Somany Ceramics Limited (SOMANYCERA.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Somany Ceramics Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sagnik Sarkar from SKP Securities Limited. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen. It's my pleasure to welcome you all on behalf of Somany Ceramics Limited and SKP Securities to this Q1 FY '26 Financial Results Conference Call. We have with us Mr. Abhishek Somany, MD and CEO; Mr. Sailesh Raj Kedawat, CFO; and Mr. Kumar Sunit, Head, Strategy and IR. We'll have the opening remarks from Mr. Somany, followed by the Q&A session. Thank you, and over to you, Abhishek ji.

Yes. Thank you so much. Good morning, ladies and gentlemen. Welcome to the Q1 FY '26 earnings call. As you have all seen the results already, there's been a muted demand on account of lower sales in India and also there's a little bit of pressure on lower exports from Morbi to various parts of the world in Q1. Exports declined to INR 18,000 crores last year. And I think this year, it would be a further decline, a couple of thousand crores is what the current trend is showing. Our sales grew by 4%; and by volume, 3%. I must make a point here that there is a specific sale of Nepal, which adds about 1.2%. In Nepal, we have come to an agreement where knowing to the specific laws of Nepal, we will be getting the sale profit only towards the end of the year, but the sale does not get counted because it's traded goods and Nepal doesn't allow to consolidate in the sales in Somany. So if I had to account for that apple-to-apple, it would be about another 1.2% growth of sales. Operating margin is marginally impacted due to low capacity utilization. Gross margin increased by 3.2% in Q1 quarter-on-quarter, and it declined 1.8% Y-o-Y. Largely, I would think it is flat. JVs were the places where we had the maximum pressure. On a stand-alone, we did reasonably okay, although the stand-alone capacity utilization was also low at 72%, whereas the consol capacity utilization reduced from 81% to 77%. There were 3 plants, which were underutilized. One was the Max plant, which is the high-end tiles. We have been extremely patient to make sure that, that plant only produces high-end tiles currently. So some other corrective action has been taken to further improve the capacity utilization this quarter, and it's already showing some signs that like in H2, this would be much better than what it is in H1. On the sanitaryware front, there was a major kiln shutdown. That is back to 100% capacity as we speak. But in the first quarter, it was impacted, which was a situation where we had to completely shut down that kiln to repair it completely. It will also yield a better quality and a little better yield and it's back to 100% capacity. So second quarter should be very good from that point of view for sanitaryware. The depreciation impact was approximately INR 5 crores in Q1 compared to Q1 '25. This is on account of reduction of life of some assets, so an accelerated depreciation. So once again, the capacity utilization at 77% sales at INR 601 crores. Correspondingly, you have seen the EBITDA. The EBITDA basically gets impacted. I've said it earlier also on capacity utilization. So this capacity utilization, we've taken -- we're taking a lot of measures to make sure the capacity utilization is up and running by this quarter, a little better and also H2 would be 100x better than what it is today. As far as the tile segment revenue is concerned, ceramic consisted of 34%, down 1% from quarter on -- from last year same quarter Y-o-Y. PVT is at 26%, down 2% and GVT is up to 40%, up from 37%. Gas prices are pretty much in line. Capacity -- brand spends will be in line of -- with last year, plus or minus a couple of crores. Working capital has marginally increased by 4 days. Net dealer addition has been approximately 65 dealers in this quarter. Our guidance, we're not changing the guidance. We're still guiding for high single-digit growth and EBITDA expansion of about 1%, 1.5%, and we are very, very confident of the EBITDA expansion if we have a better capacity utilization, and that is something, which we've taken very concentrated steps to make sure that goes through. The other salient point this quarter has been that we have concluded the JV with Durabuild. That is starting -- the go to market will be next month. We are concentrating on all the waterproofing products currently, and then we will move to other patents and other IPs, which Durabuild has to offer. We are extremely hopeful and very excited for that new venture. It's a much better margin business. But of course, while we build out the business, there will be certain pressure in the year 1 and year 2, but it's a very, very exciting business of construction chemical. So extremely excited on those fronts. These are the salient points as far as Q1 is concerned. Q2 is already looking slightly better, although there's been incessant rains across North, but still it is slightly better than last year, July was. August is yet to be seen. It's early days in August. So let's see how that goes. We're very hopeful. September should be a great month. This is it from myself, and I would then open the floor to Q&A, please. Thank you so much.

[Operator Instructions] The first question is from the line of Pranav Mehta from Equirus Securities.

Sir, I just wanted to understand, since you have touched on briefly, but if you can elaborate more on this Durabuild acquisition, and how we are seeing things playing out...

Pranav, can you repeat it. The first few sentences, I couldn't get. Can you please repeat?

Yes. Sir, so I wanted to understand on the Durabuild acquisition, so you have touched upon briefly, but if you can elaborate more on what is the strategy for this going forward and how it will be, let's say, contributing to the top line and the margins by FY '27 and '28?

Yes. So early days to talk on the top line and the margins currently because it just happened. Obviously, the strategy is in place where we're not going to lose money. But just to give you a brief, Durabuild has about 150 different IPs. We bought it for the IPs. You already know what the acquisition size is. Over the next 3 years, we have the option of buying it completely, but we will move up to 75% and then maybe 100% by that time. There's skin in the game for the current partner to maybe earn out more while we sell the 100% within 3 to 4 years. Specifically, we are getting into construction chemicals out of the 150 IPs, we're concentrating on the waterproofing piece. The waterproofing market as what we estimate, obviously, we are not in the market. So we have not 100% data, but we have 90% strong data. The market, which we are trying to focus it is approximately INR 6,000 crores, and we are currently at ground zero right now. So that is the market, which we are trying to get. And he has IPs of waterproofing material, which is literally starting from the waterproofing, which goes into the concrete while the house is being built or the building is being built right up to the bathroom and the wet areas and the terraces and also waterproofing for the wall in case there are leakages in the wall or cracks in the wall. So it is called a crack-proof. Now pretty much all these products are available with industry leader Pidilite. And various other players like Sika, Fosroc, Mapei, Asian Paints, et cetera. So that's the segment, which we are looking into. There is also another segment, which we are thinking of getting into, which is admixtures because in the concrete, the admixtures for residential and building products, and this is not infrastructure. This is only for residential and commercial buildings. Admixture, that's another market of approximately INR 6,000 crores, which goes into -- as an additive in the -- on the site or in with RMC plants. So we are gunning for currently in INR 11,000 crores, INR 12,000 crore market. And both of those, we are virtually at ground zero. This particular company was only selling approximately a couple of crore rupees of adhesives and about INR 7 crores, INR 8 crores of admixtures. So it's -- admixtures is the B2B and the waterproofing business is both B2B and B2C. We are going to leverage our dealership, and there are certain dealers who are dealing with these kind of products. We're going to attract some of our larger distributors also to see if they want to start this business with us. Plus we will be also getting into certain hardware shops and certain other specific waterproofing and admixture -- waterproofing stores. The stores like paint stores, various hardware stores, but we did a little bit of a dipstick in a lot of our dealership, not a very significant amount, but a good 10%, 15% of our dealership also has now been dealing into waterproofing for some time. So that's the business that we're getting into. We are currently doing all the packaging and all the go-to-market. We should be ready to go to market in B2B, B2C for waterproofing towards the end of September.

Okay, sir. Sir, my next question was on this. So as you rightly mentioned that the demand continues to remain relatively challenging. And let's assume this year also, the exports continue to face challenges, then do you think that in the industry, the receivable part and the realization -- on the realization part, the worst is over? Or do you feel that still some competitive intensity might increase from Morbi...

No, I think the realization part is not going down. If you see our realization also, it's down a couple of rupees, but that's not because of price decrease, that's because of the product mix. Although we continue to make sure that we sell higher product mix. But in Q1, generally, it is a situation where some lower product mix also goes. So -- and some second quality materials, some old elite items, we've sold a lot of that and, therefore, the reduction. But from a price front, in fact, we've taken a small price increase in July. But there's been no further price decrease, so to say, apple-to-apple. As far as export is concerned, current trends are showing that it will be in that same INR 17,000, INR 18,000 -- INR 18,000 crores range. But the kind of quality, which has been compromised from Morbi is really not competing with us anymore. And frankly, Morbi is only surviving. Most of the Morbi brands, I obviously don't mean the industry leaders from Morbi, but 95% of the brands in Morbi are only surviving because of extremely high scale evasion of taxes, of GST. And that has also reached a peak where there is no further scope to evade taxes. I mean they're already billing at INR 10, INR 11 a square feet.

Okay, sir. And sir, on the receivable part for the industry, more or less...

Sorry, I didn't touch upon it. Sorry, sorry, I'll tell you about that. The receivable part, thankfully for us, we've gone down on receivables by a day. We are absolutely on the ball there and not losing focus. So touchwood, receivable as far as we are concerned is only better than what it was last year, while it is a pressured market. And we are not seeing any further changes there or any further movement there. So even in July and August, we are absolutely on the ball.

Our next question is from the line of Sneha Talreja from Nuvama.

Just a couple of questions from my end. Just wanted to deep dive into the current demand scenario in the domestic market, and any improvement that you are seeing in the export market also because that will define the competitive intensity from Morbi-based players. So firstly, from that front.

So Sneha, demand hasn't further gone down. It's under pressure. We have grown. Even in July, we've grown. So from that perspective, I wouldn't say that demand is further muted in India. Yes, there's a little bit of pressure because of especially in the value-added segment, where the scope of tax evasion is that much higher. That's the only one, which is a little bit under pressure. But we are holding prices. We've in fact increased prices a little bit. And we are also holding on our receivables. So from that point of view, this is the domestic demand. As far as export is concerned, we don't export a hell of a lot; however, our export will probably go up by 10%, 12% because our base is low. But overall, export will be lower is what the trend is showing. But one never knows in exports, there is those couple of months which do cover up. Even if you see last year, till H1, the trajectory was showing that it would be only about INR 15,000 crores, then it made up. And finally, it touched about INR 18,000 crores. So that's where the export is. It's not picked up, but has it gone down further? Very slightly, not a very large amount, but the trend is showing that it's not going to be more than INR 16,000 crores, INR 17,000 crores, but I'm the wrong person to ask for export. Probably your channel checks in Morbi would give you a better idea on export.

Got that, sir. Got that. Secondly, sir, I mean, the peer is into another level of cost cutting measures that they are taking. So just wanted to understand 2 to 3 things from you. Are you following any of those cost measures along with the leader? That's first. Do you see any implication of those cost-cutting measures coming to you in the form of maybe some ad spend cut and some market share gains? So some of these aspects in case you can touch upon, that would be really, really helpful.

Yes, I can't comment on their strategy. But as far as we are concerned, we didn't have such costs. We had a single person at the top where all the vertical heads working. We don't want to change that. We don't have separate divisions other than at the corporate level where there are separate vertical heads for GVT, PVT, ceramics. The only other team, which we have, which is working separately, independently is our sanitaryware team, but that's been there since inception of sanitaryware. And now the adhesive team, which is separate, but it's already been separate since inception. So we didn't have any large cost. But yes, when going is tough, then in legacy companies, there are certain costs, which you look at even more carefully. So if you've seen our employee cost, my employee cost has remained the same. Our increments have been -- we have given increments unlike some of the people who have given none increments, we have given increments, but we've been very, very cautious of that. And touchwood, our team also has been very, very cooperative on that front. If you would see that this year, we should be able to reduce -- if we grow in the humble digits also and not the high single digits, even then we will be able to reduce our employee cost as a percentage of revenue by 1%. So we're very careful on that account. As far as the other costs are concerned, in terms of advertising, which is the other big one, the advertising cost, we are not reducing, but we are maintaining. So as a percentage, it will probably remain slightly -- maybe a little more, but nothing very substantial. The other cost, which goes down, which we are looking at very carefully is making travel more effective because as you see, travel has become extremely expensive. So we are being a little more cautious using a lot of teleconferencing facilities, video conferencing facilities to make sure that reviews, travel, et cetera, is under check. Obviously, it can't be so much under check because it becomes counterproductive. But to answer your question, we are not following anybody. We have our own strategy. We don't have such crazy cost on human resources. But yes, there is obviously enough and more can be done to make the current resource more productive. We have taken one action, there have -- every year, there are certain attritions, which happen. In some places, we have not filled those gaps. Those are nothing very, very major. At all levels, we've not filled up those gaps, and we have extended the people's territory. And maybe at the plant also, we've extended a little bit of their responsibility, but those are not crazy numbers. They're 20, 30, which we have not further replaced and rather extended the current team's responsibility. So we are very focused on not letting costs go up while demand is under pressure.

Our next question is from the line of Rehan Saiyyed from Trinetra Asset Managers.

So sir, I have 2 questions. First on the SMPL investment that we have done. Sir, for the proposed INR 50 crore investment into SMPL, could you outline the expected return profile CapEx period or either how it fits into the company's broader growth strategy?

Sorry, can you speak a little slowly? I'm not understanding. The line is very unclear.

Sure, sir. So sir, my question is regarding the SMPL INR 50 crore investment side. So we have done INR 50 crores investment into SMPL. So could you outline the expected -- hello, am I clear?

Rehan, your voice is muffled. Can you just put...

Sure, sure. I'll just shift to a -- now, it's clear? Hello?

Yes.

Hello, yes sir. Please go ahead.

So sir, my question is on the side of SMPL INR 50 crores investment. So for the proposed INR 50 crores investment into SMPL, so could you outline the expected return profile or as a payback period and how it fits into the company's broader growth strategy for going forward?

So this is -- we have taken the approval from the Board of INR 50 crores. It's not that we're going to spend the entire amount. It's an approval, which has been taken. This has been taken to further augment Max to make sure that I'm running at full capacity. So we are going to be adding certain presses there because the current press, which is a continuous press is inefficient on certain sizes. It is only efficient on the larger sizes. But to keep the plant running and not have shut down costs, we are adding to 2 traditional presses, where we would be able to produce the slightly non-value-added in the interim, at least that will reduce my losses from shutdown costs. And also, we are putting in certain other balancing equipment to further augment the value addition, and we are putting a warehouse because this non-value added, which will happen, this will go into a separate warehouse because we don't want to -- we don't have space for -- in the current warehouse. So therefore, we'll have to augment the plant to produce the other warehouse. And the rest of it is because the plant is loss-making, it is to cover certain losses. But this is all through internal accruals, we're putting in the money. And the payback is quite decent, if I had to look at any shutdown cost. So we are hopeful that we will not be doing any shutdowns in the plant, and we'll run the plant at full capacity, which gives me a lot of benefit even on the gas and on the production cost of every single material, be it the high-end material or the low-end material. That is the reason. But we are not -- we won't be spending the INR 50 crores currently. This is only empowering us to take a permission for INR 50 crores. I hope I'm able to answer that.

Yes, sure. It's a very well-defined answer. So my second question is, is on the retail footprint expansion side. So what is the current number of exclusive showrooms and multi-brand outlets? And what is the target by end of FY '26? And how is the mix between urban and semi-urban geographies, we are evolving for going forward?

Retail expansion continues. We are at 65 dealers addition, and we will be adding approximately 250 net additions of dealers. And we have targets for that as to what our net addition of dealers will yield us in terms of sales. So retail expansion continues in mostly Tier 2, Tier 3 towns and some unrepresented areas of Tier 1 towns.

Okay. And sir, my last question, if you just cater this also. Like if we assume like how much percentage of revenue or rather margins we can expect for 2 to 3 years down the line, can you just comment ballpark number?

Sorry, can you repeat how much percentage of revenue? What...

Rehan sir, your voice is muffling a lot. Can you please...

Yes. So if you can put some ballpark percentage of like what we can expect revenue or either margins growth for going forward...

Rehan sir, your voice is still muffling.

I think the margins are not going down further. So margins would only improve with capacity utilization. Like I mentioned earlier in the call, this year with -- which we are pretty sure that our capacity utilization will be back in place to last year levels or probably much better than last year levels, which means that we will be adding to about 1%, 1.5% on margin as a certainty.

Our next question is from the line of Lokesh Maru from Nippon India Mutual Fund.

Sir, 2 questions from my side. One is just an extension of what Sneha asked. Like, for example, if the leader attempts to, let's say, 2 quarters down the line or whenever attempts to gain volume, right, once they gain that margin, if they try to give that away to gain more volume via maybe cut in realization or so. And if that gap bridges with our realization, do you think -- how are you trying to fortify your position in the market on that front? That is one. Number two, second question is regarding in this market where it has been challenging to grow single -- high single-digit volumes, how are you thinking around market share gain? And what are the areas, which our major focus. It could be anything like distribution, like you said, retail expansion or product or technology. But how can that eventually pan out? And how are you thinking around that aspect? That's all.

First question is margins. If anybody thinks that they can reduce margins, already an extremely commoditized business, and we are fighting Morbi where there's high-scale tax evasion. So if one thinks that by reducing realization or reducing prices on a sustained basis, they can gain volume, I think it will hurt them more than gain. That's not the right strategy. It erodes the brand, it erodes the gain. So yes, we've been able to bridge the gap between us and leader, and we will continue to bridge the gap, and we are extremely confident of that to bridge the gap continuously. Market share cannot be gained beyond a point with just reduction in prices. That's a knee-jerk. It happens for a quarter or 2, and then you're back to square one. So that's my answer on the market share, and I don't need to fortify myself. In fact, my challenge is that how I can use my capacity better at better realization. I'm not even looking at reducing. We're going to be making better products. We're going to be innovating. We're already innovating on products. If you do some channel checks, you will see there's been a large difference between what we were doing earlier and what we're doing today. Dealers are a lot more happier with the kind of designs and kind of innovation we're coming out with. Long way to go, but that's the focus and the focus is not to reduce and go down on commoditized product. It's all about value addition and going up the value chain. So that's as far as that is concerned. Your second question was what, I'm sorry?

No, sir. Those were the 2 questions. One was on the discount or realization part and other was on the market share.

I think the domestic market is flat. If you look at most of the Morbi players, they are flat, except a few exceptions there. Therefore, from that point of view, if we keep growing at even this pace, we are taking a little bit of market share. Over there, the market share is extremely fragmented, and it's more on evasion. So I don't think that's a sustained way of doing business where you're selling products lower than your cost. So I believe 70 to 80 plants have already shut in Morbi. I see more of them getting shut in the next near future, so there will be a consolidation in the next couple of years if this is how it continues. Our balance sheet is strong. We are not taking the eye off the ball on balance sheet. Our continuous focus is on value addition, continuous focus is on capacity utilization. Obviously, that's -- both of them have been in pressure. But while we do that, we keep our balance sheet under check. And I'm very, very confident that we will be able to do both of those over time. It is a brand, which has been selling a lot of mass products. It takes time to move up the value chain, but it will help.

[Operator Instructions] Our next question is from the line of Udit from Yes Securities.

Sir, since you mentioned that you are sticking to your guidance for this year, have you seen any improvement, which is kicking in or the hopes are on H2? This is -- and also an extension in terms of the Max plant, what was the utilization? And are you seeing any structural shift or anything happening more towards mass market or low-end tiles?

There are 2 segments. Mass market is a separate segment, value addition is a separate segment. There are -- there is a larger demand and larger traction for value-added segment. Obviously, it's a very small part, but there is more and more traction happening. And at Max plant, to answer that question is, we are at about 51%, 52% capacity utilization. Therefore, we are putting these stresses to make sure that we go above 70%, 75% capacity utilization in H2 or more. So that's the idea to produce a little bit, not the entire mass product, but a little lower quality product -- sorry, lower-priced product than what we're doing in Max currently to avoid any further shutdowns. So that's as far as the Max plant is concerned. As far as distribution is concerned, it is going to be Tier 2, Tier 3. We continue to add distribution.

All right, sir. And sir, what would be the B2B mix for us? And how is that pie growing?

It's the same. It's about 75% to -- 77% is B2C and the rest is B2B. And all efforts are on to see how we can increase the B2B by at least 5%, 6% so that we are able to use the capacity utilization. But while doing that, we are also in very careful of our receivables because B2B is where you get stuck with receivables and which we don't want.

And sir, similarly, like receivables, what would be the margin differences between the 2, any kind?

Projects is -- obviously, depends on the projects. Some projects buy also the value added, but generally, there -- I wouldn't know on the back of my head, but about 4%, 5% difference in the margin between retail and projects. But it's not -- more than the margin is the delayed receivables, which further impacts the project.

Our next question is from the line of Anubhav Goel from Cosma Ventures.

Sir, can I get a region-wise split of our sales?

Approximately 38%, 39% is North and about 27% is South, and the rest is kind of equally divided between -- 40, okay. North, I'm sorry, it's 41%; South is about 27%; and the rest is divided between East and West and 3% -- 2.5%, 3% is exports.