Somany Ceramics Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Tough year, margin recovery underway: FY24 was called one of the toughest years for building materials, yet EBITDA improved on gas price relief and cost measures, with management guiding another 1–1.5% EBITDA expansion in FY25.
• GVT premiumization is a double-edged sword: GVT mix rose 400 bps but translated to only 200 bps of gross margin expansion because the segment is under maximum pricing pressure as every player floods into it.
• Morbi pricing has bottomed, but pressure is structural: Management believes Morbi pricing has more than bottomed out, yet concedes there is "no turning back" from commoditized pricing pressure that has defined the industry for 20 years.
• Volume-led growth bets on a new plant: Low double-digit revenue growth guidance is fueled by volume from the new Somany Max plant, which is running at only 40–50% utilization and must ramp to 80%+ by March.
• What to watch next quarter: Whether Q1 proves as "super, super, super tough" as warned, the pace of Max plant ramp-up, and any sign that GVT pricing pressure is easing as smaller Morbi units shut down.

Demand & Industry Structure

• FY24: a demand drought at home and abroad: Domestic demand was sluggish because tiles sit at the last leg of construction, while exports crumbled from ~₹1,800-1,900 cr/month to ~₹1,300 cr/month in Q3, adding pressure to the domestic market.
• Q1 FY25 warning: Management flagged April and May as "super, super, super tough" months specifically due to elections, with no serious growth expected in the quarter.
• H2 inflection bet: From Q3 onwards, management sees a good run-up for the next three to four years, driven by a broader building materials upcycle.
• Industry growth capped at 5–6%: Domestic tile industry is slated to grow at ~4–5%, maybe 6%; Somany expects to grow at almost double that rate.
• Morbi: overcapacity meets consolidation: Morbi is running at only 65–70% capacity; 6–7 new export-oriented plants will come online in 3–4 months, but an equal number of non-viable smaller plants are expected to shut down.
• Morbi's project entrenchment limits its growth: Unlike branded players at 70–80% retail, Morbi has 50–75% of sales in projects and is already well-entrenched there, so its growth is limited to 5–6%.

Abhishek Somany: "This year has been a very, very tough year and it's probably one of the toughest years for the building materials industry."

Pricing & Mix Dynamics

• ASP declined despite premiumization: ASP went down due to market pressure and sales incentive schemes deployed to promote sales; GVT gave better realization but is itself under maximum pricing pressure because everybody is making only GVT.
• GVT margin leakage quantified: A 400 bps mix improvement in GVT translated to only 200 bps of gross margin expansion because added sales incentives were given in Q4 to expedite sales.
• The commodity GVT trap: The 61x20 size has become a commodity; larger sizes (81x60, 121x80, larger slabs) have taken over, and the company must move towards larger slabs to arrest ASP decline.
• Inflation-adjusted prices have only fallen: Over 10 years, absolute prices rose because sizes became larger, better, and thicker, but inflation-adjusted prices have only gone down, making tiles probably the only building material where this has happened.
• Morbi pricing bottomed, but compromised quality emerging: Management believes Morbi pricing has more than bottomed out; going forward, compromised product is being visualized by dealers and consumers, which may shift preference toward branded players.

Abhishek Somany: "GVT is the segment which is also under the maximum pressure in terms of pricing, because everybody seems to be making only GVT. So, it's not going to be an easy route forward..."

Capacity & Operations

• Somany Max plant: the FY25 growth engine: The new Max plant started in January, is currently running at 40–50% utilization, and is expected to exceed 80% by March; it is the primary driver of volume-led low double-digit growth.
• GVT capacity built out in three stages: A GVT plant in West India started in Q3 FY24, South plant GVT capacity was expanded, and the last addition came at Somany Max in January.
• FY24 utilization dipped slightly: Capacity utilization was 86% for FY24, down 1.5% from FY23, though Q4 improved to 89%, up ~1% YoY.
• No major capex ahead: Only routine capex of ~₹50-60 cr is planned for next year, unless a modernization project is decided in due course.
• Nepal project delayed: The Nepal project has been delayed due to issues including rain and will probably only be in place next year, in H2.

Margins & Profitability

• EBITDA improvement levers in FY24: Gas price reduction from ₹59 to ₹45/SCM, production efficiencies, and cost measures drove the EBITDA improvement.
• FY25 margin target: 1–1.5% EBITDA expansion: Subject to stable gas pricing, which management calls extremely volatile due to wars; the two levers are increased GVT production and increased capacity utilization, plus the ability to outsource a lot more.
• Normalized EBITDA seen at ~11%: Management said normalized EBITDA margin should be around 11% plus/minus 1–2%, and the company is reaching toward that normalized trajectory.
• Industry-wide EBITDA stagnation: Pretty much everybody in the industry has had no serious EBITDA growth; capacity addition in volume came at the cost of higher gas cost and larger pricing pressure due to Morbi overcapacity.
• Quarterly margin pattern: Q1 will be sluggish; margins are maintainable from Q3 and Q4 onwards.
• Working capital normalized: YoY improvement came from higher payable days and lower inventory; this is a normalized scenario going forward, with only a small reduction in debtor days possible.

Abhishek Somany: "There is no turning back from the huge amount of pressure on a commoditized product like us in the market. That's been the scenario for the last 20 years."

Segments & Channels

• Sanitaryware struggled, bath fittings did well: The whole building materials front-of-wall industry suffered; combined bathware revenue was ₹80 cr in Q4, growing 7% for the quarter and 9% for the full year.
• Retail/institutional mix stable for now: The 80:20 retail/institutional share may shift to 75:25 over time; projects will be a large kicker in the next couple of years, with project share increasing by 5–7% from the existing 20%.
• Government projects: steady at 12%: Government is 12% of revenue; that share will remain the same or maybe go up slowly because government projects are moving up the value chain.
• Morbi cannot supply all projects alone: Most projects beyond a point cannot be supplied only by Morbi; some will be directly supplied to projects, and some contracted by Somany.
• Dealer network expansion: The company will add 100–150 dealers next year while trying to have fewer non-performing dealers exit.
• Brand spend rising: Ad spend is expected to increase to closer to 3% of revenue this year.

Exports & Trade

• Export recovery expected: Exports are slated to grow in a big way; management expects addition of ~₹2,000-3,000 cr on the current base of ~₹19,000 cr in exports.
• US anti-dumping duty: not a major concern: Somany does not export to the US; the duty is expected to be single digits or very low double digits, and at ~8–10% of the ~₹22,000 cr export value, it is not expected to move the needle too much.

Abhishek Somany: "I do believe that the US in the total gambit is approximately next year if we are looking at a Rs. 22,000 crore is approximately about 8% to 10% of the value of the US export... I don't think that's going to move the needle too much."

Guidance & Commitments

Key Metrics