Somany Ceramics Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Muted quarter, margin squeeze: EBITDA, PBT and PAT all under pressure as volume and value of sales disappointed, extra discounting of a couple of percent was needed to move material, and gas prices stayed fairly high despite tapering.
• Morbi distress hit pricing: Bottom-tier Morbi players sold at any price, even at a loss, to keep cash flowing, creating a "one-time pricing" phenomenon that management believes is now behind as gas volatility fades.
• Gas cost relief is arriving: Overall weighted average gas cost expected to fall 6–7% or more from January onwards, with LPG virtually out of the fuel mix and most plants shifting to cheaper natural gas.
• Mid-teen growth conviction intact: Management is "quite sure" of mid-teen overall growth in value and volume for FY24, driven by real estate revival, peaking inflation, and an expected turn in the interest rate cycle.
• What to watch next quarter: Whether the promised sequential margin improvement materializes as gas costs fall, whether dealer discounting persists despite lower input costs, and whether the Nepal JV and Somany Max plant timelines hold.

Quarter Performance: What Went Wrong

• Volume and value both muted: Festivities bunched together in October and an extreme winter compressed the selling window; historically Q3 would have been much better.
• Extra discounting and ad spend: A couple of percent extra discount in the market plus advertising spend above the normal 2.5–2.6% range (above 3%) added to the margin hit, though the ad spend comparison is against a low Q3 FY22 base of Rs. 3 crores vs Rs. 10–12 crores.
• Fuel cost still the dominant drag: Overall fuel cost was about Rs. 59–60, down only Rs. 4–5 QoQ, so the relief was modest relative to the margin damage.
• Inventory built across the industry: Muted demand plus a 4–5 day production mismatch pushed inventory from the historical ~50-day level to 60–62 days; the company kept plants running at 87% capacity to avoid shortage when demand picks up.
• Finance cost rose on rates, not debt: Sequential finance cost increased from Rs. 10 crores to Rs. 12 crores, driven by rising repo-linked interest rates over the last 12 months and additional debt in two subsidiaries/JVs for expansion; gross debt movement was not more than Rs. 20 crores Sep–Dec.
• Bathware stalled in Q3: Just 1% YoY growth in the quarter, though the nine-month figure stands at ~20% growth; FY23 revenue growth of +20% expected but margins flat at 12–13% EBITDA.

Abhishek Somany: "It was devil in the deep sea one side, it was shutting the plant and X amount of loss, one side it was discounting it and reducing the loss. So, I think that was the phenomena happening... there is new terminology in Morbi and there is a separate pricing which is called one-time pricing. So, that's what really played spoilsport."

Gas & Fuel: The Margin Lever

• LPG virtually out of the mix: As of the call date, only 10–15% of plants were running on LPG; the rest moved to natural gas because natural gas became at par or cheaper.
• Further cost reduction expected: Overall weighted average gas cost expected to go down by 6–7% or more from January onwards, with most plants expected to stay on natural gas through February and March until LPG comes down further in April/May.
• Fuel flexibility is a structural advantage: Plants are completely fungible between LPG and natural gas; switching takes only 6–8 hours, so the company can chase the cheaper fuel dynamically.
• Regional gas pricing dictates margin retention: In the north, gas pricing is slightly higher than the west, so some benefits should be retained with no discounting pressure expected. In the south, gas price is much higher than the west, so discounting will continue until south gas prices correct sharply. In the west, it is a pass-through.
• Morbi pricing already reflects lower gas: Morbi players factored in gas at ~Rs. 50/49 per SCM when they moved from LPG to natural gas; further reduction in northern and southern plant gas costs is expected to be retained because Morbi pricing already reflects that level, so no further price erosion is expected from that source.

Competitive Dynamics & Morbi

• Distress came from the bottom tier, not the top 20: Pricing pressure in Q3 came from the bottom 400–500 Morbi players who were strapped for cash (GST, gas, salaries) and sold at any price, even at a loss, to keep cashflows running. Management calls this a "one-time pricing" phenomenon that seems to be over as gas volatility is behind.
• Dealers are buying hand-to-mouth: Dealers are not hugely stocked; they are buying only as much as they can move in secondary sales. The receivable cycle is the same or slightly better, indicating low dealer stocking. Dealers remain skeptical because gas prices are falling and they fear further price drops.
• Morbi exports should relieve domestic pressure: Freight rates have come off sharply in the last three months and continue falling month-on-month; Europe levied only 6% anti-dumping on India (safe); China faces anti-dumping globally. No reason for Morbi exports not to continue, which would lower pressure on the Indian market.
• Organized players maintain a deliberate premium: The company maintains a 20–25% price difference versus Morbi players, and management is clear that chasing that gap lower has no bottom.

Abhishek Somany: "We have a 25%, 20% to 25% difference between us and the Morbi players. If we start looking at that, then there's no bottom."

Demand Thesis: Why Management Expects a Turn

• Real estate revival is the structural anchor: Management believes real estate has finally come back after a 10-year lull, though tile demand lags project launches by 18–24 months, so the benefit flows through with a delay.
• Cyclical headwinds are clearing: Festivities and extreme winter are behind; the wedding season absorption is behind; inflation is peaking out; the interest rate cycle is expected to start going down in the next couple of quarters.
• Gas price stability should unlock dealer stocking: As gas price volatility reduces, dealers should become more secure in stocking inventory, reversing the current hand-to-mouth buying pattern.
• Headwinds that remain: Rural India and money market tightness are still headwinds; secondary sales are not happening at the pace needed. Management's thesis is that "the worst is over and things can only get better from now, unless otherwise another war happens."
• Market growth is not 11–12%: Management explicitly corrected any assumption of double-digit market growth domestically, framing its own mid-teen guidance as share gain rather than riding a market wave.

Abhishek Somany: "I think the real estate has finally come back after a 10-year lull... whatever project gets launched today, we only come into the picture or in a sale situation, 18 months from inception, 18 to 24 months..."

Strategic Moves & Expansion

• Dealer network expanded aggressively: About 225 net dealers added in the nine-month period, a large part in Q2 and Q3, extending the distribution footprint even in a muted quarter.
• Nepal JV under exploration: The company is exploring setting up a JV in Nepal to put up a small plant, driven by recent duty increases on Indian building materials in Nepal. The plant would serve the Nepal market (75–80% of consumption) with 15–20% possibly coming back to India border towns. In exploratory/advanced stages on product selection and land identification.
• Somany Piastrelle restructuring: The board approved Rs. 115 crores investment into Somany Piastrelle Private Limited to restructure funding from unsecured loans to equity, giving the SPV "a breather in a muted market and very high gas pricing." The SPV was previously funded with Rs. 10 crores equity plus Rs. 115 crores unsecured loan from the holding company.
• Somany Max plant on track: The new plant is expected to fire up in August/September of this year (2023).
• Bathware focus intensifying: Management plans to focus a lot more on bathware next year; it should grow at the same pace or even better at a higher pace, though margins are expected to stay flat at 12–13% EBITDA.

Trade Policy Tailwinds

• UAE anti-dumping removed: UAE has already removed anti-dumping duty on Indian tiles, opening that market.
• Saudi Arabia potential: If Saudi Arabia removes its anti-dumping duty, it would be a great advantage for India Inc., though this is primarily a Morbi play; organized players never really exported to Saudi.
• US anti-dumping on China provides headroom: The US has a 5-year definitive duty on Chinese tiles, with only ~15 months elapsed; India has good headroom to gain share.

Guidance & Commitments

Key Metrics