Somany Ceramics Limited (531548) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to Somany Ceramics Limited Q2 FY of '24 earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agarwal, Head, Institutional Equities, at SKP Securities Limited. Thank you. And over to you, sir.

Good afternoon, ladies and gentlemen. At the outset, apologies for this delay. On behalf of Somany Ceramics Limited and SKP Securities, it's my pleasure to welcome you to this Financial Results Conference Call. We have with us Mr. Abhishek Somany, MD and CEO; Mr. Sailesh Raj Kedawat, CFO; and Mr. Sunit, Kumar, Head, Strategy and IR. We'll have the opening remarks from Mr. Somany, followed by a Q&A session. Thank you. And over to you, Abhishek-ji.

Thank you, Navin. [Audio Gap] Thank you for joining us for the earnings call of Q2. This -- as you can see the results, it has been a muted quarter, as far as volume is concerned and, obviously in that case, the value is concerned. We've grown only by about 6% on sales. EBITDA, however, has gone up. Correspondingly, PBT and PAT has gone up in a very handsome way. That's [ owning ] to 2 attributes. One is lower fuel costs, energy costs; and also slight bit of improvement in our realization that is mainly purely because of the extra-value-added products which have started kicking in. As you can remember, we have put in significant capacity for GVT in the past 24 months. The -- so that has started slowly and steadily showing up in more value-added sales. Hopefully, this trend will continue. Max plant, which was our latest GVT big-format, large-format, slab tile plant, has started this quarter. And we should start getting the production from that in the fourth quarter of this year, which will again add to both volumes and also to value. As far as our ceramic polished vitrified, which is PVT, and glazed vitrified, which is GVT, segment is concerned, in Q2, the ceramic was at 37%, down [ 2% ] from 39%. The PVT was almost flat, from 28% to 29%. And the GVT has improved from 33% to 34%, but in H1, it has improved from 32% to 34%, so this improvement will -- then will continue. And we hope that GVT would be well past the 35% mark this year and closer to the 40% mark later in -- probably next year. For sanitaryware and bath fittings. Again with the muted demand, the sanitaryware and the bath fittings also have been muted. However, in that, the bath fittings has done much better than sanitaryware. The sanitaryware growth has been just 3%, whereas the bath fittings growth has been [ 30% ]. This trend should balance out somewhat, where for sanitaryware growth also, we are hoping that would become much better in H2. The gas prices, which are firming up now, closer to winter every year, they come up, so that's coming up again. For us, there has been approximately a INR 2 to INR 3 increase [ from ] average price of last quarter, which is in the current quarter. As we speak, in October, the firm-up in gas has been maybe INR 2 to INR 3 per standard cubic meter from the average of the last quarter. However, this is still not an area of concern currently. We are hoping that no other global factor disrupts this movement. The fourth part which has led to slightly better margins is capacity utilization. If you can remember, in the first quarter, our capacity utilization was nearing the 70%. We are now closer to the 85%, 86%. Specifically, in tiles, we have been approximately 82%. Sanitaryware is 52%, and the faucet division is closer to 70%. Faucet, we are hoping that this will again move to ahead of 80%. And sanitaryware, we should be in the 70% to 75% range in H2. Tiles, we are hoping that we would better this [ by a couple of more percent ]. The brand spend. That again -- as I've always maintained, that the capacity utilization is a big lever in the margins for any tile company. The brand spend has been at par with what we have maintained. That's 2.5% in H1. However, in Q2, it's a bit higher, to -- closer to 3%, so overall if you see in the year, we will be on the trajectory of about 2.8%, 2.9% of revenue, as far as brand spend is concerned. There has been a significant improvement in the new dealer addition. We have added 130 new dealers, net of what we lost in H1; and 22 new showrooms, net of some showrooms which got shut, so significant improvement. Large part of that has happened in Q2. And this trajectory, again, will get only better as we move in H2. I would now come to the guidance. I think, the guidance, looking at the muted growth in Q1 -- and we were hoping for a better Q2. I was maintaining that we would be able to attain a good teens growth, as far as volume, value is concerned. I think, to be cautious as to how the demand has moved in the Q2, we are now very confident that we will be able to achieve a high single-digit growth, as far as value, volume is concerned, so that is something which I have revisited in this quarter. As far as the margins are concerned, we should be able to maintain current margins. And if the volume grows a little higher, margins will only improve from here. The only caveat there is there should not be any huge impact of oil and energy like we saw after the Ukraine war, so anything in the current range, $10, plus or minus, we're fine, but anything which goes crazy like last year, that would have an impact. But minus that, we should be able to maintain our margins. This kind of sale which I'm projecting and this kind of margin which I'm projecting, it's needless to say that our balance sheet discipline will continue. And we do not wish to have any compromise on any balance sheet discipline. If you see our working capital days standalone and consolidated, that's a clear indication as our balance sheet is well under control. Exports for the industry has grown. In August, the annualized -- in August, the figure of exports from Morbi was INR 2,100 crores, so if I had to extrapolate that and annualize that, we're looking at a INR 24,000 crore, INR 25,000 crore export for next year. And this year, we are quite confident that the exports from India would be closer to the INR 20,000 crore figure. So this is where the normal working of the company is concerned. Now we move towards another new thing which we have witnessed, which is the SREI bond. That is the 18 crore -- [ INR 18.44 crore ] provision which we had made about 3 to 4 years ago on the SREI bond. Apparently, there has been a resolution from NCLT. We have got knowledge of that. We don't have 100% details on that, but whatever paper we have, that says that we would be able to get back closer to INR 6 crore out of the [ INR 18.44 crore ]. This is yet to be realized, but the information which has come from the authorities and NCLT tells us that we would be able to realize close to INR 6 crore out of our write-off, so the rest of it which has been provided, we would then -- once the final resolution is there in place, we would then write-off the balance amount which is currently only provided for. This is as far as the SREI buyback is -- or the SREI bond is concerned. Another highlight, which I've already mentioned earlier in the call, is the max plant. Very happy to say that, that started on time. And we should -- we're very looking forward to a launch closer to early next quarter or the last part of this quarter, so looking forward to that particular launch and looking forward to a much better H2 going forward. Thank you so much. I would now like to open this to Q&A. And before I say that, please -- happy Diwali to every one of you.

[Operator Instructions] We take the first question from the line of Ritesh Shah from Investec.

A couple of questions. Sir, first is on working capital, if you could please explain specifically on the payable days. What is the change in strategy? Will it impact the interest cost or not? That's the first question. Second is on the cost curve, if you could give a regional flavor and specifically how it is faring for Morbi or West versus on a blended basis. I think that's the second question.

I didn't get the second question, Ritesh. Can you please repeat that?

Sir, second question is on basically every quarter you give this number of rupees per SCM basis for different regions. So how it has fared for...

[indiscernible]. I would -- so the -- in my Bahadurgarh plant, which is the Haryana plant, Q2, we are at an average of approximately INR 42, INR 43 a standard cubic meter. In Morbi, it is the same, about INR 42, INR 43 a standard cubic meter -- and in our South plant, which is at INR 50 a standard cubic meter. This has all gone up by INR 2 to INR 3 as we speak. Does that answer your second question, Ritesh?

Yes, sir. And so when we say it is INR 43 for West, should we read this that this would be a broad ballpark number for entire Morbi as well? Or will they be...

Yes, yes, yes. Whatever gas we are getting, we're getting contracted gas, so this is a ballpark number for everybody who is on the contract gas, whereas somebody -- some people in Morbi are not contracted. They are INR 2, INR 3 more expensive, but that's very [indiscernible].

Okay. Sir, if I have to just give a follow-up over here: I think, one of our peers, the number what they indicated for West was significantly lower than INR 43. It was lower by almost INR 6 to INR 7 per SCM. Probably I can check on that or circle back to you on this question, but...

Yes. In the West, it's impossible. [ There's a miscommunication, yes ].

Sure. That's helpful. And sir...

Because we're getting from the similar single source, Ritesh. We're getting from GSPC. Unless that peer has access to some gas which is the ONGC gas, that, I'm not aware, but 99% of Morbi is on GSPC. And their gas will be anywhere between INR 40 and INR 42, depending whether they're using propane or LPG or natural gas, so it's not going to be more than INR 1, INR 1.50 or -- difference.

Sure. And sir, on a blended basis North, West, South at a company level...

INR 44.

INR 44, perfect. This is helpful. And sir, on the first question, on working capital, specifically payable days...

Yes. I'll have Sailesh speak to, take that question.

So Ritesh, on working capital, I think you are seeing a substantial jump in -- [ mostly ] a jump in trade payables, right, close to [ 100 crores ], if I -- if my numbers are right. So I think that's your question around working capital.

That's right.

Okay. So Ritesh, what we were earlier doing was, till last year, we were -- those vendors who wanted to get early payments from us, we had given -- we had opened facilities from bank. Bill discounting was enabled for vendors. And vendors used to come, get their bills discounted using our lines. So this was there till last year. Interest was on the vendor account. We have discontinued the facilities this year. What we have done is we have done a paying arrangement for the vendors, so any vendor who wants to avail an early payment, they can reach the -- they can get the payment and we make payment to the vendors on the due date. So there is no change in payable day for vendors. The payable day remains the same. It's only change of arrangement which has happened where vendors are not utilizing our lines, so if they want to get early payment, they utilize the payer arrangement.

Sir, sorry. You went a bit fast. You said now, what we are doing, we are paying. The payable days remains the same for the vendors. What -- I could not connect that, sir.

See. The payable days for vendor remain the same. Any vendor who wishes to get an early payment, earlier, they were using our bank lines. They were getting their bill discounted using Somany's bank line, so whenever they use our bank lines, our borrowing was going up and the payables were going down. [ Credit ] interest was on vendor account. Now what we have done is, if any vendor wants to get an early payment, there's a paying arrangement which was made. They go to the payer. Payer funds the banker, and we make -- the payer funds the vendor and we make payment to the payer on the due date. So there's a shift which has happened from borrowing, the short-term borrowing, which was there earlier [ in our ] bill discounting lines, to vendor payables. [ That's basically it has ] happened. [ Firstly ], the vendor payable days remain the same. There's no change there...

So Ritesh, just to clarify. The meaning, vendor payable days remain the same, is there is no change in credit period as such, so whatever credit period we are getting from supplier, it's as it is. And without any jeopardy to supplier's arrangement, it's the same. If anyone wishes to get early payment, they can go and use that arrangement which we have done and they can get the early payment at their own cost. So this is what we're saying here.

Sure. So will there be any change in interest costs? And is this...

[indiscernible] request you to join the...

No. It was not on our account, Ritesh, earlier, also -- now also.

The next question is from the line of Viraj Mehta from Equirus PMS.

Congratulations for the set of numbers. My first question is, sir, regarding the demand outlook. Obviously, in your opening remarks, you have that -- cut your guidance in terms of what you are thinking and what will happen, but sir, as far as exports are concerned, they are doing very well, so the whole industry was expecting second half to be better. That seems to have been pushed out. What factors do you think have played out for that to happen?

So Viraj, I still maintain second half will be much better. If you've seen, we're looking at a 6% average growth for industry leader and us in the first half, correct?

Yes.

And in H2, we are saying we are looking at high single digits, which means that we will grow at a much more significant pace in second half to get my average down to that high single digit. So I still maintain H2 will be good. Export is a different animal...

Yes, sir. So high -- please complete, sir.

Which Morbi is the significant exporter from India. The branded players do not export even a fraction of what Morbi does. So if you look at a INR 20,000 crore export, the top 3 players, which is Somany, Kajaria, Johnson, would collectively not even export about INR 200 crore, INR 250 crore out of that INR 20,000 crores. So export for us is still building up. We do not give any open credits. Or we do not work on very, very, very long LCs. We do not work with LCs from unheard-of banks. So all of those restrictions, we are very careful while we export because -- for 2 reasons. A, we don't want to disrupt our balance sheet. B, we are also producing far better quality and we get a brand premium in India. So export is doing very well. Domestic probably will remain completely flat, as far as India is concerned.

Right, right. No, what I meant for exports was, if exports do well, then the capacity in Morbi gets shifted there and then we face lesser competition domestically. That was the whole point I was -- I know we don't export. Or Kajaria doesn't export.

That's -- you're right, but let me correct you. If you remember, about a couple of hundred companies came up in the last 18 months after COVID, which started in Morbi. All of that were for export focused. They got in a catch-22 because, by the time they had started to fire up and come into production, the Ukraine war pushed the freight prices absolutely to a skyrocket figure. In the last 18 months to -- these freight rates have started coming down, so all of that capacity which was actually built for them started getting consumed today. So it's not that we had a lot of capacity which was 100% utilized. That is getting exported. It is the unutilized capacity which is now getting [ exported ].

Right. And sir, when you say that we are looking at high single digit, that means for the second half you'll still have to do like 12%, 13%, 14% kind of growth. How much...

[ So it's a stiff path ], but we're going to try and achieve that, yes. I'm saying that's a stiff path. You're absolutely right, but we'll try and -- we're going to try and achieve that.

And how much, sir, would be realization growth? And how much of that will be [indiscernible] growth?

Viraj, realization growth, there is going to be out of the value-added segment. And I think, in fourth quarter, you will see a little more of that because the max plant would have started contributing to the realization, which is a product which is significantly higher in value addition. So I do maintain that, with the exports taking a lot of the load of Morbi, I don't think realization is under serious pressure.

We'll take the next question from the line of [ Dhwanit Savla from Savla family office ].

Sir, congratulations...

Sir, the line from [ Mr. Dhwanit ] is disconnected. We'll take the next question from the line of Mr. Nikhil Agrawal from VT Capital.

Sir, my question was on the -- like what is your margin -- what is the difference between margins in the -- between outsourced and your JVs and your own manufacturing? If you could help me on that.

Yes, sure.

So Nikhil, as far as our product margin is concerned with respect to sourcing mix, our own plant versus the JV, outsourced, right, which includes JV at a stand-alone level. And at consolidated level, own plants means JV and own plants together. So gross margin would be higher, as far as own plant is concerned, because traded outsourced volume comes at a total purchase cost plus a manufacturing margin of the outsourced partner, but if you talk about [ the bottom ] level, which is more of a [ PBT ] level, which is the right metrics to evaluate, then it's more of a product which makes the difference and not the sourcing mix, largely. So between -- it's normal to say that, if I manufacture the same product and if I outsource the same product, then obviously it will make the difference, but if I manufacture a low-end product and also high-end products, then it will be other way around and my margin will be better in outsourced. So it cannot be generalized that much, right, so you have to take cognizance of both sourcing mix as well as product mix. Then only you will understand it properly.

Okay. So the reason why I'm asking this is because your outsourcing and JV, which have increased -- and your own manufacturing has reduced quarter-on-quarter, but still your margins have improved, so like going forward, if your own manufacturing as a percentage of mix increases, do we expect more margin expansion...

I'll tell you what is happening. When you are seeing the mix, the revenue mix in own, JV and outsourced, right, here, JV is dissected, but when you look at the margin, which is the operating margin at a consol level, JV is not dissected because JV is here treated as own plant in case of consolidated operating margin, right. So you'll have -- [ correct the investment ] and then interpret it. And when you say JV in sales revenue mix graph which is in our investor deck, right, it's not JV for the sake of consolidated financials. It's actually own because [ its alignment and ] consolidation is happening. And entire manufacturing margin is getting captured, including our own margin.

All right. I'll [indiscernible]. And sir, you spoke about the realization from the brokers. This was related to Mentor Financial Services, right?

No, no, no, SREI, SREI bond. So we have a bond of SREI [ achievement ] of [ INR 18.5 crore ]. So resolution plan is approved, and that was the update we have shared.

So you expect to realize INR 6 crores from that.

Yes, expected. That is likely an expectation. Let's see when we get the final proceeds.

That's what the authorities have told us.

We'll take the next question from the line of Sneha Talreja from Nuvama.

Congratulations on great balance sheet improvement. Just a couple of questions from my end. I just wanted to understand on the demand front. We -- in this particular quarter, in fact, we have seen strong [ show by wood panel players ], including plywood, demand is up. Plastic [indiscernible]. [ Where ] is it that tile demand has not been able to pick up? Some sense there.

So I think it's to do with all the inventory which has got sold was all made inventory. So in the real estate, now that a lot of new launches have happened -- tile demand generally picks up maybe 9 to 12 months from when the real estate starts getting built, so you will see a lot of the tile demand coming in next year. So -- and in India, there has been -- I guess the consumers, the traders have diverted their funds to various other investments in properties [ with that and the other ] in the last 12 months, so that has also reduced the demand a little bit, but otherwise, there is no threat in the long term of any demand. This is all short term.

And then [ similar trend ]: So the demand -- like metros are doing well. The smaller cities are not doing well. Or the new residential is doing well and renovation is not doing well. How much this trend, in case you can highlight...

So this time, the demand has been tepid or a little less, pretty much everywhere. There is no specific trend that South is worse than North or North is worse than South. Neither has there been a trend between big cities and small cities. It's an overall demand which is lower which is across India, so when demand picks up, it will pick up in the smaller cities, which are for IHBs, individual homes. And as far as big cities are concerned, that will pick up for the builder market. So the builder market is more controlled by -- the cheaper builder market is more controlled by Morbi, but the IHBs are controlled by the [ mega ] brands.

Understood. And recently, we are also hearing that around 400-odd crores of investment -- or 4,000-odd crores of investment is again happening in Morbi with some 40 players coming in. Is that on the basis of real estate demand pickup that they're [ envisaging ]? Or is it continued strong exports that we're seeing? And you were talking about it hitting 2,100-odd crores a month last month.

So a large part of that is for export. The balance is for renewing old equipment, so they are getting rid of older equipment and putting new equipment. This is not really a large capacity addition. So for example, let us say they have a 7,000-, 8,000-square-meter kiln that will go down and a 10,000- to 12,000-square-meter kiln will come up. So it's not going to be a massive increase in capacity. The third reason is, of course, looking at the demand in India. So if we are looking at so much more capacity being added, obviously, we're going to be looking at more tiles to be sold in future.

We'll take the next question from the line of Amit Purohit from Elara Capital.

Just continuing with the same question on the demand profile, I wanted to understand. What is the class of customer which is witnessing good growth? So we reported a 6% kind of volume growth, so what has led to this growth...

I didn't quite get your question. I'm sorry. Could you repeat it?

Yes. So I'm trying to understand the profile of the customer which is witnessing a good growth since the overall growth has been about 6% in volume terms. So what is it -- which segment would have witnessed a good double-digit growth for you?

The answer to that is that our class of customer doesn't change. We -- 80% of our products go into retail, which is in IHB and some renovations for the upper middle class and that area. And the balance goes into projects and government. And the rest of it which is left goes into the corporates, which is the organized retail, et cetera, et cetera, so I don't think, any specific area, we have grown. All I can say is that this is a continued trend where the larger brands keep continuing to take market share from Morbi in the domestic sector.

Okay, okay. So broadly or almost all of these 3 segments that you highlighted would have grown at a similar pace you see.

Yes, yes, absolutely.

Okay. And second, on the capacity that you talked about, large slabs. So the big tiles which you are indicating, what is the total capacity in that...

So depending on what -- I mean it's been rated as a 4 million-square-meter plant, but then it all depends on our product mix between the 15-millimeter tile and the 9-millimeter tile, so that is yet to be seen as to [ what ] orders kick in for us. As you can imagine, 15 millimeters obviously is a larger mass, so we'll produce lesser square meters. So I cannot answer that question right now. However, the plant is rated for 4 million standard -- 4 million square meters at the 9 mm level.

Okay, okay. And what would be the realization difference between this on a per-square-meter basis versus the normal realization that we report?

So there are 2 things to it. Again it will depend on how much the 15 mm and how much the 9 mm, so I would want to answer that question with more clarity next quarter when we start getting the orders and selling. It would be only guesswork at this time because I do not have the product mix.

Okay. And lastly, just wanted to know. What is your current dealer count and sales team and strength in the organization?

The dealer count is approximately 3,200, if I'm not mistaken, Sunit, the last dealer count...

Addition...

No, no, total dealer count.

[indiscernible].

Yes. So about 3,200 is our dealer count. And the number of salespeople across sanitaryware, bath fittings and tiles is approximately 600, 650 people.

600 to 650, you said.

Yes, yes. I don't have the exact figure...

Yes, no problem. And dealer, you said 2,200, right, or...

3,200.

3,200, okay.

We'll take the next question from the line of Keshav Garg from Counter PMS.

So firstly, on behalf of all the shareholders, I want to thank you for the share buyback. And sir, we hope that this is the first but not the last share buyback. And sir, secondly, sir, coming back to the demand question. Sir, if you see, all real estate companies are -- the volumes that they are doing are at all-time high. Their revenues are at all-time high, so the concern is that, sir, is the polymer flooring substituting ceramic tiles, sir? Because Welspun and many other companies have gone into polymer flooring, so sir, what are your views on the same over the long term?

So we are extremely fortunate. And if you are a shareholder, you should be extremely fortunate that it's a tile company and not a vinyl company. It cannot substitute. I'll give you 3 pointers. A, vinyl has a restriction of size. They cannot make a size larger than, I believe, a little -- lesser than 2 feet by 4 feet, whereas tiles are now being produced on a normal basis which is 3 feet by 5 feet and, on a very large basis, 6 feet by 10 feet. So that's an issue. Apple to apple, per square meter, the cheapest vinyl, which is really pathetic-quality vinyl coming in from China, [ and there is that and the other ], not the Welspun types, is between INR 80 to INR 120 a square feet, whereas Welspun is in -- is closer to INR 150 a square feet. Tiles apple-to-apple comparison is between INR 30 to INR 40 a square feet, so there is absolutely no comparison. The designs, the textures, the finishes, the top surface and all of that is greatly superior in tiles. They cannot replicate so many of the natural stones and natural fabrics, natural woods which tiles can do, so it's not a substitute. In fact, I would think that we are going to be seeing tiles taking over a larger part of most of the flooring materials and, very soon, even the wall paneling material in the coming days, so no threat at all.

Great, sir. So that was really reassuring. And sir, also wanted to understand, sir, the faucets and the other non-tile business that we have started, sir. Is there any product line which is making losses at the -- basically makes losses at operating level?

None at all. I -- if you've asked a pointed question: The [ geyser ] is the latest introduction, but the losses there are so insignificant that it's not worthy for mentioning. The losses in [ geysers ] are -- on an annualized basis will be about [ INR 30 lakh, INR 40 lakh ], if at all, so it's insignificant. And that also should start improving next year.

[Operator Instructions] We'll take the next question from the line of Jyoti Gupta from Nirmal Bang.

Sir, I have 2 questions. One question is we have a huge dealer network of 3,200. Is there a dealer-per-dealer productivity which is -- which we could look at? Because compared to Kajaria, which is [ 1,400 -- 1,800-odd ], we are almost double in terms of the dealer network. And I mean I was expecting a very good tile performance number, but we didn't see that, so this net addition of dealer, how are we seeing that in terms of improvement in terms of the sales and distribution in the Tier 2, Tier 3, Tier 4 cities? One is that. And second is [ usually the tiles come to the far end ] of the construction. And while you've had good numbers in the construction side, I'm hopeful that -- since tiles also require the drier season to -- for [ sealing ], do I see quarter 4 numbers performing better than the third? Or will both the quarters [ be better at par ]? Because it looks like -- I mean single digit seems again we'll have a single-digit number in the third quarter as well. I just wanted to understand your point of view on that.

Yes. So the first one, yes, there is a historic reason why there are lesser number of dealers but much larger dealers in terms of number of crores which each dealer does. That's what your question was between Kajaria and us. And they have been sales tax exempted until, up till 2014, so they historically had very, very large dealers unlike ours, but if you look at the total count of the footprint in the -- at the ground level, their dealers; and their subdealers, which is retailers, are a good 3,000 to 4,000 maybe a little more than us. We have 3,200 dealers but approximately 10,000 to 12,000 touch points. They have about 2,300, 2,400 dealers, but they have approximately 15,000 touch points, so their touch points are much, much larger than us, but the historic reason does have an effect on the number of dealers and the efficiency. But that will start correcting out because they are also now aggressively making more and more dealers and the bigger dealers percentage is coming down. The second question is that, yes, quarter 4 is a -- far better numbers than quarter 3. And you're largely right, although we are hoping that quarter 3 would be slightly better than our quarter 2, but quarter 4 will be the bigger -- we'll be [ backing ] the maximum, as far as the growth is concerned this year. That will also be coupled with our max plant, which will again give us whatever it gives us. That will be an extra amount which will come to us in quarter 4, so all in all, quarter 4, you're largely correct, will be far better than quarter 3. [ I hope I'm able to ] answer both the questions.

Yes, you did. So do you expect a double-digit growth more in FY -- in the quarter 4 and maybe a single digit in F -- quarter 3? Because I personally see that, since you have a financial year construction closing activities, therefore, tiles should be posting a very good number, but apparently -- and second quarter, while there was -- I wasn't really expecting [ a very good ] number because monsoons -- because of high moisture everywhere, [ sealing ] doesn't work that well. So third and fourth should be good, but then I don't know. The confidence in terms of performance seems to be lukewarm again in terms of tiles despite a strong real estate...

[indiscernible]. A large part of it is exported. Whatever growth you see is exported. Otherwise, tiles, I think we should be looking at much better growth quarter 4; 1, 2, 3 for next year; and thereon. Clearly, tiles has been muted, as far as demand is concerned, in the current scenario, so it is under pressure. The only saving grace is that our capacity utilizations have gone up. Margins will keep getting -- we should be able to maintain [ margin ]. And please don't, also, forget that we have added 25% capacity. So the utilization which we are talking is on that capacity. Therefore, we showed poor margins and poor utilization in first quarter. If that starts improving, at least one piece, the balance sheet and the margin should start getting better and improved or sustained. Now growth will kick in. I'm not worried about the growth in the medium and the short term -- in medium and the long term. In the short term, you are very, very correct, there has -- there is pressure. And the reason to say that, I said that earlier in the call, in the next 10 years, we're looking at about 150 million to 170 million people getting urbanized. All will need homes and tiles is the preferred material today, so I'm really not worried on the medium and long term.

[Operator Instructions] We take the next question from the line of Mr. Rahul Agarwal from InCred Capital.

Abhishek, I had a question on all the new businesses. So basically, if I talk about -- and these are all which you are incubating right now. So Bathware, this is in the Nepal joint venture; as well as the large slab. If you could help me understand the next 3-year plan, largely in terms of how you want to build these businesses. And I also assume that these businesses have higher margins than what we do right now in terms of the entire existing scale what we have. And they also have better payback periods. So just wanted to understand. How does this business [ going to ] increase in terms of revenue share? How does Somany look like 3 years out?

Sure. So number one, the max plant, that is a tile plant. Now the payback will largely depend on how much of value added I will be able to [ makes ] out of the max plant. So if I make -- very quickly scale up the value-added segment, then the max plant can pay back within 3, 3.5 years. If I don't, then it will be maybe closer to 5, 5.5 years, so it's a -- if it's a 5, 5.5, it's a long payback, but it's a question of putting it versus not putting it. You've got to have this capacity, so it was one of those things where a responsible brand needs to put in that investment and be ready for the future. So that max plant, if we scale up capacities fairly quickly, we have enough land there to put up another max line in that location, so which will come at a much, much lesser cost than what it is today. So that is number one. So that's the trajectory, that we have to, first, utilize the max plant at 100% capacity. Whatever we make there -- let's say we don't make 100% value addition, but whatever we [ want ], we want to keep running the plant. The second one would be to start substituting and removing the non-value-added from the max plant and keeping on beefing up the value-added segment to get my payback much easier. So that's as far as the next 18 to 24 months would be concentrating on the big slabs, 4 million square meters of big slabs; easier said than done. The same 4 million square meters, as far as wall tile is concerned or my normal 2 feet by 4 feet vitrified tile is concerned, would have been consumed within 12 months, so this is going to be a tough one, as far as value added is concerned. So that's the 24-month outlook for the max plant, and once we do that, we would want to double that plant at the same location. As far as new businesses is concerned. Sanitaryware, we are changing the value mix in the plant. And the idea is to scale up sanitaryware in that plant with a better value-added mix, in which case, we will be ready in the next 12 months to put another sanitaryware line. So in the next 2 to 3 years, you would expect that we will be doing some investment in the sanitaryware segment to scale up that capacity by at least 50% of what it is today. As far as bath fitting is concerned, we have already made a reasonable amount of investment. And we are in a position where, in the next 12 -- sorry, next 24 months, we should be able to double the revenue, as far as Bathware -- as far bath fittings is concerned. And we have made an investment. There may be balancing equipment required of -- while we chug along, for making quality better and also for enhancing the product mix again over there. That's as far as Bathware is concerned. So these are the 3 primary businesses as of now which is where the outlook is. So to answer your question in another way: Tiles, we do not see any requirement of any expansion in the next 24 months. However, in sanitaryware, we do believe that there would be an expansion need in the next 12 to 18 months from today. Bath fittings, again, we do not need any expansion in a very large way. Small balancing equipment will be required.

Anything on adhesives?

Adhesives is something which is from the plants, so that keeps -- that's something which is a byproduct -- kind of a byproduct, as far as we're concerned. We're using our tiles to make the adhesives, so that will keep improving as and when the tiles keep getting used because a lot of players have also got into adhesives.

Perfect, very nice. And secondly, just one last thing, on margins. So apart from you increasing your manufacturing utilizations, the energy cost benefit is largely done with for H2 at least in terms of percentage of sales. Is that a fair statement?

I'm sorry. I didn't get you. I lost you in-between. Could you please repeat?

My question is, apart from increasing manufacturing utilizations, which can increase your EBITDA margins further, this 9.8%, the -- most of the energy cost benefit is largely done with for H2.

Well, energy cost benefits, it's to do with price of energy and also capacity utilization, so it goes hand in glove. So the 3 levers for EBITDA margin increase other than energy costs -- because that is something which is not under our control, but the other 2 levers are capacity utilization and product mix in favor of value-added products.

Yes, I'm pretty clear on that. What I was asking was the energy benefit is largely done with because we are seeing some increase in pricing, anyway, right?

Yes. I'm not -- I do not remember, last year, same time, what was the energy cost. Just give me a second, yes. So last year -- Q3. So I'm not too sure of the Q3 energy cost, but I think if you compare it to last year Q3, we still are at a much better position than last year Q3. But there will -- there are pressures on energy, [ owning ] to winter. Until February, March, prices may go up another INR 2 to INR 4 a standard cubic meter; and then they will start softening.

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

Sir, I just wanted to delve into the energy costs. Would it be possible for you to explain what is the thought process to actually optimize the costs? There are various variables available, right? Basically, you have Henry Hub's, which is where you have biogas. You have coal. You have spot. You have LPG, so what is your thought process? And will it be possible for you to give some sense on how our mix is or how it has evolved in the past?

Yes. So in Morbi, we have gone on ahead with GSPC. So we have 3 options there, as far as our kilns is concerned, so let's break it up into 2 segments. Let's break it up into the firing kilns and then let's break it up into the spray dryers, right? In the kilns, there is no option but to use any gaseous fuel, which is LPG propane, natural gas. At one time, there was coal, but that's history, so right now in the kiln we can only use natural gas, LPG or propane. Currently in Morbi, with the propane and LPG taxation which have gone up, it's almost at par with natural gas, which means we have only 2 sources, GSPC; or then one of the suppliers of LPG propane, which could be HPCL, BPCL, et cetera, et cetera. We do not have access to any spot. We do not have access to any IGX exchange gas. So GSPC does not allow that. PNGRB has not come up with any transportation tariffs, so therefore, we are only restricted to buy from GSPC. That's as far as the West is concerned. All our West plants are in the same boat, and all of -- Morbi is the same. Now in Morbi, the spray dryers: In the -- in Morbi, the spray dryers can still run on coal/biogas, so they are using either/or, depending on what is cheaper, in a seasonal way. Now let's move to the North. In the North, we have access to GAIL gas. And we also have access with GAIL's every -- GAIL, every now and then, gives us cheaper gas which is from the exchange, so that is something which we don't go to the exchange, but GAIL is able to offer us at every given time every quarter, quarter-on-quarter. Where price fluctuates, they are able to give us some cheaper gas. But we do not have access to Henry Hub or JCC, so I'm not -- I can't go and contract Henry Hub and JCC. They may be giving us the same gas, but I'm liable to take only from GAIL, in a larger sense. I do have a little bit of gas which we buy from IGX. Last year, we did that. So we do have access to IGX in the North because of PNGRB has clear tariff which has been defined here. And again, in the North, let's break up: the spray dryer. Spray dryer, after the NGT order in the North, all our spray dryers are now on biogas. Coming to South. South, we do not have access to any gas other than spot currently which we are buying from IOC or a city gas distributor, whichever is cheaper currently. And the spray dryers in the South, again, are running on coal or biogas, depending on what is cheaper in which season. This is the breakup.

This is very, very useful. Really appreciate it. And sir, is there any policy framework to optimize the costs? Or we decide this [ on a ] weekly, fortnightly basis based on the demand projections. How should we understand that?

Which cost?

Sir, basically whether you will go for coal or biogas. Also you indicated GAIL or a little bit...

[ So all parts ]. If gas is INR 2, INR 3 more expensive -- so let's say, if it's within 10% more expensive, I would rather use gas. It's a cleaner, more efficient fuel; and also it gives me slightly better quality. If it is -- if any of those -- coal/biogas/gas, if I have an option, then I would -- in the kiln, we don't have an option. We go for gas, but in the spray dryer, we flip-flop between any of the three, depending on what the prices are. So the policy is very clear: not to be foolish penny-wise, pound foolish to buy the cheapest fuel and disregard quality and disregard life of the equipment. So 10% is kind of the ballpark, under -- after which, we need to make choices.

Ladies and gentlemen, we'll take the last question for the day from the line of Aasim from DAM Capital.

I just wanted clarity on how the 3 elements within working capital will move from here on. Receivables, I think you've always said there is scope for improvement, but maybe a fresh sense on all the 3 line items over here.

I think our receivables today are at optimum level. In fact, if we give a little leeway, right, we can always do a little bit more sales, but we are real tight on the savings. And I think that's the first point which was mentioned on the balance sheet strengthening. So receivables, I think we are at optimum level. It is not going to go down from here. Maybe, 1 or 2 days, it can still increase because we are at an optimum level. As far as inventory go, we are at 56 days today. I think this is slightly higher. We have -- we are trying to reduce this. I think quarter 4 is where this should come down another 2 days or so. Creditors, once again, we are at optimum level. We are paying everything on due date, so there's [ no ] leeway there. Everything is paid on due date, so whatever you are seeing as payable days will probably remain constant.

The sharp rise that we've seen as of H1, that would continue to persist. Or would that at least come off?

[indiscernible] I explained that in the beginning. For your benefit, I'll once again explain it very, very briefly. So there is no change in payment term for creditors. Earlier, till last year, creditors were using our bank lines for getting their bills discounted and getting early payments. That facility, we have discontinued now, so the payable days what we are seeing today is the correct payable days. All those creditors who wants to get an early payment today, there is different payer arrangement which is done which is at their cost. So they'll use that payer arrangement, get their bills discounted.

That's fine. And basically, it will persist. Okay.

[ It will persist ].

The second and last question basically was on the Bathware business. I think -- I don't know if you guys have ever mentioned it, but what is the EBITDA margin of this business currently? And if you have any like goals of where that can settle on the future.

So both of them blended is slightly better than tiles, and that would only get better as and when that scales up.

Thank you very much. That was the last question in the queue. As there are no further questions, I would now like to hand the conference over to Mr. Somany for closing remarks.

Thank you, everyone. I wish you a very, very happy Diwali. And looking forward to the earning call in Q3. Thank you.

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