Somany Ceramics Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Demand tanked, but profitability held: Revenue was flattish in a quarter where demand "literally tanked" since October, yet EBITDA, PBT and PAT all improved, driven by JV turnarounds and cost control.
• JV profitability flipped the script: Every JV moved from breakeven in Q2 to profit in Q3, a structural earnings swing that management expects to continue improving.
• Max plant and COVERSTONE are the growth bets: The new Somany Max slab plant began commercial production on January 29, and the 15mm COVERSTONE launch positions the company against marble and granite rather than competing tiles.
• Balance sheet discipline is paying off: Net debt halved YoY from ₹429 cr to ₹172 cr, a ₹125 cr buyback was oversubscribed ~6x, and the company is guiding to 10%+ EBITDA next year.
• What to watch next quarter: Whether the promised mid-single-digit Q4 growth materialises after a sluggish January, the pace of Max plant ramp-up, and any stabilisation in the North India demand that management called an aberration.

Demand Environment

• Demand collapse since October: Demand "literally tanked for pretty much every industry" from October onward, with the North particularly weak; management called Q3 an aberration they had not seen in some time.
• January slightly better but still sluggish: The company grew in low-single digits in January; it was much better than October but still sluggish, though YoY growth was positive.
• Q4 bet on February and March: Management is hoping February and March will be even better, targeting 5%–6% YoY growth for the full quarter, translating to roughly 1.85 crore square metres of volume.
• Export-oriented pressure spilling into domestic: Unbranded, export-oriented OEM plants from Morbi have been unable to push material into export markets and are dumping into the domestic market; this pressure existed in Q3 and continues in Q4.
• Morbi under severe stress: Selling prices in Morbi have only gone down as players discount material; they are unable to pass on gas price hikes, and capacity utilisation has fallen below 70%.
• Industry leader comparison: The industry leader launched a big slab plant in September and pushed ~₹30–₹35 crores of material in Q3, also benefiting from better sales in South India.

Abhishek Somany: "There has been aberration this quarter. I have not seen this kind of quarter in some time so -- but it's okay, part of the game. Not overly worried as long as we keep our focus on the balance sheet, keep our focus on our quality and the Max plant launching."

Profitability & Cost Structure

• JV turnaround is the margin story: All JVs moved from breakeven in Q2 to profit in Q3; material previously sourced from JVs is now flowing, and line balancing efforts flagged in Q2 paid results in Q3. The trend is expected to continue and improve.
• Gas cost contained: Gas cost is expected to stay in the 46%–47% range in Q4 (gas only, not blended), and management says Max plant margins should be under control within that band.
• Net debt halved but interest cost flat: Net debt fell sharply from ₹429 cr to ₹172 cr YoY, but interest cost remained the same because an earlier line of credit shown as short-term borrowing was actually a paying agent arrangement for suppliers, per an analyst's math close to ₹200 cr.
• Buyback funded from surplus cash: The ₹125 cr buyback (oversubscribed ~6x) was done out of surplus cash at the company level, so it will have no impact on interest cost.
• Q4 EBITDA target: Management is very confident of achieving 10% margin in Q4, with EBITDA between the current figure and 10%, maybe a little more depending on sales.

Growth Initiatives: Max Plant & COVERSTONE

• Somany Max plant now commercial: The new slab plant started commercial production on January 29; it was fired in early Q3 (October) and launched in Bombay and Delhi, where it was very well received.
• COVERSTONE: a category play, not a tile: The 15mm thick product is branded COVERSTONE and positioned against tile slabs, marble and granite, not as a ceramic tile. A 9mm launch will follow in Q4.
• Why 15mm launched first: Management took a commercial decision to develop the 15mm first because moving from 9mm and taking a 1.5–2 month gap to develop the 15mm later would have been impossible. Sales are not super high yet but reception is better than competition, including the industry leader.
• Capacity utilisation dip is temporary: Tiles capacity utilisation fell to ~82% from 91% in Q2, but management expects upwards of 90% next year as all new capacity (~₹600 cr added in the last 24 months) comes into stream.
• Next capex cycle ahead: Management expects to announce the next capex for augmenting capacity in 12–18 months; for the next 12 months, only ~₹15–₹20 cr is planned for the Nepal project plus routine capex.

Abhishek Somany: "We are actually not calling it a tile, although it is ceramic, but it is called COVERSTONE. So the brand positioning is also changing to that effect."

Segment Performance

Abhishek Somany: "So if you want to buy, let's say, Sanitaryware, you're not thinking of Astral or you're not thinking Asian Paints. They also make the same thing."

Balance Sheet & Capital Allocation

• Net debt transformation: Net debt fell from ₹429 cr to ₹172 cr YoY, a ~60% reduction, while the company simultaneously concluded a ₹125 cr buyback oversubscribed ~6x.
• SREI bonds recovery underway: The company received a resolution award of ₹4.61 cr on ₹18.44 cr of SREI bonds; ₹1.3 cr has already been received, with the balance expected within the next couple of quarters.
• Solar power investment: The board approved a ₹3.76 cr investment in a solar power SPV for the Haryana plant, with benefits expected from Q3 of this year.
• Advertising spend disciplined: The company will maintain advertising spend at 2.75% of annual revenue, even as it builds the Sanitaryware brand.
• Nepal project on track: Commercial production is expected somewhere in Q3 of this year, with only ~₹15–₹20 cr of capex required over the next 12 months.

Guidance & Commitments

Key Metrics