Somany Ceramics Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Muted quarter, guidance cut: Sales grew just ~6% as demand stayed tepid across India, forcing management to revise its full-year growth call from "good teens" to high single digits.
• Margin levers are internal, not external: EBITDA and PAT improved on lower fuel costs and a mix shift toward GVT, not on volume; capacity utilization jumped from ~70% to 85-86% and remains the key controllable lever.
• The max plant is the next catalyst: The new large-slab GVT plant started this quarter, with production expected in Q4; its payback ranges from 3 to 5.5 years depending on how fast the value-added segment scales.
• Balance sheet discipline held, with one cleanup: The SREI bonds resolution will recover only ~Rs.6 Crores of an Rs.18.4 Crore provision; a vendor payment arrangement was restructured without changing payable days.
• What to watch next quarter: Whether Q3 delivers the promised "slightly better than Q2" performance, the max plant's first orders and product mix, and any sign that the stiff H2 growth path is actually achievable.

Demand & Revenue

• Broad-based weakness: Demand has been tepid across India with no specific regional or city-size pattern; management attributes it to an overall slowdown, not a structural shift.
• Retail still dominates: 80% of product goes into retail (individual home construction and renovations for the upper middle class), with the balance in projects, government and organized retail; larger brands keep taking share from Morbi in the domestic market.
• H2 bet is a stiff climb: Management maintained that H2 will be much better and Q4 will be "batting the maximum" for growth, but acknowledged the path to high single digits is steep after a weak first half.
• Real estate lag supports next year: Tile demand typically picks up 9 to 12 months after real estate construction starts; a lot of that demand is expected to flow through next year.
• Export dynamic helps, indirectly: Morbi's export-oriented capacity, built post-COVID, faced high freight during the Ukraine war; as freight rates eased, unutilized capacity moved to exports, taking pressure off domestic realization.

Abhishek Somany: "It is a stiff path but we are going to try and achieve that. I am staying that is a stiff path you are absolutely right but we are going to try and achieve that."

Margins & Cost Structure

• Three margin levers, one out of management's hands: Energy cost is not controllable; capacity utilization and product mix toward value-added products are the two internal drivers management is focused on.
• Utilization recovery was the quarter's real story: Overall capacity utilization moved from ~70% in Q1 to 85-86%, with tiles at 82%, sanitary ware at 52% and faucets at 70%; management expects tiles to improve by a couple more percent and sanitary ware to reach 70-75% in H2.
• Gas prices firming but manageable: A Rs.2 to 3 per unit increase from last quarter's average hit in October, with another Rs.2 to 4 possible through February-March before softening; management says current levels are not yet a concern and remain far better than the prior-year Q3.
• Fuel-switching policy is pragmatic: If gas is within 10% more expensive than coal or biogas, management prefers gas for its cleanliness, efficiency and quality; spray dryers in the north are now fully on biogas after the NGT order.
• Brand spend stays elevated: Spend was ~3% of revenue in Q2 and is expected at 2.8-2.9% for the full year, up from the 2.5% H1 average.

Abhishek Somany: "Ballpark if gas is Rs.2, 3 more expensive so let us say if it is within 10% more expensive I would rather use gas it is a cleaner more efficient fuel and also it gives me slightly better quality... the policy is very clear not to be pennywise pound foolish to buy the cheapest fuel and disregard quality and disregard life of the equipment."

Product Mix & Segment Performance

• Bathware margin profile: Blended bathware and bath fittings EBITDA margin is slightly better than tiles and will only improve as that segment scales up; management declined to provide a specific figure.
• Geyser introduction: The latest category addition carries insignificant losses (Rs.30-40 lakh annualized) and should start improving next year.

Capacity & Expansion

• Max plant is the near-term growth bet: The latest GVT large-format slab tile plant started this quarter; production expected in Q4, with the launch closer to early next quarter or late this quarter.
• Payback depends on value-added uptake: If the value-added segment scales quickly, the max plant pays back in 3-3.5 years; if not, closer to 5-5.5 years.
• Next 18-24 months focused on big slabs: Initial capacity of 0.4 crore sqm; management wants to double that plant at the same location after that.
• No tiles expansion needed for 24 months: Existing capacity is sufficient; the focus is on utilization and mix improvement.
• Sanitary ware and bath fittings get the next capex: A new sanitary ware line is ready to be added in 12-18 months; bath fittings needs only balancing equipment for quality and product mix.
• Morbi investment context: The ~Rs.4,000 Cr investment in Morbi is largely for export, partly for renewing old equipment (replacing 7-8,000 sqm kilns with 10-12,000 sqm kilns), and partly for domestic demand; it is not a massive capacity addition.

Balance Sheet & Working Capital

• Vendor payment arrangement restructured: The previous vendor discounting facility using Somany's bank lines was discontinued; vendors who want early payment now use a third-party payer at their own cost, with Somany paying the payer on the due date. Payable days and interest cost to Somany are unchanged.
• SREI bonds resolution near final: An Rs.18.4 Crore provision was made 3-4 years ago; the NCLT-approved resolution indicates recovery of ~Rs.6 Crores, with the balance to be written off once final proceeds are received.
• Inventory slightly elevated: Inventory at 56 days is a little high; management expects it to come down by about two days in Q4. Receivables are at optimum levels with maybe one or two days of room to increase. Creditors are at optimum, with everything paid on due date.
• Share buyback completed: Management thanked shareholders and expressed hope it is the first but not the last.

Competitive Positioning

• Dealer network vs Kajaria: Somany has 3,200 dealers with ~10-12,000 touch points; Kajaria has ~2,400 dealers with ~15,000 touch points. The historic gap in dealer size traces to Kajaria's sales-tax exemption until 2014, which attracted very large dealers; that difference should correct over time as Kajaria adds more dealers and its bigger-dealer percentage comes down.
• 130 net new dealers and 22 net new showrooms added in H1, largely in Q2; the trajectory is expected to improve in H2.
• Vinyl is not a threat: Management argued tiles at Rs.30-40 per square foot are far cheaper than vinyl on an apple-to-apple basis, calling the comparison irrelevant.

Abhishek Somany: "If you are a shareholder you should be extremely fortunate that it is in a tile company and not a vinyl company it cannot substitute... Tiles apple-to-apple comparison is between Rs.30 to 40 a square feet so there is absolutely no comparison."

Guidance & Commitments

Key Metrics