Somany Ceramics Limited (531548) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Somany Ceramics Limited Q2 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 of Institutional Equities at SKP Securities Limited. Thank you, and over to you.

Good afternoon, ladies and gentlemen. On behalf of Somany Ceramics Limited and all of us at SKP Securities, it is my pleasure to welcome you to this financial results conference call. We have with us Mr. Abhishek Somany, Managing Director; along with Mr. Saikat Mukhopadhyay, CFO; and 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.

Thank you. Good afternoon, ladies and gentlemen. Welcome to the earnings -- Q2 earnings call of Somany. It's been a roller-coaster quarter since Q1 for this year. I think there was some kind of stability which was -- which happened in Q2. We had issues in July where South was still not open 100%. So that was an issue. And we also had 10- to 12-day strike -- the trucker strike in Morbi, where the whole of Morbi participated. But yet, volumes came back very handsomely in the month of August and September and for the rest -- for the most of India. And for the northern part and the eastern part, I think July was also a decent one. As a result, sales grew by about 33% on both a stand-alone and consolidated basis for Q2. So that was a 33% growth on sales largely driven by volume. 25-plus percent was driven by volume. The ceramic segment, of course, the GVT segment, of course, has grown the quickest. That's the most favored product in the time line currently. So that now -- it constitutes a 28% of revenue, up from 26%. Bathware also is catching up. Bathware, we had certain nonavailability issues because of rain sanitaryware units -- our sanitaryware unit had a production outage. So from that point of view, it has gone to 100% now. So even then, we grew by about 31%, and this seems to be on a fast-track growth for the next couple of quarters, for sure, much better than this growth which we've seen now. The advertising spend obviously for Q1 were nothing, and therefore, most of the spend came in Q2. So as a result, it's about -- you would see about 2% of advertising expense for the H1, but this would be -- for the year, it would be between 2.5% and 2.7% for the year. Next year, again, it would be between 2.75% to 3% of advertising expense. So you will see a lot of our -- lot more of us now in the next 10, 12 days. Our full-blown TV campaign will be on stream for the rest of the year, which will be running till March. Capacity utilization, happy to report that pretty much all the plants were running at 90-plus percent and our plants at 300%. Even the faucet plant, which in the last quarter was not at 100%, it's virtually at 100% now. Sanitaryware, like I mentioned, had issues of rain, et cetera. And therefore, it was -- it ran at about 40%. That would -- that's currently at 100% as we see. So obviously, the growth would be much better. The one big worry, of course, on the debt front, there's -- we're completely debt-free -- nil -- net debt free. And if you would have noticed, the debtors debt has come down very significantly to 44 days. I think we are in complete control of that receivable cycle now. We should be able to shave off another couple of days from here and only endeavor is to get better and better going forward. The major worry for the short term for the next 2 quarters is of various price increases. I think every single input price has increased, whether it is paper for our packaging, whether it is raw material imported in both domestic owing to freight and whether it is gas, which is our primary raw material. The gas also has moved up very significantly, and I've never seen this kind of unprecedented move in the gas. Every 15 days, there has been an increase in gas pricing. And therefore, between the gas price increase and the product price increase, there is at least a 15- to 20-day lag and that's something which has hit the margins a little bit, and that will keep having pressure on the margins this quarter and next quarter, although I do see that the global gas prices have started already numbing or softening. So I think by March, April, we should be back to some kind of normalcy as far as gas pricing is concerned. The only advantage here is that, as you would know, most of Morbi, in fact, all of Morbi is now also on gas and not on coal. Therefore, we've been able to pass on about INR 75 to INR 80 as gas price increase. And if this does not continue any further on a 15-day basis to increase, then we should be able to pass on about 80%, 85% of the gas price by quarter 4 provided there is no further crazy increase in gas pricing, which doesn't seem to be -- I believe gas pricing will only go up till December, January, but who knows? So that's the only worry for the short term. What is keeping us going is volumes are very strong. So volumes still are helping us. And that's -- and we're eagerly waiting for our 3 plants to start. One plant would start in the middle of February. The next one would start beginning March and the third one will start middle to end March. So eagerly waiting. Next year should be completely, all of the 3 plants will be up and running. So that is something which we're clearly looking forward to and I think by then the gas price issues will also get settled. And most of the other freight issues would get settled. On a macro level, what is helping the industry on the backdrop of exports becoming slightly slow, again, only because of freight, which is again a 6- to -- 5- to 7-month phenomena because since then -- up till then, I think the freight rates will start going down and exports will again pick up but what is helping the industry currently is, finally, the real estate sector is back, after a 10-year lull. The real estate sector is back. So I think a lot of the industry will be being busy supplying to the real estate sector in India, coupled with the export focus, which anyway the Indian industry has, which will again take off the minute the freight rates go down a little bit. So overall, we see next year, again, fairly decent. But for the next 2 quarters, volumes would be helping us. And I think the pressure on the gas, to my mind, by December, there could be some kind of new normal for the next -- for quarter 4 before it starts going down. So overall, things are looking good for the industry and for Somany specifically. We continue to increase our dealerships in the Tier 3, 4, 5 towns. Currently, we have 2,700 active dealers. In fact, with this receivable cycle, pretty much 100% of our dealers are active, and we are yet to make another 150 this year. So there would be a net addition of about 300 dealers plus for this year, and the same amount of dealers would come up in the next year. So the endeavor is to increase our footprint in the Tier 2, 3, 4, 5 towns, and that's where the focus is and, on the other hand, keep branding to get the pull to convert more of our product line into value-added. So I think this is it for me, and then I would like to open the floor for Q&A. Thank you so much.

[Operator Instructions] The first question is from the line of Girish Choudhary from Spark Capital Advisors Private Limited.

A couple of questions. Firstly, on the price hikes, if you can share the quantum of hikes taken during 2Q and incrementally how much more has been taken in the current quarter. And then, likewise, if you can also share the gas cost details in Morbi and outside of Morbi?

Yes. The price hike since April to now to inside Q2 end, which is September end, has been about 4.5%. And since then, we have taken again another approximately 3.5% price increase already. And we are in for another price increase, which we're waiting for the next 15 days to see where the gas price goes. So overall, we have taken approximately a 10% price increase, and I think there would be another price increase very soon in the next 10 to 15 days. As far as gas price is concerned, I can give you the pricing but it’s fairly futile because this is changing on a weekly, in fact on a 15-day basis. So currently, our price in the northern plant is about INR 41, INR 42 a standard cubic meter. And we have clear sight because this is on a 3-month moving average, this would go up to INR 47 to INR 48 within the next 3 to 4 months a standard cubic meter. The western plant, which is our western plant and also the JVs in Morbi, which means the entire Morbi pricing is about INR 61 to -- INR 61 to INR 62 a standard cubic meter. And this should move up, which we believe is on the offering with the GSPCL, this should move up to approximately INR 70, INR 72 a standard cubic meter within the next 15 to 20 days, so by 1st of December. As far as the south plant is concerned, there we are exposed to spot. There, our pricing is about INR 92 a standard cubic meter. And this price, I think, has probably peaked. We will see some kind of reduction in the next 1 month, if not the next fortnight.

Got it. Got it. That's helpful. Secondly, I just wanted to get some sense on the second half expectations. Like last year, I see that you had a very strong second half around INR 1,050 crore plus of revenue. So currently, our pricing itself is up around 10% on a Y-o-Y basis, including the -- this quarter price hike. So what will be your volume growth assessment? And then, consequently, if you can also guide us on the margin trajectory considering the price hikes and the inflation hike which you mentioned?

I think the volume growth is something which we are more confident of. So for their point of view, I think we should be able to do a 15% to 20% growth. So it could be a fairly good growth in the H2. And as far as margin guidance is concerned, steady state if nothing bizarre happens going forward, which I don't think should happen. We should be able to margin -- maintain a margin of the current level, which we've shown. Obviously, it would have been far superior if the gas prices would not have been jumping every 15 days and this volatility would have seen some kind of stability. So we're hopeful that we will be able to do the same kind of margins, plus or minus 100 bps -- sorry, 1.2,so between 12 and 12.2, 12.3 something that we're fairly confident.

Got it. Sir I have one more, if I may. So this is on the exports. In the past, I know that it was not a priority sort of avenue for the company. But are you incrementally evaluating because what we have seen is that one of the peers setting up a subsidiary in UAE and sort of directionally guiding for increasing the exports. What have you thought about this?

What about the UAE, I'm sorry, I missed that.

So one of the peer has set up a subsidiary in UAE and directionally, they are guiding for increased export target from a revenue perspective. So in the past, I know that it wasn't a key priority for the company. But increasingly, given the size of the market, are you sort of thinking about this?

No. It's still not a priority for me at -- the way the export is happening from Morbi, which is a long credit and no instruments backing that. So from that point of view, no, I'm not prioritizing, but if we are opening various new countries, and opening a UAE office is probably because probably a showroom would be coming up or something like that. Anyway, as far as we are concerned, it's probably in the organized sector the highest number in exports. So from that point of view, I think we're fairly happy doing a profitable export rather than a long credit without any financial instrument in place. So from that point of view, I think there's enough headroom for us in India. Export will remain in the 3% to 4% of that. I don't see that going up at least for the next 24 months.

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

Congratulations on great set of numbers. First of all, on the GAAP basis, which you mentioned, this what, north, prices, Morbi and south, which you mentioned, are they the current prices as we stand in October, INR 41, INR 42, INR 61, INR 62 and INR 92. So average of -- how would the average numbers for 2Q look like, sir, average in 2Q across these 3 locations?

For gas price.

Yes, yes. Your convention average.

No idea. No idea. It doesn't make -- I mean, why you even discuss Q2 that's past quarter. So we are looking at Q3 now.

No, no. That's right. Just to understand the cost impact, how would that have sequentially...

I have no clue. I have no clue on that. You can take it off-line with Sunit, but I don't have that calculation.

Okay. The GVT share, you mentioned 28% is for 2Q or H1?

For Q2.

Q2. So why I'm asking...

There is no significance because 1.5 months in the Q1, we were anyway short.

Okay. So is this a steady run rate, at least for this year is what you expect to maintain? Why I'm asking is because 2 years...

It will only get better. GVT will only get better.

Yes. Because I believe 2 years back, it was well below 25%. And now at 28%, you're expecting this to move up. This is one direction where your margin can improve and on the higher freight growth.

Yes. And when you are -- out of 12 million square meters, which is coming up 8 million square meters is all in GVT in our own plants. So when that happens, this would even further improve.

Okay. So next year, what is any ballpark number you're looking at when these all the new 8 million -- 8 and the same factory would be operational?

Sorry?

By end of this year, when all these new GVT factors will get operational for FY '23, what sort of GVT revenue share you're looking at?

31%, 32% to begin with, it would only improve from there.

Okay. And volume guidance is -- was it 15% to 20% you're looking for the full year?

Volume guidance is about 12% and the balance would come from value. So volume, again, the question is that we don't have enough material today. So it's a good problem to be in.

Okay. And margin, you're looking at 12% to 13% range. Is that understanding right?

I'm saying at current levels...

No, no. Obviously, assuming things remain as they are. We're not holding you that you are not delivered. And sir, on the CapEx front, how much is left for the ongoing CapEx, first half which is around INR 83 crores, INR 82 crores.

Yes. So in first half, we have done roughly INR 75 crores to INR 80 crores, already done. Our total outgo would be somewhere close to INR 150 crores to INR 190 crores, including the total amount of escalation, which just happened in due course on account of steep increase in freight and all these things. So another INR 100 crores in 2 years.

So this INR 100 crores will be totally spend in this financial year itself second half?

Yes. Yes, yes. All these commissioning will be completed by end of this financial year maximum in a phased manner.

Okay. Great. And sir, on the demand side, you mentioned that exports were hit because of the sharp rise in freight rates. And now that even freight rate has started to cool off significantly, at least on the Baltic side, we see that number, Dry Index coming off. Any sense on export gaining momentum in this quarter, third quarter?

No, I wouldn't have immediate BI on it because we don't export too much, but I do believe that the next 6 months, Morbi is -- obviously, they're pursuing the exports very rigorously. But in the next 6 months, freight rates haven't cooled off enough for this to have a jump, but it's a question of the next 4 to 6 months before it, again...

Because any improvement on the export side will have positive gearing for domestic majors like you? Is that understanding right?

I think there has been a clear differentiation now largely between branded and unbranded players. So from that point of view, I don't see -- if the exports pick up, obviously, the pressure will be reduced, but I don't see a very significant pressure on us looking at the current raw material prices going up. I don't think Morbi also has enough headroom to really cut prices and sell over here.

Right, right. Correct. Because the cost inflation is higher over there. And lastly, on the Bathware segment.

Sir, sorry to interrupt. We request you to return to the queue for your follow-up questions as we have people in the queue.

Sure. I'll do that.

[Operator Instructions] Next question is from the line of Yogesh Patil from Reliance Securities.

Sir, you are expecting a gas price hike of INR 8 to INR 10 per SCM in next 15 days. So how much product price is required to pass on to cope up this gas price hikes? Any ballpark number which you can provide?

Yes. So I am expecting an INR 8 to INR 10 gas price increase in the Western part in -- so looking at INR 2, INR 3 increase in the northern plant. And in the southern plant, I'm not looking at any increase going forward. So I think on every INR 10, there is a requirement of approximately INR 2 a square foot to INR 1.5 to INR 2 a square foot depending on the product price increase required. So about 5%, 6% further, it will go up.

Sir, my second question is related to your total power and fuel cost. So how much would be the gas cost? Will it be 60%, 70% of the total power and fuel cost or more than that? Sir, because as per our understanding, you are using gas for tile setting purpose only and other manufacturing purchases can be energized by other fuels. Is that right understanding, sir?

So your question is how much is our gas price of our product or how much is gas out of our power and fuel?

Correct, correct. Gas out of your total power and fuel cost?

About 60%, 65% of the total power and fuel, largely gas basically.

Yes, sir. So sir, in this high gas price scenario, can your company switch to other fields like LPG and fuel oils as we know that coal gasifiers are already banned in the Morbi, but...

That's even more expensive. That's even more expensive. And you have create an infrastructure for it. So nobody has infrastructure of LPG yard, and it will be silly to create an infrastructure for 6 months because these kind of gas prices are clearly not sustainable.

Next question is from the line of Dhananjay Mishra from Sunidhi Securities and Finance Limited.

Congratulations on a really strong operating performance. Just wanted to check -- and opening remarks you said, we also had inflation impact on the freight side and packaging side. So could you quantify in terms of what percentage we have seen in terms of increase in the deal?

So yes, every time we're taking a price increase, it's a holistic price increase. And currently, looking at the gas increase, those increases are fairly insignificant in the larger picture. So until Q2, we had taken that into our increase of that 8% to 10%, which we did. Going forward, there's not been any further increase in the paper costs. So it's largely gas as far as October, November, December is going to be concerned.

And what about the imported raw material you mentioned?

Yes, so imported raw material is extremely small, under 2%. So all our glazes and frits have got affected a little bit. But again, it's insignificant in terms of when we look at the gas price increase.

In terms of price hike, you said 5% we took from April to September, 3% in October and 3% more we'll take in the next 15 months. So overall, 10% price hike, right?

Yes, plus whatever else will happen in the next 15 days.

Okay. So already 10 -- 10% is taken and 3 -- on next 15 days we will take another -- some hike?

That -- I don't have BI on exactly what the cash price will be. Whatever that will be, we will try and pass on around about 80%, 85% of that.

Next question is from the line of Ashish Poddar from Systematix Institutional Equities.

Congratulations on great set of numbers. Sir, my question is on the pricing. So where do we stand when we compare with Kajaria, the leaders pricing? And has the gap narrowed in the last few years? And are we taking price hikes you think with them? Or we are taking on a call based on our focus on market share gains or something like that? So what's our strategy there? So this is one. The second is on the margin. So this 12%, the current margin, which is under this challenging scenario. But next year, you are saying that the growth outlook is strong and the input cost pressure will normalize. So what is the margin trajectory you see in coming years, from 2, 3 years perspective?

Thank you so much. So -- yes, so the first question, which is how are we taking the price increase. Yes, we are absolutely in tandem with the industry. And mind you, here, the large part of the price increase is led by Morbi, which is about 70% -- 75% volume. The only difference being that Kajaria is -- you really can't compare because a large part of his manufacturing is in the north versus we're equally distributed in Northeast -- North, South and West. So therefore, from that point of view, his price increase for a larger part of his production about 40 -- 50%, 52% of the production being not, the price increase has not been that much because it's on a 3-month moving average. However, when the gas price, the spot starts going down, these prices will go down 3 months later. So at that time, 52%, which is today at an advantage of it will have probably a little bit of a disadvantage for those 2, 3 months and including our 30%, which is being produced in the north. So it's not an apple to apple. So I really can't compare. But yes, obviously, he's also not losing the opportunity of any increase just like us. When Morbi increases, everybody increases. So I think that's the answer as far as the -- I mean the difference is concerned. And if you want the absolute difference, it's about 14% to 15%, of which approximately 5% to 7% is on product, and the balance is on the product mix between us and Kajaria and that we hope to narrow -- if we have narrowed that, and we hope to narrow that further the minute our manufacturing starts. But I'm looking at more my own margins rather than being obsessed with somebody else's margins. As far as the second question is concerned, it was -- what was it?

Strategy to build.

Yes, the next year's strategy, obviously, with our 3 units starting I think wherever the margins would be this year, I think it would be at steady state, obviously, gas is not going to go down overnight. So we're looking at nothing less than 100, 150 bps increase pretty much immediately when these plants start and the endeavor would be to better that for next year.

Next question is from the line of Sneha Talreja from Edelweiss Securities.

Congratulations on great set of numbers. So just one question here. Also you mentioned on the distribution front about your distribution network going to 2,700. Is that number correct?

Yes. Our current active dealers is approximately 2,750 or something like that, yes, plus or minus 20, 30.

Sir, I believe there's a substantial increase in that number since I recall, during Q4, it was somewhere about 2,000 active dealers. Could you also tell me that how has the addition gone through, which are the territories that you're, I mean, being aggressive on, especially what is the amount of volume growth that you're only getting? You used to give some numbers in terms of the 5% to 7% revenues coming from new dealer so probably specified from last year, how much it has been up?

Yes, Sneha. So there are 3 buckets. One was the active dealers. You -- I think the numbers are a little off. It was about 2,100, 2,200 and so forth what are active dealers. Since then, we've been able to add about 170, 180 dealers net additions. Obviously, most of the additions have happened July onwards because only then the lockdowns had opened. That 170 dealers have given us about 3%, 4% of extra revenue -- sorry, 3%, 4% of our total revenues had come from the new dealers. And the significant increase has been in 3 buckets. One is the increase in dealers. And the other increase has been that the receivable cycle becoming better, all the dealers which were still stuck have all come back online. So I would have actually under 100 dealers -- or under 75 dealers which are still in some form or the other stuck with some receivables, which is the endeavor to shave off that extra 1, 2 days by bringing them in line. But largely, all our dealers have come into bidding cycle. And what's even alarming figure is that about 24 months ago, this active dealer list was only under 800. From there, it's gone to 2,700.

Sir, just clarity on that. I mean, there's a phenomenal increase in number of dealers. Just wanted to understand is that are these dealers completely new to the tile space but are these the ones who were earlier dealing with the smaller brands have now started dealing with you? And if that's the case, after any which way this capacity addition is happening in Morbi, they are coming up in December or whenever things improve for Morbi, is there any chance we can go back? Or do you think that these are the dealers now that they've been attached with you, they will stay for a longer time? So just understanding the thought processes there.

So I think we've been able to add dealers on 3 fronts. One is -- it's a mixed bag as far as that is -- your first question is concerned. Not that many brand new people who let us say, were doing paint or ply or pipes or something like that and jump into tiles. Some have not that many. The second market is that we've been able to attract dealers who are already trade in a larger town and they've gone into Tier 2, Tier 3 and branched out. So they also have grown within their own state in a smaller town now where they have other working hands in the family who will branch out into a new location altogether. And the third has been that -- there's been a large shift from unbranded to branded. And I think this is here to stay. With Morbi coming back on, the dealers are fairly clear that Morbi is going to be under pressure only because of exports not happening so significantly due to the freight rates being very high. They very clearly know that the minute the freight rates numb, which it will have to, it could be a question of 4 months, 6, 7 months, something like that. The minute that happens, they would again drop them like a hot potato and move towards export. So the dealers are also very vary of increasing their shop share with the Morbi brand, they're clearly looking at the branded sector. So there's -- that focus, which we've been talking of since the GST days is slowly and long term happening today.

Right. So that's becoming kind of a practicality. In that sense, just one last question. You also end with what would be our revenue run rate that now we can look at. I mean, the growth, we at once before the real estate, I mean, we're doing margin favor of us, we used to 18% to 20% of our revenue base. Even now, if you look at even on the low base, we are seeing -- we're able to do a strong revenue growth. So what's giving that -- I mean, why are we not able to give a guidance, which is more than around 12% to 14% all in the double digits. So can we move back to this golden days of 18% to 20% of run rate that we used to see from the real estate was going well?

Do you mean revenue growth or EBITDA?

No. Actually, I would restrict myself to volume growth since prices is something which is more related to gas.

You see whenever the thought of growth, it's largely led by volume, so within 80-20 between volume and value. And I'm fairly confident that, in the next 2 to 3 years, it should be in the mid-teens to high-teen growth, at least for the branded sector. I have a caveat there. Over there, the caveat is that there should not be a complete slump in export, which should not be. And the other caveat is that the gas prices shouldn't move up to -- I've never seen gas prices beyond 35 and is currently at 90. So it shouldn't go to 200 or 300 and make tiles unaffordable. But both of those are very, very cautious caveats, highly unlikely. So therefore, I'm quite confident of a mid-teen high-teen kind of growth. So yes, you can pretty much take that.

Next question is from the line of Rupesh Tatiya from Intelsense Capital.

I just have one question. In H1, I see that interest finance cost is roughly INR 16 crores and other income is INR 10 crores. So we are kind of losing few crores there, even though we are net debt free. So do you see that moving? Even though you are doing CapEx, do you see gross debt to continuously go down every quarter?

Yes, I'll let Sunit answer that question.

So Rupesh, basically, you are referring to the consolidated number, whereas the debt guidance and the CapEx things is more from a stand-alone perspective because the consolidated number includes 9, 10 operational other companies where we don't have any corporate guarantee then or maybe kind of debt servicing, I would say, guarantee. So it's basically the debt and equity funding and the arrangement, the means of finance arrangement for that particular SPV, that particular JV only. right? And it goes as per the amortization schedule of that particular JV and it gets looks fully paid out over the cycle -- long cycle of that entity. So the debt-free thing is with respect to the stand-alone number, where we have close to INR 200 crore line in our balance sheet as a surplus. But definitely, this is not available to pay off the debt of those other entities. So I hope that clarifies your question. If you look at the stand-alone number, there is hardly any finance cost. It's a very minimal number, and that's to -- attributable to one term loan -- the long-term loan, which is the line in the balance sheet and getting paid off in another 12 to 14 months.

[Operator Instructions] Next question is from the line of Venkat Samala from Tata Asset Management.

Just wanted to understand the strong growth that you're currently seeing and that you foresee of 15 to 18, mid to high teens growth that you're foreseeing if the export scenario kind of looks robust and plays out as we are envisaging. So what percentage of that you would attribute to industry growing? And how much would be because of, say, shift from Morbi to organized players?

So okay, I'll answer the question in a different way. This year, the industry will degrow. So from that point of view, whatever growth we've taken, we have taken market share within India because we were -- we didn't have the playground of the exports any which way. So let's break out -- break down the industry. Let's take, for example, the INR 35,000 crores, for argument's sake, plus/minus INR 100,000 crores for this year, out of which about INR 12,500 crore, maybe INR 13,000 crores should have been export at last year's run rate, which is going to be nothing more than INR 9,000 to INR 10,000. So let us for argument's sake INR 10,000 away from that. So INR 35,000 minus INR 10,000 is INR 25,000. INR 25,000, approximately, 50% is Morbi. So let's take INR 12,500 crores. So in INR 12,500 crores, there are 2, 3 players at the top, which have taken significant market share from the others. And the balance INR 12,500 crores in the Morbi area is going to degrow. So I think going forward, we're fairly confident because this whole branded to nonbranded shift which is happening that is where we are thinking that the top couple of players will keep growing fairly significantly and garnering market share in the branded space and, obviously, the overall space. So it would be an unfair comparison going forward now between what the industry does and what the top 2, 3 players do.

Understood. Understood. Right, right, right. But do you also expect the industry to grow at maybe double digit going forward given the optimism that you are seeing in the overall environment as well?

Very optimistically, I would think that the industry should double from here in the next 5 years, 6 years. Obviously, hopefully, there will not be any serious continuous lockdown, pandemic lockdowns. If that doesn't happen, let's say, 22 to 27, we should be doubling this industry from INR 35,000 crores to INR 70,000 crores. And very pessimistically, I think we should be doubling in the next 7 years, maybe 8 years. So you can extrapolate from there. It's a very large number. So this industry is definitely going to grow. And it's going to grow on the backdrop of the real estate industry, backdrop of further organization happening in India and on the backdrop of the export moving from a 20% level for the last 10 years of the industry to about 45% to 50% level of the industry being exported. So mind you, China is still sitting at 6 billion or 7 billion square meters of tiles which they produce. And India is just at 1.2 billion. So and I mentioned on the call that we are genuinely very competitive compared to China, forget the dumping part of it, but we are genuinely very competitive. I don't see any reason why the export should not move up very, very significantly going forward.

Understood. Understood. And my last question would be a qualitative one. So generally, we are seeing very good numbers when it comes to absorption of the real estate, right? But at the same time, the new launches or whatever we are hearing it's a little mixed. I mean it will still take some time to pick up. Given the fact that we come at the later part of the development cycle in the real estate segment, do you think that there could be -- I mean, the growth could slightly taper off before picking up?

So again, this would be a differential between the top players and Morbi. For Morbi, which is highly, highly dependent on the real estate sector, the growth may taper off if what you were seeing happens. But for us, our entire exposure to the real estate industry, which is the private builder industry that does not include government and does not include corporate homes -- corporate sales, which is the retail sales of a Maruthi, or Banjara or an IT or something like that. If you discount that, our total exposure to real estate directly is about 5% to 6% and, indirectly, it's about 8%, 9%. So I think we are good as far as that is concerned. It's a fairly insignificant portion. Even if that could taper off. It's not going to hit my growth very significantly.

Understood. Understood. So you're largely immune to what happens in the industry is what you're getting at. I mean the whole pie itself is too large for the top 2, 3 players to grow irrespective of what really happens to the industry?

The top 2, 3 players are largely now dependent of selling to the plotted market or the homes being constructed on either a plot being bought from a builder or then an individual plot being bought and then, and made. So that is where we are selling. Unlike the others the -- unlike the industry, which is largely dependent on the large builders.

Understood. Understood. Right, right. Sir, just as a follow-up, what would be your exposure to the metros in terms of revenue?

No, I don't know the exposure to the metros, but I do know that more than 75% of our exposure is in all nonmetros. Actually, 80% is nonmetros.

Next question is from the line of [ Asam ] from ITI Alternative Funds Management Private.

Sir, if you could just provide a brief overview of your CapEx?

Well, whatever CapEx has to happen that INR 175 crores, which will happen this year. The rest of the CapEx for the next 18 months is on -- basically the routine CapEx, routine maintenance, et cetera, et cetera. So the number will be anywhere between INR 30 crores to INR 40 crores, like it has been in every normal year but at a much larger volume.

Next question is from the line of Nikhil from Galaxy International.

And congratulations on a good set of numbers. I just have a fundamental question. So the company has been doing well and has definitely traveled a lot of distance over the last couple of years in terms of margins and, let's say, predictability and other things. However, when I still compare it with the industry leader, so I think there is still a very, very significant gap between where we are today and where they are operating. So what are your thoughts on, let's say, on the journey that we are taking to move closer to them or equal to them in terms of margins, revenue, sales and other?

Yes. So we are growing at our pace. I mentioned what our growth would be for the next couple of years, 3 years. And as far as the margins are concerned, we will narrow the gap, that's the endeavor. And I've already mentioned that there would be 150 basis points increase overnight the minute these plants start. So therefore, you will have that gap reducing.

Okay. Fair enough. But sir, is the difference coming in basically because of, let's say, higher realization for them? Or is it like on the cost side, they are very different than ours?

No. So it's not on cost side. I think it is on 3 points. One is proximity to the market, large part of their manufacturing in the North, so we get an advantage of that. Number two is their brand, which gives them an extra price realization. The number three is on the economies of scale, which obviously they're 35%, 40% larger than us, the economies of scale. And the fifth point -- the fourth point is the product mix. So we're trying to address each one of them one by one and -- to narrow the gap. And the endeavor is to currently be a formidable #2 before we breach the gap and close in on #1.

Next question is from the line of Aasim Bharde from DAM Capital Advisors.

Two broad questions from my side. So firstly, you mentioned that what Morbi would or may do on the pricing front, we most likely would have to follow that. But as per your estimate, if gas prices come down from April, would Morbi have an incentive to cut prices given the strong demand environment?

Yes. I think there's been an unprecedented price increase. So from that point of view, there will be -- when the gas prices go back to the older prices or some kind of old price levels, there will be a cut. And at that time, the endeavor is that we hold on to some percent of our increase, and that would be the extra margin, which comes in to the top couple of players.

You would be trying to retain some part of the price increase?

Right, right, right.

And what can we do to really decouple from this pricing movement? So that -- what industry does is no longer relevant for Somany. Is it just brand spending that could be the only factor? Or can you do something else on say product innovation or service something to truly differentiate yourself?

So globally, this industry is a commoditized industry. So it's -- I think the other way around, it's going to be the economies of scale. So we keep scaling up, which gives us a large pillar. But as far as pricing is concerned, gas being such a large element of our cost, if that goes up, I don't think we can decouple ourselves and fortify ourselves to that extent. So it's inevitable that prices go up or go down depending on the gas. And can we be absolutely on the other end of the spectrum? Not at this volume. That decision we would have had to make maybe 20 years ago where we would choose to be a niche player. So you will see in Italy there are companies which makes 30% EBITDA, but then what they sell in a year, we probably sell in 15 days. So with that kind of volume, yes, you can do a lot. But not at our kind of volume. I mean I'm selling like 25 lakh square feet a day and industry leaders selling about 32 lakh, 33 lakh square feet a day. And this volume is highly sensitive. It's a mass product. It is meant for the masses and not the classes.

Got it, got it. Just one final question. So the industry numbers that you talked about doubling in the next 5 years or maybe 8 years depending on what your perspective is. How much would exports be as a percentage when the industry doubles? And just another follow-up on this. How much would be replacement or renovation proportion as a percent of the overall industry price?

I see export, whatever the number of the industry is going forward, I see exports at between 40% and 50%. Traditionally, whatever that number was 10 years ago, so let us say 2019 and below, so 2009 to 2019, whichever year you take a number, export did not constitute a more than 20%, 21%, 22%. So now going forward for the next 10 years, exports will constitute of 40% to 50% of whatever that number is. And your next question was?

On the replacement/renovation demand, how much that would be?

The replacement market is between 15% to 18%. I see -- I don't have BI on this. I'm sorry, because the industry doesn't capture it. But I do see a lot more replacement happening now, specifically because, with the pandemic, a lot of people have realized that they need to upgrade the home. They need to probably -- somebody who didn't have a small mini office in the room -- in a home, make a desk, make an office, make a gym, et cetera. So I think that traction is definitely happening, but I'm really sorry, industry doesn't capture that data unlike the paints industry. But I guess, going forward, it has become a serious point, and we -- somebody will capture this soon.

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

I have a follow-up on the Bathware segment. Could you share what is the outlook? And also what is the margin profile in this segment, please?

The margin profile going forward, we should be looking at a 14%, 15% EBITDA level. And the outlook is that we should be growing at 30% to 40% in this segment, at least for the next year. Obviously, the base becomes larger and then I will probably give the guidance at that time.

And sir, with the recent announcement by a pipe major foray into this segment, how do you look competitive intensity of like more branded player entering into this segment?

I think the sanitaryware bath fitting industry hasn't been as competitive like the tile industry. So in tiles, we're fighting 1,200, 1,300 brands. In sanitaryware even today we are fighting at best 10 to 15 brands. So a few more have to come. I mean India is growing. So I think, yes, it's -- there are -- I would say that 3 or 4 more people will probably jump in and this is not the end of it.

Okay. And second, when you talked about the tiles industry, and you said that this year, you see the industry contracting, so do you imply even domestic plus export or only on a domestic basis, you're looking at demand contraction and market share gains for the branded player?

No, in exports, we don't get any. We hardly -- none of the branded players export.

No, no, I'm not asking from that perspective. When you talked about the industry contraction this year. Is it only in domestic you are talking about?

No. So largely, the contraction will be on account of export.

Okay. So any sense how would the domestic numbers look like year-on-year in FY '22 versus '21?

Too early to say because if the freight rates go down in the next couple of months, this might just jump because there is a latent pent-up demand there also. So very, very early to say. It would be unfair to even pin a number right now.

Okay. And just to cross-check the number, you said INR 25,000 crores ballpark domestic out of which INR 12,000 or 50% is Morbi.

Yes.

And in Morbi, the 50% of Morbi is an organized top few players who are gaining market share at the cost of the smaller Morbi players who are active in the domestic market? Is that understanding right?

Both, both, both. So in the Morbi sector and also the top couple of players are gaining market share. And in the branded segment, also the top 2, 3 are getting market share from the other branded...

And that is where the growth is appearing much stronger compared to the industry numbers.

Correct.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Somany for closing comments. Over to you, sir.

Thank you so much, ladies and gentlemen, and sorry, I forgot to wish, everybody, Happy Diwali. I think we're looking forward to a good next year. This year, there is going to be a little bit of pressure on margins, like I mentioned. Volumes are holding up positively. But next year, we're really looking forward to next year. So see you again on the Q3 earnings calls somewhere in Jan. Thank you so much.

Thank you. ladies and gentlemen, on behalf of SKP Securities Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.