Somany Ceramics Limited (531548) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Somany Ceramics Limited Q1 FY '22 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 and Somany Ceramics, it is my pleasure and privilege to welcome you to this financial results conference call of Somany Ceramics Limited. We have with us Mr. Abhishek Somany, Managing Director; along with Mr. Saikat Mukhopadhyay, CFO; Mr. Kumar Sunit, 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 your opening remarks.

Thank you, Mr. Agrawal. Welcome, ladies and gentlemen, for this Q1 earnings call of Somany Ceramics FY '22. I hope everything is safe and well with all of you. It's been a challenging quarter yet again. We thought we were over with this pandemic, but it hit us again in the quarter 1. Nevertheless, I think there were a lot of learnings from last year, which were put to use. We were able to do a sales of about INR 324 crores where we lost almost the whole of May and up until mid-June, things were extremely sluggish and slow. The demand started coming back fairly aggressively in June in the second half, except the southern states, some of the southern states which got affected later. We were reeling under the pandemic pressure and the lockdowns, but the Northeast and the West started coming back on demand. I don't think there is any comparison on EBITDA or on any other parameters compared to last year first quarter or from a normal quarter, both of them are aberrations. Last year, first quarter was a complete washout. So all the percentages you are seeing are inflated and extremely aggressive. Obviously, that's because there was nothing last year. But we are very happy to report that we're in line with what we have envisaged for the entire year, considering with the period that we lost the May month, and we would hope to make up as much as possible off the May month if there is no other third wave or the fourth wave while we finish this FY '22. Going forward, the ceramic, we were at 39% in FY '22 there, which is quarter 1, up from -- down from last year's Q1 from 42% to 39%. PBT was up to 35% from 34% last year Q1, and PBT remained at 26% compared to 24% of last year Q1. The sanitaryware sales have been decent, but not as much as we would have expected it to be. but we are extremely confident that we will still manage the growth of between 35% and 40% overall across the year. So it's really no point looking at that quarter-on-quarter figure as far as the tiles or ceramics figure that is concerned. Tiles obviously has done slightly better in this quarter. It's something which is a larger volume, and it goes into various other areas which do not necessarily be only residential. So things have been better there. On the other parameters as far as debtors are concerned, we are even better off than what we were last year and better off than ever before. So we're at a 49-day debtor level. Inventories obviously have gone up a little bit, nothing major from 31 days, it has gone up to 42 days of inventory. That is purely because of May being a washout month, and we were still producing in some of our plants. We had been shut off 100% of our lines, which will be visible in our investor report, which has been uploaded. You've seen some of the plants which have run reasonably high compared to last year first quarter. Trade payables are again absolutely in line. It has gone down to 37 days. The net working capital is flat from a stand-alone basis and a little up on a consol basis. So we maintain -- and as a result, of course, the debt-equity has only further improved, we had completely net debt-equity in May. I think it is probably -- it will be very important for you to know 2, 3 aspects, which have changed in the recent past, specifically on the gas pricing. The gas pricing has absolutely gone out of whack. We used to be at an overall INR sub-30 figure. If you look at July, we're already at closer to INR 40 as far as the southern -- sorry, as far as the northern plants are concerned. And in the Morbi plants in West, we are expecting a price increase, which will bring it closer to INR 38, INR 39 in the next 10 to 15 days, probably by the 15th of August. And in the South plant, it has, in fact, further increased. It is now at approximately INR 45 a standard cubic meter. So this has been a large price increase. We're very fortunate that we've been able to increase prices. We increased prices by about 1% to 1.5% in April and about 2.5% to 3% in July, 1st of July. So an overall impact of about 3.5% to approximately 4.5%, which would result in a net increase of about 2%, 2.5% on an overall basis. And that has been a very big positive. Both the industry leader and us have been able to manage a small price increase. So we've been able to pass on, if not all, at least a decent portion of the gas price increase. Capacity utilizations have been at 65% in tiles, 40% in sanitaryware and about 75% in faucet. The brand spend, obviously, because of the pandemic was low in the first quarter, it was just about 2%, a shade below 2%. But we remain confident that we would be in the 2.5% to 3% range, whatever the revenue may be going forward. So the brand spend are going to only enhance and we will keep our visibility absolutely high. So going forward, I think we are very, very hopeful looking at the July. July has been positive. We have been able to do 100% of what our normal July would be. In fact, we were absolutely poised to do an even better growth. Had it not been for the strike, the trucker strike, you must have heard, which is there in Morbi, it has been on since the 28th of July and it still continues. We're hoping over the weekend, it would finish. But if it's not for that, we would have done even better, surpass the July targets on a normal July basis. Needless to say that the INR 324 crores, which we received in Q1, had we not got the setback of the pandemic, we were absolutely interjectory to do a very decent growth of approximately INR 470 crores, INR 480 crores is what we would have done on a normal basis had it not been for that. Our collections have been extremely strong. No surprises there. Last year, I think we learned a good lesson there. Without giving any stops, I think the discipline which we put in last year has paid off and our collections are very, very strong. So no issues on the collections even in the May or even in the month of May, June and July, of course, has been very, very good. So looking at the trajectory, we are very hopeful that we should be able to grow extremely aggressively, and we had predicted a growth of 20-plus percent when we began the year. And now with the way debacle and we're not sure how much we would be able to cover with this, but we're still looking for a high-teens growth, if not more, going forward. Obviously, the caveat being that there should not be any third wave or the fourth wave. And on the margin front, we are fairly confident. Of course, we have taken a hit in this quarter. And you have seen the results. Had it been for much better sales, the profit would have been extremely high because we've covered all our costs, everything would have come to the bottom line. So looking at that, we're very hopeful. And looking at the July trajectory, we're very hopeful that we should be able to maintain the 12%, 13% margin guidance, which we had made at the beginning of the year. This would be -- again, if the sales go as per plan, which we should be able to achieve. So on both fronts, we're looking very positive. Collections are good. The inventory levels are in line. The gas price, I think we are reaching peak. I don't see it going any further. So having said all of that, demand is coming back. So we are looking at a positive next 8 to 9 months, whatever is left. As far as the project is concerned, we had embarked on a very aggressive expansion plan. All projects are in line. There are certain delays, obviously, because of the pandemic, and you would have read in the newspapers that there are extreme shortages of containers and vessels. So owning to that, we may be about 15 to 20 days delay. So we should be able to fire all of these 3 projects between January and February of next year, which means quarter -- early quarter 4, we should be able to start firing up each and every one of the projects. So we should get an entire year next year, a full year of all the 3 expansions going on stream. We're seemly excited about that and looking forward to it because that will further increase the margins and, more importantly, further increase the value-added mix. I will stop here and then now open the floor to questions, please. Thank you so much.

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

Sir, my first question is more towards sanitaryware and faucetware, if you can comment on that. Just wanted to understand how much is the market size over here. To my understanding, it could be around INR 10,000, INR 15,000 for faucetware and sanitaryware. Wanted some numbers over there. And just wanted to understand how is the market landscape changing given the container issues and the impact it would have on imports, specifically for these 2 categories. And how is it that the company is reacting or adjusting to the market pace given the opportunity at hand?

Yes. So the market size to the best of our knowledge is approximately INR 8,000 crores, INR 8,500 crores as far as faucet is concerned and approximately INR 5,000 crore to INR 5,500 crores of sanitaryware is concerned. That is the market size in India. A large part of it is, of course, nonbranded. In the faucets, the leader is Jaguar and then the rest follows. In the sanitaryware space, we have the 3 large ones, which is Parry Roca, Cera and Hindware and then the rest. We're very excited about this particular segment, and we're very sure to reach approximately -- still very close to the INR 250 crore figure this year, which makes us a very serious player in the market. As far as the container is concerned, we are not too worried because the very little of our products were coming in from China. And we've been able to adjust our delivery cycles accordingly. So only a fraction of our sanitaryware used to come from China. Faucets, we pretty much became reliant on the Indian produce from our own plant and some from the outsource. Rest of the materials, we are pretty much buying within India. So not a large worry as far as we are concerned. I think the worry would be more for the larger sanitaryware players, which have a larger reliance in China. So this is where we are as far as sanitaryware is concerned.

Right. Sir, just had a follow-up over here. You indicated INR 8,500 crore plus INR 5,500 crore. I was trying to understand how much would the imports be over here. So we have advantage of capital products...

I'm not too sure how much of this would be import. I think if you ask the bigger players, they would have a better idea on this one.

Sure. Sir, my second question is on price increases. You indicated a cumulative, I think 1%, 1.5% and 3%, 3.5% in April and July. If one had to benchmark it with the current spot pricing, to what extent has it covered up for the cost inflation? Or how much is the incremental increase, which is required assuming, say, 25%, 30% being power and fuel cost on the overall cost structure?

Sunit, do you want to -- so there have been 4 or 5 increases. Gas price is one of the increases. There's also been an increase in power and the other increase, which is very substantial increase in terms of paper where packaging cost has gone up. And all of these keeping in mind, we did the price increase. The April price increase were more from a standpoint of paper and the July price increase were more in standpoint of power and fuel because paper hasn't gone up any further since then. Sunit, would you mind a question -- answering that question as to what percentage you've been able to pass on, considering we will get a net effect of approximately 2%, 2.5%?

Yes. So I think let's begin with this.As far as Q1 number is concerned, it is taking care of whatever increase we have done in April. And that was -- so Ritesh, coming back to your question and to what extent it is taking care of, particularly in view of the gas price, I would say, whatever increase we have taken so far, it is good enough to take care of the gas price level, which we reached in the month of July, including the other cost escalations, which we had earlier during the Q1 like so far, material and all these things. So now the gas price are somewhere INR 30, INR 39 or maybe INR 40 price, it is well taken care of. We just increased whatever we have taken so far. Now if it moves up further that the brand moves beyond the level or if spot beyond the level, then it would be a different scenario. So to that extent, it is welcoming.

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

Sir, it was mentioned a lot about gas prices. Can you give a planned-wise gas take up prices driven on this?

Yes, sure. So the North plant, we are currently at about INR 3,950 standard cubic meter, net landed price. The South plant, we're at approximately INR 45 standard cubic meter. And the West plant has still not gone up because the West plant has a 1-month lag. So West, we are still at about INR 33 is where Morbi is, but we very clearly know that on the 15th of August, this would climb up to approximately INR 38, INR 38.5%. We're 110% sure.

So that was very, very helpful. The second thing, was there something...

Just to follow up. When the gas price starts going down, whenever that happens, the North plant will go down quicker than the South plant. And obviously, again, the Morbi plants will have a lag of 1 month where it will go down also a month, 1.5 months later.

Sure. That is really helpful. Sir, second question is related to the hearing of some transportation strike. Do you expect it to happen or something, which will be in Morbi and especially something related to double charge? Could you give us some clarity over it, have you heard something from your, I mean, JV partners?

I'm sorry -- considering double charge, I missed that one?

Sir, there is some transportation strike, which has been in talks about. Is there any impact that you see on your volume...

There's a transportation strike since the 28th, 29th of July. It is still continuing. So Morbi is absolutely at a standstill. No dispatches have taken place in the month of August. Orders are piled up. So the minute it opens, orders will start going. I don't think it will impact any volume, maybe a day, 1.5 days, if at all. But it's not going to affect volume because everybody is on the same boat. So there are no transports taking place from Morbi. And this is not specific to double charge or anything. It's an entire Morbi's transportation strike. Fairly useless and not called for, but whatever it is, it's still a strike. So we believe that over this weekend, it would get resolved.

Sure. But no impact on our volumes. We are getting steady-state supplies from partners, all from our own...

Yes, yes, yes. We have -- in fact, we have an issue. We have too much of products lying there to be built. As minutes the transport strike opens, it will get built. In fact, a good amount of material from the 30th and 31st of July is also standing there, which should have got built in July, but it hadn't. So that is something which will get built in August.

The next question is from the line of Dushyant Mishra from SageOne Investments.

I just have one question regarding gas prices. At what point -- crux point do we consider switching to a different fuel like propane?

So that's not an option at all. We don't have any propane or LPG tanks. Only a couple of these plants have that option. And as and when we keep -- keeping a watch on the gas pricing, those 2 plants can move at any given time to propane. And they do, every now and then they do average it out and move to propane. But out of the 10 plants, only 2 plants are equipped with that option.

And there's no switching cost per se to the fuel?

No. There is no other fuel we can switch on to, it is just gas. I mean, unfortunately, even the coal prices have gone up. Sorry?

Switching from one to another. There is no significant adverse impact from devices that are switched from one to another.

Dushyant, sorry to interrupt you, but your voice is breaking. May I request you to come in a better reception area, please?

Is this any better?

Yes, go ahead.

Yes. I was just asking, is there a cost of switching from one fuel to the other, when we...

I can't swap. So there's no question of even considering that. I can't swap the fuel.

The next question is from the line of Akhil from RoboCapital.

Sir, I just have one question. Just regarding -- during your opening remarks, could you just clarify the growth numbers again? The 35% to 40% growth is for which segment?

Bath fittings. Bath fittings and sanitaryware.

And the 12% to 13% guidance is for the entire year for the entire business?

Margin, for the margin. No, no. The growth for the entire business is high teens.

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

Can you help us with the gas cost, like what you mentioned for the current level -- currently what is the gas cost? Can you help us with the first quarter gas cost?

Do you want to compare it with the first quarter gas cost?

Yes, yes. What was it in the first quarter?

So first quarter, Kassar was -- the Northern plant was at INR 36, which has climbed up to close to INR 40. The South plant was INR 34, which has climbed up to INR 45. And the South -- and the West plant is in the same range, INR 32, INR 33, but that will climb to INR 38.

Understood. And any particular reason the sharp increase in South? Are you going to imagine both are linked with North and South?

No. So we have 3 separate formulas for our 3 locations. The northern plant is on the 3-month moving average of the Brent. The South plant is completely exposed to spot. And the Western plant is a combination of Brent moving average, spot and APM, all 3 combined. And don't ask me what their calculation is. That only DSPC knows.

Understood. And the second question I had is with respect to the employee cost. I recall in fourth quarter call, we had talked about employee cost like almost was INR 43 crores, and we said INR 5 crores to INR 6 crores of reversal employee cost in that quarter. So it would have been a INR 36 crore, INR 37 crore run rate. But I see that despite lower production, we've gone back to quarter 3. So just sort of understanding, if there is any one-off? And what kind of a run rate should we look at?

So the employee cost, we have not taken any salary cuts this quarter, neither have any labor being laid off. So it's at steady state, and we have taken increments this year after 2 years. So we did give a decent increment to all our people. The only thing which is lower this quarter is on account of the plants being shut and the contract labor, which obviously didn't come. So packing and loading, unloading, those kinds of contractors, which are not there. That is the only thing which is reflected in this quarter. Other than that, employee cost is what it is in this quarter, inclusive of the increment, which we gave to pretty much everybody in the system.

So should one assume that this is the new normal run rate if we want to continue in terms of the capacity utilization?

Yes, it will not go up, but it is a new normal. But then obviously, with the volumes going up, this would -- from a percentage terms, will only keep coming down with volume going up.

Excellent. And can you help us understand the expansion in gross margin? I'm talking at the stand-alone level. If I look at the gross margins, they were at about 47% in fourth quarter, had jumped to 55.8%. Can you help us understand the drivers? And how do we look at the gross margins on an annual basis?

Sure. Sunit, do you want to answer it line by line?

Yes, sure. So Achal, I think there is some gap in the calculation when you're doing the gross margin calculation. I think we have given this clarity earlier as well. While calculating the gross margin, it will be better if you take key laser components that will be the material, power fuel and the change in inventory. If you calculate on that on a Q-on-Q basis, there is not that kind of change in gross margin. It's around 100, 150 basis points improvement in gross margin and that's primarily led by improvement in product mix and the price increase we have taken in the month of April.

Understood. And just one more question, if I may. I will see in terms of what is the volume outlook we have for the current year, sir?

Yes. So we're maintaining 15% to 20%, but we hope to be in the high teens as far as the entire company is concerned, in terms of volume value. And for sanitaryware, anywhere between 35% and 40% of the last year figure growth.

Understood. And if you could help us in terms of the breakup for the quarter, sanitaryware and faucets?

Sure. Sanitaryware for Q1 was about INR 18 crores and bath fitting was INR 11 crores.

Sorry, I couldn't get you, sir. Could you please repeat?

INR 18 crores and INR 11 crores.

[Operator Instructions] The next question is from the line of Pankaj Tibrewal from Kodak Mutual Fund.

On your guidance, if I do the maths, book maths and accounting for the first quarter's number, the remaining 3 quarters works out to be just 5% growth. Am I reading it right? Or do you think...

On what parameters, Pankaj ji?

So last year, if I'm not wrong, you did INR 1,650 crores of top line, right, as a company as a whole. The first quarter is about INR 329 crores odd. And even if we assume an 18% growth for the next 3 quarters, it's roughly about INR 1,500-odd crores, INR 1,550 crores. And the last year, same 9 months was about INR 1,450-odd crores because first quarter was a washout. So that translates into for the remaining 9 months, about a 5% year-on-year growth. Is it -- because virtually then because you've taken a price hike of almost 2.5%, 3%, 3.5%. So virtually, we are talking about a flattish volume growth. Is my numbers calculation right or I'm making a mistake on that?

No, I think you're making a mistake on that. What we are looking at is, last year, we did INR 1,640 crores or INR 1,650 crores, right? We are looking at a figure of 17%, 18%, 19% on that figure overall growth.

Yes. So if you do the math, I mean, for the remaining 9 months and compare to the previous 9 months, there's not much growth, which you're talking about.

Previous 9 months also, we did INR 176 crores in the first quarter.

Yes, yes, yes. So I mean so if you look at -- you actually did INR 1,450 crores, INR 1,500 crores of top line in the remaining 9 months. And right now, we are talking about saying INR 1,550 crores, INR 1,600 crores. So there's not much of a growth we are talking in the remaining 9 months. So...

We're talking about 10% growth in the next 9 months. INR 1,475 crores to approximately INR 1,650 crores.

Okay. Fair enough, fair enough. So 10% growth. And on the margin side, for the full year, you are saying 12% to 13% despite of first quarter being a lower number. So the asking run rate for the next 3 quarters will be higher than what the number you're talking about on a company happening?

Yes.

And where is that optimism coming from, from a margin perspective? Because...

I think the volume increase. We're back to full volume. And the operating leverages of running the plant at 85% plus, 90% plus gives a lot of bottom line plus the product mix is also changing for the better and including -- I mean, along with that, there is also an increase in the price. So we hope that the price increase gets completely passed on and there's no other further gas price increase.

Okay. Okay. Fair enough. And the third question is more an observation and I don't know what's the strategy. Tiles industry is the only industry in India where the export is being done by small -- smaller guys compared to any other industry where IT, pharma, where the larger guy goes out and the smaller and the middle guy follows them. In tiles, the leaders in the domestic markets are not even exporting a small amount. Looking at the kind of numbers, INR 10,000 crores, INR 12,000 crores, which India is doing, there seems to be large opportunity sitting out there. Can you just throw your thought process around why you also are not looking to build a good export revenue and can it be export -- can export be a growth driver for you going forward? And if not, why? Because this is a little perplexing to us.

Sure, sure. So first of all, correction there is not only the tile industry. If you see the sanitaryware industry and the bath fitting industry, both are extremely low. Yes. So even if you look at a company like Jaguar, which is a giant as far as bath fitting is concerned, gets 45%, 50% market share, his export numbers are also north -- south of INR 200 crores. I believe last year, it was about INR 150 crores odd figure in export. I think the basic reason here is that there is such a large small-scale section as far as India is concerned in terms of tiles, sanitaryware and bath fitting. Obviously, tile and sanitaryware have the largest share of that being a larger part from Morbi. If you look at the pharma companies, there aren't such large companies in the small-scale unorganized sector, so to say, in the pharma segment. And I think there's a lot of R&D which happens. So it's a combination of this being a highly commoditized product, non-branded, it doesn't matter. Most of them are OEM to somebody abroad. So branding really is not making a difference. There is no R&D involved. It's like I just mentioned, it's a commoditized product. So I think coupled with being commoditized, coupled with it being an OEM for somebody and, more importantly, about 1,000, 1,200 tile players and approximately 400 sanitaryware players, I think that is the reason why the larger players are not able to export or not find it lucrative to export because in the export market, there are 3 concerns which we have. One concern obviously is the price because you're competing with a sector, which is extremely price competitive, especially in the export market. Secondly, you're also competing with the sector where they are able to give open credits or cash on delivery kind of payment terms especially in the Middle East, in Africa, et cetera. They have their own conduits over there to collect the money, which the larger players don't. So I think these are the 4 or 5 reasons where I don't think this is going to be a huge sunrise for us. Yes, of course, on an overall basis, the export in absolute numbers is only growing. I mean this year, we are hoping that we should be close to INR 100 crores in export, which is a fairly decent number. And this, mind you, will be at a realization where we're trying to maintain the realization of India, the India average selling price in the export. If I had to lower the price, I would be able to export a lot more. But it's not extremely lucrative from -- if I look at from a payment perspective, from the exposure perspective, etc.

Next question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

Sir, my question is, these 3 plants, which are going to fire in the month of approximately January 2022, sir, what will be the approximate turnover from that plant for the next -- that quarter and what will be approximately margin thereon?

Sunit, do you want to answer that, please?

Yes. Sure. So approximately turnover from these 3 plants together would be somewhere around INR 250 crores to INR 300 crores, right, on an annualized basis when it will be running on the single scale. And we expect that the margin -- this will lead to a margin expansion of at least 200 basis points, plus/minus 50 basis points on an EBITDA level. So I hope this answers your question.

So effectively, when we are talking about for full year, the increase of around 15% to 20%, correct? So this increase will include in that 15% and 20%? Or this is in addition to that, too?

No, no. The 15%, 20% is for this year. None of -- nothing of that 3 plants we will be getting in this year.

[Operator Instructions] The next question is from the line of Amit Zade from Antique Stockbroking.

My question is a slightly near term. So we have seen these Morbi exports being impacted by freight nonavailability -- container nonavailability and freight rate. So does that mean in the near term, there could be some decline in exports from Morbi? And is there a possibility of that decline in export can get flown into the domestic market? So is that a kind of risk do you see in the near term until this issue of container availability is sorted?

Yes, good question. There are 2 aspects to this. One is that the export, yes, it has got hit to an extent where containers have become extremely expensive. But today, the consumers are still willing to buy because the cost of containers have gone up from every single country, namely China and India. So we're a level playing field as far as that is concerned. So from that perspective, buyers are not hoarding material or stocking material, they're still buying what they want and paying the extra freight, and that is being passed on to the consumer to that extent. So yes, to that extent, the export has got a little hit from Morbi. Now would it come into India? Yes, a little bit of that may flow into the Indian market. I think we are reasonably okay and well poised to face that competition. And the reason for that is that over the years, specifically over the last 2, 3 years, the top 2, 3 players have been able to move their retail focus very significantly. So earlier, we used to be exposed to the private builders approximately 17%, 18%. Today, our revenue only 5% or 6% of that is through the private builders. So to that extent, because of retail being a larger focus for us, with the material flowing into Indian market, the retail does not get as affected in terms of volume or in terms of price. I think that discipline has come in the market. The market also knows that in case the export material would come into India, it could be a stop gap and it would finally go back into the export market. So people are careful to buy any products from stop gap. They do realize that when they stock up material in their warehousing and change their displays, it's a long-term game. It's not a short-term quarter-on-quarter game or maybe 2 or 3 quarter game. And so to that extent, the industry has learned and disciplined. A larger chunk of the retail is being shared, the space is being shared by the larger branded players rather than the smaller unbranded players. I do feel that there may be a little bit of pressure, if at all. We are not seeing it as far as way concerned currently. So I am in no position to say that we're facing the heat on that front. Demand is back very, very decently, very aggressively. So if it does come into the Indian market, it will probably further lower prices and advantage the builders in a segment which we are not currently very present and don't want to be present in the future. So our focus is retail, our focus is corporate. And our focus -- the third focus is to supply to the government. The private builders is our last priority. Please take that with a pinch of salt, nothing against them. But we are trying to strategize to those players, which payments are more secure and payments are more on time. And therefore, we are preferring retail, corporate and then government. And private builders, we are only doing business with those builders which are extremely healthy, we have a good credit score on them and, more importantly, are personally not only well known but extremely well known to the company.

Yes. My second question is on the industry volume growth guidance for FY '22, if you can guide on that because one of our larger players has indicated that domestic market could actually see a decline in FY '22 on a lower base of FY '21. So do you believe is that a possibility?

I missed that. I'm sorry, what did you say?

Sir, one of our larger players has indicated volume decline for the industry -- our domestic tiles industry in FY '22.

So if they are referring to a larger export, then yes, may be true. In terms of our export last year, the industry hit approximately 37%, 38% total export, and that may climb up to 50%. So to that extent, if there is a flattish growth in the domestic industry from a Morbi perspective, that may be something to be considered, although I do not frankly have any BI on that. As far as the larger players are concerned, we continue to gain market share over the Morbi -players.

The next question is from the line of Devanshu Sampat from Yes Securities.

Just one broader question from my side. So with sizable capacities coming on stream by the end of the year or early next year in the domestic market by -- which have been announced by the larger players, so should we be concerned about a possible overcapacity situation and/or pressure on realization as a result?

Not really. If you see the capacity addition which is taking place, that is already in terms of Morbi. The capacity addition started going on stream from July -- June, July onwards. And I think by October, November, most of those plants will be up and ready. The only 2 other large expansions are happening is from industry leader and us. And this is again to augment capacity in North, South, West. All 3 are different independently run plants, independently run service markets. So I do not feel any pressure on that front. As far as our West expansion is concerned, we are very confident of that, because we're already buying a reasonable portion of that from Morbi from the outsource, and we will take that into our plant. Hence, improving our margin and hence also improving some amount of volume. As far as the Northern plant is concerned, the expansion is basically augmenting capacity of all time, where we are currently running at 110% capacity. And we do believe that, that is required to further augment the volatile. And anyway in the North, we are reasonably insulated as far as freight is concerned from Morbi. There are only 2 or 3 players in the Northern market. In the South, it's a very specific expansion which we are doing. We're doing it for the full body vitrified tiles. So from that point of view, that particular expansion also we are currently outsourcing. Obviously, we're not able to do it to the extent we would want to sell. We have a short supply as far as that is concerned from the outsourced market, that is from Morbi. So again, there, we are quite sure that, that expansion would get absorbed extremely quickly within the first 6 months of the plant coming. Yes, of course, we would be selling a reasonable amount of non-value-added products while we keep pushing the value added and bringing that plant to a better value-added mix. But having said that, the minute that plant comes in, all the non-value-added products which we are making in the current plant would all be shifted. So the current plant of the South will become 100% value addition. And the new plant would be to start with 50-50. 50-50 would be the non-value added, which is the 60-60, 60-120 basic tiles and 50% would be the value added. So we are very confident of the plants getting to 100% capacity within 6 to 9 months of operations.

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

Sir, my first question is, how should one understand the inventory in the channel and at the plant level for us and overall for the industry?

So inventory is absolutely in line. We are not high on inventory. The only one plant which we still haven't operated is one of the lines in our Kadi plant, which is in West. That also has gone on stream this week. As far as our Qatar plant is concerned, in fact, we are building up a little bit of inventory, trying to push the plant to 110% capacity because, mind you, we will be shutting down one of the lines for 2 months between November and December to make space for the new double capacity line, which will start hopefully by the end of January. So there will be an outage of 2 months for that capacity. Therefore, we're building up whatever stocks we can. So you may see, of course, the demand is also really strong, but we're hoping that we were able to build in at least some amount of stock in the Kassar plant to service the market when that outage happens. As far as the South plant is concerned, our inventory is absolutely in line. In fact, the South plant is the only plant, which ran pretty much the entire lockdown. This lockdown, it had to shut down only for 15, 20 days. Rest of it, we were running full capacity. So to that extent, I think in South, we are, in fact, trying to modify some balancing equipment to further augment the capacity of Unit 1, which we are currently running. So on the plant side, no serious concern on the finished stocks. As far as the inventory is concerned at the dealer level, I think the dealer level is not very high on inventory. They -- the fact that our April sales were pretty decent, which means that the inventory which we pushed to them in March did get consumed. It's not the early signs would have been that April sales would have suffered, which it did not. So we believe that the market inventory is also not high. It's not extremely low either, but it's not very high.

Great. That's useful. Sir, second question is more generic. We understand container freights are a problem -- obviously, it itself is a problem. Then why is it that the Morbi is not chatting up prices on export pricing and competitively? Players have more legroom to actually increase local prices as well. So just trying to have some sense on the ASP of exports. Is it moving up? Or is it the same thought process on how they operate in the domestic market? Because over here, we are looking at a far larger market what they're catering to, then what is it that's stopping the Morbi guys to jack up prices and exports, which can have a positive impact on local pricing?

So you will see that jack-up happening in the month of August when the prices go up because this is a substantial price increase from INR 32 crores, INR 33, we believe there will be a sudden increase of at least INR 5 to INR 6 -- maybe INR 4 to INR 5 to INR 5 or INR 6 a standard cubic meter. So I do believe at that time, they would have no option but to jack up prices. But other than that, I have no reason why they should jack up price and export where the consumer is willing to pay for -- already willing to pay for the extra freight. There is no reason for them to jack up price if the costs haven't moved up. The Morbi did take a small price increase last quarter or sometime in the middle of -- not last quarter, but last to last quarter, in the Jan to March quarter, where the paper prices had gone up, so they did take a little bit of increase at that time. But since then, there has been no price pressure from a Morbi perspective. The minute that happens, they will jack up the price. So I do believe that in August, if not 15th of August, then first week of September, there should be some amount of price increase in the export market from Morbi. And it would be a good idea for you guys to have a call with some of the larger exporters as to 1-day deal.

Right. Sir, where I was coming from is if you look at the container freight charges from China to East Coast or West Coast versus India, I think the inflation over there has been far more significant, which essentially means if I am promoter out of Morbi, I have an optionality to jack up prices, which they could have easily done so far and they could have possibly jack up the local sizes as well. So -- and we know that there are smart people, pretty opportunistic. Then why is it that it hasn't happened so far? So I'm just trying to understand the market...

I don't know the dynamics between China export and India export. So I guess this question will be better answered by a large export-oriented manufacturer out of Morbi. It really doesn't matter to us because our export focus is very little.

The next question is from the line of Rajesh Ravi from HDFC Securities.

My question pertains to, again, the Morbi. You mentioned that the capacity buildup has already started over there. Could you give some sense of what is the incremental capacity...

Rajesh, sorry to interrupt you. Can you speak a little louder, please?

Am I audible now?

Yes.

Better? Yes. So my question pertains to the capacity addition by Morbi. Could you give a sense of what quantum of capacity is coming up over next 6 months or over next 12 months at the Morbi cluster?

So whatever capacity will come, will come between May this year to November this year, and that is approximately 50 to 60 brand new glare vitrified plants who are in the offering, and they're all starting one-by-one. Most of them are for export oriented or spot focused.

Okay. In terms of capacity, how much would that number be, 50, 60 plant?

Each plant, fairly easy calculation, let's say, 60 plants. 60 plants into approximately 12,000 square meters of production per day into 340 to be existing. So about -- yes, whatever that number is.

Okay. And beyond that, we see that there are CapEx announcements by almost all of the national players. So how do you look into the demand-supply scenario given that -- so the point is what sort of an industry growth, domestic consumption growth you're looking at over for the next 2 to 3 years, industry basis?

Sorry?

On an industry basis, what is the demand outlook? What is the growth outlook you are looking for next 2 to 3 years, industry?

I think we are seeing the real estate segment, again, coming back to life. We've been speaking to a lot of builders and all of them are fairly happy with residential sales, leave alone the commercial sales. So I do believe that we will be seeing and witnessing a lot of new launches from a builder perspective, which means that the Morbi will get very busy supplying to all the builder segment. Otherwise also, we do believe that with the pandemic, there is an upsurge in demand of renovation. People are focused more to beautify their homes. And there is a lot of other demand, which is coming up from the Q3 -- sorry, the Tier 2, Tier 3, Tier 4 towns, even Tier 5 towns. Our focus is going to be largely there. Therefore, we believe that the demand would be in the healthy double digits going forward. Now whether it will be 10% or 15%, I'm not sure. Obviously, this year and for next year also, there will be an aberration. We have lost last year first quarter. And this year also, the bigger players have lost maybe a month, 1.5 months, but the smaller players probably have lost a little more. So there will be that aberration for next year, where it would be a more healthy growth because the numbers are lower this year. But from a steady state, I do believe that we are back in the teens from single digits in terms of the future 3- to 5-year growth. I hope I've been able to answer the question.

Sure, sure. That's helpful. In terms of, again, the 60 plants addition is working out close to around 250 million square meter annual capacity. So around 20% capacity increase in this year itself. So like how is the dynamics, which work out at Morbi? So this 250 million is for next 2 to 3 years? Or we will again see new capacities coming up? So what is the time and lead distance?

Sir, it all depends on how the export market pans out. Please let us not forget that a lot of countries have put an antidumping on China. China's capacity currently is about 3.5 billion square meters. India's capacity is 1 billion square meters. On 1 billion square meters, they are adding 20%, like you said. So 200 million square meters is what they're adding. On the other hand, other side of the coin is that India's export, when we were at 1 billion, our India's total export used to be sub-20% of the total 1 billion Today, India's export is climbing to 40% of that 1 billion and, therefore, the addition in capacity. So with the export climbing in Morbi, which is 80% -- 75% of the Indian industry in terms of volume, they are already climbing to -- this year would climb to about 50% export-oriented units. So I think there's a large demand sitting there for us to see more expansion coming up. On one hand -- the trouble is that when it comes at one shot for the interim, it gives a little bit of a depressed scenario in terms of excess capacity, et cetera. But on the other hand, I do believe that the Indian tile industry will more than double in the next 5 years. Now that can only happen if there is more supply, which comes in because there is no question of that kind of price increase. So obviously, there will be more capacity put in while we want the Indian sector to become more than double. So from the current 35,000-odd crores, whatever that number is, plus or minus 2,000 crores, 3,000 crores, we're clearly, clearly looking at 30,000 plus in the next 5 years. How does that happen? That can only happen with more capacity.

[Operator Instructions] The next question is from the line of Manish Mahawar from Antique Stockbroking.

I just wanted to understand, how do you see the domestic market, the domestic tiles industry market size in last year? And what's your expectation about the current year?

Domestic?

Tile industry's market size last year FY '21? And how do you see that growth in FY '22?

Hard to say. It is all going to be -- so the top 2, 3 players, you know how we are going to grow. From a Morbi perspective, it's going to be largely dependent on the export. So the total industry will be largely dependent on exports. The domestic industry is steady. I think earlier in the call, somebody mentioned that there was another industry player who mentioned there would be a negative domestic growth. I don't see how that is possible. So I'm not too sure of that.

Okay. But in your judgment, tile industry will grow, right? The domestic industry this year?

Yes, of course.

Yes. Okay. Okay. And what was our market share in the last year? And how do you see over the next 3 years the market share would be?

So that is a drill down of how much the domestic industry would be. Maybe we will do some calculations on that and come back to you because there is a large focus -- large difference happening between domestic and export. Frankly speaking, our earlier calculations are based on the ex amount of export and ex amount of domestic industry. We'll have to recalculate. To be precise, I do not have that immediate answer. But yes, what I can say is that we are growing faster than the other players in the industry other than a couple of top players. So from that point of view, obviously, we are taking market share from somebody. I'm actually looking at our own growth figures and not really considering what would be our total landscape in an overall perspective.

Okay, understood. And in terms of gas price, yes, we have already taken a price hike, but do you think this -- whatever price hike we have taken on tiles are sufficient to offset the higher gas price or latest price increase in terms of a gas cost?

We said that it was enough to offset the price which we are at current levels. Any further increase will be out of pocket. So for example, in South, we were okay till of INR 40 a standard cubic meter price, but now that it has gone up to INR 45, there is pressure there. And I don't see this price is holding because this is on spot. Spot goes up and comes down also very sharply. Unless it sustains for the next couple of months, we don't feel that we would be able to do another price increase. So we're waiting and watching. We are hoping that the gas price settles here. If that happens, then we are comfortable. If that doesn't happen, then maybe if it goes up very sharply going forward, we probably will have to, as an industry, look at another price increase maybe in October, but nothing between now and October. We are only focusing on pushing volumes.

Okay. Understood. And last question. I just wanted to have a clarification from Sunit. In terms of the CapEx, I think we have mentioned, right, the new CapEx what we are like coming up in the 4Q will lead to a margin expansion of about 200 basis points. So this is -- basically, this will lead to an overall company's margin expansion by about 200 bps? Or it does see that particular 3 plants have a higher margin versus the industry -- sorry, in the company average?

Sunit, you are on mute.

Yes. So it's a guidance on overall margin, right? So this will take an enhancement on overall margin of the company, considering that INR 250 crore to INR 300 crore revenue would be added and that to from a value-added segment. So obviously, it will pull up.

Okay, it will lead to -- or a company level, the margin expansion of 200 basis points, right?

Yes. There will be plus/minus of 30, 60 basis points, which we cannot predict, but we are looking at broader guidance.

Okay. And it will be paid honestly on a competitive product, better product or a product mix, right? It will be margin expansion or cost side also, we have some benefit?

No. Certainly, it's a product mix only because these 2 plants are planning for GVT only, the West one and the South one. And the North one also is the value-added segment of wall tile. That's why it will pull up back.

Okay. Okay, sure. Just, Abhishek. I have just one more question, if I may. Just how do we see the demand in terms of a project business or a builder-type business?

Builders coming up again, but we are not concentrating too much on the builder segment. We are only concentrating on those builders, which are good paymaster and where we know our money is secured. But I do hear that the builder segment is really, really coming back very aggressively. And like I mentioned, we should be looking at many, many more launches, which a lot of the better Morbi players would be in the offering to supply those builders. I don't think the top players are in any mood to supply to anybody where the payments are not secured.

Ladies and gentlemen, we'll take the last 2 questions. The next question is from the line of Achal from JM Financial.

My question is what is the price difference between us and the Tier 2 brand and the unbrand? For similar, I'm sure, I mean, the design and all that. But just broadly, what is the difference currently? And what was like, say, about 3 years' time? Has that gone up, reduced? Any color on that?

With industry leader, there are 3 aspects to the price. One is the product mix; one is the value-added mix within the various product mix; and the third is the brand premium or the brand -- or the pricing. So all of these 3 constitute of our net contribution or net realization. That between us and industry leaders used to be approximately 10%. That has been narrowed to approximately 7.5% to 8%. And we do believe that going forward, we should be able to narrow this down further to approximately 6% to 7%. As far as Morbi is concerned, the top of the Morbi players, there are differential of about 20% between us and them and the bottom end of the prism of the Morbi, which really doesn't matter, there it's approximately a 30% difference between us and them.

And how is the...

All of 3 -- that constitute on all of these 3 things. It's not pure play pricing. It is a question of pricing. It's a question of product mix and it's a question of value-added mix within the product mix.

Yes. I wanted to also understand how the like-to-like product for a GVT tile or a PVT tile, what is the price difference for like-to-like, not at the company average?

Between whom?

Between us and the Tier 2 brand and the unbrand. So...

We can answer that, but it's very different when it comes to soluble salts, it's different when it comes to double charge, different when it comes to non-value-added GVT tiles, it's different when it's value-added GVT tiles. So I think if you want, we can do this offline and I can give you an answer on in which pricing, what is the apple-to-apple difference because it differs from SKU and also differs from segment.

Understood. Understood. And has that been reduced or it has increased? Why I am asking because why is it so difficult for us to kind of pass on a price increase, especially when the cost inflation is so significant?

Because the price increase does not happen in uniformity because if you just see the 25% of our cost is gas and gas has not gone up in Morbi. So if the gas doesn't go back -- go up in Morbi, they are not increasing any prices. But it has gone up as far as our South plant is concerned very significantly and reasonably significantly as far as our North plant is concerned. So we've been able to take price increases here. We are fortunate that there are all the players in the same boat. But as far as West is concerned, we will only be able to do that when the Morbi prices go up.

[Operator Instructions] Next question is from the line of Arun Baid from BOB Capital Markets.

Just carrying along with the earlier participants. I want to reclarify, with these 3 new plants coming in, right now, we are looking at 12% to 13% margins for this year. That range will move to 14% to 15%. Is that reading right, sir?

Yes, correct.

Okay. And second thing is we do expect in FY '23 when these plants come in, full utilization for the full year, right?

Do you mean our plants?

Yes, sir, these 3 new plants of ours, which are coming.

Yes. We hope to utilize the entire 12 months of that for next year.

So ballpark, you will be growing at mid-double-digit volume growth for sure in that pace. If that is the case?

That's correct. That's correct.

And sir, in the -- in your sanitaryware and your faucet business, this 35% to 40% growth is sustainable beyond FY '22?

No, obviously, at a larger figure, it will slow down. But for the next 2 years, obviously, it won't slow down to the teens. It will keep that pace of a reasonably high growth until we reach INR 300 crores, INR 350 crores number.

Next question is from the line of Rajesh Ravi from HDFC Securities.

Just on this realization difference, if I compare Somany with the national leader, I believe you also have a strong distribution and premium presence across market. And your product profile is also equally spread out across all the 3 ceramics, PVT and GVT. However, if I look at the blended realization for the tiles versus Kajaria, your realization appears to be 15% lower for the last 5 to 6 years number that we are comparing. So what would go into that differential? And how would that get bridged, if at all?

So first of all, it is not 15% lower. It is 10% lower, to be precise, and that has been bridged to, like I said, approximately 8% to 9%. And we will bridge it further to 7% going forward. So we are closing in as far as that is concerned. But clearly, he has a better product mix, he has a better value-add mix and he also gets a brand premium being industry leader.

Okay. So like I was looking at the blended realization number, which you report outsourcing subsidiary and GVT...

No. Sunit, do you want to throw some light on the blended number also?

Yes. So yes, there is slight correction, yes. So yes, on a blended level, Rajesh, you are right. It appears 15% only. But yes, it has multiple lever because you have to come to -- take into consideration the difference in product mix and then little product mix also like what is the percentage of GVT and all this stuff. So if you -- on a broader number, yes, it is close to 14%, 15%. But if you do an apple-to-apple comparison from brand premium and all these prospective, then that number is much lower.

Okay. So how much of that can be bridged -- the gap can be bridged? Because you have worked last 5 years immensely on your distribution network and your market reach and that is the exclusive showrooms. So how would that lead to -- that narrowing it closer to because you are the #2 today in terms of even the upcoming capacities will accelerate your volumes. So where do we see Somany in terms of this differential over the next 2 years?

See, there is 3 lever. I've clarified earlier also. There are 3 components, as I've said, 3 factors. One was brand premium and other was product mix. And then there is operating -- operational efficiency as well because when you operate at a higher level that reaches in a different kind of benefit. So now coming back to each of these components, separately. Brand premium is something which cannot be catch up and overcome overnight in a shorter period, but this is something which we can do over the period. And this is what we have been doing, a continuous deeper distribution network, including the touch points and higher brand strength, visibility and all these things we have been doing. At the same time, we are also doing good. So there is nothing like they are not going good. We are doing great and then we will just subsume at one point of time. But just, I would like to add one -- but I just would like to add one more thing, Rajesh. What this -- similarly, we also command a premium of 12% to 13% over other competition is lower than us, right? So it's -- so we are also that way at the stage #2, I would say, in terms of commanding and brand premium or in terms of pricing. So yes, gradually, when we are improving our GVT share and other value additions within each of these segments, that would help us to bridge it to some extent.

So why I came to this point is that in a quarter like June when there was a sharp impact on volumes, the margin fall in case of Somany seems to be higher compared to the national leader. So what really impacts us in an adverse manner?

See, we don't do the comparison that way you do and you are always free to do that. See, we can talk about ourselves. And has it that the impact would not be there, in our case, which was there in the month of May, we would be fairly in the range of 12% EBITDA margin, which is the fair number which we put for ourselves, and that is what the guidance we have given for, 12% to 13% annually, right? If we have not announced that INR 131 crores, which is revenue in the month of May, we would have been fairly in the range of 12% of EBITDA margin. So just -- there is almost 500 basis points shrink in the margin and that's something we look to that operating leverage advantage as of today. There is advantage for this particular quarter, which is what we can explain you with respect to our margin.

Ladies and gentlemen, that will be the last question for today. I will now hand the conference over to Mr. Somany for closing remarks.

Thank you so much for joining us. We hope that this quarter will be a better quarter and we'll not be faced by any issues as far as COVID-19 is concerned. And if that is the case, then we would have fairly decent numbers, both at the top line and the bottom line. Look for a better future. Thank you so much.

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