Somany Ceramics Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Demand perplexity, but orders building: Sales grew 4.5% in a quarter where domestic industry demand was negative, yet individual home buying is being deferred for unclear reasons. A strong order book from builders points to a project-led recovery starting Q1/Q2.
• Margins held flat at 8.4% despite a 4% gas price rise, helped by a 1.4% gross margin improvement and no discounting. Management sees a 1-1.5% margin uplift ahead if volumes grow high single digits.
• JV exits clean up the P&L: Two loss-making JVs were exited, releasing INR20 crores in capital and adding an exceptional gain of INR9.42 crores. The exits remove a drag and improve sourcing economics.
• A small, strategic acquisition in construction chemicals was announced, adding formulations, land and a B2B channel adjacent to the existing tile facility.
• What to watch next quarter: Whether the project order book begins converting to bulk supplies, the pace of Somany Max plant ramp-up beyond 51% utilization, and any government stimulus to lift lagging end-consumer demand.

Demand: A Bifurcated Market

• Industry in decline, branded players flat to growing: Domestic tile industry demand was negative, driven entirely by the Morbi cluster where exports collapsed from ~INR20,000 crores to INR13,000-14,000 crores, causing stockpiling and production cuts. Most branded players grew or stayed flat.
• The IHB deferral puzzle: Individual home buying is being delayed even though homes are being built and tiles are mandatory materials. Management called the deferral "perplexing" and attributed it to an overall economic slowdown.
• Builder demand is coming, just not yet: Large builders like DLF, Lodha and Prestige remain with top branded players, but their projects are at finishing stages that have not materialised. Smaller builders are extremely price-sensitive and prefer Morbi. Orders secured in December and January were very positive, with bulk supplies expected to start from Q1 and Q2.
• Retail carried the quarter: Since builders and exports did not grow, all growth came from retail volumes. The retail mix is expected to shift from 77-80% down to 74-75% as project supplies begin.

Abhishek Somany: "It is a little perplexing. I think this is a deferred purchase, and there is an overall slowdown in the economy."

Margins: Holding the Line

• Gross margin improvement offset gas headwinds: Gross margins improved 1.4% sequentially, absorbing a ~4% rise in gas prices driven by dollar movement and spot natural gas. Operating margin stayed flat at 8.4%.
• No discounting, no bought sales: Average realisation was maintained despite industry pressure. Receivables rose only 1-2 days, better than the industry, and the company did not buy sales.
• JV exits are margin-accretive: Two loss-making JVs (ceramic wall tiles and normal glazed vitrified tiles) were exited. The exited JV will continue as a supplier at slightly better prices, and the P&L benefits from removing the losses. Management declined to quantify the margin impact.
• The path to 9.5-10% margins: At steady-state pricing and retail mix, if volumes grow high single digit to low double digit, 1-1.5% margin improvement is achievable through operating leverage and a richer value-added mix.
• Employee cost spike is temporary: A 12-13% increase in employee costs came from new hires for strategic initiatives (including the acquisition), increments, and flat sales. Costs will normalise when sales pick up.
• One-off depreciation in Qatar: Accelerated depreciation was taken on discontinued equipment as old lines were removed and new equipment installed. More incremental charges will come in Q4 as line balancing continues.

Abhishek Somany: "So yes, with the capacity utilization going up and my value-added mix only improving, you can very clearly see it improving. That's why our margins have remained the same."

Portfolio Reshaping: Exits and a New Entry

• Two JVs exited, capital released: One JV made ceramic wall tiles, a category losing sheen; the other made normal glazed vitrified tiles where the product needed renovation investment and the partner sold its stake to Inframart, causing discomfort. The exits released INR20 crores in capital and generated an exceptional gain of INR9.42 crores.
• Construction chemicals acquisition: A small acquisition of a Bahadurgarh-based construction chemicals business was approved. It comes with land, a building, and intellectual property (formulations), located 10 minutes from the existing tile facility. Somany takes 51% initially and will move to 100% over 3-5 years. Products will flow into existing B2B channels and some new dealerships.

Abhishek Somany: "So it was only prudent to get out of this JV, so that we can source better, smarter, cheaper from regional sources and get some profit in the bottom line."

Segment Performance

Capacity & Manufacturing

• Somany Max plant: Running at 51% capacity utilisation, representing half of its INR250+ crores revenue potential. Another product launch is planned for March or early April to lift utilisation further. The plant produces value-added tiles and will be margin-accretive as it ramps.
• Sanitaryware and bath fittings: Fittings are running at ~110% capacity (INR5.5 crores/month). Small expansions are underway in machine shops and furnaces. Sanitaryware will need a major expansion over the next 12-18 months.
• Own vs outsourced mix is noise, not strategy: The shift in sales volume between own manufacturing, JVs and OEMs was described as an aberration, not by design. Own manufacturing delivers the best margins, and the focus remains on line balancing to keep own plants at optimum capacity.
• Optimum utilisation target: Near 90% (88-92%) for any tile company. Currently, capacity is not being fully used for either cheaper or better formats; ramping up and shifting to value-added products both contribute to margin accretion.

Guidance & Commitments

Key Metrics