Somany Ceramics Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Gas costs dominated the quarter: Consolidated EBITDA of ₹45 crore reflects sharp gas price jumps across all regions, with South gas nearly tripling YoY from ₹34 to ₹90 per SCM.
• Value-added mix is the margin story: GVT share moved from 26% to 30% of tile revenue, with a path to 35%+ by mid-next year once the slab plant comes on stream.
• Propane conversion provides a ₹7–8 per SCM edge: Two Somany plants converted in the last 10 days, a third by month-end, bringing production cost to ₹58–60 vs ₹65–67 for gas-fired peers.
• All delayed capacity is finally on stream: Three plants now operational after gas-related delays; the South plant is expected to hit 100% utilization this quarter.
• What to watch next quarter: Whether the promised Q2 margin expansion materializes as gas stabilizes, the pace of value-added ramp from new plants, and whether the Morbi shutdown actually tightens the market.

Gas: The Quarter's Defining Pressure

• Gas cost escalation was severe and broad-based: Gujarat gas rose from ₹36 to ₹65 per SCM YoY; North from ₹36 to ₹58 (₹62–64 currently); South from ₹34 to ₹71 last quarter and ₹90 currently. Management called these "very, very significant sharp jumps." Management called these "very, very significant sharp jumps."
• JV margins hit harder than standalone: Gas price increases at the JV level could not be passed on via price increases, unlike standalone operations, creating a gap between standalone and consolidated performance.
• Propane conversion is the near-term mitigation: Two Somany plants completed conversion in the last 10 days, a third expected by month-end. Propane is ₹7–8 per SCM cheaper, giving those plants a production cost of ₹58–60 per SCM versus ₹65–67 per SCM for others. Around 130–140 Morbi plants have already moved to propane, with ~150 expected total, though many of the 800–900 players lack space, ability or permissions.
• South gas sourcing effort underway: Somany is trying to acquire gas at cheaper rates from third parties in the South; has already succeeded for a small amount and is working on larger amounts for the next couple of months, hopefully after that gas prices should start getting muted.
• Gas price trajectory offers cautious relief: Prices seem to have stabilized in the last month; Northern gas will see a small increase in September due to the three-month moving average, but with Brent down, prices should start evening out and going down by mid-next quarter. Management expects gas to be stabilized going forward, barring new war-related surprises.

Abhishek Somany: "So very, very significant sharp jumps in all of the gas prices as we speak."

Value-Added Mix & Capacity Ramp

• GVT share is climbing on plan: GVT segment share increased from 26% to 30% YoY, driven by new plant launches and focus on value-added products. Management expects another 2–3% increase within the next quarter and the quarter after, reaching 33% in Q2 and closer to 33–34% by year-end.
• New plants are transitioning from basic to value-added output: Plants initially started with non-value-added products due to initial 15–20 day commissioning issues. Six launches were done from June-end until just before the call across all three plants, including value-added products. Half of Q2 will give good flavor, and full Q3 and Q4 will show the full value-added mix benefit.
• Slab plant adds the next leg: Machinery for the Somany Max slab plant in Morbi has been ordered; production expected by end of Q1 or early Q2 next year. This adds another 2% to GVT mix, taking it to 35%+ minimum by the middle of next year.
• Capacity utilization is healthy: Tiles at ~85%, sanitaryware at 88%, faucets at ~95% in Q1. The Northern plant is fully sold out; the South plant is coming on stream and expected at 100% utilization this quarter; the West (Kadi) plant for GVT is also ramping.
• Ceramic vs GVT balance is structural, not transitional: Ceramic is not going down as fast as polished vitrified tile; a reasonable balance between ceramics and GVT is expected, as seen in Italy, Spain and China, with ceramics still preferred for kitchens and bathrooms.

Abhishek Somany: "Ceramic is not going down as fast as PVT is going down, polished vitrified tile is going down further. There will be a reasonable balance which is what we've seen in Italy, Spain, China everywhere, between ceramics and GVT."

Bathware: The Growth Bet

• On track for 35–40% growth: Bathware segment growth guidance is intact; faucet production expected to double after balancing equipment and tinkering is completed.
• Faucet capacity doubling by October: Balancing equipment is done; capacity to double from early Q3 (by October), which will give increased margin and more sales.
• Sanitaryware penetration is still early: Out of approximately 2,900 active dealers and 3,300 total dealers, not more than 350–400 dealers currently stock Somany sanitaryware. Management says "we have not even scratched the surface" and is planning mega launches of new products in the coming quarter to build awareness.
• Competitive intensity is rising: The bathware segment, which had few players for the last 30–40 years, is now seeing more entrants.
• Return on capital employed is directionally higher than tiles: Management declined to dissect precise capital employed percentages since bathware is part of the same larger company, but said returns are higher than tiles.

Abhishek Somany: "We have not even scratched the surface. We have approximately 200 -- 2,900 active dealers and about 3,300 dealers... not more than 4 to -- 35 crore to 400 dealers are still keeping our sanitaryware. So long way to go on that one."

Morbi Shutdown: Industry Dynamics

• The shutdown is an attempt to manage supply and pricing: Morbi players are trying to create more demand by removing one month of production from the calendar annually, and are also hoping for price increases when operations resume. The move is exaggerated by lack of demand and high gas prices that smaller players cannot pass on.
• If annualized, it could benefit the organized industry: Management noted that if the shutdown becomes an annual feature, it would be "quite decent for the industry" because everything gets planned. Organized players like Somany could align their ad hoc maintenance shutdowns to the same period from year three onwards.
• Immediate impact is limited: 60–80 plants are expected to keep running. A rumored 10–12 day transport strike, if it happens, would affect Somany for those days, but past transport strikes never lasted more than 3–4 days. The period until Janmashtami is anyway a muted period.
• Channel inventory is not overstocked: Dealers are not overstocking because Morbi has only reduced prices or increased discounts in a rising input cost scenario. Inventory may have gone up slightly in the last week ahead of the shutdown.

Abhishek Somany: "So they want this to become an annual feature. And if it does become an annual feature, it'll probably be quite decent for the industry, because everything that gets planned. And maybe some of our plants, which we do ad hoc maintenances, we could also fall in line and do the maintenance at the same time."

JV Restructuring & Outsourcing

• Amora Ceramics divestment is capacity-neutral for Somany: Somany is divesting its stake in the Amora Ceramics JV (2.5 lakh sqm per month ceramic plant) because it never achieved 100% utilization across both JVs, using only ~5 lakh sqm out of 6.5 lakh. The partner is taking back Amora Ceramics for exports. Somany retains first right of refusal on any incremental capacity.
• Amora Tiles capacity is being augmented simultaneously: ₹10–12 crore in balancing equipment is being added, increasing capacity from 4 to 5.5 lakh sqm per month, expected on stream soon after Diwali (November). Management stated "we are not going to have a single square meter which will go down."
• Outsourcing tie-ups are expanding: Somany tied up more capacity for ceramics and GBT at the end of July, and is also tying up capacity in the South for ceramics within the next month.

Abhishek Somany: "So as far as Somany is concerned, we are not going to have a single square meter which will go down. And even in Amora Ceramics which we're divesting, first right-of-refusal for any incremental capacity will be ours."

Exports: A Rising Tailwind

• US has become the largest importer from India: Exports are only going up; the industry is looking at ₹17,000–19,000 crore this year versus ~₹12,500 crore last year (₹13,500 crore annualized).
• Freight rates are easing: Freight rates have started numbing and are expected to be even better in the next 12 months. Management believes exports will be a "huge plus point" for the Indian tile industry.

Guidance & Commitments

Key Metrics