KAJARIACERNSEQ3 FY23February 1, 2023

Kajaria Ceramics Limited

8,493words

211turns

20analyst exchanges

5executives

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Management on call

Ashok Kajaria

CHAIRMAN & MD

Chetan Kajaria

JOINT MANAGING DIRECTOR

Rishi Kajaria

JOINT MANAGING DIRECTOR

Sanjeev Agarwal

CHIEF FINANCIAL OFFICER

Arun Baid

ICICI SECURITIES LIMITED

Key numbers — 40 extracted

35%

s maximum capacity by mid-February 2023. This will take total consumption of alternate fuel up to 35%, resulting in good saving in power and fuel cost. We are also doing modernization of our Gailpur

12%

ng in fuel consumption as the new kilns are more energy efficient. Overall, the company grew by 12% in volume terms and at 22% in revenue terms during the first 9 months of the year ending December

22%

he new kilns are more energy efficient. Overall, the company grew by 12% in volume terms and at 22% in revenue terms during the first 9 months of the year ending December 2022. We are dedicated to

rs,

foundation and commitment to excellence will continue to drive its success in the upcoming quarters, both in terms of sales and profitability. Export momentum has improved in Morbi after

Rs. 15,000 crore

improved in Morbi after being impacted for a few months, and we anticipate that export will touch Rs. 15,000 crores to Rs. 16,000 crores in this financial year 2022-23 against last year of Rs. 12,700 crores. No

Rs. 16,000 crore

er being impacted for a few months, and we anticipate that export will touch Rs. 15,000 crores to Rs. 16,000 crores in this financial year 2022-23 against last year of Rs. 12,700 crores. Now, for this quarter's

Rs. 12,700 crore

touch Rs. 15,000 crores to Rs. 16,000 crores in this financial year 2022-23 against last year of Rs. 12,700 crores. Now, for this quarter's performance of Kajaria; in quarter 3 FY23, consolidated revenue from

er's performance of Kajaria; in quarter 3 FY23, consolidated revenue from operations increased by 2% year-to-year to Rs. 1,091 crores from Rs. 1,068 crores in quarter 3 FY22. The dismal increase in

Rs. 1,091 crore

Kajaria; in quarter 3 FY23, consolidated revenue from operations increased by 2% year-to-year to Rs. 1,091 crores from Rs. 1,068 crores in quarter 3 FY22. The dismal increase in revenue is mainly because of dis

Rs. 1,068 crore

FY23, consolidated revenue from operations increased by 2% year-to-year to Rs. 1,091 crores from Rs. 1,068 crores in quarter 3 FY22. The dismal increase in revenue is mainly because of discounts offered in resp

ts offered in response to subdued demand scenario. Revenue from the bath ware segment declined by 3% in quarter 3 FY23 to Rs. 79 crores from Rs. 82 crores in quarter 3 FY22. Revenue from the plywood

Rs. 79 crore

subdued demand scenario. Revenue from the bath ware segment declined by 3% in quarter 3 FY23 to Rs. 79 crores from Rs. 82 crores in quarter 3 FY22. Revenue from the plywood segment declined in quarter 3 of

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Guidance — 20 items

Ashok Kajaria

opening

“We expect further improvements from quarter 4 onwards.”

Ashok Kajaria

opening

“We have started using alternate fuel from December 2022 onwards, which will reach to its maximum capacity by mid-February 2023.”

Ashok Kajaria

opening

“Export momentum has improved in Morbi after being impacted for a few months, and we anticipate that export will touch Rs.”

Rahul Agarwal

“What do you expect in the fourth quarter and next year in terms of volume growth?”

Ashok Kajaria

“and going forward, quarter 4 should be in the range Rs.47 to Rs.”

Ashok Kajaria

“You will be happy to know when we started in December, it was about 11% to 12%.”

Ashok Kajaria

“Nepal, we have yet to kick start the project.”

Ashok Kajaria

“EBITDA margin, I can't say right now, but definitely it will be very positive, and the plant will be coal fired and also we will use biofuel for spray dryer.”

Ashok Kajaria

“Next year, as we are doing many things, the CAPEX should be close to about Rs.”

Mahek Talati

“So, any expected capacity expansion in that segment going forward?”

Risks & concerns — 10 flagged

Sharp decline in margin was mainly because of disruptions in natural gas supply followed by unprecedented increase in cost of gas.

— Ashok Kajaria

And how do you see the situation now given the fuel cost seeing a decline even for the others, especially Morbi players.

— Achal Lohade

Quantifying is very difficult because it depends on product to product depending on what you want to push.

— Ashok Kajaria

And if the market is tough, the growth is difficult.

— Rishi Kajaria

And the second question is related to subsidiaries only that in the last 7 quarters if I look at, the realizations were quite volatile.

— Praveen Sahay

In the last 7 quarters if I look at, the realizations were quite volatile from Rs.

— Praveen Sahay

So, every quarter, it's quite volatile, not consistent, I can say.

— Praveen Sahay

We already have said earlier, markets are under a lot of pressure.

— Ashok Kajaria

It's not a question of only downward pressure because of the export market.

— Ashok Kajaria

You mentioned that October month’s demand was weak because of the monsoon and multiple festivals.

— Jignesh Kamani

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Q&A — 20 exchanges

Sir, three questions. Firstly, on demand. Sir, I need some help to understand this. Obviously, it looks like a tough environment outside. But how is January? What do you expect in the fourth quarter and next year in terms of volume growth? How would you look at the lay of the land right now? That's the first question. Second was on the gas price, if you could help us with the average gas price for third quarter and fourth quarter expectations. Because my sense was it was supposed to be down 10% Q-o-Q in the 3Q to Rs. 56 SCM from Rs. 62. I don't think that happened. If you could just explain to

Ashok Kajaria

As far as the volumes are concerned, July, August, September, October were very, very tough. November, December things picked up. January has been, again, very tough, but I hope that February onwards things should be better. And in future, we are looking at about 13% to 15% volume growth for the year 2023-24. As far as the fuel cost are concerned, quarter 2 of FY23 was Rs. 56 average. Quarter 3 was about Rs. 53. and going forward, quarter 4 should be in the range Rs.47 to Rs. 48. We are using biogas as a fuel. In tile plant, we have two things. One is kiln and one is a spray dryer. Kiln is fir

Sir, my first question was with respect to the discount. You made a comment that there is increased discount. Would you be able to quantify that? And how do you see the situation now given the fuel cost seeing a decline even for the others, especially Morbi players. So, how do you see the price evolution actually in the coming quarters? Do you see the discounts or price reductions or you think the benefit of the fuel cost can be retained by us?

Ashok Kajaria

Normally what happens when the prices of fuel come down or costs come down is you don't reduce the prices. What you do is you basically pass on some discount to the dealers to sell more. And that is what we did in quarter 3, and that is what we, again, will do in quarter 4. Because, with the gas price coming in, two things will happen. We don't talk about raising any prices as you people keep on asking us. The price increase is off limits. And to sell more, because ultimately we have to sell bigger volumes, we offer some discount to the dealers so that they can sell more. Would you be able to

Sir, my question was regarding the demand scenario. You said that the demand was tough in January. From which segments are we expecting good demand in markets of North, South, East, or West from February onwards?

Rishi Kajaria

Demand overall is tough. The ground reality is still very tough. But because we got some respite in our costs, we will try to get some more extra market share and we’ll try to sell more. But overall, the entire India, the demand situation has not improved a lot. And that is what you will see in all the building material industry overall. What is your current capacity utilization? We're almost at about 90% to 93%. Any expected CAPEX for increasing capacity? Because, I see in expansions, we don't have much capacity with regard to the tile. So, any expected capacity expansion in that segment goin

Firstly, just a bit more on the alternate fuels. You said that the usage has increased. I just wanted to understand the sustainability of the supplies of the same? And also, is it getting used across all your plants or specific to a few regions?

Ashok Kajaria

Alternate fuel came in the picture because in NCR, you cannot use coal, right? In Morbi, they are using partly coal in the spray dryer. The alternate fuel is biomass which has been allowed and being used in NCR plants for spray dryer. Sustainability is not an issue. It is basically mustard husk which is being used, so sustainability is not a problem. And Rajasthan, as you all know, is a big producer of mustard. So, sustainability is not an issue. And the cost has come down and will further come down as we go along. You are using this primarily in your Rajasthan plant. Not yet in….? In Rajastha

The first question is related to volume growth in the subsidiary, which is pretty well as compared to the own manufacturing. So, is it fair to understand that the premium tiles’ volume demand was softer compared to economy or ceramic?

Rishi Kajaria

You're talking about South Asian Ceramics or tiles on a general level? Overall, in a quarter, subsidiary volumes were pretty well as compared of your own manufacturing volume. So, just trying to understand is it because the own manufacturing largely is PVT and GVT? Is that the softer demand in the premium tiles versus the ceramics….? All the categories of tiles are growing simultaneously. And the South growth has come because of acquisition of South Asian Ceramics, which we did 2 months ago. That also helped us penetrate deeper in the southern markets. And the second question is related to sub

Sir, my first question is what will be the optimal mix on fuel? You indicated that we have inched up biofuel to nearly 30% of the overall mix. I just wanted to get a sense if the current pricing remains, what is the threshold which is possible practically on biofuel, LPG, and the other long- term and mid-term contracts that we usually have?

Ashok Kajaria

The biofuel and LPG proportion (gas which was 100% at one time – 4-5 months back) will be 35% by end of February. Sir, how much would be LPG? 35% is biofuel. LPG would be how much? If I take you 4-5 months back, it was 100% gas. We are now comparing gas versus LPG & biofuel. Four months back, it was 100% gas. End of February, it will be 65% gas and 35% will be the combination of LPG & biofuel, out of which, LPG will be 5% and biofuel will be 30%. Sir, how much will be the prevailing LPG prices or biofuel? You indicated, I think, Rs. 30 per SCM. I would presume that is on landed basis. How much

Sir, just one question on the demand front. Like you said that demand is sluggish, could you highlight is it from the metros or more to do with the tier-2 and tier-3 cities? And where is the respite from Feb that you are expecting from should come?

Rishi Kajaria

The demand is overall slow all over India, whether it is tier-1, tier-2, or tier-3 cities. And things going forward, let's see, hopefully, I think the demand and market should improve everywhere. We cannot single out any place that we are looking at better demand. But because of our penetration and because of our South plant, we’ll get a little better market share in the South market with our Tirupati and our South Asian plant. Otherwise, the demand scenario is tough all over India.

Sir, I just wanted to understand more about the biofuel that you mentioned. Rs. 53 was the average that you said for Q3, which is a blended average of biofuel and natural gas?

Ashok Kajaria

No, Q3, we had no biofuel. Biofuel only started in the month of December. And by the end of February, it will be complete. Whatever we can, we will be in a place to put that by the end of Feb. So, the average that you said, Rs. 53 for Q3 and Rs. 56 for Q2 was only the gas cost? Only gas, yes. For North, it was gas; for South, it was a combination of various things, fuel; and West also, it was a combination of fuel and this thing. But for North, it was only gas. As far as I remember, for Q2, the average gas cost previously you had mentioned was Rs. 61 in the previous call. Yes, but at that time

I think there has been a slight downward trend in the expectations for the exports, i.e., Rs. 3,000 to Rs. 6,000 crores. So, now are we expecting any supply side pressures in the domestic market due to any potential diversion from Morbi? Are we expecting anything on that front?

Ashok Kajaria

We already have said earlier, markets are under a lot of pressure. It's not a question of only downward pressure because of the export market. The demand scenario has been sluggish. Things should gradually improve, because ultimately…. One of the factors for sluggishness, as we all know in the entire building industry, is the increase in interest rates by 2%. Repo rate has increased by 2%. That's one of the reasons why the real estate market is facing this problem. Once things settle down, things will correct. So, there are no supply side pressures that we envisage at this point in time? You f

You mentioned that October month’s demand was weak because of the monsoon and multiple festivals. How was the growth in the November and December months combined?

Ashok Kajaria

I already said, not because of the monsoon but because of the entire festive season right from Durga Puja to Diwali to Chatth Puja, October was literally a washout. And in November and December, things have been much better. In November and December, volume growth was in double digits? It was 10% plus. And that November-December run rate is continuing right now also, right? I can only tell you right now, we hope it should continue.

Most of my questions are answered. Just one question. For this biofuel, do we have any long- term acumens, or how are we planning to source this new fuel which we are planning?

Ashok Kajaria

Ma'am, supply is not an issue. We, as an industry, started using it only about 2 months back from December. But the boiler industry like textiles, they have boilers, they have been using it for the last 6-7 years. Our friends are also using it. Supply is not an issue at all. And especially in Rajasthan, it's not an issue. We have plenty of mustard husk available. So, it will be largely spot that you will be taking as per the requirement? Yes. And one more question. Did you see any pricing reduction by Morbi players during this demand sluggish environment, like they have increased the prices wh

Sir, what would be the current debt levels and any specific reason for rise in interest costs during the quarter?

Rishi Kajaria

We have negative debt to Rs. 188 crores as of 31st of December. Any specific reason for interest costs going up from a run rate of around Rs. 3 crores to Rs. 8 crores? We'll check and come back to you.

Given that mustard is more a seasonal crop, first thing, is the supply of biofuel assured or consistent throughout the year? And secondly, what is the kind of pricing volatility that could be there in the biofuel element? Is it more stable than the gas cost? Or is it also has quite much of volatility? This is one. And secondly….

Ashok Kajaria

Let me answer this first, if you don't mind. First is, supply is assured throughout the year. Right now, what we are paying is the highest because the mustard crop comes only in the month of early March. So, prices will further come down when the crop comes, which is there for almost 4 months, and then they store it and supply you for the rest of the 8 months. So, what we are paying right now is the highest. And supply is not an issue at all for the whole year. So, consistent supplies would be there and pricing would actually be going down from what it is currently? In March, April, May, and J

Sir, I wanted to understand whether the Indian market itself is seeing a very good acceptance of the large-slab tiles and that is the reason why you and your peers are going for a lot of capacity addition in this category of tiles?

Chetan Kajaria

Definitely, it's a growing market. That's why we're going ahead for this production of large tile slabs. And the realizations are much better there. But sir, I think even before the pandemic, this market was not growing that strongly, but have you seen a shift occurring in consumer acceptance of large-slab tiles and is there a possibility that after GVT, this segment is going to see very strong growth coming in over the next 5 to 7 years? No. Firstly, it is part of GVT. Secondly, it will always be a small percentage of the overall sale. But yes, as a market leader, we have to be there in the m

Just one question on fuel. Can you talk about what are the constraints for your using propane or more LPG in your plants versus natural gas? Is it because all of them have reached pricing parity, so it doesn't make much sense to use it? I understand the biofuel part, but I guess that is more for a North-based issue and is more for spray dryers. Otherwise, as a substitute for natural gas, is propane and LPG not being looked at as an option?

Ashok Kajaria

Propane, LPG, and natural gas, they are the 3 products which can be used, right. But natural gas comes from a pipeline; propane and LPG come from bullets. You cannot use propane and LPG beyond a certain quantity. That's number one. And if you recall, the Gailpur plant started in 1998. Until 2010, twelve years, we have worked with propane and the propane prices were almost 30% to 35% more higher than gas because we didn't have a gas pipeline. So, propane and LPG do not replace gas unless the price difference is very high. And in bigger plants, you can't use. Sir, is the pricing difference that

Sorry, if I'm harping on the same thing. Sir, prior to this, we were under the long-term contracts for the North plants. Is there any take- or pay-related penalties as we move more mix towards biofuel? And this 35% is only for the North, or at the company level, you are talking about 35% will be biofuel?

Ashok Kajaria

1) First thing, the contract still is there. There is no take or pay. They themselves have cut gas. It's not that I have asked for lesser requirement, they have cut gas. 2) Since they cut gas sometime in September, we started exploring and then this biofuel thing came in. Otherwise, we had a lot of problem in September and October. When the gas supplies were cut, the spot prices had gone up to Rs. 120. So, please understand that we have passed through very tough times. And biofuel came in later when we got permission to use biofuel because it was not allowed to be used in anything other than t

Sir, it’s just a quick one. Sir, any particular reason why we have not used biofuel for our Gujarat JV?

Ashok Kajaria

In Gujarat, there is no such thing as biofuel. They are using coal in the spray dryer. They are allowed. But sir, when we look at the costing, it is Rs. 30 per SCM versus, I think, when we say Rs. 57 to Rs. 58 for LPG. No, their costing is also around that – Rs. 32 to Rs. 33. Coal has a similar cost. Coal is also Rs. 32-33.

Sir, you spoke about FY24 volume being 13% to 15%. But given the commentary on rising interest rates and current sluggish real estate, etc., what gives you confidence there? Bath ware and plywood after many years have not seen material increase in size. So, if you can give your strategy there? And finally, you spoke about increasing dealer/distribution number. Where does that number currently stand?

Ashok Kajaria

As far as confidence is concerned, we will always have confidence. I always see things positively. Don't worry on that score. As far as the dealers are concerned, we have told you that in the next 3 years, we will add almost 450 to 500 dealers. You will be happy to note that in the first 9 months, we have added 125 dealers out of which 35 are exclusive Kajaria. As far as faucet and ply are concerned…. And also to add to that, to give you that confidence that whatever happens in the market, Kajaria, as a brand, our numbers will always be better than the industry. If the industry is growing by X

Sir, I just wanted the volume and value mix for ceramics, PVT, and GVT tiles for Q3.

Ashok Kajaria

Volume-wise, ceramics 45%, PVT 26%, GVT, 29%. Revenue mix, ceramics 40%, PVT 27%, and GVT 33% approximately. I just wanted to correct one figure I gave you. Rs. 106 crores was the quarter’s cash profit. The 9-month cash profit is Rs. 335 crores.

On behalf of ICICI Securities, I would like to thank all for attending this call and also the management for giving us a chance to host this call. Any concluding comments, Ashok-ji?

Ashok Kajaria

I thank on behalf of myself, Chetan, Rishi, and my colleagues, Sanjeev and Pallavi. I think it was a good introduction. A lot of good questions have been asked. And any follow-up questions can be addressed to Sanjeev and Pallavi. Many thanks for organizing this.

Speaking time

Ashok Kajaria

Rishi Kajaria

Moderator

Achal Lohade

Ritesh Shah

Saurabh Jain

Nikhil Agrawal

Praveen Sahay

Girish Choudhary

Mahek Talati

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Opening remarks

Arun Baid

Good afternoon ladies and gentlemen. On behalf of ICICI Securities, I welcome you all to the Q3 FY23 post results con-call of Kajaria Ceramics. From the management side, we have Mr. Ashok Kajaria – CMD, Mr. Chetan Kajaria – JMD, Mr. Rishi Kajaria – JMD, and Mr. Sanjeev Agarwal – CFO. Now, I hand over the call to Mr. Ashok Kajaria for his opening remarks post which the floor will open for question & answers. Over to you, sir.

Ashok Kajaria

Good evening everyone. It gives me a great pleasure to welcome you to the Quarter 3 FY23 and 9 months FY23 Earnings Conference Call of Kajaria Ceramics Limited. Joining me on this conference call are my sons, Chetan and Rishi, our CFO Sanjeev, and Pallavi Bhalla from Investor Relations. The 3rd quarter of the year presented a unique scenario, as all the major festivals such as Diwali, Durga Puja, and Chatth Puja, all fell in October 2022. The extended holidays during this month had a significant impact on our sales. However, we observe the resurgence in demand during November and December 2022. Recent dealer expansions in untapped markets such as semi- urban areas should also result in better growth in the future. Our margin recovery has been slow. We expect further improvements from quarter 4 onwards. We have started using alternate fuel from December 2022 onwards, which will reach to its maximum capacity by mid-February 2023. This will take total consumption of alternate fuel up to 3

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