Cello World Ltd Q2 FY2024 Concall Summary

Key Takeaways

• H1 revenue lagged volume, H2 expected to surge: Revenue grew 9% while volume grew 13% in H1, as softening raw material prices forced 5-6% price corrections. Management expects H2 revenue growth of 20% YoY, driven by 22-24% volume growth and a festive demand recovery.
• Margins set to outpace revenue in the near term: Profit grew ~20% in H1, and with raw material prices now saturated and booked at lower levels, margins are expected to grow above the revenue growth rate in percentage terms for the next six months.
• A new glass growth engine is about to fire: A greenfield soda lime glass unit in Rajasthan, with ₹200 cr CAPEX and up to ₹230 cr revenue potential, will be operational by March 2024, adding a major new growth and import-substitution vertical.
• The writing instruments business is scaling rapidly: The segment grew 24-25% in H1, reaching a ₹285 cr run-rate in just four years, with a strategy focused on higher-margin products above the ₹10 MRP category and further geographic expansion.
• What to watch next quarter: The actual delivery of the promised 20% H2 growth, the margin trajectory as lower-cost raw material flows through, and the initial ramp-up and margin profile of the new Rajasthan glass facility.

Growth Outlook & Recovery

• H1 softness explained: Value growth lagged volume growth because the company passed through a 5-6% price correction from softening plastic and energy prices. Consumer demand was also "a little muted" in H1 before picking up post-October, and the Diwali festive shift from October to November made Q2 appear weaker.
• H2 growth drivers: Management expects 20% YoY revenue growth in H2, with volume growth at 22-24%. The recovery is pinned on a post-festive demand improvement and the lapping of price corrections, as raw material prices have now saturated.
• FY25 acceleration: Growth is expected to be faster in FY25, with the new glassware facility contributing to sales. The company is targeting a 20%+ CAGR over the next three years.

Pradeep Rathod: "For at least this six months I'm very sure. Because of the raw material pricing softening up and a little demand being opened up in the market much better than what it was in H1 and now we have the raw material which is fully down, almost we are at a stage where we are now saturated and going down further and we have raw material which is already booked. So, for the next six months, definitely we see whatever we grow the margins will be above that in percentage of sales."

Margin & Profitability Dynamics

• H1 profit outperformance: Profit margin grew ~20% in H1, outpacing the 9% revenue growth, as the benefit of lower input costs flowed through faster than the top-line price corrections.
• Near-term margin tailwind: Because raw material prices have softened and are now saturated, and inventory is already booked at lower prices, margins will grow above the revenue growth rate in percentage of sales for the next six months.
• Longer-term margin posture: Management is at a "very good level of margins" and does not want to commit to expanding from current levels. A willingness to compromise 1-2% of margin exists if it unlocks much higher growth.
• Glassware margin ramp: The new soda glass facility will see EBITDA levels become "much healthier" from the first year to the next, but the EBIT level will take 1-2 years to mature. EBITDA is expected to be "very high" next year.

Pradeep Rathod: "Definitely, we are at a very good level of margins. I do not really want to comment here we will grow from here. If we compromise also in future a percent or two, definitely the growth will be much higher."

Glassware: The Next Growth Engine

• Greenfield soda lime glass unit: A new facility in Rajasthan, with 25,000 tons capacity and ₹200 cr CAPEX, will be operational by March 2024. It will manufacture tumblers and storage containers, with expected revenue of up to ₹230 crores and margins similar to the current opalware unit.
• Import substitution play: Management describes it as "one of its kind facility in India," with the majority of output replacing imports. The company imported small quantities of glass over the last two years to study the market and determine the right product mix before manufacturing begins.
• Ramp-up timeline: The plant is a continuous process that will run at full capacity and build inventory until the market is established. It will take a maximum of 2 to 2.5 years to achieve the full ₹250-275 cr sales potential. The first year will not achieve full turnover because of staggered SKU launches.
• Opalware capacity: Expanded in August 2023 and now at 60% utilization, with full utilization of the expanded capacity expected in about 1-1.5 years. Benefits are already visible and will improve in H2.

Writing Instruments: A High-Margin Scale-Up

• Rapid scaling: The business has grown from zero to a ₹285 cr run-rate in approximately four years since the Unomax launch in 2020, with 24-25% top-line growth in H1.
• Margin advantage vs peers: Higher margins than larger competitors come from a product mix focused above the ₹10 MRP category, more value-added products instead of lower-end volume items, and a more innovative distribution approach.
• Geographic headroom: The company currently covers only 55% of India's geography and is expanding distribution into two- and three-tier cities. The retail network is still small relative to the total market size.
• Future mix: The stationery portfolio will evolve to a 70% writing instruments, 30% stationery split, moving toward higher price points of ₹20, ₹30, and ₹50. Stationery margins are almost at par with writing instruments.

Pankaj Rathod: "We operate in a more innovative way in terms of the distribution, which gives a better margin. Second is also like we don't operate into a lot of categories like there can be a sketch pen which can be sold at Rs.12 for 12 pens but we are selling a coloring pen at about Rs.150 for the same product."

Portfolio Strategy & Competitive Positioning

• Molded furniture value migration: The company is shifting its molded furniture mix toward value-added "lifestyle" products that cannot be produced from recycled material, because it faces "unethical" competition from recycled-plastic producers that makes price-based competition impossible. The aim is to take the value-added mix from 13% to 25-30% over the next 2-3 years.
• Kitchen appliances: niche only: The strategy is to restrict the portfolio to niche kitchen appliances (mixers, induction cooker, kettle, cookware) and avoid crowded mass-market categories. The vertical is small at about ₹75 crores turnover this year, with muted profit percentage due to higher initial expenditures, but management intends to take it to a "very healthy level."
• Brand license security: The Cello and Unomax brands are registered in a promoter partnership company and exclusively sub-licensed to Cello World for 20 years with perpetual auto-renewal, at zero royalty cost. No other entity can manufacture consumer items under these brands.
• Future adjacencies: With a "big basket" of growth across all verticals for the next two years, management will only consider adjacent product-line expansions after that period.

Pradeep Rathod: "Molded furniture per se where we really want to go into value added products, because we have a competition, which is unethical because of raw material which is used from recycled material and that competition we cannot chase because it's not apple-to-apple, right? And that's why we want to shift our portfolio to a category where it cannot be produced from any recycled raw material or where the brand definitely comes into picture when the price point is very high for a buyer."

Channel & Distribution Evolution

• Three-year channel mix target: General trade is expected to shift from 75-76% to ~70% of revenue, while online scales from 9% to 12-13%, modern trade from 5% to 7-8%, and exports from 8-9% to 10-11%.
• Online ambition: Online sales are targeted to scale from the current 8% to 10-12% of revenue, supported by a marketing spend maintained at 2-2.5% of revenue.
• Credit policy stability: The company will cut credit "a little bit" and has started channel financing, but will not go fully aggressive. The credit period extended to distribution has been a key enabler for 25 years and will be largely maintained.
• Seasonality context: Writing instruments see spikes during back-to-school and exam periods (Jan-Mar and May-Jun). Consumerware gets a 4-6% festive spike, with the Diwali two-month period contributing 21-22% of sales, plus a summer spike for bottles and water jars. No extreme seasonality where sales collapse in off-periods.

Guidance & Commitments

Key Metrics