CSL AUDIO Q4 FY15

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Good day everyone. On behalf of Asian Markets, I welcome you all to the 4Q and full year FY15
earnings conference call of Seras and Interware Ltd. We have with us today Mr. Bharat Modi,
Strategic Advisor representing the company.

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

Thank you so much, Thomas bhai. And before I really initiate, you know, the policy, I'll try to
read the disclaimer first. Certain statements in this release concerning our future growth
prospects are forward-looking statements.

Witness 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 mutually 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 the fluctuations in earnings, our ability to manage growth,
intense competition, including those factors which may affect our cost advantage, wage
increase, our ability to attract and retain highly skilled professionals, political instability,
managerial limitations and legal restrictions of acquiring companies outside India, and
unauthorized use of our intellectual property and general economic conditions affecting our
industry.

Serra Sanitary Ware Limited may from time to time make additional written and or oral
forward-looking statements, including our reports to 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 this release and the management's
commentaries and opinions thereon, based on which the media may wish to make a comment
and or report on the same.

Such comments and or reporting may be made only after taking due clearance from the
approval of the company's authorized personnel. The company does not take any responsibility
for any interpretations, reviews, commentaries, reports which may be published or expressed
by any media agency without the prior authorization of the company's authorized personnel.
On behalf of Serra, I am Strategic Advisor Bharat Modi and I will just give you the brief synopsis.

We have been growing, but that growth is a continuous process. We always try to reinforce this
with our endeavors. The top-line growth for the FY15 has reached 23.80%. The bottom-line
growth has gone to 30.36%. Our EPS has gone to 53.36%. And the dividend also has gone to
125%, which we raised from 100% last year.

I would straightaway go to any question-and-answer sessions from the participants, because

We will now begin with the question-and-answer session. Anyone who wishes to ask a question
may press star and one on the touch-tone telephone. If you wish to remove yourself from the
question queue, you may press star and two.

Participants are requested to use handsets while asking a question. Anyone who wishes to ask
a question may press star and one at this time. Ladies and gentlemen, we will wait for a
moment while the question queue assembles.

The first question is from the line of Avneesh Roy from Edelweiss. Please go ahead. Sorry to
interrupt you, Mr. Roy.

Please use the handset mode while asking your question. Sir, my first question is on the gross
margin. You have explained this in your interview, but if you could clarify in greater detail, why
quarter-on-quarter also there is a sharp dip? And based on your comments in the interview, is it
that in the coming quarter the gross margins will see recovery based on sales recovery? First of
all, let me understand what exactly you have in terms of a gross margin, because we have a
yearly margin which is almost maintained throughout the quarter, which is about 15 percent
plus.

And on a quarter-to-quarter basis, I had a mail from you also. You are expressing your anxiety
about we going down by 2.97 percent down on a margin. I would not accept it, because actually
I need to really corroborate those kinds of things.

And I would invite you where exactly you get these figures from, because I still maintain that we
have the figures which are 15.06 percent yearly. And on a quarterly basis also we have more or
less the same kind of thing. Sir, my question is more on the gross margin front.

If you see, if I add all your raw material cost, it is down both quarter-on-quarter and YOY. I
mean, gross margin, you take what kind of figures, because I generally would focus on EBITDA
margin. And you want to add about what kind of other things.

Because EBITDA margin, if I take, you know, for the whole of the year is about 124 crore per 11.
Is that what you are referring to, or are you referring to any other figure? No, if you could start
with the gross margin for the quarter. So if you see, if you add all the raw material cost, etc.,
then the total raw material cost comes to around 126 crores.

And that's why, if you see, the gross margin is seeing a sharp dip both quarter-on-quarter and
YOY. So EBITDA margin is an update. Yes, I could send some questions on this part.
And I'll try to really, you know, answering this whether, okay, the quarter-to-quarter, what kind
of a product that we have and which has been pushed in terms of reaching the targets. Now,
you know, there are the product mix which has a varying or a different kind of a margin.
Sanitary ware is one that we are talking about.

We have one product which is a faucet ware. We have a different margin on these, and we have
a different margin on the tiles as well. Now, if you really say that, okay, look, yes, if any of the
quarter, the tiles are the lowest of the margin, then we have EBITDA margin which is in the
faucet ware, and the highest margin is on the sanitary ware.

So if in any of the quarter, if you are referring, you know, the product mix is led by, or probably
a growth is more that intensely, you know, by a product category which has a comparatively
lower margin, then obviously, you know, that particular quarter would always be on that kind of
a thing. So that's useful, but could you explain seasonality in your product field in greater
detail? So you have explained the margin profile, but if you could tell us Q1 to Q4, how the
movement happens? Generally, I'm not asking for guidance, but generally, will the shift be so
much on a quarter-on-quarter basis in this kind of product? Well, it all depends upon, you know,
because, you know, many times, you know, there are certain kind of the quarter where a
certain kind of a demand for the product category is more. Now, if you really see, you know, if
I'll give you an overview of the things, you know, generally the product category that we have,
as I said, you know, there are four categories.

Category starts with basically a sanitary ware, then we have a faucet ware, then we have a
toilet, and then the wellness product. First of all, I'll try to give you an overall picture about it,
then I'll go to the quarter-to-quarter basis. The overall picture is, you know, we have something
close to about pure sanitary ware, which is coming about 51% of the total turnover that we are
talking.

We have certain alloyed products, you know, which are completely outsourced, which
comprises of PVC cisterns, seat covers, some of the fittings, which essentially go with the
sanitary ware. Now, this goes to about 15%, and then the category three, you know, second,
you know, we have a faucet ware. We have a faucet ware, which is about 19%, and we have a
toilet, which is contributing about 15%, but the balance 3% comes from a wellness product.

Now, as I had said, you know, on a toilet and a faucet ware, comparatively, the margins are
lower margins, but it's a volume game. Both of them, both the categories are volume, and
therefore, if any of the quarter ware, the provenance of these two products, faucet ware and a
toilet, is more than the sanitary ware, the overall margin will always be in a line where it's
slightly coming, you know, in terms of a comparison of a pure sanitary ware, it will be a lower
margin. Now, this exactly is the scenario.

Sir, that's useful. My last question is on the sales front. This quarter, obviously, the slowdown
was much more pronounced versus the full year.
Yes, I would accept it. I would accept it. There is a slowdown, yes.

Sir, that's the question, sir. The CMD in the interview is saying that there will be a recovery, but
is that recovery based on the Swachh Bharat Abhiyan of the government? So, where exactly the
slowdown happened and why it happened? I would answer, there are two ways you could look
at it. One is, you know, there are general market conditions which is subdued at the moment,
subdued in terms of that, okay, look, the entire construction industry is slightly subdued about
it, and all said and done, the material that we manufacture will go into the construction as a
part of the industry itself.

We have been still trying very hard, you know, in some of the pockets where the slowdown has
comparatively a smaller effect. These effects, we have experienced more of a slowdown in the
metros, like let's say Bombay, Delhi, Bangalore, Calcutta, Chennai. But if you really go to the
entire two-tiered city, the slowdown has not had high in terms of the impact because they're
more of an actual users rather than investors coming and trying to, you know, get into
construction business.

So we have been trying to really, you know, float above the water in terms of our penetrations
into the interiors of the states, leaving aside the metros. This is one where, but despite this, you
know, the toll of the slowing down has also really been raised out to this kind of a thing, though
not in the same intensive proportion in which it is experienced in the metros, but even in the
entire two-tiered cities also there is a slowdown. Swachh Bharat is one where, you know, there
are a lot of hopes about, because the government has really, you know, trying to allocate a lot
of funds from the government and trying to induce even a lot of other corporates in the CSR
responsibilities where Swachh Bharat is going to be one thing which, when it opens, it is going
to open up a tremendous business for an expansion as well as a growth.

Yes, you are very right that that still has not reached us, but it is something which we really
hope that, okay, well, we might really catch up after a while. So I would try to really say, you
know, this entire year, 2015, is a year of consolidation, right, starting from quarter four, where
we would like to build capacities, we would like to stabilize our production processes, and we
should be ready where the demand really opens up, you know, we are ready with the
production capabilities as well as the capacities to really meet with no challenging market
situations. So this is what is a stage of a consolidation, and thus CMD very rightly has said that
the Swachh Bharat Abhiyan is something which is, in fact, has started coming to the
unorganized sector, where the capacities are almost getting full up, and therefore that, in fact,
when it takes and catches up, is also going to reach out to the organized players where we are
there.

Just one follow-up, quite useful, sir. How much is the urban and rural split and metro demand,
you said, has slowed down? So is it in negative terms in terms of volumes, and when do you
expect urban recovery? I would not say it is negative in terms of the growth, but yes, you know,
we used to grow in terms of the volume by about 10 to 15 percent, but anything between that
and sanitary, if I am talking about, that slowdown has come to about 7 percent, 6 percent. And
what will be the split? The split, you know, we are almost about 60 to 65 percent in the semi-
urban and, you know, the lower category where the mass market is there.

If I give you a split about, you know, almost about, let's say, 40 percent is coming from a mass
market that we are into it, our total business. We have about upper-upper and upper-lower
categories of a business, which are about 20 to 20 percent, each contributing. And about 15
percent goes to a premium segment.

So when you really talk about a premium segment, yes, there is a slowdown. But when you talk
about upper-lower category, the slowdown is there, but then it's not a negative growth. It's still
a positive, fairly positive on that part.

Even upper-upper also is positive, but then, you know, the growth used to be about more than
12 to 15 percent in terms of the volume. If I really talk about the price side that we used to take
and the volume growth, both if I take the growth used to be about 30 percent, 35 percent. Now,
that slowdown has definitely taken, which we have also experienced.

But let me tell you, leave aside the quarter, to our own surprise, April, this particular month,
you know, we again have bounced back to about 25 percent growth. Okay, so... We wanted, you
know, the 15 percent growth for the entire quarter. In fact, you know, January and February, in
the history of Sera, I can go back to the last 20 years.

Those two months, we have never seen such a low thing. But April has been good, yes. March
did pick up.

March did pick up a little bit. And April again, you know, has shown a very good sign, where our
growth, if I compare with last April 2014, we are almost making to 24, 25 percent. But if I talk
about January and February, those growths were almost zero, zero.

There was just no growth on that part. Sir, but are you able to call out why there will be so
much variability in three months? What has changed on the ground? You see, there are, on the
ground, our own efforts, our own marketing strategies have changed. You know, there were
days where, you know, the orders were flowing and probably, you know, a lot of our
salespeople were also getting a little confidence and then we were trying to give them a thing.

Now, we have to go and make efforts. We have to go to the market. So, we have intensified, you
know, our sales team has been strengthened and now we go back to the people, we really try
to follow up and then we generate sales.

And this has really also paid off in terms of our aggressive marketing and sales efforts. Sir, but
the discounts have increased? No, not at all, not at all. The discount would have increased
probably by the entire margin, but I have been upset.

No, sir, April, April. You said April has been good. Despite this, there are no discounts, yes.
It is only the policy which we generally follow that has been followed. Discount is something,
you know, we have taken as a policy, it can only, you know, probably sometimes where you
carry some excess inventory in one of the product categories, in one of the designs, one. In
some of the territories where we are trying to get an entry, you know, we want to really get, let
us say, some of the territories are where our presence is very low.

Some of the far east states, some of the eastern states. You know, just for an entry, a lot of
people know Sera as a brand, but when you really enter, you know, you really want to enter
with a slightly modest supplier and therefore many times these with a category of a product
which we sometimes have an inventory. We also would like to get rid of those kind of an
inventory we might offer, but as a rule, discount is not that is general incentive to the dealers, it
is the same which is uniform.

Sir, quite useful and very detailed answers. Thanks a lot, sir. My pleasure.

Thank you very much. Thank you. Ladies and gentlemen, in order to ensure that the
management is able to address questions from all participants in the conference, we would
request you to please limit your question to two per participant.

If time permits, you may come back for a follow-up question. Thank you. The next question is
from the line of Gunjan Prithyani from J.P. Morgan.

Please go ahead. Hi, sir. Thanks for taking my questions.

Just a follow-on on the revenue, I just wanted to clarify, you said the volume growth is about 7-
8% in this quarter, is that correct? This particular quarter, if you really say, you know, the
volume growth in terms of FDI is about 5-7%. It is across the category, you know. There is a
category where, you know, if I talk of premium segment, then the growth is 2%, but if I really
talk about a lower category or upper-upper and upper-lower category, then the growth is
slightly higher.

So, if I average it out, it is about anything would come over 5-7%. Okay. And how much would it
be for mass market in 5% or so? Well, that is slightly a larger growth in terms of the volume.

Okay. And this, I mean, if I look at the previous quarters, I mean, sanitary ware, overall average
would have been more than about 15%. Well, yes, because we predominantly are sanitary ware
manufacturers.

So, therefore, you know, those kinds of growth are always in excess of about 10%. Okay. And,
sir, the slowdown in this quarter, you did mention it is the market weakness, but is it across
segments that you have seen? I mean, especially for the faucet and the tiles wherein… In fact,
across the segment, but then, you know, in fact, our faucet and tiles has been one where, you
know, we have grown phenomenally higher than compared to the sanitary ware.

Sir, would you be able to share the growth trends across the segments for the quarter? Sorry?
Quarter of… Would you be able to share the growth trends across the segments? We do not
give a product to product category. We do not. As a policy, we do not share that information.

Okay. But, broadly, tiles and faucets, how would have they performed versus, I mean, against
the sanitary ware? The reason being, again, you know, tiles and the faucets are on a lower base.
And, therefore, you know, if I am, let's say, targeting about 50 crore or 70 crore business, which
we did last time in a tie is to double that business, is very easy for me.

Because, you know, SRA is such a strong brand. And when I reach out to any of the new
territory, those kind of a thing will straightaway take me to about 100% growth on a year-to-
year basis. That's very easy.

But when I talk, when I already have penetrations, I am known for a sanitary ware to get that
kind of a growth across, is very difficult. So, you know, you talk about a category of a product,
and, therefore, our focus also in terms of maintaining a growth, also has been more on the
faucet as well as on the tiles. And there the response has been phenomenally high.

Phenomenally high. Sure. And, sir, in the light of the slowdown that you've seen in the market,
how are we looking at next year in terms of growth? Is there any change to the guidance that
we've been talking about? We hope.

Our chairman already made a statement, and we are really geared up that at least we would be
maintaining a growth board. We have registered about 24-25% years. We are committed to that
kind of a growth.

And if I say, the very first April, the beginning of the year, is really giving us a lot of confidence.
Okay. So, you've seen growth trends improving in April? April has grown almost about 24%,
23% compared to April 2014.

Okay. And, sir, coming to your margins, there has been, of course, the margins have been
coming down because of the mixed change. But is there any target mix that we have in mind
that we want to maintain 65% from sanitary and the allied products? So, is there any mix that
we are internally targeting? We do have a target for the year, do you know? We do have a
target where the overall margin will be at least about 15%.

Whatever the composition may come. Sorry, the overall? Overall margin will not be less than
15%. EBITDA margin, I'm saying.

Will not be less than 15%? That's right, yes. Our endeavour would be to exceed these
expectations of 15%, but at least, you know, conservatively, we would try to maintain 15% every
day. So, mix should not change significantly from here on? Even if the mix changes, you know,
we really would try to do it in such a way where even if the product category, which is
contributing an EBITDA margin, which is reasonable, but then, you know, we'll try to cover it up
in terms of our cost advantage because we've been working very hard on both the product
categories, where how do we reduce our cost? Okay.
And, sir, lastly, on your CAPEX plans, what are we looking at for F-16 and F-17? We have a rolling
plan, you know, for the next three years, which is about 180 crores, 200 crores. 180 crores,
that's the way I'll put it. 180 crores for the next two years? Next three years.

So, on average, you could always have about 60-65 crores, but then, some years, it might
exceed, you know, the current F-16, we exceeded that particular target. We almost made CAPEX
about 82 crores. Now, which probably would, you know, say, look, this year, we might probably
go to about 60 or 55 crores, or it may probably, as the year goes down the line, depending
upon what the market is figuring out, you know, we would always try to say, look, the CAPEX is
adding a capacity, number one.

The CAPEX is taking us to a new orbit in terms of our business targets. It has to really generate
revenue eventually. So, we have a plan where we would be, you know, a rolling plan with about
180 crores, and generally, we try to fund it to internal accruals.

Unless we try to acquire a business somewhere which would call for something where we need
extra money, which probably would be funded, you know. Very recently, we had a preferential
issue with RFII, and that was only at the end of March, which we had the money, and that
money we are trying to see where we are able to task somewhere, where in terms of
acquisition is helping us. Okay, and of this 180, we've already incurred about 80-85 crores in F-
15, right? Well, I said it's a rolling plan.

So, you know, the rolling plan was, let's say, about 12, 13, 13, 14, 14, 15. Now, you know, you're
talking about 13, 14, 14, 15, 15, 16. Okay.

So, that's the way it would… It's very difficult to really pinpoint, and let's say, like, yes, that's the
way I'm going to do it in a bottle-type compartment while you're doing KPIX. So, that's what we
have a rolling plan, which is for three years. Okay, and in terms of our ongoing KPIX, we only
have that sanitary ware going up to 3.2 and the faucet expansion.

I mean, capacity for faucet ware to almost about 3, 3.5 times, you know. We have capacity of
2,500 pieces, which would be really… We almost are through with that. Buying some of those
balancing equipment in terms of that, we need to really put it to use, and we need to put it to a
commissioning stage.

So, maybe by the end or before the end of the quarter, one, we would be ready with the
capacity, which will be at least about 7,000 pieces per day on faucet ware, as against 2,500
pieces. Okay, by the end of 1QF16. That's right, yes.

Okay. Probably even before that. You know, we have been trying too hard to really put it to use
as fast as possible.

Okay. All right. Very useful.

Thank you so much, sir. Thank you. Ladies and gentlemen, please limit your question to two per
participant.

The next question is from the line of Sayan Sharma from Crystal Limited. Please go ahead.
Hello, sir.

Good morning. Thanks for taking my question. Sir, most of my questions have already been
answered, just a couple more.

Is it possible for you to share the breakup of what we produce in-house and outsource in this
quarter? Yeah, I can try to give you that part. You know, we have almost… If I take, you know,
the faucet ware, our own manufacturing is about 9%, outsourcing is about 10%, making about
19% total. Okay.

Size is 15%, which is completely outsourced. Yes. And on sanitary ware, you know, we have
about 28% is in-house and 34% is outsourced.

Okay. Sir, what is the figure? 34% includes 14%, sorry, I would say 20% is outsourced and 28% is
manufactured in-house. Okay, sir.

Okay. Sir, what is the status of the solar panel installation that we were planning by the end of
this year? Is it done? 400 KVA is already installed. Another would get installed very soon now.

Okay. So, we'll make it one megawatt solar panel. Okay.

Okay, sir. I think my other questions have been answered. I'll go back to that queue.

My pleasure. Thank you, sir. Thank you.

Next question is from the line of Enid Fernandez from Tata Asset Management. Please go
ahead. Hello, sir.

Thank you for taking my questions. Sir, firstly, if you look at the balance sheet for FY15, you
know, there's been a certain increase in the receivable days as of end of March 2015. So, I just
wanted to understand, are we facing any, you know, is the entire channel got under a bit of
stress in terms of receivables for us? You see, what happens here, you know, the quarter, last
quarter, if I say, we had a subdued quarter.

The very quarter was subdued. January and February were, in particular, quite subdued. In fact,
the March really picked up.

And when you really build in the March, you know, what would happen, that sizable portion of
that quarter was built in the month of March. Okay. Now, generally, we give a 45 days credit.

So, what happens is that, you know, when you really take a balance sheet on a particular date
of 31st of March, the law of billing which was done in the month of March would really figure as
an outstanding. Okay. Understood.
And... But I could assure you that, you know, the average date that we generally, the data are
not more than 52 days. Okay. Okay.

And, sir, you know, just, you mentioned that, you know, January and February was flattened,
probably, you know, one of the slowest months in Serra's history. That's right. You know, is
there, you know, any possible understanding that you have as to why January and February
were, you know, so weak for us? You know, the market dynamics really, probably, you know, we
also thought that, okay, this is something which is very phenomenally subdued.

They just have not been picked up on any kind of the thing, maybe some of the projects which
were already there, they are not able to sell out their own inventories and the new projects are
also subdued. So we had to change our complete marketing strategies and we realized by
January and the middle of February and we started intensifying how best we could really, you
know, gather strength to combat this kind of a situation. And the result was, apparently, all
those efforts were coming and visible in March and it continues even in April also.

So is it that we are focusing now on, you know, non-project kind of... It's more on a retail
customer that we started focusing and also, you know, some of those projects which are in a
full swing and the builders are more solid, you know. Earlier what used to be that, that, okay,
there was only a dealer or a distributor used to approach and they used to do it. Now what
happens that even the company is representative.

Okay. Also, really, companies and they really build the confidence, inspire the confidence on
deliveries, on qualities. We didn't have that in place before.

We had that kind of a thing but it was a call of a distributor or a dealer. That, okay, they need
us. And now, you know, we said, you know, whatever the way we are going to be with you.

Okay. And, you know, that proactive action from our side has really inspired dealers to put
more efforts. Okay.

And it has been a push kind of a thing but then, yes, it's producing real symptoms of the targets
as well as the top-line growth. Okay. Sir, could you give, you know, a revenue breakup between,
say, retail and institutionals for F-515? You know, it's generally is about 50-50.

Some of the quarters may go to about 55 and 45 kind of a thing but it hardly matters to us
whether it is institutional or retail. The reason being, you know, our collections are always
routed to the dealer and the distributors. Exactly.

And it is the dealer or the distributor, he has to take a call about kind of a credit that he would
get.

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