Q2 FY17 Cera Sanitaryware concall transcript

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Good morning everyone. On behalf of Asian Markets, I welcome you all to the 2QF517 Earnings
Conference Call of Sera Senitivir Limited. We have with us today Mr. Bharat Modi, Strategic
Advisor representing the company.

I request Mr. Bharat bhai to take us through the quarterly results highlights and then we shall
begin the Q&A session. Over to you, sir. Thank you.

Thank you so much, Kamlesh bhai. I'm Bharat Modi, Strategic Advisor to the company. I
welcome everyone who has joined this call.

But before we begin, I would just read out a disclaimer, which is as follows. Certain statements
in this release concerning our future growth prospects are forward-looking statements within
the meaning of the applicable security laws and the regulations. These statements involve a
number of risks and uncertainties beyond the control of the company that could cause actual
results to differ materially from those appearing in such forward-looking statements.

The risks and uncertainties relating to these statements include, but are not limited to, risks
and uncertainties regarding fluctuations in earnings, our ability to manage growth, intense
competitions, including those factors which may affect our cost advantages, wage increase, our
ability to attract and retain highly qualified and skilled professionals, political instabilities,
managerial limitations, and legal restrictions of acquiring companies outside India, and
unauthorized use of our intellectual property and the brand, and the general economic
conditions affecting our industry. Seros Senatorial Limited may from time to time make
additional written and oral forward-looking statements, including our reports to the
shareholders. The company does not undertake to update any forward-looking statement that
may be made from time to time by or on behalf of the company as a sequel to or in
continuation of these statements.

The company also expects the media to have access to all the parts of these releases and
management's commentaries and opinions thereon, 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 interpretation of views, commentaries, reports, which
may be published or expressed by any media agency without authorization of the company's
authorized personnel.

I would try to give a glimpse of the performance that we have. Let me say we have a consistent
performance and our performance has been based on many strands. The top line we achieved
for Q2 is 260 crores for 98 lakhs.
This is a growth on a quarter to quarter on a year-to-year basis about two and a half percent.
The results of Q2, if I just say, the EBITDA margin has gone to 43.69 crores, which is 16.74
percent. The net profit is 25.14 crores.

There's a growth of about 40.60 percent when you compare it with the same quarter of the
previous year. I would now straightaway suggest to come on the questions from the
participants and I would try to answer them to the best of our information. We can begin the
questions and we could start on that.

Thank you very much. We will now begin the question and answer session. Anyone who wishes
to ask a question may press star and one on their touchtone telephone.

If you wish to remove yourself from the question queue, you may press star and two.
Participants are requested to only use handsets while asking a question. Ladies and gentlemen,
we will wait for a moment while the question queue assembles.

Participants who wish to ask questions may press star and one. We have the first question from
the line of Kaushal Botra from Crystal. Please go ahead.

Good morning, sir. Hello. Good morning.

Good morning, Kaushal. Yeah. First of all, congratulations for the decent set of numbers.

Sir wanted to understand for the sanitary wear growth. Have you taken any price hike in this
quarter or it is a factor of premiumization? No, he has not taken any price hike. He is on the fact
of a premiumization and a lot of things.

Okay. And also, sir, how has been the festive season? Do you see any uptick on account of
festive sales? Well, if you really see, you know, the growth that we have registered is close to
about two and a half percent, which again is aligned with one of FY17 as such, if you see it. So
the festival season has not as it opened up, which has come to the books until quarter two.

Okay. And sir, how has been the regional pickup in sales? Which has been stable and steady on
that part. Overall business is still subdued, you know.

We honestly, you know, Sera is not used to really a growth of only two and a half percent. We
have a gaggle, which probably exceeds 30 percent. But purely because of the market dynamics
and the industry, which has been quite subdued for over a year, year and a half for the last so
many months, you know, and that trend still continues.

And therefore, the growth of over 12, two and a half percent, that's what is a moderate growth
that we have been able to do it. And sir, any outlook on faucet wear, sir? Last question. Faucet
wear is, you know, contributing to business over 21 percent, and they should really go up to at
least 25 percent in the time to come.

Okay. Okay. That's it from my side.

Please go ahead. Bharat bhai, good morning and congratulations. Very good morning, Nihal.

Thank you so much. Yeah. And congratulations for good set of numbers.

Thank you. Thank you. Sir, two, three questions.

One is with regards to fuel cost. Now, that is obviously going down, but that's going down in a
hurry. So the fuel cost for the first half of this fiscal has gone down by almost 45 percent.

So what's your take on fuel cost going forward? Is the trend likely to continue? Well, it's
basically stabilizing. You know, it's not going to go down further. But there are two ways, you
know, we look at it.

One is we have an administrative price mechanism for a gas that we get from Gale. And
definitely there is a reduction of about 10 percent plus on what they used to bill us. Right.

You see, the current rate that, you know, they bill us is about 9.42 rupees a cubic meter, as
against 11.5 earlier. So there has been a reduction on that part, which already has come to the
books of accounts, because we have a reasonable savings in our energy costs and more on a
gas. The APM factor has already come in.

It has come down, yes. And so also the Sabarmati gas, which is, you know, the normal market
rate also has been steady and it is maintaining around 26 rupees a cubic meter. And we hope
that, OK, that trend should continue as such.

But, you know, if you really see, OK, that's going to go further down, well, only the Commodity
Price Index would really tell us about this, rather than we preempt anything on this. All right.
Great.

And, sir, as regards Anjani tiles, obviously we have not incorporated consolidated numbers, but
can you throw some light on what is shaping up there? What is the kind of utilization margins
are we likely to get, say, probably at the end of the year? Well, sure. You know, we started from
Q1 of these FY17 only. Yes.

And Q1 was, you know, we are trying to stabilize about Q2, and we started using the capacity at
about 90 percent. In fact, there has been a subdued market overall, and therefore, you know,
the off-peak that we are going to do is only about 80 percent, 75 to 80 percent, which means, in
turn, you know, there is a slight pileup on inventory unit size from the Anjani tiles that we have
been trying to cater to the market needs in the southern part. But then this is a temporary
phenomenon, as we all would agree to that part, because the moment, you know, there is a
moment of which probably would set right in a time to come, which we all hope to be so.

Utilization of 100 percent capacity is not a big deal for such a strong distribution network that
we have, number one. And the EBITDA margin, you know, is almost into double digit now, as
far as Anjani is concerned. Okay.

And with, you know, we are also trying to change a product mix where we would be
primamizing and going for a GVT as well as double charge. So currently 100 percent soluble
salt? Almost. You could say about 90 percent is soluble salt.

But then in a time to come, as we stabilize the market, but in a soluble salt also, you know, we
have a slight advantage there, you know, because we kind of a material, raw material that we
get, you know, which has improved our quality parameters. And the whiteness that you get on
a soluble salt tie is, compared to the competition, is quite superior. And therefore, even in a
soluble salt also, we get a reasonably good price.

Okay. And so what is the debt on books, debt on Anjani's books? Is, Anjani, you know, basically
is 50-50. That's the way we had structured that part.

Right. The project cost is about 68 crores that we had, and we had about 34 crores that we had
pumped in as our equity. And now we have also, you know, modernized or upgraded the
technology to take care of the GVT as well as double charge.

We have pumped in another about 10 crores between the promoters. We have contributed
about 51 percent thereof. So, slightly, you know, in terms of the composition, the equity has
gone more than the debt.

Okay. So roughly your equity is around 44 crores versus debt of 34 crores. That's the way you
could take it, yes, largely.

Okay. And so my last question is, your recent announcement, which is coming on the packaging
company, can you throw some light on what is the Packard all about? What is the model? What
was it? Basically, he's one of our suppliers. He used to buy a lot of packaging material from
them, but then he used to supply other people as well.

Okay. So we thought that, okay, it would be very worthwhile if we get into some arrangements
where we could really, you know, fill up the entire capacity at a pre-agreed price, like, you know,
the transfer price mechanism that we generally have with Anjani. We made it a subsidy, but it's
a very small project, less than about three and a half crores.

And the model is, again, you know, 51 percent stake that we have, but that gives us a lot of
flexibility in terms of controlling the product mix that they manufacture, and they'll have a
priority that they would be really giving it to us. So which would mean that, okay, in our books,
you know, we don't carry a large inventory of a packaging material, which is almost adjoining in
that unit, with hardly about three kilometers from where we are located at the moment. So we
just have, you know, a concept of a just-in-time kind of an inventory we are able to practice that
part.

So basically, just about efficiency in operations. Exactly. And, you know, no investments, almost
zero investment on an inventory, you could say that part, for a packaging material.

And so the last question is, can you give us the product mix for the first half and the growth in
each individual category? Yeah, I can give you that part. But, you know, overall, the trend has
remained very stable about us. You know, we, if I really give, you know, 60, 61 percent is still
coming from the sanitary valve, which again was earlier, if I say Q1, was again about 61, 62
percent only.

And 12 percent remains, you know, out of that is Allied, a product which is going with the same
interval like previous systems and the seat covers, which leaves about 48, 49 percent for pure
sanitary valve. Faucet, again, has exactly same percent or 21 percent. And Tice also has about
15 percent.

So there is no change major in terms of the product mix that we had. And if I really see the
growth that it has happened, you know, the growth in sanitary ware in terms of value and
volume put together is about 8 percent. Okay.

In Faucet, we have about 12 percent growth. And in Tice, we have close to about 37 percent
growth. 27 percent.

37. 37 percent. Yeah.

But it's a low base. And therefore, you know, when you take a weighted average, you end up
with about 12 and a half percent overall growth, which was in a Q1 about 11.65 percent growth.
So we're slightly improved in terms of growth for a Q2.

Okay. So these numbers are for the second quarter? It's quarter two. Yes.

Okay. Fine. But if you really see, you know, if you if you see, you know, our EBITDA has gone as
against one and a half percent growth.

EBITDA margin has gone to 33.60 percent on an upward. And if you really see our net profit has
gone by 40.60 percent. Right.

That means, you know, the realizations that we're getting is has improved. Sure. Though the
volume in terms of, you know, we have been steady at about 8 percent growth or about same
12 percent growth in terms of faucet as well as a sanitary ware.

Right. Fine, sir. Thanks a lot for the... My pleasure.

Thank you. You're welcome. Yeah.

Bye. Thank you. The next question is from the line of Anshuman Atri of Hightong Securities.

Please go ahead. Yeah. Thanks for the opportunity and congratulations on the result.

My question is regarding demand side. So are we seeing any uptick from the government
orders? And if yes, in which all regions? You see, honestly, we do not cater to the government
contracts directly. The reason being, you know, government has a very set procedure where
they have approved contractors and they deal only through the approved contractors.

But as far as the product recognition is concerned, yes, we are approved by every state
governments, which would mean that, you know, whenever a government floats a tender
through the contractors who are registered on the panel, they could really, you know, buy a set
of product and can always deliver it to the government. But directly government does not buy
from us and therefore we would not know that. OK.

And secondly, in terms of the tile... But to answer your question again, you know, there have
been a lot of movements in railways. There are a lot of movements in other government, these
things where, you know, the sanitary ware and strata is really getting a lot of recognitions and
acceptability. OK, sir.

The second question is regarding the tile business. So as we are upgrading the product, how
much of realization improvement and margins improvement can we expect going forward?
Well, it's still a very, very first year where we are into a joint venture model, and therefore I
could only say that, OK, we are in a double-digit available margin there. And with GBT, what do
you expect it to be? Well, GBT, when it comes and takes a sizable portion, you know, we really
might take in about a year, year and a half down the line, but then we stabilize that.

This percentage would definitely improve. OK. The question is that, OK, the market dominance
has to support this.

Today, the market dynamics are not very favorable for the entire building material industry.
True. And lastly, in terms of tiles, are we seeing reduced pressure from imports? Well, there was
an anti-dumping duty which has come to an end on 30th of September.

But then even if you really take an anti-dumping duty, you know, because of the commodity
price, which has already slipped down, the advantage that, you know, we all tile manufacturers
had was reduced sizably because the freight costs from China had also gone down. OK. So
therefore, you know, the tiles and the competitions from the overseas, which will have to really
follow the new policy guidelines if government comes out with it.

OK. Thank you for answering the question. Thank you.

Thank you. We have the next question from the line of Dhaval Mehta of MK Global. Please go
ahead.

Yeah. Morning, sir. Good morning.

Good morning, sir. So congrats on an excellent set of numbers, sir. So my first question is on
demand, sir.
Is it the right thing to say that sequentially we have seen demand on a downtrend? I'll tell you
where I'm coming from. So basically in Q1, we did a growth of around 12 percent a bit on a
higher base, while even in this quarter, we have clocked around 12 percent, though the base
was quite favorable. So is this the right thing to say that demand sequentially has been a bit has
has basically lowered? No, I would not agree to that.

In fact, you know, for Q1, if you compare Q1 of FY17 and Q1 of FY16, we had grown with about
11.65 percent. And if you really say Q2 for both the years, you know, we've grown by 12 and a
half percent. So there has been an upbeat on that, but not as much as that you would have
liked that to be.

OK. OK. And are we seeing any regional trend in terms of demand, sir, like any particular
pockets of country doing quite well or really facing stress? Well, generally, the southern
business, we used to have a fairly good business, but that remains subdued, except in Andhra
Pradesh.

OK. When you really talk about Maharashtra, these also have been subdued about this. But if
we really talk, you know, let's say going to the U.P. in the north, these has picked up a little bit
more.

Gujarat has been stable, Rajasthan and Punjab has been stable, all that. OK. OK.

OK. So my next question is on faucets. Earlier, the rate should be in high teens or 20 percent
plus kind of a growth in faucets.

But now we are seeing a growth in lower double digits. So has the base picked up or the
competitive intensity has increased manifold? As a matter of fact, the entire market is subdued.
And therefore, even if you really compare the figures, which probably may be published or may
be published in time to come, the growth for all players in the industry has been more or less
stagnant to about 8 to 10 percent, which earlier used to be far more on a growth.

And therefore, overall percentage, when we thought also that we should have crossed about 15
percent growth on a faucet, but then there was market dynamics, which were sort of a, you
know, headwind coming into that part. I was not able to grow as much as we would have liked
that to. OK.

OK. So what will be our market share in the faucet category? Sorry, market share is hardly
about 2 percent to a half percent. As of now, market leader Steel is Jaguar.

I mean, I will very candidly admit, you know, 1 to 8, 1 to 10 is Jaguar. Anybody who starts is only
starting from 11, 12, 13, 14. So is even Jaguar growing at the same pace or even it has slowed
down? Well, you would know that better because you do not have an access to those kind of
figures because they are not a listed company as such.

Right. Right. But then what we hear from the market is that, OK, the growth also has been more
or less about the same thing, about 10, 12 percent.

OK. OK. OK.

So my second, my last question is on margin, sir. So we have seen a margin in the range of 16.5
to 17 percent from last few quarters, benefiting by the lower input as well as the lower fuel
cost. So once we, the tile business, especially in the tile business starts full fledged, will this kind
of margin will be sustainable? There are two ways I would answer this, you know.

The EBITDA margin would purely become applicable to the material that we manufacture. OK.
EBITDA will not be applicable where we are outsourcing.

OK. And therefore, when you compare EBITDA, you know, I think you should always try to
compare what we are manufacturing. We are only manufacturing faucets as well as sanitary
ware.

Right. Tiles, you know, that's a business we are more or less on an outsourcing model.
Outsourcing is two ways.

One is straight outsourcing without any kind of a commitment. Another is an outsourcing

Which is a transfer price mechanism. EBITDA does not affect wherever we have a tiles business.
OK.

So sustainability of the EBITDA margin that you've been talking, you know, is not related to the
tiles at all. Right. And therefore, you know, we should be able to sustain or even further
improvise that further because these are manufacturing process parameters and improvisation
on that with the product mix that we have been able to do it on a premiumization would help
us to do so.

Hmm. OK. OK.

OK, sir. Yeah. Thanks.

Thank you, sir. Thanks a lot. And all the very best.

Pleasure. Thank you. Thank you.

We have the next question from the line of Archal Lohade of JM Financial. Please go ahead.
Yeah.

Thank you for the opportunity, sir. A couple of questions. One, if you could talk about the
growth for the second quarter, because you talked about the first half, I believe.

Yeah, growth for the second quarter, as I said, is about 12 percent, one and a half percent.
Sorry. Segment wise, I wanted, sir.
I mean, segment wise growth, as I said, I did give that figure also. But then I can give you
further about this. You know, I'm giving a figure for the Q2 only is about 8 percent.

OK. And we have a growth of about 11.6, 12 percent is on the faucets. OK.

And we have a 37, 38 percent growth coming from tiles. And in terms of the revenue mix? In
terms of the revenue mix, revenue mix, as I said, you know, 60 percent is coming from the
entire sanitary ware block. Right.

And if I really take off, you know, the allied product out of that block, you know, which
comprises of the PV systems, seat covers, et cetera, which go essentially with the sanitary ware,
which contributes about 12 percent. 48, 49 percent is coming from pure sanitary ware. Right.

We have a faucet which is contributing about 21 percent business. OK. And we have 15 percent
business coming from tiles and the balance 3 percent is coming from a wellness range of a
product.

Understood. If you could talk a little bit about the capacity utilization, where are we in the
CAPEX plan? Capacity utilization on a sanitary ware is almost 98, 99 percent. And as we are
talking, you know, on a faucet, we are using about 60 to 62 percent capacity utilization.

OK. So what is the plan on the sanitary ware CAPEX front, sir, given the utilization? You know,
we are already gearing up ourselves to increase further capacity and make it from 3 million to
3.2, 3.3 million, which is about 10 percent rise on the current capacity. OK.

We only are only waiting for the market to really take off that part. Right. And we probably are
at a stage where, you know, once we have a feel as to the market being taken off, you know, we
can really achieve those capacities in about another three to four months.

OK. So the lead time is about three to four months, you mean? No, we are already committed
and therefore this has been a process which has already been initiated about a year before. OK.

Generally, it takes about 15 months. So we have already made a lot of headway on that part.
But we are a bit slow on this because the market is also slow.

And therefore, we are not really hurrying it up. Right. Right.

But we are committed to that part. Understood. In terms of the demand improvement, you
think there is slightly pickup, not material as of now.

What do you think, what could drive the pickup in your view? Would be monsoon or the seventh
pay commission? All these would be the drivers or you would look at any other driver as well? I
mean, question, your question, I'll have a part one and part two. One is, you know, what would
currently the market is fairly subdued. Right.

And you don't see those kind of an improvement excepting a moderate improvement of over
10, 15, 12 percent, which we have been doing anyway. We've been registering that part, which
you can see from our results as well. Now, in terms of the growth of drivers, if you really say it,
yes, definitely good monsoon is one of the major good drivers.

And we have a good monsoon this time. Almost about 90 percent, 88 percent monsoon has
been there. So they should really give us a good flip on that part.

Number one. Number two, there have been some pockets where this kind of a moment has
started, but then it has still not come to us. But we do see moments.

But there is a one thing, you know, which we need to really accept is that there is a sizable
amount of unsold inventory which is existing. So these have to settle first, which may take
about another six months or one year down the line before the market really picks up. Right.

Unsold inventory of the real estate property. That's right. That's right.

Therefore, the new projects which are, you know, I mean, very subduedly coming, you know, is
not very ambitiously coming to that part. So you need to wait till all the unsold inventories really
settles and that they have an actual user or the buyers who need based buyers rather than only
the investors. Right.

Right. And just last question in terms of the gross margins. Would you say that these margins in
terms of the because of the lower raw material cost or the fuel cost would sustain at the current
level or are you seeing any pricing pressure? There are three ways I would answer.

One is, you know, it's sustainable because number one, you know, the cost has been managed
very well etc. Okay. Number two, you know, we have always changed our product mix, which
has a better realization, which would mean that, okay, we are going more for a premiumization
of the product.

Right. And the third thing, the price of energy or power, including the energy, which is
continuing to be stable around where we are. So our efforts to control cost and having a better
realization with a product mix change towards the premiumization would allow us to sustain
the margin.

Great. And just last question on the sales growth, what would be the guidance you would
probably look at for FI17? Our chairman on a public platform on a TV show, he said that, okay,
we should be seeing a growth of about 15%. So we hope that we should be closing the year
with about 15% growth.

Got it. But, you know, the market, these are all subject to the market dynamics. So
conservatively, even if you take it, you know, even if you sustain about one and a half percent to
a 15% growth, that's where we look forward to.

Understood, sir. Thank you so much. I'll come back in a few seconds.
Thank you. Thank you. We have the next question from the line of Gunjan Priyatyani of JP
Morgan.

Please go ahead. Yeah, hi, sir. Thanks for taking my question.

Just two clarifications I needed from your side. Firstly, you mentioned this anti-dumping duty is
expired. Is this something which the industry is taking up again? Or what is the thought
process? Does this get extended or, you know, we'll still wait for it to come up again? No, we
would not know about it.

Representations have been made to the government about it and the government has to take a
call. Okay. So that, so it was only for a period of six months, is it? Well, generally, it comes, you
know, it gets renewed once, you know, you stabilize, you know, a lot of people would say, look,
we need initial time to really settle on this.

By the time we can face a competition. But honestly, personally, what I feel is, you know, you
cannot really do a business based on government policies and anti-dumping duty alone. You
should have your own strengths.

And that strength, everyone has to develop, if not now, maybe in a time to come. So
government would give another six months, probably should be used in such a way where
every manufacturer develops inherent strengths. So our focus is on developing inherent
strengths rather than depending on the anti-dumping duty to help us every time.

Sure. Okay. And second question I wanted to check with you is the number growth numbers
that you share are the value growth.

Is the volume growth materially different from this? It's the same thing. It's a volume and
volume put together. The reason being, you know, it does not really give any kind of an
indication.

So when I say, you know, if we start manufacturing more premiumized items, which are in
terms of a volume, they are larger items. Then the number would go down. Okay.

No, what I'm trying to gauge is basically, is it that the mid-end market is doing relatively better
and the high-end market is lower? Just some sense on which, where you're seeing the growth?
Whatever. I will try to answer these indirectly to corroborate the figures because

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