Key Takeaways
- Demand vanished without a clear cause: Volume was flattish YoY, and management repeatedly said it “can’t put a finger” on why demand slowed across all geographies and channels, despite strong real estate launches.
- Margins compressed by fuel costs and operating leverage: EBITDA fell as gas prices rose ~100% YoY, no price increases were taken, and plants run at near-100% utilization built inventory instead of sales.
- A big bet on H2 recovery rests on history, not visibility: Management is confident of 15–20% full-year sales growth because H2 has always been 10–15% better than H1, even in the worst years.
- Fuel switching is the margin bridge: 50% of lines moved to LPG, heading to 60%, which together with softening gas prices is expected to lift operating margins starting this quarter.
- What to watch next quarter: Whether the promised H2 demand recovery actually materializes, the pace of inventory normalization from 45 days back toward 34–35, and the magnitude of gas-cost relief flowing through to margins.
The Demand Disconnect
- Broad-based slowdown: Demand was muted across Tier 1, Tier 2, Tier 3 cities, projects, and retail. Dealer feedback was inconsistent, citing cash-flow issues, low walk-ins, extended rains, customers waiting for price decreases, and spending shifting to holidays, weddings and autos.
- Morbi disruption added supply-chain noise: A one-month Morbi shutdown, intended to prevent further price reductions, coincided with 15–20 days of trucker unavailability that hit JV plant dispatches. Somany ran plants above 100% expecting to capture Morbi’s lost volume, but that volume did not arrive.
- Real estate launches not yet converting: Management noted that strong developer launches benefit tile demand only 1–2 years later, and Morbi is more exposed to a real estate slowdown from higher steel and cement costs. The specific disconnect between launch activity and current tile demand was not resolved.
- Festive season compressed the pain: October sales were muted because Dussehra, Diwali, and Chhath Pooja all fell in a single month, making the effect more pronounced than usual. Early November showed no clear pickup.
Abhishek Somany: “I really can't pinpoint anything which has muted the demand we can keep arguing as to what happens, but I do not have a specific answer. ... if you had to ask me, I really do not have any specific answer as to why demand has slowed down all of a sudden.”
Margin Mechanics: Fuel, Mix and Operating Leverage
- Gas cost was the dominant headwind: Natural gas prices rose ~INR 5 QoQ and ~100% YoY. Non-fuel raw materials also climbed: glazes (fired on gas), imported Ukrainian clay, freight rates, paper, and diesel-driven inward freight all contributed.
- LPG conversion is the primary margin lever: 50% of lines converted to LPG during Q2, targeting 60–62% by end-November. The South plant moved 100% to LPG-blended. The Q3 blended gas cost is expected at ~INR 59–60 (natural gas ~INR 64, LPG ~INR 50–52 at a 60:40 mix).
- Price cuts are not expected: Management argued that exports have picked up, the dollar is boosting realization, and 50% of Morbi has already moved to LPG, so that gas-price decrease is already reflected in market prices.
- Product mix shifted away from higher-value PVT: PVT share declined from 34% to 28% YoY, while GVT rose from 28% to 33% and ceramic from 38% to 39%, indicating a pull-away from PVT toward GVT and ceramic.
- Inventory overhang depressed absorption: Inventory days rose from 34–35 to ~45 days because plants were run at high utilization expecting Morbi-shortage-driven demand that did not materialize. Normalization is expected in H2.
Abhishek Somany: “If you haven't seen a price decrease now, I doubt we'll see a price decrease later.”
The H2 Recovery Bet
- Confidence is anchored to historical pattern, not current signals: Management expects high double-digit sales growth (15–20%) for the full year, implying a strong H2, because H2 has always been 10–15% better than H1 even in the worst years. Double-digit volume growth is assumed safe.
- Gas-price tailwind is already unfolding: A softening gas regime is expected for at least six months, with another INR 3–4 decrease overall and possibly more next quarter. Full benefit shows in the last quarter.
- November–December expected better: Management sees better sales and gas pricing ahead, though early November was “a little too early to say” how much better.
- Sanitaryware and faucets still targeting 30%-plus full-year growth: Despite muted Q2 (sanitaryware +2%, bath fitting +5%), the full-year target stands, supported by doubled bath-fitting capacity that started in October.
- Market share gain expected: Management confirmed it expects handsome market share gains in a domestic market implied to be flat YoY (INR 38,000–40,000 crores industry, INR 18,000 crores exports).
Abhishek Somany: “We've gone through many cycles with so many years in business, and we've seen some very poor years in the last 15, 20 years. And in every scenario, H2 has always been 10% to 15% better than H1 in the worst of years in the best of the year.”
Capacity, Sourcing and Brand Investments
- Regional sourcing scaled up: Incremental quantity of ~1.50 Lakh square meters per month secured in both South and North, moving toward more regional sourcing to reduce freight exposure.
- MAX plant on track for mid-next-year: The Greenfield large-format tile slab plant (via subsidiary Moneymax, INR 170 crore rental project, INR 40 crore invested via rights issue) is in the process of commissioning, with ~0.4–0.45 crore sq m capacity expected by around July. Total capacity will then approach 7.7 crore sq m.
- Brand spend sustained: A 360-degree TV campaign broke out from the day of the call (November 10), with brand spend expected to remain at ~2% of revenue.
- Dealer network expanded: Net ~150 dealers added in H1.
- Amora capacity reshuffled: Ceramic capacity was divested but tile capacity was increased very substantially, resulting in a net addition. Details were not discussed on the call.
Export Opportunity and Competitive Dynamics
- Europe opening as a large export opportunity: Low freight rates, antidumping duties on Turkey and Europe, and high European gas costs create a window. India received only 7% antidumping duty, making it competitive.
- Morbi price stability expected: Exports picking up and the dollar boosting realization support prices. Half of Morbi has already moved to LPG, so that cost decrease is already reflected. South prices, exposed to spot and LPG, should come down.
- Long-term substitution story intact: Management emphasized that tiles continue to gain share from natural stone, wood and other products, providing a medium-to-long-term demand floor regardless of short-term cyclicality.
Abhishek Somany: “...we are in a sector where we are sharing off market share from all other products like natural stone, wood, etcetera. So from that point of view, nothing is to be worried on a long term, even on a medium term perspective.”
Guidance & Commitments
| Commitment | Specifics | Timeline |
|---|---|---|
| Full-year sales growth | 15–20% (high teens) | FY23 |
| Full-year revenue growth | 15% | FY23 |
| Volume growth | Double-digit | FY23 |
| Sanitaryware & faucet growth | 30%-plus | FY23 |
| LPG conversion | Reach 60–62% of lines | End of November 2022 |
| MAX plant capacity addition | ~0.4–0.45 crore sq m, total capacity ~7.7 crore sq m | Around July 2023 (mid-Q2 FY24) |
| Gas price regime | Softening expected, another INR 3–4 decrease overall | Next six months at least |
| Margin improvement | Operating margins increasing from Q3 onward, driven by LPG conversion and gas softening | Starting Q3 FY23 |
| Consolidated debt reduction | ~INR 45–50 crore annual repayment; no specific reduction plan beyond scheduled amortization | YoY |
| Brand spend | Remain at ~2% of revenue | Ongoing |
| Further significant capacity expansion decision | “Probably six months down the line” once demand depth is better assessed | ~H1 CY2023 |
Key Metrics
| Metric | Q2 FY23 |
|---|---|
| Revenue growth | 9.3% YoY |
| Volume growth | Flattish YoY |
| EBITDA | Hit by power and fuel costs; no price increases taken since beginning of the year |
| Inventory days | ~45 days, up from 34–35 days |
| Gas price (blended) | Up INR 5 QoQ, almost 100% YoY; North ~INR 65, Morbi ~INR 65, South ~INR 75 |
| Current gas price | ~INR 60–62, expected to decline further |
| LPG conversion | 50% of units on LPG in Q2, expected 60–62% by end of November |
| Current natural gas price | ~INR 64; LPG ~INR 50–52 |
| Tiles capacity utilization | ~88% |
| Sanitaryware capacity utilization | ~45%, seasonally muted due to rain shutdown |
| Faucet capacity utilization | 93% |
| PVT share of tiles | 28%, down from 34% YoY |
| GVT share of tiles | 33%, up from 28% YoY |
| Ceramic share of tiles | 39%, up from 38% YoY |
| Sanitaryware and bath fitting growth | 3% YoY; sanitaryware 2%, bath fitting ~5% |
| Brand spend | ~2% of revenue |
| Net dealer addition (H1 FY23) | ~150 |
| Price increase | ~2–2.5% taken in June/early July; no further increases in Q2 |
| FY23 revenue growth outlook | 15% (full year) |
| Sanitaryware and faucets growth outlook | 30%-plus for FY23 |
| Export expectation (industry) | Grow to ~17,000–18,000 from 12,000–12,500 last year |
| Antidumping duty (Europe on India) | 7% |
| Industry size estimate (FY23) | INR 38,000–40,000 crores, of which ~INR 18,000 crores exports |
| Domestic industry size (FY23) | ~INR 22,000 crores, flat YoY (per an analyst's math) |
| Own production capacity | 6.2–6.3 crore square meters; total accessible capacity 7.3 crore sq m |
| MAX plant capacity addition | ~0.4–0.45 crore square meters, expected by mid-Q2 next year |
| Net debt | ~INR 359 crores (per an analyst's math) |
| Annual consolidated debt repayment | ~INR 45–50 crores |
| Routine/balancing capex (annual) | ~INR 40 crores |
| Employee fraud recovery | Half the amount recovered; rest pending |