Somany Ceramics Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Soft quarter, demand-side pressure: Sales grew 8% against a double-digit target as rain, heat and inflation slowed both retail and project segments, while capacity utilization fell to 70%.
• Gas tailwind partly offset by volume: EBITDA margin rose 60 bps on gas cost relief, but the benefit was muted because lower production kept fixed-cost absorption weak.
• Utilization snapped back in July: Management reported near-100% capacity utilization from 1 July, setting up a materially better Q2.
• Morbi capacity discipline emerging: Export recovery is absorbing excess Morbi capacity, while land-price inflation and plant-cost escalation are making new additions less viable.
• What to watch next quarter: Whether the July utilization jump holds through the monsoon, the pace of GVT mix recovery toward the 35% target, and any further gas-price movement.

Demand & Volume

• Q1 headwinds were weather and inflation: Unseasonal June rains in the North, extreme heat driving labor back to villages, and persistent inflationary pressure depressed both retail and project demand.
• Regional divergence was wide: Telangana performed very well, the North was decent until mid-June, while the South, especially Kerala, lagged the 8% company average.
• Tier 2/3/4 still outgrowing Tier 1: Smaller-town growth remains faster, partly because the company is more retail-focused while Tier 1 is a builder market where Morbi supplies dominate.
• July inflection: Demand improved over the Q1 average despite ongoing rains, and management expects a full pickup post-Diwali.

Abhishek Somany: "Silver lining is that from 1st July, we are almost at 100% capacity utilization. So things are looking much, much, much better."

Margins & Cost Structure

• Gas relief delivered 60 bps: Blended gas cost fell from the INR50 range in Q4 to INR45 in Q1, and a further shift from propane to natural gas (INR40) is expected next month.
• Volume leverage was the missing piece: Power and fuel cost per square meter declined from INR114 to INR110, but other raw material cost per square meter rose from INR230 to INR255 because production was lower and costs must be mapped to production, not sales.
• Full-year margin guide held: Management reiterated 9.5% to 10.5% EBITDA margin for FY24, with expansion coming from higher capacity utilization, value-added sales, and the 60 bps gas saving, plus possible further gas upside if prices stabilize.
• South gas disadvantage persists: The South plant pays a spot price while gas is available at INR40 in the region, but PNGRB has not mandated IOC to supply at that rate, a regulatory deadlock management called out as a structural cost handicap.

Abhishek Somany: "Unfortunately, we work in India and it's the governments -- two different government departments fighting with each other is why we're getting a spot price. So gas is available at INR40 over there, but PNGRB has not given any mandate to IOC to supply to us."

Product Mix & Down-Trading

• GVT share rose, but value within GVT fell: GVT mix improved to 33-34% (up 2%), yet customers bought smaller, vanilla sizes like 60x120 instead of larger formats (80x160, 120x180) due to market pressure and inflation, reducing the value-added sold without any price cuts.
• Full-year GVT target intact: Management expects GVT to cross 35% in FY24, implying a mix recovery in the second half.
• Soluble salt exit was surgical: The Somany Fine plant, which made soluble salt products, was shut 4-5 months ago and sold after demand halved from 6-7 lakh sq meters to 3.5 lakh sq meters. Supply is now tied up from third parties running at full capacity, so there is zero sales loss.

Capacity & Competitive Dynamics

• Idle capacity was the margin culprit: Extra capacity added in the last 24 months (~25% with the new slab plant) sat idle in Q1, creating margin pressure that management expects to correct as utilization rises.
• Slab plant on the verge of starting: The large-format slab plant will begin production in early Q3, with the majority of capex already spent and no further expansion planned beyond it.
• Morbi behavior is shifting: Export recovery from INR500-600 crores/month to INR1,700-1,800 crores/month is absorbing capacity that was built for exports. Land prices in Morbi have risen significantly, and plant costs are up 15-20% on rupee depreciation, while tile rates have stayed flat, making new capacity less viable.
• Nepal is the next frontier: The next capacity addition will be in Nepal, sometime next year, with no significant domestic tile expansion planned after the slab plant.

Abhishek Somany: "The problem is that we've put in so much extra capacity in the last 24 months, that capacity lay idle and therefore, we had a margin pressure. And that should get corrected the minute we start using capacity in a larger fashion. So I'm not worried at all. In fact, I'm very optimistic on that."

Bathware Segment

• Sluggish quarter, mixed by region and category: Bathware growth was slow overall, with the South very poor, the North very strong, and the West decent. Sanitaryware (33% of Bathware) had no growth, while Bath Fittings grew about 20%, lifting its share from 20% to 26%.
• Medium-term ambition is material: Management is targeting INR300+ crores revenue this year and INR500+ crores in 3-5 years, with segment EBITDA closer to 14-15%.
• Next capex is sanitaryware, not tiles: The next expansion will likely be in sanitaryware, spread across FY25-26, and will be far less capital-intensive than tile capacity.

Guidance & Commitments

Key Metrics