Somany Ceramics Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Volume-led growth, margin recovery begins: Tile volume grew 9.2% YoY in Q4, and EBITDA margin improved 120 bps to 6.7% as gas prices eased, though value-add mix slipped 1%.
• JV losses dragged consolidated profitability: FY23 consolidated PAT fell to ₹75 crores from ₹89 crores, with joint venture transfer-pricing pressure amplifying losses relative to peers.
• Gas price tailwind has further to run: Q4 gas was ~₹60; April dropped to ~₹47 and management expects ₹43–44 in coming months, with some of the benefit retained rather than fully passed through.
• Morbi shakeout tightens supply: 70–80 small or inefficient plants shut down, no new capacity is coming this year, and the existing supply overhang should get consumed as exports rise.
• What to watch next quarter: Whether the lacklustre demand start to FY24 persists through monsoon, the pace of GVT mix recovery toward the 40% target, and the trajectory of sanitaryware margins as scale builds.

Volume Growth & Demand Environment

• Q4 volume delivery: Tile volumes reached 1.76 crore sq. m, up 9.2% YoY, driving standalone revenue growth of 11% to ₹668 crores.
• Full-year scale: FY23 standalone revenue grew 18% to ₹2,426 crores; consolidated revenue grew 18.3% to ₹2,465 crores, establishing a larger base for the cycle ahead.
• FY24 volume ambition: Management guided mid-teens volume growth for FY24, with the increase coming almost entirely from volume rather than price.
• Demand caution: The year has started lacklustre and management expects the pain to persist until the end of monsoon, with rural India still under pressure.
• Private builder tailwind deferred: Larger growth from the private builder segment is expected only 18–24 months down the line, when newly commissioned projects reach the tile-installation stage.
• Sales geography tilt: Over 70% of sales come from Tier 3, 4, and 5 towns; including Tier 2 takes it above 80%, reflecting a structural shift toward lower-tier cities.

Margin Recovery & Gas Price Mechanics

• Q4 margin walk: Standalone EBITDA margin improved from 5.5% to 6.7%, backed by fuel price decreases and operating improvements, partially offset by a 1% decline in value-add mix.
• Gas price trajectory: Q4 averaged ~₹60; April dropped to ~₹47; May moved further down; management expects ₹43–44 in coming months, with the new normal at ₹40–45.
• Retention, not full pass-through: Somany will reduce prices as gas falls but expects to retain some of the decrease, cushioning margins on the way down.
• North plant floor: Gas price in the North will not go below ₹46–47 because of the GAIL RasGas contract structure, where Somany holds only one contract versus the industry leader's three.
• Regional gas spread: South plant trending to ₹50; Western plant ~₹43–44; Northern plant to remain similar, creating a persistent regional cost differential.
• FY24 EBITDA guidance: Management guided 9.5%–10% EBITDA margin for FY24, conditional on everything remaining where it is in Q1, and confirmed consolidated EBITDA would surpass the FY17 peak of ₹234 crores.

Abhishek Somany: "The new normal now is kind of a INR40 to INR45 gas price depending on where the Brent is. I don't think we can go back to the INR33, INR34 level prices ever unless the Brent had to really crash and also do not forget there is a reasonable amount of foreign exchange component, which anyway has moved up by 20% because the rupee dollar has appreciated over the last two years by 20%."

Value-Add Mix & Product Shift

• GVT mix slipped: GVT contribution fell from 33% in Q3 to 32% in Q4 and for the full year, while ceramics mix rose 1% YoY to 39%. Management characterized the Q4 pressure as minor and transient.
• Three-year GVT ambition: Management expects GVT contribution to reach closer to 40% in three years, driven by an industry-wide shift, and aims to reach that level faster than the overall market.
• Capacity support incoming: New value-added plant capacity and the Max plant, starting Q3, will further augment the value-add portfolio.

Abhishek Somany: "The question is how much, how can we outsmart it and take you to 40% under three years is actually the question. There's nothing which is stopping GVT. I think the whole industry is moving only towards GVT. So it's a natural extension, any which way so not much that I'm doing. What I will do is to — the effort from our team would be to see how quickly we can reach it and not when the entire market reaches."

Bathware & Sanitaryware

• Bathware growth trajectory: Q4 Bathware revenue grew 18% YoY to ~₹74 crores; full year grew 18% from ₹207 crores to ₹245 crores, with traction present but muted by soft demand.
• FY24 growth target: Management is looking at 20–25% growth in Bathware for FY24.
• Sanitaryware scale ambition: The internal target is to reach double digits (hundreds of crores) in the next 3–3.5 years, with a margin profile that at ₹500 crores scale will be significantly better than tiles.
• Management change: Abhishek Somany's brother now looks after the Sanitaryware business day-to-day, with direct promoter involvement to sharpen focus.
• Current utilization: Sanitaryware capacity utilization sits at ~55%, with one small line shut and only the large line running, leaving headroom for volume growth without fresh capex.
• Bathware margin undisclosed: An analyst asked for Bathware margin in FY23 and expectations for the next two to three years; management did not have the figure and offered to provide it later.

Morbi Shakeout & Competitive Landscape

• Plant shutdowns: ~70–80 Morbi plants have shut down, comprising very small capacities that could not survive the gas price cash-flow onslaught and very old or inefficient plants with poor gas consumption.
• Tax evasion factor: Many small plants carried substantial tax evasion and had no money to pay authorities for gas, accelerating their closure when cash flows tightened.
• Supply overhang absorbing: No new capacity is coming up in Morbi this year, and the existing supply overhang will get consumed during the year as export demand rises and domestic real estate grows.
• Export competitiveness gap: Somany is not competitive in exports because Morbi players offer extended credit and very aggressive pricing; Somany gets a premium in India that it cannot replicate in export markets.
• Morbi focus area: Morbi players are largely focused on the non-retail, private builder segment, not retail, limiting direct competitive overlap with Somany's distribution-driven model.
• Industry growth driver: Industry slated to grow ~5–7% next year, largely driven by export, which is expected to reach ₹18,000–20,000 crores.

Abhishek Somany: "It's much like a car when you buy a 10-year-old car it is less competitive than a brand new car, which gives you better mileage. It's literally directly proportional in the tile industry."

Distribution, Capex & Balance Sheet

• Showroom expansion: 109 new exclusive showrooms opened in FY23 (gross), taking the total count past 400; management did not have the net addition figure after closures.
• Dealer additions: ~300 new dealers added in FY23, with a plan to add another 300–500 in FY24.
• FY23 capex cycle complete: Gross block addition of almost ₹300 crores across three plants: Somany Piastrelle (larger capacity), South plant expansion, and Northern India modernization (~₹40 crores for one line).
• FY24 capex light: Only routine maintenance capex of ₹60–65 crores, plus ~₹12–13 crores toward the Nepal plant toward year-end.
• Nepal plant timeline: Will commission maybe sometime late next year, at least 18 months from now, and will largely serve the Nepal market.
• Ad spend rising: Absolute ad spend goes up fairly significantly in FY24, though the percentage of revenue remains at 2.5%, with new adverts being shot for TV, social media, digital, and below-the-line.
• Balance sheet priority: Management explicitly stated it does not wish to deter from having a stronger balance sheet, even while taking aggressive growth targets despite muted demand.

Abhishek Somany: "We do not wish to deter from the site of having a poorer balance sheet. So we want to make our balance sheet even stronger."

Guidance & Commitments

Key Metrics