q1 fy19 part1

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Good morning everyone. On behalf of Asian Markets, we welcome you all to the 1QF519
Earnings Conference Call of Sera Connectivity Limited. We have with us today Mr. Bharatbhai
Modi, Strategic Advisor representing the company.

I request Mr. Bharatbhai to take us through an overview of the quarterly results and then we
shall begin the Q&A session. Over to you sir. Thank you.

Thank you, thank you so much, Mr. Bharatbhai. This is Bharatbhai Modi, Strategic Advisor to the
company. Good morning and very warm greetings to all of you.

Sera Management has the pleasure in welcoming all of you on this call. Before I start, I will try
to read out the disclaimer, which is as follows. The statement that is released concerning our
future growth prospects are horror-looking statements which take the meaning of applicable
security laws and regulations.

These statements involve a number of risks and uncertainties beyond the control of the
company. That could actually cause material difference from those appearing in such horror-
looking statements. The risks and uncertainties relating to these statements include, but are
not limiting to risks and uncertainties regarding fluctuations in earnings, our ability to manage
growth, intense competition, including those factors which may affect our cost advantages,
wage increase, our ability to attract and reach our highly skilled professionals, political
instability, managerial limitations, legal restrictions of acquiring companies outside India and
unauthorized use of our intellectual property and general economic conditions affecting our
industry.

Sera is trying to, in a very limited way, from time to time, make additional recent and horror-
looking statements. Including our reports to the shareholders, the company does not
undertake to update any horror-looking statement that may be made from time to time, by and
on behalf of the company, as a sequel to or in continuation of these statements. The company
also expects media to have access to all or part of the release and the management
commentaries and the openings are on, based on which the media may wish to comment and
or report on the same.

Such comments and or reporting may be made only after taking due clearance and approval
from the company's authorized personnel. The company does not take any responsibility for
any interpretations, views, commentaries, reports, which may be published or expressed by any
media agency without that authorization of the company's authorized personnel. Now let me
give you some glimpses of the performance that we have achieved during Q1 of FY 2018-19.

I would like to share, despite the continued subdued market trend, we have done reasonably
well on the top line for Q1, with a growth of 14.5% for the quarter on a year-to-year basis. But
for the applicability of the India Standard, more so with respect to the comparable figures,
neither of these states exercise duty. The growth would have been even more, at 19.67% on a
year-to-year basis, for the first quarter compared to what 14.6% is now reported.

Always, the bottom line has continued to remain in the position, largely because of the product
mix, the cost push, motor and energy costs, gas and power, demand power costs, and a group
of other expenses. This collectively has put a pressure on the overall margin. The EBITDA
margin for the Q1 remained about 37.22 crores compared to 35.58 crores of the same
preceding period, the last quarter, whereas the PETS for the quarter month remained at
20.2686 crores, as against 18.90 crores for the similar comparable period for the previous
accounting year.

Having said this, I would now like to invite the questions from the participants. We can begin
the questions now. Thank you very much, sir.

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes
to ask a question, may please press star 1. Then 1 on their touch-screen telephone. If you wish
to remove yourself from the question queue, you may press star, then 2. Participants are
requested to use handsets while asking a question.

Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a
question, please press star, then 1. The first question is from the line of Nihal Shah from ICICI
Securities. Please go ahead.

Thank you, Paragbhai, for taking my question. Sir, on the product, on the segment-wise growth,
can you just elaborate on the growth for all the segments for the quarter? Sure, Nihal Shah, it
would be a pleasure. First of all, I'll give you a vote as a breaker for the revenue, and then I'll
also relate it to the other vote.

The total sanitary value we have done is about 56%, which includes a live product of 11%. We
have a faucet, which is about 22%. We have toys, including the exports, with about 18%.

And the balance, 4%, is coming from the runner's range of the product. And when I take the
segment-wise, the growth domain is sanitary, where we have grown by 11.21%. On the faucet,
we have grown 19.27%. On the toys, we grew with 11.38%. When you compare the same
figures of Q1 of FY17-18. Okay.

Sir, times growth, the last couple of years, we have been growing at a pretty strong rate of
almost like 25-30%. Sir, exactly what has led to this lower quantum of growth in times in this
quarter? Well, if you really see, the entire building material industry has remained fairly
subdued, and we were growing on our toys largely because our base was low. As our base has
also increased to a reasonable extent, the growth per se, looking to the economic conditions at
a macro level, would always remain that, number one.
Number two, we also have been trying to reorganize our product-mixing in terms of going for
more of a premiumized product, and therefore the premiumized product, the competition at
the label, you know, also has been one of those things where to push it at a price. And we never
wanted to put down a price when we wanted to have a business. So we thought that, okay, let's
have a very strong foothold in our product market, because gradually, when we want to
premiumize us, and therefore we could always, you know, get a momentum on a growth level
once we are stabilizing our presence in the premium market.

So we took a stand in terms of strategies where, you know, let the price also go in a normal
way, but then our main focus, which for a while was slightly more on a price, you know,
compared to what other two products like, let's say, Sensitive and Faucet, we're having our
bread and butter exam also, so we also have focused more on that, where we could go with
11% and 19%. So these are the strategies that management had decided that, okay, let's not
really only focus on a price, do it in a lower base. But then now, having come to a reasonable
base, let's really distribute our efforts and attention in all the products.

So this is why the price has remained. Not only that, in a price, you know, we are also trying to
probably come up with more premiumized products with a better presence across India in
terms of our visibilities as well as displays. So these are all timings where we try to build our
capabilities and divisibilities more.

Sir, also, can you give us these growth numbers excluding GST impact, so excluding the
excisivity base, because this, I think, would come down to 14% growth, which is what excluding
GST, which is what the reported number is. Yeah, you know, we hardly, if I compare both, you
know, let's say, excising GST both take off. On a Q2Q basis, if I say we have grown by about
19.67%. Right.

And similarly, if you can give us growth for the segment wise. Well, that I'll have to work out,
because I don't have those ready-made figures, you know, because I need to really work
individually on those segments. But I can always come back to you, you know, individually or
wherever you want me to do that.

Sure. So my last question would be on margins. Now, margins, obviously, we've seen significant
pressure even compared to the sequential quarter, which was in March quarter.

So just want to understand as to our guidance for margins for the full year and any incremental
steps are we taking in terms of hiking prices in faucets, sanitary ware, or anything, any lever we
have for margins to move up from these levels going forward? Well, certainly, yes, because, you
know, first of all, you know, there are two ways we could do it. You know, first, we have to look
at the things which are under our control, the things which are not under our control. For
example, the current market scenario, which is not under our control.

And therefore, let's really, you know, have a move of a tailwind or let the headwind stop, first of
all, on the market whenever we want to penetrate first. With a better price realization, this is
one of the ways that we could improvise our margins. Second, what is under our control is a
cost cutting.

Whenever we feel that, okay, there are possibilities about controlling costs, getting far more
better recoveries on the product that we have, and using our, you know, all capital allocations
in a more efficient way, that has been a focus area as of now. And in the time to come moment,
you know, we have a slight improvement in terms of the macroeconomics in the milling
material, mostly new construction. We are capable of people with a lot of branch presence,
number one, the distribution that we have, we will be able to bounce back on this.

So, currently, you know, we want to really continue with the market share that we have. We do
not want to lose out on the market share. We would like to sustain our market share and also
increase our market share further, wherever possibilities are.

And then we will bounce back on the margin. So, as of now, margin is definitely under pressure.
We admit what you are saying is yes.

The time to come there. Otherwise, it would be that, okay, how we really provide the margin is
one of the most focused areas from the management perspective. But, sir, can you give a
ballpark number in terms of margins you are looking at for the current year? Nevertheless, it
would be too early to really say so, what kind of a margin that we would be doing it, because
generally what happens, you know, in an industry like ours, the first quarter is always subdued.

Right. And therefore, unless, you know, you really come to a second quarter and any guidance
for a margin, even if I give and even if you take from me, both of us will be wrong. So, I might
probably suggest to you that, okay, you could come up with the same questions, you know,
maybe when we have a next call after the quarter too.

Sure. At that time, it will be in a more definite position to give you a better guidance. And
generally, you know, I might say, let's really not really be very bullish about this kind of a thing,
but then continuing and improvising day first.

There are always scope for improvements, which we have been doing. Sure, sir. Two quarters
go on this.

Let the rain go on also. The economy of this country is more agro-based and therefore, you
know, let the rain come and then it will be in a better position. Yes, sir.

I think, sir, lastly, just my last question, the impact of the trucker strike for you in the last
month, if you can just elaborate. Well, it was there, you know, we lost the business, you know,
we lost the dispatches, not the business, and because of the dispatches, they were delayed, but
then we could recoup it up for a while, you know, because what we have, you know, a lot of
trucks have been under our control in terms of how we manage the distribution channels. So
we were, compared to the other competitions, we were slightly less affected of that, but despite
this, yes, this did affect us.
But then we were able to recoup for a while, yes. Fine, sir. Thank you for your time.

Thank you so much. Pleasure. Thank you very much.

Thank you. The next question is from the line of Sonia Lalvani from Punnata Investments.
Please go ahead.

Congratulations, sir. I have two questions. First is on the industry part.

So how do you see the industry in the next one or two years, and what kind of sales could be
directly proportional to the housing? And that is again divided into commercial and residential
size. So and also, what do you think, which segment of your company should grow more with
respect to housing, if there is a housing demand from commercial and residential size? So this
is the first question. Well, Sonia, thank you for your questions.

You know, I might try to analyze the whole situation in a macro level like this. You know, the
industry that we generally are servicing is basically the building material and the building and
the construction. And, therefore, largely we depend upon the construction projects which come
up.

There have been no very solid, reliable data available for what is a replacement market. It is an
immense market, but there has been a lot of headwinds in terms of execution part of it. And,
therefore, in this country, the trouble for execution, even if you want to renovate a bathroom,
you know, you have resources, you like to do it, but how many times in the last five years if I ask
you a question, did you or could you renovate a bathroom, then you know, despite your wishes,
you are not able to do it.

So there is a market which exists, but then again there has not been able to be bringing efforts
to the company. And, therefore, we largely depend on a new construction which has been
subdued. But speaking to the kind of a product line that we have, you know, we are in a
planetary ware which hardly has an option.

If you didn't see centuries, you know, there are no options to the ceramic planetary wares. So
we are in a right product line as such. You know, you need a faucet also, you know, to really
transport and convey the water from pipeline to that, and, therefore, the kind of a product that
we are into it.

We have the best of the products which have probably no replacement as such in terms of any
options. Well, within the product categories, there could be many designs, many options, there
could always have, but faucet per se, you know, you do not have an option to replace that part.
आपको नल चािहए ही चािहए, इसके अलाब आपके बास कोई option है नह ही.

Similarly, you know, on a flooring also, the vitrified tiles is one of the most economical option
that you have compared to any other substrates. And per capita consumption of the tiles in this
country is far more low than in neighboring countries. So, at a macro level, we feel that, yes, we
are in the right product line, each has a life cycle of at least an opportunity of next 10 years, or a
15 years for that matter, you know, is unaffected.

Coming to what is now happening is, a market is always subdued for various reasons. You
know, there has been an era which has come into it, there has been a demonetization effect, I
mean, a lot of things which GST has also come into the fray in terms of regulatory bodies. So, all
these, a lot of people who have been in the news, sort of, unless there is a need base, the
overall market for the housing, or even for that matter, commercial, is subdued.

Because there has been, you know, we have witnessed that this is a very cyclical business. If
you look last 25 years, or even 28 years, right from 1992-93, every 5th or 7th year, you know,
there is a slump. And then, again, for a couple of years, it will, you know, you will have a
subdued atmosphere, and again, it will start to pick up.

Again, it will have a slump, and again, it will pick up. So, this is one cycle. Probably, we all hope
that we are at the second of the great cycle, and, you know, anytime, maybe in about six
months, a year down the line, we should be able to reverse this business in one.

This is done. We are capable, a lot of people, in terms of our distribution rates, in terms of our
product mix, in terms of our brand presence. So, all the three should really take us in terms of
the forefront runner, and we should be able to bounce back.

So, it's a question about weathering out a rough time, or a headwind that currently every
construction or every building material industry is facing. But, amongst them, you know, Sera,
per se, has internal strength in terms of being a debt-free company, number one. We have a
tremendous brand power, and we have a vision where we can take the brand from where we
are.

We have also been revamping our product mix to fit to the market based on the preference in
terms of premaritalization. So, our strategies are being done where we would stand by and
weather out this. So, it's a question of time.

Yeah. Okay. So, sir, do you see all the three segments of your company growing at a good pace
coming in six months or one year down the line? Well, we hope so, yes.

It has to pick up. Because, you know, even in a subdued market like this, you know, we have
grown more than 15 percent, which is a testimony we should compare with our peers, and we
should compare with any other building material. But markets, of course, have remained in
pressure, but then that's what is always in a business.

You always come across this kind of a thing. Okay. Okay.

The second question was on the other expenses break-up. So, if you can just provide me the
break-up of other expenses for this quarter. Well, other expenses, you know, largely comprising
of so many expenses, which is a group of about 28 expenses, but then your concern I can
appreciate is where the other expenses has gone up.

Yeah. Largely, one is because of the freight and forwarding expenses, which as earlier we used
to have a revenue, which was net of freight and forwarding expenses. Now, as for the increase,
you know, we have to improve freight and forwarding in our revenue, and now we have to
debit that in our other expenses.

So, these have largely contributed towards the rise in the expenses. Okay. There have been
some push markets, and therefore, you know, dealers also who generally we don't treat them
as a buy-selling arrangement, but we always handle them as our general partners.

So, in a difficult market like this, we also support them. So, there is some sort of an extra
incentive that we need to give them, sometimes depending upon a product category or a
charity, not as a general loan. So, that also is accounted.

Publicity expenses also has gone up a little bit of it. So, these are the major contributory factors.
Three of them that I narrated has really taken the other expenses.

These are about 300 plus basis points on a rise. Also, sir, the adjustment that you are doing for
freight and forwarding charges has been adjusted like for quarter on quarter as well as for the
year on year numbers. Yes, because after India's, now it has to be debited below the line.

You know, earlier we used to knock it off. You know, it's not our revenue. That's the way we
used to consider, and therefore, it was not appearing.

Now, you add up to the revenue, number one, and you claim a reduction as an expenditure.
Okay. So, that's a new ad which immediately came up, you know, when you compare pre-India's
and post-India's.

Okay. Also, sir, could you give me the number for freight and forwarding charges that has been
debited if you have it readily available? Well, I wouldn't have those really figured out a month,
but you could always reach me out separately, and I can give you that part. Okay.

And, sir, next question is, how has the power and fuel cost increased? Has that increased, like,
bio-wise? That's also an increase on a year-to-year basis because both, you know, the years and
the power cost both has been on an increase. On the power front, you know, we are almost
self-dependent on power generation, but we are dependent on an alternative energy
generation, like a windmill, and we are at the mercy of a God, many times, in terms of the
velocity of the wind. So, this time what happened in the last three months, the velocity of the
wind has remained very subdued, and it was not able to generate as much as that you would
have liked that to perform.

On the gas front, when I said, you know, there has been an average cost for a gas that we had
about 22 rupees and 50 paisa per cubic meter, which used to be earlier 17.56 percent. There's
about 28 percent rise in our gas cost as compared to what we used to do it. So, gas cost also
has, but then, you know, in terms of the cost of a gas as a percentage to the sales is not that
material.

It is less than, you know, about 1.5 percent, or less than 1.35 percent, and therefore the impact
in terms of absolute amount is larger, but in terms of percentage is not there. But despite this,
yes, it's one of the major contributory factors which has taken our cost forward. Okay.

Sir, could you share the industry figures for faucet and sanitary ware and tiles, if you have that?
What kind of an industry figure do you want? Do you want a top line, bottom line, or a cost?
What is it that you are asking? Sir, there are many figures. Top line. Well, I started the call for
STERRA, and therefore, let us stick to what you have been asking for STERRA, because those
comparisons many times, you know, even if I try to make, I may be wrong, because I do not
have the right data with me as of now.

But in general, what we gather from the market and our salespeople, their report was that
everybody has been in the same boat. Probably, we are one of those who have done better
than compared to the peers. Okay.

Awesome. Okay. Thank you.

So, for tiles… Yes, please. Hello? Yeah, I'm listening to you. Tell me.

Yeah. Sir, for the tiles, I just wanted to ask you, how many days do we have for tiles business?
We have, as of now, only one day which is operational, and the second day, we were boarded
very recently yesterday as approved, and we'll be taking an exposure of 26%. The total cost of
the project is estimated around 40 crores, and our exposure in that JV will be anything between
8 to 10 crores.

Oh, okay. That's helpful. Thank you.

Thank you so much. Thank you. Thank you.

Next question is from the line of Satish Shah from Investec Capital. Please go ahead. Hi, Bharat.

Thanks for the opportunity. So, my first question is on the working capital, sir. Are there any
specific trends that you would like to highlight on the receivable days? Well, if you really see,
our receivable days have come down.

If you have those figures ready, you know, for the whole of the year in 2018, we had receivable
days of 70 days plus. And for this quarter, you know, we have already about 55 days. And if I
take Q1 comparisons with the previous accounting, you know, we had about 62 days earlier.

So, that also has been pretty tight on the receivables. And let me be very honest about it. You
know, the growth that we have projected, or we've achieved, why projected, I would say,
whatever that we have achieved over there is far more than what we have reported.
Had we been a little liberal on our receivables, but we have been very strict on this. Unless, you
know, you have paid within 50 days or 55 or 60 days, we wouldn't bill you further. So, there has
been very tight control on the working capital.

Put together with inventory, you know, we hardly have 100 days. Okay. Okay.

That helps. So, second is, how do you see the impact of the eBay bill actually going forward? So,
how do you see it from a tax compliance point of view? And when do we see actually the
organized sector getting back in the limelight? Look, it's one of the best reforms that the
current government has been able to bring out. There are two things, you know, they are trying
to do is, one is a transparency, another is a traceability.

You know, these two T's, the traceability and the transparency that the government is aiming
at, can only be achieved when you book every business through your books. Now,
unfortunately, the building metal industry had a major share coming from unorganized sectors.
And when we call unorganized sectors, they largely had a lot of business which was not
reflected in the books.

Now, with eBay bill, you know, they have no chance but to get it reflected. But then, you know,
still, there are a lot of brains who probably try to flout the law, which is not unknown in this
country. They try to do that kind of a thing.

But the question is, you know, the execution machinery from government has also been very
strict this time. And therefore, sooner or later, these will be 100% coming on our books. But yes,
you always have black sheets in any business, so there could be 10%, 15%.

I don't know what kind of people would be there. Even if I use these figures, it will be only
hunch figures. So people try to do that.

But then you don't do business only for those kind of keeping those people in mind. You always
do a business with looking your eyes forward. So in a time to come, we feel that eBay bill will be
a lot of things which will bring to the books.

And therefore, the difference currently that people enjoy in pricing will get much narrowed
down. So organized actors in a time to come should benefit. That is what is the premise.

Sir, just to put this the other way around, how do you see the tax compliance so far, specifically
in this entry-level segment? I don't know what is happening on organized actors at the more we
are. But reportedly, because I don't know authenticated figures, even if I tell you about this, I
would be wrong and you would be wrongly said to me. But reportedly, there have been efforts
to flout that.

But that's not very workable and it's tenable in the long run. That's what we all feel.

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