The Q3 FY25 earnings conference call of Cera Sanitaryware Limited, held on February 12, 2025, provided insights into the company’s financial performance, operational updates, growth strategies, and future outlook amidst a challenging market environment. Below is a summary with emphasis on growth strategy, future outlook, and market situation as articulated by the management, followed by a detailed Q&A section.
Overview
- Financial Performance: In Q3 FY25, revenue grew by 2.9% YoY to Rs. 449 crore from Rs. 437 crore, while EBITDA declined by 5.2% to Rs. 71 crore. Profit after tax dropped 9.9% to Rs. 46 crore. For 9M FY25, revenue rose marginally by 1% to Rs. 1,337 crore, with PAT slightly down at Rs. 161 crore from Rs. 164 crore.
- Market Situation: The management highlighted persistent demand sluggishness, particularly in the B2C (retail) segment, despite early signs of improvement. Macroeconomic headwinds and subdued consumer sentiment continued to suppress growth, though the B2B (project) segment showed resilience, contributing 35-37% of revenues compared to a historical 30%. The Union Budget (February 1, 2025) measures, such as tax reductions and Rs. 15,000 crore allocation to the SWAMIH Fund, are expected to boost disposable income and real estate activity, potentially reviving demand in the building materials sector over time.
- Operational Highlights: Capacity utilization remained high (90% for Sanitaryware, 91% for Faucetware), reflecting operational efficiency. The company maintained a strong cash position of Rs. 662 crore despite a Rs. 106 crore reduction due to a Q2 buyback.
Growth Strategy
Cera Sanitaryware outlined a multi-pronged growth strategy to navigate short-term challenges and position itself for long-term success:
- Luxury Segment Expansion: The company is targeting the growing luxury segment with its Senator and Cera Luxe brands, introducing innovative products like Red Dot award-winning electronic toilets, designer basins, and wellness products (e.g., OxySpa). Senator will launch with 20-25 exclusive stores by FY25 end, scaling to 75 by FY26, while Luxe products will be displayed in over 100 existing stores by FY26. These brands are projected to contribute 10% of revenue (Rs. 290-300 crore) by March 2027.
- Product Innovation: In Q3 FY25, Cera developed 158 new SKUs for Senator and launched 104 for the CERA brand, focusing on premium and value-added offerings like large 6×4 tile slabs and high-performance showers.
- Faucetware Capacity Utilization: Expanded capacity to 4 lakh units per month is yielding positive results, with strong replacement demand driving a 6% YoY revenue growth in this segment.
- Retailer Network Expansion: The company aims to add 300-350 display centers annually, with 1,682 centers as of December 2024 (218 Style Galleries, 191 Style Hubs, 1,273 Style Centers). The Retailer Loyalty Program enrolled 23,000+ retailers, contributing 42% of retail revenue.
- Cost Optimization: Amid sluggish demand, Cera is reducing logistics (9-10% of costs), labor, and insurance costs (Rs. 16-17 crore annually), while leveraging favorable gas prices (weighted average Rs. 33.53 per cubic meter, below industry average).
- B2B Focus: With retail softness, the B2B segment’s contribution rose to 35-37% from 30%, targeting institutional buyers and large-scale projects to stabilize sales.
Future Outlook
- Growth Projections: Cera revised its FY25 growth forecast from high single-digit to low single-digit due to persistent demand challenges. However, it remains committed to achieving Rs. 2,900 crore in revenue by March 2027, contingent on market recovery. Management anticipates demand improvement in the next one to two quarters, supported by budget initiatives and RBI interest rate relaxations.
- Market Recovery: While retail demand remains subdued, green shoots are visible in the project segment (15% increase in project banks since March 2024). Urbanization, real estate recovery, and replacement cycles are expected to drive future demand, though the next one to two quarters may remain challenging.
- Competitive Positioning: Cera’s strong brand equity, diverse portfolio, and in-house R&D capabilities provide a competitive edge. Management downplayed threats from new entrants (e.g., conglomerates), citing their limited success in Sanitaryware and Faucetware, and emphasized focus on existing players and demand dynamics.
- Financial Discipline: With a robust balance sheet (Rs. 662 crore cash), disciplined CAPEX (Rs. 25 crore planned for FY25, Rs. 15 crore deployed), and stable margins (targeting 16-17% EBITDA once demand recovers), Cera is well-positioned to capitalize on an anticipated recovery.
Detailed Question and Answer Section
Below are ten questions from the Q&A session, along with detailed responses from the management:
- Archana Gude (IDBI Capital): Given B2B’s outperformance and sluggish retail, is achieving 16-17% margins challenging in the near term?
- Vikas Kothari: Despite tough conditions, we’ve maintained stable EBITDA (Rs. 59 crore, flat YoY excluding other income). The 40 bps margin drop to 13.2% is due to demand factors. We expect to reach 16-17% in one to two quarters as demand improves.
- Deepak Chaudhary: The margin dip is partly due to higher discounts amid sluggishness. Discounts have bottomed out, and as sales improve, rolling them back will restore margins to 16-17%.
- Archana Gude: Was the Q2 price hike poorly timed given sluggish demand?
- Vikas Kothari: The Faucetware price hike yielded 6% YoY growth in Q3, though Q2’s 20% growth included 8-10% pre-hike stocking by dealers. Excess stock liquidated in Q3, but 6% growth reflects segment strength.
- Deepak Chaudhary: The hike was essential due to a 20% brass price surge earlier in FY25 (stabilized at 8-10% above March). All players needed it to maintain margins.
- Archana Gude: Are we sticking to high single-digit growth for FY25 given flat 9M sales?
- Deepak Chaudhary: No, FY25 will see low single-digit growth, not high single-digit, due to ongoing demand challenges. January-February 2025 showed YoY improvement but not enough for earlier projections.
- Mithun Aswath (Kivah Advisors): Are you seeing demand bottoming out like paint companies report?
- Vikas Kothari: No clear bottom yet; retail sluggishness persists despite project order growth. Budget and RBI measures may boost spending, but the next one-two quarters remain tough.
- Mithun Aswath: Is this a typical cycle, and how does rural vs. urban demand compare?
- Deepak Chaudhary: Post-COVID boom faded by Q3 FY23-24, with sluggishness for 4-5 quarters. Project green shoots and budget support suggest improvement, but retail recovery is unclear until Q4. Rural (Tier-3, 44% of sales) outperforms urban (Tier-1, 35%) currently.
- Mithun Aswath: Will you delay the greenfield project given demand, or expand proactively?
- Vikas Kothari: Land is acquired, but construction (18 months from zero date) won’t start in FY25 due to uncertainty. Inventory, spare capacity (90-91% utilization), and outsourcing flexibility suffice for now. We’ll reassess by FY25 end.
- Praveen Sahay (PL Capital): What caused the operating margin contraction despite gross margin improvement?
- Deepak Chaudhary: Both higher discounts (since Q3 FY24, now stabilized) and inflation-driven cost increases (beyond gross margin) impacted operating margins. Without discounts, margins would be higher YoY.
- Praveen Sahay: What were the 9M price hikes, and do you maintain the Rs. 29 billion target?
- Vikas Kothari: Faucetware saw a 6% hike (2% realization, 4% volume), Sanitaryware 1%. We’re committed to Rs. 2,900 crore by March 2027, supported by projects and potential retail recovery, but it hinges on market conditions.
- Ritesh Shah (Investec): What’s the captive vs. outsourcing mix for Q3 and 9M?
- Deepak Chaudhary: Q3: Sanitaryware 42% in-house, 58% outsourced; Faucetware 52% in-house, 48% outsourced. 9M: Sanitaryware 43% in-house, 57% outsourced; Faucetware unchanged.
- Ritesh Shah: Are you comfortable increasing outsourcing to meet the Rs. 2,900 crore target?
- Deepak Chaudhary: We’ve hit 120% utilization historically (now 90%). As demand rises, we’ll outsource simpler products again, scaling capacity by 50-60% internally plus outsourcing. Current setup meets demand for two years.
Additional Insights
- Competition: Management sees minimal threat from new entrants (e.g., conglomerates struggling beyond Rs. 40-50 crore) and focuses on demand recovery over competitive pricing pressure.
- Working Capital: Increased to 76 days from 60 (inventory 85 days, receivables 33 days, payables 42 days) due to demand-production mismatch and policy shifts, but manageable with recovery.