Cello World Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Decent quarter, not the best: Revenue and profitability were decent, lifted by festive season momentum, but management acknowledged consumer demand was muted and the quarter could have been better if market conditions were stronger.
• Volume-led growth with price headwinds: Consumerware volume grew 5-6% above value due to raw material pass-through; moulded furniture volume grew ~15% but value only ~2% for the nine months.
• Raw material cycle turning: Raw material prices have risen 3-5% from their lows, but management expects to sustain margins, citing inventory cover and the ability to pass through increases with a lag.
• Glassware entry is the big bet: A new soda lime glass facility fires up by end-March, targeting a market with ₹800 crores of imports and no prominent local player; peak revenue of ₹225-230 crores is 1.5-2 years out.
• What to watch next quarter: Whether the March quarter delivers its seasonal uplift, the pace of glassware commercialisation from June, and any margin impact as higher-cost raw material flows through inventory.

Demand Environment

• Consumer market subdued: Growth is not very high; management called it a muted sales environment and said they could have achieved better if the market position was good. This year has been overall subdued for the consumer market, so there were a little bit more price discounts given.
• Festive season provided a pulse: October was a very high growth month because of Diwali; consumer insulated-ware like casseroles for gifting and presenting grew a little higher. General trade always increases in Q3 because presentation material is not very high on online and other channels.
• Rural not the drag: The last two-three quarters were not really subdued in rural areas; management expects rural expansion to be very high over the next 3 to 5 years, driven by nuclear families emerging even in smaller towns and enhancement of product usage.
• Product mix benefit delayed: This would have been a better year; margins might have improved because of good product mix with more value-added products in the market, but because the market was slow, the company couldn't really get the fruit of that.

Pradeep Rathod: "That's why it is a decent quarter, not the best quarter. That's what we feel."

Segment Performance

• Moulded furniture margin dip: The quarterly dip in margin for plastic furniture and allied products is probably because of product mix, about 1% difference. Value-added products target is 25-30% of revenue, which will help increase margins.
• Writing instrument retail expansion: Increasing at least 10-15% retail touchpoints every quarter; by end of next year, will be almost doubling the number of retailers.

Glassware: The Next Growth Vector

• Facility timeline: Production will start in Q1 FY25; the furnace gets fired by end of March, main production and category will come in another two months, and sale conversion would be around June.
• Market opportunity: Glass could be very big; ₹800 crores is import, there is no prominent local player in India, and the company has taken one of the best equipment. The market will not be a problem for growth from here.
• Pricing advantage vs imports: Will be price competitive, at least 10-15% compared to imports. No anti-dumping duty on glass at present; freight leverage of around 8-10% plus 20% duty on the product provide a structural margin cushion.
• Peak revenue timeline: To reach peak utilisation of ₹225-230 crores revenue, minimum 1.5 years, maximum could be 2 years. Could be earlier because they are replacing imports.
• Margin profile: In line with Opalware, but management cautioned "we have to test the waters yet." After two quarters of running, it will be at the same level as projected; capacity is much higher in tonnage terms, so that will give better cost.

Pradeep Rathod: "Glass could be very big because as I said 800 is import. There is no really prominent local player in India, and we have taken one of the best equipment. I think the quality as we desire to have if it comes, the market will not be a problem for growth from here."

Margins & Raw Material

• Raw material cycle turning: Raw material prices have gone up by around 3-5% from the low, after having come down by 30% from last year till 2-2.5 quarters ago. Management believes they will be able to sustain margins if not increase further from here.
• Pass-through mechanics: Management can pass on raw material price increases; if not in one month, then a month later. For the next one quarter, gross margins will not reduce because of raw material price increase due to inventories at good pricing and quantity.
• Discount withdrawal as a lever: Once the market improves, some discounts will be withdrawn, which will take care of raw material price increase and maybe some price increases. Furniture will have to increase price or stop little discounts going forward because raw material effect is much higher than any other products.
• Rural margin profile: Rural market will have lower price point products selling more but the margins are similar on those; maybe some freight element would be a little higher in the initial time but going forward it will definitely be at the same level.

Pradeep Rathod: "The raw material prices at this level have gone up by around 3% to 5%, what it has come down by 30% from last year till the 2 or 2& half - 3 quarters. It is a little up now and I think we will be able to sustain our margins if not increase further from here."

New Products & Distribution

• New SKU engine running: 80 SKUs in consumerware, 40-50 in writing instruments, and 14 in moulded furniture introduced in the nine months.
• Writing instruments moving up the value chain: Company is entering coloring pens, sketch pens at the higher end with brush markers, paint markers, calligraphy pens. These will be added in Q1 and some in Q2 of next year. This is a niche market where nobody is getting into that category at the moment.
• Glass category addition: The category that will be added is glass, in the next 3 to 6 months.
• Rural distribution thesis: Over the next 3 to 5 years, retail has to double from here on this kind of product; rural area expansion is much more what the company relies on. Rural mix in consumerware to go from 18-20% to 35-40%.
• Export visibility: Export is fully booked for at least the next 3 months; orders are in hand, just execution. In the US, customers buy material much earlier for back to school because the timeline to get to stores takes a lot of time.

Pankaj Rathod: "We are getting into this coloring pens and all those stuff which will be added in the next year... This will be added in the first quarter and some of them in the second quarter of next year. So that would be a market where we look at a very niche type of product. At the moment nobody's getting into that category."

Guidance & Commitments

Key Metrics