Somany Ceramics Limited (531548) Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to Somany Ceramics Limited Q1 FY '27 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. It's my pleasure to welcome you on behalf of Somany Ceramics and SKP Securities to this financial results conference call. We have with us Mr. Abhishek Somany, MD and CEO; Mr. Shrivatsa Somany, Head, Bathware; Mr. Ameya Somany, DGM; and Mr. Sailesh Raj Kedawat, CFO. We'll have the opening remarks from Mr. Somany followed by a Q&A session. Thank you, and over to you, Mr. Somany.

Yes. Good afternoon, ladies and gentlemen. Welcome to the earnings call of FY '26-'27 Q1. As you can see, our sales has grown moderately by about 3%, whereas the value has grown by 24%. The sales growing only at 3% is due to April, we did not get a certain segment which we were generally buying from Morbi. As you all know that Morbi was shut for the entire 1.5 months. So we missed a couple of percent of sales, but it would be made up this quarter very handsomely. As a result of capacity utilization, our EBITDA margins have gone up on operational efficiencies, both on capacity utilization in our plants and also on the JV performances. So EBITDA margins go up by 3.6% to 11.6% for the quarter. Capacity utilization in the JVs and very, very significantly in our own plants have gone up. The gas price has been extremely volatile. I had mentioned that in the earnings call for the FY '26, but the gas price since then has been extremely volatile. Every month, there have been a small increases in gas price. Fortunately, we've been able to pass on all the gas price increase until now. So the current price increase has been between 16% and 18%. Other than that, the demand of May and June has been pretty decent. July also has been not bad considering that there's been rains in many parts of the country. Morbi operations have completely started. They have resumed 100% production on very expensive gas, which is on -- which is being supplied by GEL, formerly known as GSPCL. The price is significantly higher, and they have also priced it in as far as their pricing is concerned. The only negative in the quarter has been from a Morbi perspective is exports has been down due to geopolitical reasons, the export is down a good 50%, 60% from the peak. That's been a little bit of a downer for the quarter, and this would continue probably for this quarter until it starts settling, until the freight starts settling. We have been healthily growing in our sanitaryware, bath fitting and the building materials division also. Again, there's been a large expansion, which we've taken place in the building materials -- sorry, in the construction chemical space. We have added capacity in South and also we have added a very large capacity in the North, which has gone on stream only last month. So effects of that will be seen partly in this quarter and mostly next quarter. Advertising spends are in line. Receivables are in line. We've only bettered our receivables. Stocks, we've been able to reduce our stock fairly significantly due to Morbi not being running. That's been a big booster for clearing out old stock and also reducing a large amount of inventory which we were carrying from the past. Our debtor days, inventory days, creditor days are all healthy. Working capital days also have come down from 17 to 12 days. Overall, we are extremely bullish of the future outlook. Because of that, we have announced setting up a 9 million square meter plant -- 9-plus million square meter plant in the South, which would be up and ready by in the next 12 to 15 months. This would give us a potential revenue of about INR 350 crores. Other than that, we are taking many more steps, which are all work in progress to augment further capacity by about 4 million to 5 million in our existing lines in Bahadurgarh in -- which is in Haryana and in Gujarat and in Morbi and also in the South. All put together, we will be adding another 4 million to 5 million for the mid -- this will be ready from mid-quarter 3 and would be completely in place in quarter 4. This would add, not only capacity, but also will add value-added mix. I have been maintaining that our JVs were not performing to our expectation last year. This year, they have all started performing, and they will only perform better going forward. Again, one of the JVs we've taken up a fairly significant capacity increase -- I'm sorry, not capacity increase. We've taken a significant value-add increase by balancing equipment. It doesn't come at a large cost, but that will further value add our products. So from a product point of view and volume point of view, we are looking good for the future. And we maintain that the EBITDA margins delivered in this quarter would be maintained, and we are trying to better our EBITDA margins, which we have delivered in last quarter and on this quarter. So on EBITDA and on value volume, things are looking very, very positive going forward. I would stop here, and I would take any Q&As going forward. Thank you so much.

[Operator Instructions] Your first question comes from the line of Sneha from Nuvama.

Congratulations on great set of numbers. Coming to your margins itself, which is pretty surprising. We generally see a strong quarter-on-quarter drop when it comes to Q1. This time, we have seen strong improvement in margins. What's really leading to this change? And how structural of a change it is in terms of these numbers remaining from Q2? That's the first one.

Sneha, I think this is because of capacity utilization being much, much better than last quarter. So if you see same time last quarter, which is Q1 last year, it was 72%. We are at 83%, and that's an 11% increase in -- sorry stand-alone, yes. On a stand-alone basis from 72% capacity utilization to 83%, which is a major, major increase, and that has led to margin. On the other front, I think our JVs, which gave us last year on the same quarter, which is Q1 last year gave us a loss of INR 10 crores. This time is a profit of INR 3 crores, and this would only get better going forward. So very, very confident of maintaining this margin and only bettering this.

That's a strong commentary. Secondly, with respect to demand, while we understand I think April was slow for us and May and June saw a pickup, how has July been for us, if you could quantify some numbers here? And also, we keep hearing very mixed thing about Morbi. At times it is shut, at times it is opening up. What is the situation? And how are even exports doing?

So first of all, April was not slow. April was slow because there was no material available in Morbi. There was only that much material available. And even our plants about -- because there was a restriction of 60% and then 80%, so some of our lines were also shut. And a lot of the material has already gotten out in March. Therefore, we were also at lower capacity utilization from that point of view, considering that we didn't have enough gas, which normalized in May. And Morbi, there is no ambiguity there. It is not shut or closed. It has been open since May. Of course, they took 20 days to completely normalize because of labor unavailability. But May end onwards, they've been absolutely at 100% capacity. 15% to 17% of Morbi, which has not started is never going to start. That never started even in May, and that's not started even today. The situation as far as demand is concerned of July, July with the rains, obviously, it is a tough month. But frankly, we've been able to push our sales.

Got that, sir. And thirdly, I just wanted to understand the gas pricing. What would be the pricing in Morbi versus your North and South plants?

Yes. So our blended price comes in at about INR 68. And South, we're still buying partly in spot. So South is -- South and Morbi are pretty much at the same level, which is close to mid-70s. And in the North, it is slightly lower, which is around the INR 68, INR 69 level. This is for natural gas. This is the pricing for natural gas.

But is that your blended fuel cost because you also use biofuel. We would like to get your blended fuel cost on that.

No. What we have reported is the blended natural gas cost.

Could you help with your blended cost for quarter 1 versus probably a quarter 4 blended cost?

I don't have that off the cuff because we do use reasonable amount for bioproduct. Yes, please.

Your next question comes from the line of Gunit Singh with Counter Cyclical PMS.

Sir, what kind of a price hike did we take in Q1?

We took a price hike of -- you can take an average of about 16%, 17%.

Got it. So how much of a premium do we have over the players in Morbi in terms of realizations because of the higher input costs, I believe that Morbi also took price hikes and our premiums to them narrowed over the previous quarters. So how does it look like now?

I don't understand. When you mean higher input costs, what do you mean by that?

Higher gas prices?

We don't have higher gas prices. Gas prices are the same as what the other people in the country are getting.

No. What I'm saying is Morbi took a price hike, right, because of higher gas prices -- higher premium.

Okay. So our price increase was about 16%, 17%. Morbi was just double of that because they were selling that much cheaper than us. So, obviously, when they have increased prices by more than double of what they were selling, the price gap between us and Morbi has reduced. Plus do not forget that Morbi was buying propane and LPG earlier and not natural gas, and they were buying that in various different ways, which were not the cleanest of ways. So now that they're buying Gujarat gas, then they have to rectify their books. So that also narrows our landed pricing to the dealer versus Morbi price.

Got it. So our premium has basically narrowed despite the price hike?

That's right.

Okay. And currently, in Q2, have we seen a fall in gas prices, our blended gas costs?

No. The prices of June and July, in fact, July is a little higher, marginally higher, but a little higher than what it was in May and June. And so is August. August is again slightly more marginally higher.

Got it. And how does the demand scenario look like for the rest of the year, given that the prices are also higher, but still demand is holding up. I think it was 2% higher in this quarter. So I mean how is the demand scenario and what kind of...

Demand is looking good. Let's not forget that in the last 30 months, prices had reduced also by 15%, 16%. So that's been the price increase. So from that point of view, because of that scenario, it's been well accepted in the market. And demand seems to be absolutely good. Of course, there are these months of the rain, which is nothing to do with demand. It's more of an issue with the weather. But other than that, the demand is perfectly fine.

Got it. So if we look at the current cycle or maybe the last 5 years, how would you compare our prices currently? I mean, are they mid-cycle or are they high?

I don't understand your question.

So you mentioned that prices earlier were higher and they were reduced, right? So I want to understand if today, with the higher prices, with the price hike, do we still...

We're still lower than what we were 5 years ago. The cost of tile 5 years ago was more than what it is today, inflation adjusted.

Got it. Sir, so despite -- I mean, giving -- despite the business growing over the previous 5 years, our company has developed -- hello?

Yes.

Yes. I'm saying despite our business growing over the previous 5 years, our company currently is trading at a market cap of INR 2,100 crores and around an EBITDA of 8 to 9, which is 50% lower than our own historical PE as well as maybe half of the valuation of our peers. And our stock price has given a negative 5% CAGR over the last 5 years despite Somany building a household brand. So I would just request the management to consider -- seriously consider a share buyback because it could not...

Thank you for your suggestion.

[Operator Instructions] Our next question comes from the line of Keshav Lahoti with HDFC Securities.

Sir, we have seen the demand was slightly muted in March and April because of production shut and all. So we are expecting the pent-up demand to hit by June last quarter. Having we see where is it?

Sorry, I didn't get your question.

Sir, my question is, in last call, you said March was slow. April has been slow because of supply issue. Possibly, the expectation was once the supply issue will get normalized, we'll see a pent-up demand. So have we seen that? Or where are we on that front? Because Morbi has been shut, still volume growth is low single-digit. So when should we expect high single-digit volume growth?

We're getting high single-digit volume growth, in fact, now. We're getting not high single-digit, but we're getting mid-single-digit volume growth. And this is looking good. Beyond the point, the biggest positive is that the price has been pushed into the market, and we're looking at very decent volume and value growth.

Got it. And sir, it will be heartening to hear you saying the margin what you have shown in the last 2 quarters will continue. But just playing devil's advocate, what we have seen Morbi was shut, there was a supply crunch in the market, which will get normalized now because Morbi has started operations. Export is weak. So possibly the price cut and all those things possibly can play out in upcoming months, which can put a pressure on our margins. What are your thoughts on this?

So my margins really have not gone up because of pricing. My margins have gone up because of operational efficiency that we are producing 100% in our own plants and also our JV losses have come down. So due to that, the margins have gone up and not so much of pricing. Pricing has only been a pass-through. I'm not earning anything from the pricing. So if it goes down, so be it. As long as I'm producing 100% and my JVs are profitable, this margin will sustain. So that's why I'm so confident.

Got it. That is good to hear. And last question from my side. What has been the Somany Max has been EBITDA positive this quarter? How [ exciting ]?

Yes. So Somany Max last year, same quarter, we had a INR 7 crores minus. And this time, we have a INR 1-point-something crore minus. And going forward, even this would be controlled. So if you remember, I had said that Somany Max, will be in a situation which will be INR 10 crores loss or less, and we are very, very confident of achieving only bettering that.

Our next question comes from Saket, an individual investor.

Sir, my question was like, sir, as you say that you see the EBITDA margin being maintained at this level. So as your prices have increased and the price of Morbi has increased little higher. So because of this difference between the 2 getting narrowed that is why the margins are being maintained or like why you see that the margins will be maintained going forward?

Because of operational efficiency, I just mentioned earlier, it's because of operational efficiencies.

So efficiency can come down once the Morbi comes up in future, the prices of gas goes down and the Morbi again reduces the price of the products. So in that case...

If gas goes down, even we will reduce the prices of the products. Obviously, like we passed it through, we will pass on the benefits also, but that does not take away my operational efficiencies of my JVs, which I worked so hard last year to make sure that they are efficient in terms of producing material. And the biggest part is that our own plants are producing at the fullest.

So for this year, sir, what kind of volumes you see?

Mid-single digits.

Mid-single digits. So, sir, in the last quarter...

Sorry to interrupt Saket, sir, may we request you to return to the queue for further follow-ups, please as there are several parts waiting for their turn. [Operator Instructions] Our next question comes from Viraj Kacharia with SiMPL.

Congratulations on good numbers in a challenging environment. Three questions. One is, see, I understand for the quarter, you had a low single-digit volume because supply side, you were impacted because of Morbi. But at the same time, you had a channel which was completely -- the inventory for the channel was very lean, right? Now supply is back to normal for you. How would you -- if you were to give some color in terms of the channel inventory, is it back to normal now? Or any color you can give? And similarly, on the corporate side, project side, how is the overall trend? Any color you can give on that side?

What is the last question?

On the project side, I think earlier comment thoughts that project itself will also be a lever for growth in addition to retail.

Okay. Understood. So as far as the channel inventory is concerned, they had stocked up a lot in March, considering that they knew that April, there will be no production. But otherwise, since May, the channel inventory has come back to normal. In fact, the channel inventory is again fairly lean because they're quite careful because of the volatility in the gas pricing. They are presuming that the gas price will come down overnight and then there may be a price reduction. So channel people are not taking the inventory they should be taking. So from that point of view, channel inventory is still not very lean like it was in April because there was no production, but it's not -- they are not full to their brim. The second question on project is that, yes, project is going to go up. Our total project was about 7%, 8% in retail and about 10%, 11% in government. This in totality will go up by about 3% to 4%.

Sir, then if you -- I understand, see, if you look at Q1 also, and I'm just kind of doing a relative comparison in terms of volume growth, say, the leader had a 6% volume growth, the other smaller players had a very high double-digit volume growth or single-digit -- high single-digit volume growth. So incrementally, with supply coming normal for you and you also focusing on the project side, why the conservatism in terms of the mid-single volume growth guidance? I mean, just trying to understand the disconnect.

There is no disconnect. Industry leader had an advantage where they had higher in-house production. There's a particular category, which is polished vitrified tile, which we are completely exposed to Morbi. They have a small production of their own. Therefore, they were able to push that extra 2% to 2.5% growth. Other than that, the guidance for us is single-digit, mid-single-digit growth is what we think would be absolutely achievable. Various people have promised, including us in the past that we'll have high single-digit growth, low double-digit growth, but never has been delivered. So we have been very, very cautious in what we are saying, something which we will deliver for sure is our EBITDA margin and also our single-digit growth. As far as the smaller players are concerned, the base is very small, and I'm pretty sure it's not sustainable, and you will see that playing out from the next quarter onwards.