Kajaria Ceramics Ltd

Good evening, and thanks a lot for opportunity. A couple of questions from my end. Firstly, on the demand front, I know you've already answered a lot. But just one clarity here, this kind of scenario that you're seeing right now, is the demand stood on completely broad-based, like region-specific or Tier 1, Tier 2 cities or whether it be a replacement or new demand? Any sense on any of these parameters would help.

Going forward, we are more positive than what we are today, number one. Metro is more of a renovation, Tier 1, Tier 2, Tier 3 is more of a new construction. So, if you take it like that, it

will be new construction will be close to about 75% and replacement, renovation will be about 25%.

But I also like to add for the benefit of the people that a lot of work is also coming from the government side. A lot of things are happening on education, and health sectors, a lot of work is coming from the states on that front. They are now with this new push towards new railway stations, push towards new airports, all this is going to add more to the demand because of the infrastructure spend being spent by the government.

Understood, sir. Sir, secondly, on your new division, could you specify what are you exactly -- like what is the -- how is the distribution with respect to adhesives on plywood front? How is the distribution reached? What we understand is your Bathware was something which were -- you were targeting our existing tile dealers. But what's happening with the plywood panel space? As well as adhesive’s part would be helpful.

First, I'll answer the adhesives part. Currently, our existing dealers are selling our adhesives, plus we're also hiring a new team from the market from the adhesive industry. In terms of plywood, the distribution network is totally separate. And the existing tile dealers do not sell plywood and laminate, they have separate distribution networks for that.

Sir, lastly, while you mentioned a lot on the Morbi-based player, any comments on large brands looking at entering into tile industry, whether it be somebody like an L&T or somebody like -- we have been hearing even a couple of other players are in this industry. Any view there? What's the right to win or any such feedback would be helpful from your end.

We haven't heard anything like that. Number one. Number two, the key thing, as you all know, you see number of dealers, the kind of dealers you have. See, to manufacture in the industry is much easy. To have the network of dealers is the most difficult part, which has been generated over a period of 35 years. So, I think any new guy coming in, I'm not talking about L&T.

There are some sanitaryware people who also wants to come in, they come in, they get out, they come in and get out. So, I leave you to judge that, how it will shape up.

And the next question is from the line of Mahek Talati from Yellow Jersey Investment Advisors.

So, a couple of questions, especially on the export side. So how has the Red Sea prices impacted the overall export market?

Exports have slowed down. November, December, January, the exports which are on an average of about INR18 crores, which is the data we gave you for the first seven months have come down to about INR1,300 crores. November, December, January, the exports have been to the order of INR1,300 crores each month. See the rates have really increased. I give you an example, container to UK was costing $600 in December. And today, it's costing $4,000. So, because of the high fee rates and the transit time, exports are down 40 days of year. The export -- transit time has increased in that part of area from 20 days to 40 days also. So, availability of shipping will be less, this will further be high if this problem continues.

So then -- can we expect this export demand to transfer that to domestic, which can result in oversupply and further decrease of prices going ahead?

I just answered this in earlier this thing, two things will happen. Part of it will come to domestic, I don't say. Whereas, secondly, they will cut down in production because they can't sell everything to domestic. And third, the moment the situation exists in that part of the world, they will again go back to export because exports is a priority to them for various reasons. And also, it's not easy for any brand to just dump in the Indian market without any network since they've been exporting. So, there are no leverage, they are not...

And they have no brand. So, it is not a switch on and off button that you suddenly export, you suddenly dump in the domestic market, you're starting to export again. So, if your exports are going down, then you most probably reduce your production and you stop the plant.

Okay. And last, in terms of the two acquisitions. So, what are the capacities which we are expecting to come from KUPL and KTPL...

KTPL already mentioned, it's going to be 6 million square meters at our acquisition costs about INR50 crores. And for KUPL, it's still very early. We're just buying land right now. And in the next three to four months or in the next quarter review, we will give you an outline as to what we are planning.

And the next question is from the line of Anmol Grover from Albatross Capital.

I just wanted to know what is the profitability for the bathware segment?

Bathware segment EBITDA is roughly about 8% for the first nine months. And I think by the time year-end, it would be between 9% and 10%. Sorry, 9% and 10% for nine months?

No. So far for nine months, it has been close to 8% plus. And by the year-end, it will be close to between 9% to 10%.

Okay. Okay. All right. Is there any way you can bifurcate this between faucet and sanitaryware products?

More or less the same. It's more or less the same.

And the next question is from the line of Arun Baid from ICICI Securities.

We have seen you diversify from tiles to bathware, now getting to plywood, adhesives. Do you think our broad range is not done, or we still have more addition to think about?

We are diversified. We have only diversified to plywood. These are all related fields where the dealers said, you are already a big supplier of tiles to us. Why can't you give your bathware and sanitaryware, which we started. And as I said in my various earlier meetings, 50% joined,

50% didn't joined because some of them were married to other brand like Jaquar or HSI or Cera.

And now in the last year,the dealer themselves said, we are using adhesives also. Why can't you supply adhesives to us? So, we have launched the brand name of GresBond by Kajaria.

So, adhesives have been launched on those lines. The only diversification which we did was in the field of ply and laminates.

Sir, do you think the portfolio is complete from that sense? Or there are more to come?

See the kind of growth we are talking about, unfortunately, it has not happened from the volume side or revenue side this year. I think the hands are full for both my sons, they are looking after the day-to-day things. And next three years, actually, we hope that we should grow much faster than what we have done. And we should focus on what we are already doing.

On the wood front, particularly, we have gone into plywood, MDF is fast-growing segment there. Do we have plans for that segment too?

No. You see as far as ply is concerned, you all know that we have not made any money so far, we have lost money. So, first idea is to make money. And as Chetan said earlier, that we had to have this JV because of the quality problems because of the supply problems because they were small units who were supplied to this division. Now once this plant comes, then we should have stability. Next year, we are talking about INR150 crores. And still, we'll lose some money. Let me tell you in advance to the order of about INR6 crores to INR7 crores. And next year after that, we should be able to breakeven. So that's what we are talking about. So as of today, what we have to do is to do our job well as far as ply is concerned so that we will be breakeven at the earliest.

Just one clarification here. My question was with regards to MDF because most of the guys who sell ply are looking at MDF also. So, I'm just trying to understand whether we have plans for MDF in the near future?

No, I already answered, you didn't listen, we are not looking at anything. The only growth is what we are doing, ply we will do by partly manufacturing, partly outsourcing. Laminates, as Chetan said, we will do by outsourcing.

Just one small clarification. You said the realization. So, we saw the realizations have dropped for you, 1% Q-o-Q. This is because though Morbi has not taken any price increases you said and we wouldn't have either, is this because of the product mix change? Or have we taken some price cuts? Or as you said, that we passed on additional benefits to the dealers which has led to lower realization?

No, I said two things. One, Morbi has not taken any price hike, yes, they have not taken. And our prices have fallen by 2% to 3% over a period of time. And they have not fallen as far as price is concerned, we have given that additional benefit to the dealers to sell more. So it could be in the quarter, we have given a discount of about 2% to 3%. And partly you see a 1% fall could be due to product mix.

Right. Sir, and given that you've said that the exports have also seen a downtrend, if I got the numbers right, you said INR1,700 crores was the run rate -- monthly run rate earlier until October, which has decreased to INR1,300 crores since November. And since...

Yes, November, December, January is INR1,300 crores average per month.

Yes. So, since that has happened in some tile is being diverted to domestic markets, are you seeing an increase in competition?

Sir I have already answered this question twice. Anyways since you are asking again. And as we said, partly they have taken shut down which is much easier than what we can do, number one. And partly, as Rishi said just now, a few minutes back, that it's not easy that unbranded player comes and says you buy my products today and tomorrow, I'll not be there because I have to export. It doesn't happen in the trade, you know. The dealer has to run a shop, he is an entrepreneur. He has to take his wise decisions, whether I should have a onetime thing or I should continue doing my business. So, it doesn't happen like that.

Right. What I was asking was, have you seen a month-on-month increase in competition in January over December? Like would you be able to give some...

Nothing like this, nothing like this. You see, you are asking this question, you have seen the results of other building material companies, like Asian Paints, everybody is feeling still the market has been tough. So, we are not out of that. We are putting our best efforts. I can tell you. But what the market scenario is, as you all understand.

The next question is from the line of Aasim from DAM Capital.

One question on the Tiles realization. I think just taking your 9-month volume and tiles revenue, the average number is just about 380 per square meter. Now given that pushing price hikes is hard unless everyone in the industry does it. I just want to know that how will mix improvement help this realization figure in the future? Can your upcoming capacities in GVT and large format tile basically mix improvement? Is there a case for the 380 figure to go to say, 395, 400 in the next couple of years?

See, the question which you asked is very valid and very important. Let me tell you about GVT then I'll tell you about ceramics also. Once value-added tiles increases, your realization per square meter will definitely come up, for example, it will take some market share of the existing players. And you their the price is much higher.

Similarly, ceramic also sell value-added products bigger sizes tile, the realization will go up.

Price increase per se will not happen at least for some time that we are looking at. But value realization, the market is slightly improved.

But I think product innovation has not really helped keep prices rather blended realization, higher for a longer time, but given that the competition has also been -- have been able to provide similar products in the past. So just that the 380 number going to 390 by 400, I just wanted to understand the degree of confidence behind.

I understand that theoretically it should go up. But the probability of that happening, is that like a decently high number as per you? Or would this still be like overall a volume game?

Tiles volume growth will come in, blended realization may be flattish given the way the competition is?

You didn't understand what I said. The market is moving gradually towards bigger tiles in the last three to four years. When these bigger tiles come in, they are priced higher as compared to these smaller tiles. So, the realization will, is not a resultant of how better I'm producing a good tile or the other guy is producing a slightly lower tile. Realization will come from more use of bigger tiles where the prices are higher. And at the end of the day, you will get a better per square meter realisation for that particular commodity, whether it's ceramic or GVT.

In PVT, also we have brought a lot of value-added products, bigger sizes, which some of them we are outsourcing and the value addition will also be looked upon accordingly.

So yes, to answer your question, the company is moving towards value addition as we go ahead. And that's the reason of putting the continual plus lines also. That's the reason of buying the land also in future. So yes, it will take time because the market is flat, we have really not got any results this year, but maybe in future, definitely, we are looking at a very positive scenario.

We are also working on our distribution network and seeing how we can display more and more of value-added tiles. So yes, the future looks good. We can't comment on the exact numbers what the realization will increase to, but yes, company is moving in that direction.

Sure. And just one follow-up. I think to an earlier question, you did say that Tier 3 and 4, Tier four markets will grow faster. Will that have a negative bearing or would that not be material enough on the realization -- blended realization?

We are selling best of the tiles. People have a lot of money out there; they are showing interest to the tiles. I gave you an example, the showroom opened in Jhanjharpur and Darbhanga, they are state-of-the-art showrooms. Jhanjharpur is a population of 70,000. It's a Tier 4. Darbhanga, you can say Tier 3.

And the guy over there has opened 15,000 square feet in Jhanjharpur exclusive Kajaria. In Darbhanga, he has opened 11,000 square feet exclusive Kajaria and all kinds of products are

displayed, all value-added products. People have money but they didn't know where to buy their product. They used to go to Patna to buy the products.

The next question is from the line of Rahul Agarwal from InCred Equities.

Ashok ji, one question I had in my mind was on real estate. What we understand is premium luxury real estate is actually doing better across the country, both if we track Delhi, Bombay, Bangalore, that's what it looks like, larger metro cities. Larger houses, people want more square footage, higher floors, in-built amenities, stuff like that.

Most of the discretionary companies, I know, you also mentioned Asian Paints and Havells they are looking at some kind of slowdown and everybody is hoping for a recovery to retail demand. Just wanted to get a sense, obviously, it has to tie up with this Tier 3, Tier 4 story of that mix actually getting better. And your exposure to metros, as you said, is over 20%. So, I'm not really sure whether this premium luxury kind of changes our business.

And coupled with this also is you mentioned infra demand from government airports, ports, railway stations and stuff like that. Would you -- since you sell everything through your dealers, how would you track that? What is Kajaria's penetration into, let's say, project side?

And then on the retail side, does this premium luxury demand also help you? I'm just trying to get a sense of whether this real estate demand actually will play out into our favour or not?

See, there are two things. You said metro. For metro, they require better tiles, good tiles, even larger tiles for which we are talking about putting up the plant of glazed vitrified and we already have products in glazed vitrified in bigger sizes, but even more bigger sizes.

As far as general construction is concerned, they're using all kinds of tiles. Be it ceramic, be it polished vitrified, be it glazed vitrified it doesn't make any difference.

It all depends on where you're making that property, number one. Number two, metro is a different story. Tier 1 is a different story. Tier 2 is a different story, Tier 3 is a different story, Tier 4 is a different story. India being a large country, all kinds of products are being used not from today, it will last for many years and will continue to do. See, when you talk about specifically that luxury is in demand. It's basically limited to cities.

When you go to Tier 1, Tier 2, Tier 3, Tier 4, it's again a normal scenario. So, Tier 1 to tier...

Just to add in that, like Delhi, Bombay, Bangalore and all we supply directly to projects. Lot of these especially we supply directly to projects and can track what is happening. Even government projects, a lot of it is supplied directly so that we can track and they also wants to buy directly from the company. Some of them are very large-scale projects, so, they are through contractor. So, all our sales are not through dealers.

So, what my understanding was about maximum 10% is what you build directly to government or projects, right? Is that correct?

It's close to about 30% is the institutional sales. Yes, we always been saying 70% is through retail outlets that is a dealer outlet. And 30% is institutional sales. When you talk about the institutional sales, it is a two to three types. One, government projects where they want the billing directly or through a contractor, but company markets itself for that account. Then smaller builders where they want direct billing, but payment is not an issue. So, these are the two key kinds of things which we are targeting as far as institutional sales are concerned.

I mean your experience over the last 12, 15 months, where we're seeing a tough time, has this proportion changed in favour of institutional sales? I think that should have happened?

Institutional sales have improved. But in Kajaria, the overall percentage is still low.

Institutional sales, when you say government institutional sales have improved, and it will be more and more with the kind of government putting infrastructure. As I said earlier, two areas we are spending a lot of money is health and education. And also, now a lot of business will come from airports, which they are trying to modernize.

So ultimately, tiles have to be used in all these places.

And our mix will remain about 75%, and 25% is projects because we're working in both the plants. So that proportion is more less the same even going forward, we feel it's going to be the same.

And the next question comes from the line of Utkarsh Nopany from BOBCAPS.

Sir, like if we see in December quarter, we operated at 101% capacity utilization. I'm talking about our old and subsidiary facility. And our capacity would increase by only 7% in FY25 with the help of the recent acquisition of 6-MSM GVT facility in Morbi. So, I wanted to know, do we have scope to increase our own and JV sales volume in the current March quarter on a sequential basis as we operated at full level in December quarter?

And do we plan to add more capacity in the domestic market in FY25 as we are quite positive about the demand scenario from next year onwards?

See, it will be a mix of both outsourcing and increasing our own capacities. And we take the call, there we go ahead and see how the market conditions improve. We already announced two projects in GVT When as the market condition improves, we can update you more in the next couple of quarters how we are planning to increase our own production or outsource the remaining capacity.

Okay. So, for this March quarter, whether our owned and JV sales volume would be limited to what we have done in December quarter, there would not be any sequential growth in the volume? Correct. I already said that.

And the next question is from the line of Amit Purohit from Elara.

Just -- sir, on the initiative that the company is taking up more on the sales for automation from April 2024. And on dealer management system, if you could give some more insights into what is this change will happen due to this operational...

The sales force automation is more to improve the efficiency of our existing sales force. And we don't plan to increase more manpower. As we go along and increase our production and capacities, the same team will do the sales. This is more for more efficient working, mapping their routes, making them more efficient and you managing your time more efficiently.

The dealer management system is more for making the dealers more efficient. They can see the stocks online. They can see the outstanding online. They can place the orders to the factory. So, to get this is more automated and make it more efficient for everybody on holding the good supply chain.

Yes. But would that result in some reduction in the inventory at the dealer level? Or would this could have an impact on a -- whenever it gets launched, some inventory correction in the system?

It will reduce inventory level also, plus it increases efficiency of our people, increase the efficiency of the organization.

Okay. So, I mean would this be more of an online ordering system by sales force guys?

No, no, no online ordering. Online ordering, we see, the dealers still do online orders, but we can see live stocks and order directly to the plant through dealer management system, just like an airline ticket. It will increase his efficiency also.

Sure. And sir, sorry, I'm new to this sector, but I just wanted to know that what is the sales force automation, which is the sales team does is basically to take orders and give it to the dealers in terms of -- for execution of the orders? Is that...

It is more of automating the whole system. As they make new dealers, it will map that new dealers whole profile that all comes in the system. Everything is stored digitally to reduce the paperwork, map their routes, increase efficiency, and know what they're doing. The whole chain gets more digitized and automated.

And all the seniors to the juniors do know exactly what is happening in the system where the people are traveling, what is in the whole day, are they efficient or not. That is the whole purpose of introducing a sales force automation system in the organization.

Many good companies have done it. Just like we were told that Asian Paints, Havells, they're already doing it. We are slightly late, but we are implementing from 1st of April. And also going forward, if -- this should also make sure that we don't increase our manpower and the same team will take care of the future growth as well.

So, all these systems -- so two or three years down the line, as the company grows, but no of employees will not grow, and it will be more systematized.

So, we are the first in our sector to do this?

I can't say that. We can't say that. We are the first of -- yes.

No, no, we are not the first -- we don't know -- in our trade, we don't know, but I just told you that Havells and Asian Paints are already doing it. And that's what we have learned, and we are trying to improve ourselves. That's all I can say at this stage.

Sure. And just one more thing on the investment that we are doing. One, I understand that there is an acquisition. And first is a subsidiary for the tile. So why is he setting up a subsidiary why can't we do it in the Kajaria itself?

We are going through subsidiary because we also want some stake of local partners from Gujarat from whom we are buying the company. Okay.

Morbi is really peculiar market. We don't want to have any factory on our own, for all the local issues, you always need a partner. So, all our JVs and Morbi have a local partner. So, the similar model, we wanted this one to be as well. There's the other controlling stakes, anywhere between 80%, 90%, and the rest is with a local partner.

And the next question is from the line of Achal Lohade from JM Financial.

It's been a while now. Just in terms of the data, if you could help us with the GVT PVT ceramic mix for 3Q FY24 and nine months?

So roughly, the ceramics -- revenue is at 39% and volume is at 43%, PVT is 26% and 25% and GVT is 36% and 32%.

Got it. And Chetan, if you could help us understand in terms of the comment made was obviously not given the harsh winter. Obviously, it's impacted. Can you help us understand from a FY23 or nine months, how the mix is for North, West, South, East?

So roughly, North is 40%. South is roughly 30%, West is another 18% and East is 12%.

Understood. Understood. I think that's very helpful, sir.

And the next question is from the line of Saurabh Jain from HSBC.

I'll make it quick in the interest of time, sorry. So, what I'm trying to understand is why there is so much variation in terms of your capex cost for setting up 1 MSM of capacity because it ranges from almost like INR10 crores per permission for the new plant acquisition that you have made just now.

And it goes up to more than INR30 crores for the Nepal plant and some of the previous brownfield expansions that you have done, I think it translates to somewhere about more than INR20 crores per MSM. So, I understand it could be different for different kind of products that we do, but what explains so much the variation in your capex cost? I wanted some clarity here.

See, as far as Nepal is concerned, nothing is available there. Everything has to go from India.

So like equipment and the machines have to be coming from China or Europe and has to be routed through India. So, putting up the costs are high. But at the same time, the realizations are much better because it is based on basically an input-based country.

There are three plants already coming up and running. But at the end of the day, the realisations are much better than what we have it here. So, the cost of putting up the plant will be there, but the realizations, EBITDA margins will be better at the end of the year.

But then comparing the, say, ROCEs for the new acquisitions that you have done, would the ROCEs be materially higher than what would you probably do at Nepal or some of your previous business? Or how do you see that?

See, that's what we are seeing, and that's why we are putting up the plant. Nepal ROCE should be better than what we are having it correctly.

And compared to the new acquisition, Keronite?

Keronite it will be me much, much better because we've got a very good deal on the entire project. So there, they're expecting ROCE almost 30% plus.

Yes. So that is precisely my question is that why we rather -- if we have such attractive rates in the market, why not rather try to focus our capital allocation on striking such good deals, wherein we make very strong ROCE?

It's not necessary to get that deal every time. So, this is, I think, one of the good deals we got, and we grabbed it. And in the future, if we get anything like that, we are still open, right? If we have cash in the company, we are always open to good deals. So, this is a good deal. So, we got it, you're right, your calculation is pretty good that INR50 crores for 6 million square meter is a very good deal. And that's why we're looking at a much better ROCE and margin in this.

Yes. And does it also then imply that probably the Ultima? Because I remember, I recall a couple of years back, we had plans to do 5-MSME at INR210 crores of cost in Ultima. So then again, that expansion could actually be kind of much lesser in terms of ROCEs compared to the Keronite acquisition?

You're absolutely right. This is the same Ultima plan which we have planned earlier, which we put on hold that time. We were not confident in the market, but now looking at this scenario, we are very bullish. And yes, going forward, the land we are buying is for something similar, which we are working on right now, which we want to buy the land first.

And last two, three months, we will announce in the next meeting as to what we want to do.

But yes, it is to put our slab plants. The exact working we will share in next quarter meeting.

Okay. Thank you so much. Thanks for answering the questions. Thank you.

Thank you. As there are no further questions, I would now like to hand the conference over to management for closing comments.

Thank you very much for this meeting. I think good questions, and I hope we have answered it to the best of our ability, and thank you very much for organizing this. So, I thank all the people who have joined us today for this conference on behalf of Kajaria management and myself. Thank you.

On behalf of ICICI Securities, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.