again coming in certain areas, especially in the north. But nevertheless, we did a handsome quarter. Obviously, the percentages are all skewed because last year was a very low base, a, especially for Somany Ceramics because we -- until upon last year, we had a large queue on a month end sales basis. That is something which we've corrected this year. Extremely happy to announce that our queue as on week 1, 2, 3, 4 are pretty much equal, and there are no month end queues anymore. But as a result of that, what I'm saying is that last year when we locked down on the 10th of March, we had a lot of sales pickup. So from that point of view, we've done a good job in our Q4, where we grew by approximately 60%. Every other number, it would not be fair to compare any which ways, whether it's EBITDA, PBT or PAT compared to last year quarter. But what we can say is that we've been nudging up our EBITDA from Q2 onwards. And I do believe that this is something which is sustainable. I will explain later as to why there was a spike in quarter 4 versus quarter 3. I will let my colleague, Sunit, explain to you exactly where it is. But I do believe that the quarter 3 numbers which we showed are sustainable, and we will show a growth going forward on that. As you know, last quarter, I had announced an expansion plan. You would be happy to know that all the machinery has been ordered, and we are on track. We should be able to make up lost ground of last month in terms of the civil work, and we should be up and ready by Q4 of this year with all the 3 expansions, one in the South, one in the West and one in the North. The North and the South are brownfield, and the West is kind of a greenfield because it's a new land which we have taken. But the last year, if I look at it from my piece, I think I'm very happy with the way the tiles division has worked. It has grown very well, and we've been tracking value-added sales growth, and we are pushing the needle on the value-added sales. And we continue to do so with the expansion coming up that would, again, further get enhanced. But I was not very happy with the way we worked in the sanitaryware. We had a little bit of -- I have been saying on all the calls that we had payment issues in it that is more than the tiles. But again, happy to announce that where -- on the payment also now, we are at even keel with tiles. We're absolutely fine, ready to fire all guns for this year. So last year, we had made sure that we were not supplying anything which people hadn't paid up. Now that has been previously corrected. And we're absolutely at level playing field with tiles. So this year, again, we are very excited about the sanitaryware, but for reasons known to us and purposely done, we were not pushing too much on sanitaryware. And as you know, Somany is known more for tiles and not so much for sanitaryware. So it was a little more of a task to get the payment out there. So now that, that work has been done and behind us, we are completely ready for the next blast as far as our sanitaryware and bath fitting division. I'm extremely bullish. Manufacturing is in place, and now we need to push the pedal on the distribution and do sales. A few more strategic changes which have happened in the last one year due to the pandemic. Of course, there's been -- across the board, we've had cost-cutting measures. Some of it will be retained. Some of it will not be retained. As in how we grow, for example, R&D -- S&D spend, et cetera, will increase this year. But a lot of the cost savings will be retained. On the other hand, we have moved our model even more towards the retail segment. Today, we are 80%, 85% -- 80-plus percent on retail, and we have reduced our exposure to the private builder. So it is retail, number one, which is 80-plus percent. And about 12%, 13% is government. A couple of percent is -- 1.5% or 2% is corporate. And only the balance is the private builder. So that's a very welcome change. The second welcome change is that our cash discount sales, the CD sale as what we call, used to be approximately 20% and hovering on the 20% mark of our total revenue for sort of last 5, 7 years. That has moved up to 50%. So 50% of our revenue today is on CD, which means my people, my sales guys, are that much freer to strategize, to go to newer markets and not keep begging for payment. So that's another big positive. The third big positive is our month-end scheme. There is no longer a month-end queue, it's month -- week 1, 2 3, 4 is equally divided. Obviously, week 1 is slightly smaller -- lesser than week 4, but a very average and very happy to announce that that's a very welcome change. The other thing what we've done is further improved our distribution network in the Tier 3, 4, 5 towns. Today, 75% of our revenue comes from Tier 3, 4, 5 towns. And the balance, major amount comes from Tier 2 towns. So that is, again, something which is extremely happy that we've gone more, not really rural, but we've gone to the smaller urban areas. So these were the highlights for last year. The other highlights on the finance front was, we were able to collect money and manage our cash flows much better, reduce stock, reduce payment cycles, et cetera. And as a result, we had a INR 200 crore surplus, that is after completely paying down the working capital. So we did not have any working capital for almost 6 months of the year. And the debt, again, has gone down further, both on the consol level and on the stand-alone level. The small amount of debt, which you see on the stand-alone level, we've kept it purposely because there are relations with the bankers. And that comes at a very, very low interest cost. So it is there, and it didn't make any sense to surrender that debt. But whatever debt made sense to surrender, we did that. There was a tailwind which we got on 2 fronts last year, which we see is not going to be sustained this year, at least for the first 6 months, is on the gas pricing. The gas pricing was muted last year, and we did get a tailwind there. Furthermore, we had the coal gasification ban in Morbi, which also helped, where we were on level playing field. This year, the gas has gone up. So just to give you a flavor, we were running on approximately INR 31 to INR 34 -- INR 31 -- sorry, a INR 25 overall gas pricing. Today, the overall gas pricing is above INR 30. So an average gas pricing we're getting today is approximately INR 30, INR 31 and going up. So this is something which is not too much of a worry because they're at level playing field, and Morbi is also looking at price increases soon as and how the gas price increases. So at least that is something which is a very heartening effect. But that tailwind is not going to remain for us going forward for this year, at least for the first 6 months. I do believe the current gas price is not sustainable, and it will go down. It's probably speculative to the supply going down in Iran, et cetera. The other big highlight was that our balance sheet, we've tried to clean as much as possible. We have given a guidance when we had an issue in the company 2 years ago that we will not be running a treasury. And further to that, we have unwound pretty much all the positions. And we had a bloated ICD, which we had explained, but there's only so much you can do with accumulation. That also has been completely unwound, and we do not have a single ICD now, which had bloated 1.5 year -- 2 years ago, sorry. It's completely back in the books, every little paisa of it, inclusive of the interest. So there's nothing other than the very old ICD, especially for the JVs, et cetera, which is more of equity. Otherwise, the bloated ICD, which we had, is completely back in the books, nothing to worry about, which will be part of the balance sheet. And if you would have noticed, we have surrendered -- we have made a provision for the SREI bonds. Now that particular SREI bond is being serviced. Let me remove all the speculation on that. It's been completely serviced. We have had no issue. But we took this decision because we are, again, on an upward field. We did not want any surprises at a later date, if at all. We don't hope, and we don't think that there would be any downward surprise on this account. But just to be extra cautious and also in line with we saying that we will not be running any treasury, we have made a provision on this account. We do believe that memories are short, and we didn't want any surprise at a later date on this account. Therefore, we made a provision. But once again, let me reiterate that the entire bond is being serviced, bang on time, and we have no worries on that account because there was some amount of speculation in the same category. It's just an extra cautious approach from our end, which will be completely behind us in our next phase of growth, which we are extremely excited about, especially with the expansion which we are taking up, which is one of the largest expansions we've taken so far. So these are the highlights. There are some other highlights I would like to highlight from a sales perspective, marketing perspective, other than increasing our footprint and increasing our dealers. I think Sunit will give you the figure as to how many dealers we've added, net dealer addition. But what is really exciting is that with the payment coming in, generally we used to lose an x amount of dealers. This year, we've lost virtually no dealer. So everything has been a net addition in the Tier 3, 4, 5 towns. Other than that, we did not shy away from any kind of advertising. We did the same advertising which we would have done, 3%, 3.5% of revenue we've done. If any of you traveled, you would see us very vibrantly in all the airports, the Bangalore, Bombay, Delhi, Calcutta airports. Extremely vibrant there, we did participate in Bigg Boss. We were anchor sponsors for 2 months on the Bigg Boss, et cetera, et cetera. So we were very, very visible across media from quarter -- from the end of quarter 2 last year right up to quarter 4. We did see the pandemic coming back somewhere in the mid-February. There were some signs of it, so we stepped back a little bit on the last quarter advertising. And Thank God, we did that. It was, I think, an absolute right call. So going forward, I think I would give a guidance that we're looking at an aggressive growth for this year. We were -- obviously, this is with a pinch of salt of the first quarter, but we still want to keep the same figures on. And we want to grow at high teens, even though we would have lost 1.5 months this year. And on the EBITDA front, we are looking at a consol EBITDA of the current level and inching towards the -- between the 12% and 13% EBITDA, which we're very confident of achieving even this year, having lost the year -- 1.5 months. Obviously, that would be true for this quarter 1. Quarter 1 is kind of -- half of the quarter 1 is a washout, but I'm talking for the full year. This does come with a caveat that -- I hope there are no another wave of pandemic, et cetera. So any unforeseen conditions, obviously, that we will talk about later. But otherwise, steady state, we are looking at that level. And I think the next year is something which will be very exciting when all our 3 plants will start and start firing and giving us that extra volume. So before I open the floor, I would very quickly let Sunit give you a little bit on the quarter 4. But just before that, I'm sure there will be questions on this quarter. So where we are is that in April, we achieved approximately 70 -- sorry, 85% of our April envisaged figure. And as for May, we were at about -- between 30% and 32%, 33% of our envisaged May. And we are hoping that June would be approximately 70% of the envisaged June. So overall, we should be able to close the quarter anywhere between 60% and 70% of this envisaged quarter target. And of course, we will try and make it up over the next quarter 2, quarter 3, quarter 4. Sunit, I would like you to step in here to give a brief on the quarter 1 -- sorry, quarter 4 versus quarter 3 aberration so that, that is put behind us. Thank you so much.

Thank you, sir, and good afternoon, everyone. So this is just basically clarity with respect to the margin improvement with respect to quarter 3 versus quarter 4. So we would like to clarify there is not that kind of dramatic improvement as such, which is appearing in the numbers by 3% or even more than 3%. It's more because of certain accounting reporting with respect to expense items particularly. Like, in Q3, we have additional loading with respect to employee focus, which we rolled back, we decided earlier in the year. And then Q3, we had a loading of 2 quarters additional employee costs that was -- suppressed the Q3 profitability to that extent, we would say. And if you adjust that, it's -- you will find it's very much consistent and in line. So Q3, Q4 is not a much strain and deviation in the profitability. At the same time, in Q4, our ad spend is slightly lower, I will say, very marginally lower, as anticipated. So we contained our ad spend somewhere around INR 32 crores, INR 33 crores approximately. And it would have been INR 3 crores, INR 4 crores additional also if -- considering the situation and all. So the total full year ad spend and value spend came to approximately INR 35 crore. And whereas a slightly larger part of it was taken under the Q3 commitment because we already given the contract and replacement of orders. So if you adjust -- if we adjust these 2 factors, it's very much in line, and there is no wide string, I would say, whereas there are many people who are reading it as there is a 300 basis point margin expansion quarter-on-quarter, which is not the reality. And we are consistent, 12% to 13% type of values on a quarterly basis. Considering that this year we have taken certain cost levers and certain costs are by default lower, like brand expense is not that much, like INR 50 crore plus, so we have -- that is the advantage, which is appearing in the numbers, and that's why it is appearing close to 14% mark, whereas we maintain around 12% -- 12% to 13% type of mark. At the same time, travel cost is also lower to that extent this year, which is with respect to the guidance on the sustainability of lower costs going forward. And coming back to this distribution piece, we have added close to 400 net dealer addition during this year. And when we say net dealer addition, it's net of the dilution, which happened during the year.

I would like to now open the floor for Q&A.

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

Congratulations on the good set of numbers. A couple of questions. Sir, first, I wanted to understand the trend on exports. How should one look at it? And secondly, a related question. Is container issues or freight or logistics a problem over here? Or is it something which is behind us? That's the first question. The second question is, Morbi, there was a lot of capacity addition expectation which was there. Is it something which has been deferred? If possible to quantify this, that would be very useful. And third is, for us and overall for the industry as well, the price increases for ceramic, GVT, PVT versus the cost inflation, what we are witnessing in different regions. I think these are 3 broader questions.

So first of all, export, I'm not the right person to answer that question because we hardly export. Export is only consisting of about 3% to 4% of our revenue. This year was 5% because of another reason, but it will be in that 4% to 5% range. Therefore, we don't feel that kind of pressure on exports. But yes, there has been issues with containers. But what I can say on the macro front is that Morbi has definitely moved from 20%, 25% of their revenue or their volume going towards the fourth -- last year, it touched a high of close to 40%. And I think this will -- this is only inching up towards 50% of Morbi's volume and revenue, which will keep getting exported. And the reasons are the same. People have [indiscernible] China and also the net importing nations like America, Indonesia, Mexico, et cetera, still wanting tile from India because there's a ban in China. So I'm sure they are facing issues with containers because the entire world, there has been a logjam as far as containers are concerned, especially the to and fro from India and China. So to that extent, I think this question would be better answered by somebody, some large exporter from Morbi than us. Ours is so miniscule that somehow or the other, we manage. Anyway, we are exporting at a premium. So therefore, that just comes. As far as the gas price is concerned and the price increase is concerned, yes, we're looking towards Morbi. I think GSPC would be increasing the prices this fortnight or maybe next fortnight, which is -- there would be a price increase because there's been a substantial jump in the price of both the spot LNG and also the oil. So from that point of view, there is going to be a jump, and we would then increase the pricing accordingly. But I do believe that there should be -- if this happens, then it should warrant between a 2%, 3% price increase. But again, I would be cautious in saying exactly how much that would be. And it would be led currently by what the Morbi guys do. But at least they're all at level playing field, and nobody else is firing on any other fuel, but gas. So we are not overly worried about that. There could be a 15-day plus or minus delay. Now as far as the capacity expansion is concerned in Morbi, most of the capacity is up and ready. Obviously, there's been last-minute delays because technicians probably could not come in, labor had gone off, et cetera. But I think all of that will start back. It was supposed to start by May all the way up to October. I think there is -- that's delayed by 2 months, so this will all start from July all the way up to December. But all the capacities are going to come in. And as we had envisaged, there is going to be an export focus as far as all of those capacities are concerned. And happy to announce that the Indian real estate industry is also now showing some green shoots across the country. So hopefully, this amount of material which is being added, specifically in the GVT, should get consumed between the export and the upside in the Indian market.

That's very useful. Sir, just a follow-up on the cost inflation part. Typically, you do quantify and give a flavor on how the absolute prices are more on, say, Jan to March versus April, May, June for South versus West. If you can help quantify that, it will be quite useful. You already indicated a requirement of around 2% to 3% price increase. But just for our number understanding, that will be useful, if you can just help per SCM.

Very difficult to answer this question because on different tiles, there are different kinds of costs, different kinds of explanation will happen. So this has to be drilled down. We never increase prices across the board any which way. There are certain vanilla items, sometimes they warrant an increase. Certain times, only the high value items warrant an increase. So we do a working where in aggregate price increase across the board, North, South, East, West, we then look at it. And also, please be reminded that our North, South, West -- sorry, yes, North South, West pricing is very different in terms of gas. Because in South, we're only buying spot, that works in its own trajectory. In West, I'm getting the GSPC. Only God knows how they will make their pricing. So that works on a completely different trajectory. In the North, we are completely linked on the oil, the 3-month moving average of the crude oil. That is more predictable. We know basically plus/minus INR 0.50 as to how it's going to move. So in North, we are more in light as to what is going to happen. So it really depends. In the South, if we -- there could be a situation where the oil has gone up, but the spot has gone down, which means my South plant doesn't need a price increase. So very difficult to answer that question on one shot.

The next question is from the line of Dixit Doshi from Whitestone.

Just one question from my side. You mentioned that we are doing a CapEx of 3 plants, 2 brownfield and 1 greenfield. Can you quantify how much will be the capacity? And what kind of CapEx it will have?

We've already quantified it on our last call as to what the CapEx will be. It's INR 150 crores between the 3 plants, South, West and North. The South is a joint venture CapEx, which is going to cost us approximately INR 75 crores, but that's a joint venture CapEx. So only 50% is something that we're pulling in. In the West, it is approximately a INR 90 crore CapEx, which is funded completely by us. And in the North, it's a brownfield where we are shutting 1 plant and putting a larger plant in its place. So the civil work and all that is limited. That will cost approximately INR 40 crores. So that's the total outlook from Somany's side, approximately INR 160 crores to INR 170 crores. And all of that will be done internally.

And -- so current tile capacity is around 63 msm. So what kind -- so all these 3 CapEx, what kind of new capacity will come?

Yes. So the current tile capacity, approximately 9 million to 10 million, is an outsourced capacity and the 51 million, 52 million is between the JV and our side. The 51 million, 52 million goes up by approximately 12 million square meters. So that will become approximately 64 million. And then the balance will be the outsourced capacity, which will remain at the 8 million to 10 million square meter level. So overall, if I see the way we are going, we have some cushion on the outsourced capacity to take it up to 10 million or maybe more and bring it down to 8 million or maybe less. So I think, very safely speaking, considering that we need all 3 capacities because there are certain vanilla items we buy only from the outsourced capacity. So keeping all of those 3 requirements of our buyers, our capacity very safely will move from the 61 million, 62 million to about 71 million, 72 million to answer your question.

The next question from the line of Jigar Shah from ICICI Securities.

Congratulations, sir, for the good set of results. My question is on EBITDA margins. You guided for 12% to 13% for FY '22 despite higher gas costs and for 6 months of impact due to COVID. So going forward with increasing GVT mix and operating leverage, what -- do you expect the margins to go higher than 13%.

Yes. Definitely. So 12% to 13% is what we are saying this year because of 1.5 months lost and there is some kind of speculation even going further as to how quickly the market will open. And I do believe that the kind of response which we got last year with the opening of the economy, this year, I think the entire morale is very down of people. People have spent disproportionate amount of their wealth on getting beds in hospitals, et cetera, et cetera. So I do believe that the comeback will be slightly slower than what it is last year. So having said that, we have been cautious in saying 12% to 13%, but I think the magic will be when our 3 plants start next year. That is when you will see a very large delta being increased from the 13% onwards, moving on to a much higher number in the FY '22/'23.

Okay. Great. Sir, what would be your GVT mix currently?

Yes. I will just give it to you. Just give me a second. This year -- one second please. Yes, in FY '21, we were at 26% of GVT mix, up from 23%. And quarter 4 was pretty much the same. And ceramic was 39% for the year and PVT was 35%. So ceramic was down 1% from 40% to 39%. PVT was down 2% from 37% to 35%. And GVT was up 3% from 23% to 26% for FY '21.

The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund.

Congratulations to the entire Somany team for a wonderful execution. Abhishek, if you reflect back, and it's a great time to reflect, last 3, 4 years, we had our own share of challenges, some internal, some external. But somehow, looking at the last few quarters, it looks like we have emerged out stronger. The cash flows, I mean, it's the highest ever I have seen in Somany.

Pankaj, we had lost you after somehow. And could you please come back with...

So what I was saying was that we had our fair share of challenges in the last 3, 4 years. And somewhere over the last few quarters, it looks like we are emerging out of those issues and emerging stronger. And the cash flows are a clear reflection of that, that we have generated the highest ever cash flows probably in the history of the company, if I'm not wrong. And the last quarter margins were also the highest ever. You explained there are some aberrations to that. My question to you is that, as you look ahead over the next 3, 5 years and embark on this new CapEx journey, growth journey, what are the key things you won't compromise from what we are looking today? And what are the key things probably which could be one-off and which cannot be sustainable as you grow yourself? So a broader vision would be really helpful because we have seen margins all over the place, we have seen cash flows in the past all over the place. So just some vision on the way you want to build the company over the next 3 to 5 years would be really helpful.

Yes. So I think there's been a lot of learning. Sometimes when it hits you, you learn a little more. There was nothing new in what happened and there was nothing old in what we wanted to know. But to give a 2-word answer as to what we will not compromise and what we thought was a one-off and may not be sustainable and you'll have to go around the curve on that one, I think that's what your question is. There's a couple of things which come absolutely top of mind in terms of not compromising on the growth, whatever the growth might be. I'm sure we may have another pandemic kind of a year for some other reason, going forward, 5 years, 7 years, 10 years down the line, we're here for the long term, we don't know that. But I think the couple of things which we will not compromise like we have never compromised on the fact that we never pledged a single share, we've never overleveraged ourselves beyond a point. So those are the things which were in our blood. And I think the other thing which has now completely been a very hard learning for us is, I don't think -- we're tile makers and sanitaryware and bath fitting makers and manufacturers, so -- and we do not have a large treasury any which ways, like some of the larger groups in India. So one learning is that we will not be running any treasury. Whatever money we have would be parked in FD, liquid funds, to use for expansion within the industry. I think we are lucky that we are a part of an industry, a part of a product line where there is enough and more growth, at least for the next 10 years before we recalibrate it to see what's next. So that is one big learning that you can be rest assured that we are not going to have any treasury. The second one is going to be a cash flow focus. So not going to let go off the receivable cycle. I think that is something which we already knew. It was a quarter mistake, which led us into this. But I think the company has only grown stronger. And more importantly, the discipline has actually made the brand come out even stronger, where the dealer also respects us that much more. Otherwise, you were getting recognized by any other player in Morbi because we were doing the same thing. So I think from that point of view, the fact that we are doing so much on advertising, S&D, et cetera, the dealer is also appreciating that this is how a top branded player behaves. So it's only been the positive. There was, of course, pain when you give somebody a lolly -- kid a lollypop, take it out, that is something which hurt. But that was a very small hurt. I think the dealers understood that. And today, they are also with us in this journey. So that's another thing which we will definitely not compromise on. In case we don't have growth on a quarter or 2 or maybe a year also, doesn't matter, but that on the cash flow, we're not going to compromise. Similarly, there will be a focus even more, but that's always work in progress on the cost front that keep looking at costs very, very, very stringently because that's the only thing. I do believe that, in our industry, it's such a commoditized product, very little we can do on innovation, some other lens. Certain industries can do innovation and come up with patents, et cetera. But in our product, it is such a commoditized industry, the 2 biggest levers for us to move forward and keep our cash flows healthy, a, is not lose focus on the cost-cutting, capacity -- and capacity utilization. And on the other hand, do not lose focus on the receivables. So these were the 2 things, I think, if we keep in mind, looking at the distribution increase, which we're doing, I think we should be in good shape. So next 5 years -- and to answer your question as to what was our tailwind which we got, I think there was a massive tailwind last year of gas being extremely low, coupled with Morbi being suddenly woken up to an export focus, they started exporting. There was a certain amount of dealers which were wanting to deal with a branded player in the first 6 months after the lockdown opened last year because we had the material in our stocks, Morbi did not have material in the stock. They were more concerned of their cash flow. Dealing with us, they were sure of the cash flow and making that sale rather than looking at Morbi. So those were certain things which were kind of a little bit of a wind, which we had, but I don't think that will convert into a headwind. But that is something which we need to keep our eyes and ears open on. But the other large vision, which I definitely want to share is, we do not plan to enter any other segment. We do believe that both bathware and tiles and sanitaryware, coupled with geysers and some allied products within the bathroom and kitchen, our dealership range, will propel us for doubling from where we are in terms of revenue even more, only then we will think of something if at all. So those are the larger thoughts which we have top of mind. If there is something which I have missed or something else you want to probe on, please do so. Thank you so much.

Quite reassuring. The only point which is missing in the entire thing is the ESG part. Only request is that if you can incorporate the ESG ASAP over a period of time, it will be really...

Pankaj ji, before our balance sheet comes out, you will have something on the ESG in the current balance sheet itself because that's, again, work in progress. It's a 2-year work in progress, so -- but we will have the first cut of the ESG in the current balance sheet itself.

[Operator Instructions] The next question is from the line of Achal Lohade from JM Financial.

My first question is, Sunit, if you could just clarify in terms of -- if I look at the current quarter's employee costs or the other expenses, how do we see? I understood the third quarter aberration, but how would we see the fourth quarter in terms of the decline in the cost item?

I would have Sunit take this question, please.

Yes. Sure. So Achal, I think the Q4 is a steady state quarter. So there will be neither any aberration either side, upward or downward. So it's more of a steady state quarter with the plant operating almost at some capacity. So definitely, this is something which I would say it is a normalized quarter for us and a right number to look into.

And what about the other expenses? That's also kind of normal one?

No. So that's definitely not a normal one. That we have clarified in the very beginning itself that a couple of expenses, particularly the brand spend and the travel, which is not a normalized one. And it should not be -- whatever numbers we have reported, it cannot be taken as a sustained number going forward because we cannot afford to have that much of a lower brand spend which we have. We generally used to have INR 50-plus crore every year put in brand spend, which this year we have put around INR 32 crore, INR 33 crore. So to that extent, the delta would come. How much would come in '22 and '23, that time we'll decide because it's subject to market environment and the value of the money which would be fulfilled at that point of time. So that addition we have...

If we backward calculate very safely that we will not be spending less than 3% of revenue on branding.

3% of revenue. Understand. Can you, Sunit, if you could quantify what was the A&D spend for 4Q '20 and 4Q '21, please?

I have annualized number right now in my mind. So for Q4, I'll have to see. But yes, for the annualized basis, this year, we spent around INR 32 crore, INR 33 crore against around INR 50 crore last year. So that's all the difference.

No, I would make a correction there. We spent 60 -- we spent approximately INR 40 crores compared to INR 60 crores of last year.

Okay. So you mean for FY '21, INR 40 crores versus INR 60 crores for FY '20?

More or less, yes, more or less.

Okay. Understood. And in terms of this Morbi capacity addition. Now is it possible to give some sense in terms of what is the incremental capacity which is going to come in effectively after all the expansions are done? What is the incremental capacity to the current capacity of Morbi? And you mentioned that, hopefully, that gets absorbed through the domestic as well as the pickup in the real estate. So I just wanted to understand the numbers, sir.

So 50 new plants are coming up. 50 new plants into, let us say, an average of 10,000 square meters per plant into 340 days. That's approximately 170 million square meters is what's being added, if I'm correct. And the current capacity of the industry is about 1,250 million -- or rather 1.2 billion square meters. So approximately 15% to 16% addition in capacity. That includes our expansion also.

And this 1,250 million is the total, you are meaning, right? How much would be Morbi within that?

Most of it is Morbi. I think 95% is Morbi. Other than us and a couple of -- somebody else, Morbi really is expanding in the year. All these expansions that have been announced even by industry leader will only come into play next year.

Understood, understood. And in terms of the -- you said 12% to 14% growth. Sorry, if you could just help us in terns of what kind of growth are we looking at from a volume perspective for FY '22?

So volume terms, we took on aggressive target and we're sticking with the target considering that we've lost 1.5 months already in this year, but we are looking at still high teens, mid-teens growth, volume perspective.

Right, right. And what is the underlying assumption here? The industry remains flat or industry grows? And what has been the change -- or rather industry level decline in FY '21? I mean I know it's...

The assumption is that the industry will not remain flat. The assumption is that the industry will grow. But a large amount of growth will come from exports. And large amount of growth for the organized sector will come from the domestic market growing and the organized sector capturing more of the domestic market. I mean people are definitely becoming brand conscious and the dealers also are finding it easier to deal with us. One must not forget that with the coal going out of the picture, that much of the revision of GST is also taking place to that much of a lesser extent. Therefore, the dealers are saying that Morbi guys who used to give me an extra 180 days of credit has gone out of the window, they used to give me an extra 20 -- 15%, 20% of tax evasion, that's gone out of the window because these guys now need money to pay for the gas with GSPC, et cetera. So all of that combined, they're not finding too much of a delta dealing with a branded segment versus a Morbi buy. So there is that many more people who've given more of that shelf space to the branded guys. I'm not saying that they have completely done away with the Morbi. That will never happen. That's a separate segment. But yes, more of the -- a little more of the shelf space has gone towards the branded segment, for sure.

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

Congratulations on very good set of numbers. Just a couple of questions from my end. Firstly, I think an extension to the previous question. You said that Morbi has definitely the tax evasion has gone away. And they have stopped giving extra credit days. Is there any pricing gap which must have also reduced with all this? And can you quantify it, like what used to be the pricing gap between you and the other local players versus now what is it?

Yes, a couple of percent has been reduced on the pricing front because of coal. And another 1%, 1.5%, I reckon, also would have reduced in the dealer mind in terms of the extra credit he used to get. So that's not a direct reflection of the pricing. But it's a direct reflection of the interest cost he would save or get that extra free credit from the Morbi guys. So to that extent, yes, there has been a little bit of a convergence, but nothing much. But at least today, there will not -- this gap, whatever the gap is currently and we are functioning at a playing field, whatever that playing field might be, this particular gap is not going to now widen because GST is changing, neither is the coal coming back. So in fact, this could only narrow as and when the authorities become stricter and stricter with either the GST, et cetera. And also we are hoping that the Honorable Prime Minister and the GST Council takes our suggestion to lower the GST from 18% to 12% for tiles in line with the Housing for All theme which India has. We have already represented to them that over 2.5 years, this will become revenue-neutral. And whatever the revenue is lost also will be extremely low in terms of -- in the next 2.5 years in case they had to consider our suggestion of lowering the GST from 18% to 12%.

Sure. That was helpful. Sir, also, I mean, you've answered a lot on your growth prospects in the previous question. But my question is, are all the working capital control now done with since you've already moved a lot of your business on cash and carry? And maybe in the past, as you rightly said, that you had to avoid certain business. You know get things back on track and open cash basis. Now can we assume it will be steady comparison that we can do with other players because now all those corrections are done with and now we are even on level playing field on those respects?

Yes, absolutely. Of course, the working capital, you must appreciate that whoever it may be, whether industry leader or ourselves, there has been a pressure in this quarter. And because we have the INR 200 crores in the bank, we had not -- it gives me no reason to panic. Obviously, some of that has been liquidated to fund the 1.5 months of plant closures, complete plant closure and hardly any sale, which is the month of May. But I think these coffers will again start coming back from next month onwards. So we have nothing to worry. And on the working capital, I do believe that the working capital would increase a little bit next year because the 3 plants would start pretty much in 20, 25 days of each other. So there would be a little bit of pressure because there are preoperative issues when the plant starts up, it doesn't start up with the kind of quality, et cetera. So there's an extra amount of stock would get built up in the first couple of months. So all those pressures will be there. So we do believe that the working capital will go up a little bit next year, but that's something which is part of the game.

Right. And also with respect to that with new plants coming in, I believe there will be -- like today you are enjoying excellent operating leverage on your facilities. With new plants coming in, there will be some amount of impact also because of that. So the margin guidance that you gave, which is 12% to 14% apart from the impact of Q1, which you're already building in, are all those things built in? Or that will be largely reflective in FY '23?

No. So the 12% to 13% guidance, with the caveat that nothing crazy happens on the dollar or on the oil front and there's no price increase, of course, that is not a question which would happen, but I think the only thing which can be a spoil sport is a wave 3 to this or wave 4, which none of us know. Other than that 12% to 13% guidance is only for this year. The delta what we are talking with the 3 plants starting, that is not being factored in. That is above 13%, which would be for next year. And we do believe that these 3 plants which are coming in are 3 different locations, and they're not cannibalizing each others markets. So therefore, the new plant margin has not been factored into the 12% to 13%, and that is what we were trying to clarify.

Right. That's what I was just trying to see. Got that, sir. Sir, last question, if I may just -- if I may ask. You, of course, have answered a lot with respect to the ICDs and you have done your part and impact related to employees' default. Also you have mentioned in your notes that there's some property done. Is there anything also done with regards to the broker default? Is there any development there that we can hear of?

Yes. So it's in a legal battle, so we are fighting it. But with this pandemic, that is one battle which would take longer. But we're very hopeful that, that also over time will come. We're not going to do leave any stone unturned to make sure that happens. On this one, we got kind of lucky because before the pandemic hit, we were able to arrest the employee and his wife. And therefore, the pressure on them to get bail, they would not have got bail unless they would have given us this property. So -- I'm sorry, I forgot. I should have mentioned that. We have been able to get INR 7 crores of share out of the INR 15 crore, which we were defaulted. The rest amount of money is also not foregone. That is up in the court, that we're still fighting a criminal case in court, but that may take time. But at least, we have got the INR 7 crore, out of which INR 4-point-something crore was in the current balance sheet, but because of the delay in registration in the last quarter, we've got the balance amount also. So as we speak, we have all of it in our books. And over the next couple of quarters, we are going to liquidate that and get the money back in the company.

Sir, that was really helpful, sir. All the very best.

Thank you.

The next question is from the line of Jainis Chheda from Dimensional Securities.

Congrats for the good set of numbers. I actually had a question with regards to your CapEx. Like will it be funded completely from internal accruals or any debt will be required?

Sunit will take the question, please.

Sorry?

Please go ahead.

Yes. Can you just quickly -- your voice was a bit cutting off in between. Can you please just reiterate?

I'm sorry. My question was with regards to the CapEx, the INR 140 crores CapEx will be funded through internal accruals? Or will there be any debt raised for the same?

No, no, absolutely. The INR 140 crores is basically our 2 own plant only, 90 -- approximately INR 90-and-odd crores for the greenfield in the West plant, and around INR 40 crores, INR 45 crores for the modernization of North India plant. And it would be fully funded from our own internal CapEx -- own internal accruals.

Okay. And any guidance towards debt repayment going forward?

So it's a steady state, I would say. We have only one term loan in the stand-alone balance sheet outstanding and the amount is INR 50 crores only. In fact, it is still outstanding despite almost INR 200 crores plus cash balance. It is obviously at a very, very lower rate. And that too, rate is fixed for a longer period, I would say. Last time when you were repaying the debt, it was locked for next 1 year at a much lower rate. So definitely, it doesn't make sense to repay it. And at the same time, we have to maintain the banking relationship also, so it's more of that. And coming to the consol level, the repayment also, it's a steady state. Every year, on an average, we keep paying INR 50-and-odd crores. And this year also the obligation is about INR 50 crores, which is going to paid off at a consol level.

Okay. And one bookkeeping question. Last quarter, you mentioned that there is an aberration in employee cost. So how much extra employee cost was paid in the Q3 because of salary reversal?

Yes. So it was, I would say, inflated to the extent of around INR 9 crores approximately. And that was loading for the previous 2 quarters, which happened in Q3 itself because we rolled back the pay cut of the employee. And it was accrual for the entire 9 months in a quarter.

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

Sir, earlier in your calls, you have indicated an aspiration target on ROCE to reach eventually 25% with the near-term undergo to be at 20%. Sir, just wanted to understand this one. On working capital, is there any further room for improvement? I also want your views specifically from a technology angle wherein can it -- can the inventory levels at the distributor level would be reduced, et cetera, et cetera. So can working capital go down? That's one. And secondly, you did indicate 12% to 13% margins. But to understand it better, possible if you can help us, that what would be the product mix basically, GVT, PVT, ceramics, going forward, which can actually help this number even go further? So -- and I'm just trying to put the blocks in place to better understand how the ROCE can pan out going forward.

There's always room for improvement on the debtor level. On the inventory level, it keeps going up and down depending on the kind of products which we make. But I do not believe there's a massive room for any further reduction, maybe a couple of days here or there, in terms of inventory. But in terms of receivables, in terms of our collection, yes, there is room for another 5, 7 days over there, if not more. That is the brand strength. Mainly, it is a commoditized industry, and there is -- it's not like the paint industry where we have the top 5 guys and then the rest. Here, there is a cluster of the top 20, 25 people and then the rest. So until that starts consolidating, this is going to be a challenge to bring it down to a negative working capital on the receivable front. But yes, there is scope over there. As far as the GVT mix is concerned, after the -- I think you will see 1%, 1.5% increase even this year in the GVT mix compared to where we were today at 26%. So we should be at 27%, 27.5%. But the maximum increase will be once these 2 plants start, the South plant and the West plant. That's when we're looking at the GVT mix going up to 30-plus percent with that. So that will also bring us more contribution and more EBITDA. And ROCE, I think it's a function of us being able to keep our sites disciplined and execute whatever we've spoken earlier in the call and whatever will be spoken -- been spoken in the last year or so. There could be quarter aberration. But overall on the -- if you look at us for -- on a 24- to 36-quarter -- 36-month level, so 8 to 12 quarters, we should be able to maintain or do exactly what we have spoken about. One such quarter is this current quarter, which is an aberration. So that continued to play havoc. But otherwise, nothing on the long term. Long-term seems fine. And ROCE, why would it not be achieved if we keep our discipline and execute our expansion plan with the kind of debt, with the kind of working capital we want this to be profiled by.

This is very useful, sir. Sir, GVT you indicated eventually 30%-plus post South and West plant. How will the PVT and ceramic broad mix be?

So ceramic will continue to grow. So ceramic probably will remain at the current figures, maybe go down by 1% or so. PVT would be the maximum loser when the GVT goes up. So I would suggest -- I would think that PVT would be in the range of about 32%, 33%. GVT would be in the same range and the balance would be ceramics.

That's very useful. Sir, my second question is on bathware. Would you like to highlight any specific steps that we are taking in this business, be it on the distribution side or launching new ranges or anything on aftersales service that we are doing, which gives us optimism on the headline numbers what you broadly indicated?

So bathware, I think we're looking at a 35%, 40% growth at least this year. We had our share of issues as far as receivable is concerned, which is completely behind us. Manufacturing is in place. Sanitaryware, we are extremely confident, although sanitaryware is the place where we lost out last year. But sanitaryware, we are extremely confident. And as far as the bath fitting is concerned, there also a lot of new innovations are being planned and launched. Some of it was going to be launched this quarter itself. But obviously, for reasons known to us, it will be delayed by a month. But yes, we're very excited about the bath fitting business. And now that tile is something which we have -- the machines has been ordered, the plan for the next 2 years is set. I think all our focus is now getting into making sure that the bath fitting grows at the same level as what we had envisaged. So no stress factors as far as bath fitting is concerned, be it distribution, be it manufacturing. All those things are in control. We have enough capacity at least for the next couple of years in both those divisions. So no suspects on that front. It's a question of now getting down to doing business and making sure that we are able to execute what we plan to with such an aggressive growth line.

Sure. Sir, last question, if I may. On the technology side, are you looking at improvement, be it on the working capital side or linking the tiles and bathware business together either to cross-sell or how you manage a dealer or a distributor when it comes to ordering systems or bundling, et cetera, et cetera?

I think you're looking -- you're inching towards the forecasting system what we have in place. So yes. As and when the CRM -- we are working on a very robust CRM that we think that should be able to give us little more BI on how we would forecast our demand. But in the industry in India, where everybody buys on just in time, on one side, you are -- I don't think that is going to be a very easy task. It's very easy to get an order from a project guy and then predict your manufacturing, but we don't want to be a project company. We want to be a retail company. And the minute you have a retail company, when is the last time somebody went out to buy a tile and you have planned on when you would want the tile and when we would put it. I mean we go to buy a tile, literally the next day you want to put the tile. So to that extent, there's always an anomaly on the forecasting. It's not such an easy task, unlike in bath fitting or in sanitaryware because there, you select the model, and you've already done the work in the wall off of the diverter in the wall. So you are pretty much sure that once the diverter is put 6 months earlier, that particular model is going to be sold 5 to 6 months hence from there. So it's not so easy. Tile is something you can buy and you can install it literally within the hour. So we are trying to come around that and put in BI and put in -- trying to address that, address it how much we have a possibility with CRM, but this is not an easy ask. This is a tall one.

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

Just a clarification I needed, sir. With respect to the gas price, can you help us exactly what was the gas price for the fourth quarter for our gas plants in the North?

What price, I am sorry?

The gas price -- gas cost.

Yes, gas cost. Okay, I'll do it. Just give me a second.

Yes, for fourth quarter for our North and the South.

Yes, give me a second. The gas pricing for fourth quarter overall was INR 26.5. For Kassar, it's INR 29. Overall, the current gas pricing is INR 37 in Kassar, INR 33 in the West and similar pricing in the South.

So INR 26 overall for the fourth quarter and Kassar was INR 29 for the fourth quarter? Understood. So just to understand, given the way prices have moved Q-o-Q specifically for Kassar, you did give some sense that Morbi will also see an increase. So what kind of price increase, I mean, we should look at? If we were to assume that the current price sustains, theoretically, what is the extent of price increase which is required?

I mentioned earlier, between 2% and 3% of price increase is something which everybody should look at.

That should take care of the entire raw material -- the fuel cost inflation, is that sir?

Yes, almost all.

Understood.

I mean, not obviously. We can't pass on 100% of it because this is a moving average. So from that point of view, if it's going up, and anything which goes up so sharply also will come down as sharply. You've seen that not once but 10 times in the past. So you average it out over there, but you sustain the prices. When it's on a downward turn, you still sustain the prices until you reduce the prices. So it's an averaging out. You can't really pass on everything and take back everything. That doesn't -- never happens in the industry.

Fair point, fair point. And just a mix in terms of the sanitary and bathware for the quarter and for the full year, sir?

Give me a second. Okay. So for the quarter, bath fitting, we did INR 23 crores. For sanitaryware, we did INR 35 crores. For the year ending, we did INR 100-plus crores on the sanitaryware, INR 101 crores, and about INR 65 crores on the bath fitting.

Understood. This is very helpful. Wish you all the best.

Thank you.

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

All my questions have been answered.

[Operator Instructions] The next question is from the line of [ Manoj Shah ] from MS Investments.

Sir, first of all, I want to thank you from an investor's perspective. You've done a fantastic, clean job in the year. And -- what I wanted to ask was, like you said, your monthly end system channel push is not happening anymore. So -- but we continue to -- but -- does that mean that 4Q will not be the largest quarter and second quarter, third quarter, the quarter gaps will not be as...

I'm sorry, I don't understand your question.

So you said the end of month schemes that we used to have that...

We had an end of month scheme on -- there was a larger amount of sales which we used to have -- which we used to do in quarter -- in week 4. That has been corrected. And we now have quarter -- sorry, week 1, 2, 3, 4, very average kind of sales, which is really helping us both in terms of planning our inventory, planning our receivables and also helping us with no pressure at the month end, which leads up into extra discounting or which used to lead into breakages, et cetera. So that's what I meant.

So 4Q will yet be the large quarter compared to the...

What -- I was talking about within the month. But yes, quarter 4 will be always the largest quarter. So H1 generally for the industry is 40%, 45% of the total year; and H2 is generally 50%, 55% -- sorry, 55% to 60% of the entire year. So that is how it is. And obviously, the Q1 is the smallest quarter, and Q4 is the largest quarter in history of the ceramics industry.

That was the last question. I would now like to hand the conference over to Mr. Somany for closing comments.

Thank you so much for joining us for the earnings call for Q4 and for the year ending. We're very excited for the next leg of our expansion and our industry -- our company. We're looking forward to the next year with the 3 expansions coming up. And we look forward to a more disciplined balance sheet going forward and make sure that we are able to execute whatever we have left off. Thank you so much until we meet again for the quarter 2 -- quarter 1 call. Thank you so much.

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