Good afternoon, ladies and gentlemen. Welcome to Somany Ceramics Limited Q2 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions after the management's opening remarks. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agarwal, Head Institutional Equities at SKP Securities Limited. Thank you, and over to you, sir.
Good afternoon, ladies and gentlemen. At the outset, apologies for the delay. On behalf of Somany Ceramics Limited and SKP Securities, it's my pleasure to welcome you to this financial results conference call. We have with us Mr. Abhishek Somany, MD and CEO, Mr. Sailesh Raj Kedawat, CFO, and Mr. Sunit Kumar , Head Strategy and IR. We will have the opening remarks from Mr. Somany, followed by a Q&A session. Thank you, and over to you, Abhishek [Non-English content] .
Thank you, Navin. Thank you for joining us for the earnings call of Q2. This, as you can see the results, it has been a muted quarter as far as volume is concerned, and obviously, in that case, the value is concerned. We have grown only by about 6% on sales. EBITDA, however, has gone up correspondingly. PBT, in fact, has gone up in a very handsome way. That's owing to two attributes. One is lowered fuel costs, energy costs, and also slight bit of improvement in our realization. That is namely purely because of the extra value-added products which have started kicking in. As you can remember, we have put in significant capacity for GVT in the past 24 months. So that has started slowly and steadily showing up in more value-added sales. Hopefully, this trend will continue.
The MAX plant, which was our latest GVT, big format, large format slab tile plant, has started this quarter, and we should start getting the production from that in the fourth quarter of this year, which would again add to both volume and also to value. As far as our ceramic polished vitrified, which is PVT, and glazed vitrified, which is GVT segment is concerned, in Q2, the ceramic was at 37%, down 2% from 39%. The PVT was almost flat from 28%- 29%, and the GVT has improved from 33%-3 4%, but in H1, it has improved from 32%- 34%. So this improvement trend will continue, and we hope that GVT would be well past the 35% mark this year and closer to the 40% mark later in, probably next year.
The sanitary ware and bath fittings, again, with the muted demand, the sanitary ware and the bath fittings also have been muted. However, in that, the bath fittings have done much better than sanitary ware. The sanitary ware growth has been just 3%, whereas the bath fitting growth has been 30%. This trend should balance out somewhat, where the sanitary ware growth also, we are hoping that would become much better in H2. The gas prices which are firming up now, closer to winter, every year they firm up. That's firming up again for us. There's been approximately a INR 2-I NR 3 increase to the average price of last quarter, which is in the current quarter. As we speak in October, the firm up in gas has been maybe INR 2- INR 3 per standard cu m, from the average of the last quarter.
However, this is still not an area of concern currently. We are hoping that no other global factor disrupts this movement. The fourth part, which has led to slightly better margin is capacity utilization. If you can remember, in the first quarter, our capacity utilization was nearing the 70%. We are now closer to the 85%, 86%. Specifically, in tiles, we have been approximately 82%, sanitary ware is 52%, and the faucet division is closer to 17%. Faucet, we are hoping that this would again move to ahead of 80%, and sanitary ware, we should be in the 70%- 75% range in H2. Tiles, we are hoping that we do better this by a couple of more percent. The brand spend, that again, as I've always maintained that the capacity utilization is a big lever in the margins for any tile company.
The brand spend has been at par with what we had maintained. That's 2.5% in H1. However, in Q2, it's a bit higher to closer to 3%. So overall, if you see in the year, we would be on the trajectory of about 2.8%, 2.9% of revenue as far as brand spend is concerned. There's been a significant improvement in the new dealer addition. We have added 130 new dealers net of what we lost in H1 and 22 new showrooms net of some showrooms which. A significant improvement, large part of that has happened in Q2, and this trajectory again will get only better as we move in H2. I would now come to the guidance.
I think the guidance, looking at the muted growth in Q1, and we were hoping for a better Q2, and I was maintaining that we would be able to attain a good teens growth as far as volume wise is concerned. I think to be cautious as to how the demand has moved in the Q2, we are now very confident that we will be able to achieve a high single-digit growth as far as value is concerned. So that is something which I have revisiting in this quarter. As far as the margins are concerned, we should be able to maintain current margins, and if the volume goes a little higher, margins will only improve from here. The only caveat there is there should not be any huge impact of oil and energy like we saw after the Ukraine war.
Anything in the current range, $±10 , we are fine. But anything which goes crazy like last year, that would have an impact. But minus that, we should be able to maintain our margins. This kind of sale which I am projecting and this kind of margin which I am projecting, it is needless to say that our balance sheet discipline will continue, and we do not wish to have any compromise on any balance sheet discipline. If you see our working capital base standalone and consolidated, that is a clear indication as our balance sheet is well under control. Exports for the industry has grown. in August, the figure of exports from Morbi was INR 2,100 crore. If I had to extrapolate that and annualize that, we are looking at a INR 24,000-INR 25,000 crore rupee export for next year.
This year, we are quite confident that the export from India would be closer to the INR 20,000 crore figure. This is where the normal working of the company is concerned. Now we move towards another new thing which we have witnessed, which is the SREI bond. That is the INR 18.44 crore provision which we had made about three to four years ago on the SREI bond. Apparently, there has been a resolution from NCLT. We have got knowledge of that. We do not have 100% details on that. But whatever paper we have, that says that we would be able to get back closer to INR 6 crore out of the INR 18.44 crore.
This is yet to be realized, but the information which has come from the authorities and NCLT tells us that we would be able to realize close to INR 6 crore out of our add off. The rest of it which has been provided, we would then, once the final resolution is there in place, we would then write off the balance amount which is currently only provided for. This is as far as the SREI bonds is concerned.
Another highlight which I have already mentioned earlier in my call is the MAX plant. Very happy to say that that started on time, and we should be very looking forward to a launch closer to early next quarter or the last part of this quarter. Looking forward to that particular launch and looking forward to a much better H2 going forward. Thank you so much. I would now like to open this to Q&A. Before I say that, please happy Diwali to every one of you.
Thank you very much. Ladies and gentlemen, we begin with 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. Each participant is requested to limit himself, herself to a maximum of two questions. Time permitting, we shall revert for any further questions that you may have which remained unanswered. We will wait for a moment while the question queue assembles. Thank you. We take the first question from the line of Ritesh Shah from Investec. Please go ahead, sir.
Yeah, hi. Thanks for the opportunity. Couple of questions. Sir, first is on working capital. If you could please explain specifically on the payable days, what is the change in strategy? Will it impact the interest cost or not? That's the first question. Second is on the cost curve, if you could give a regional flavor and specifically how it is faring for Morbi or West versus on a blended basis. I think that's the second question.
I didn't get the second question, Ritesh. Can you please repeat that?
Second question is on basically every quarter you give these numbers on INR per SCM basis for different regions. So how it has fared for-
Got it. Thank you. In my Bahadurgarh plant, which is my Haryana plant, Q2, we are at an average of approximately INR 42, INR 43 a standard cu m. In Morbi, it is the same, about INR 42, INR 43 a standard cu m. And in our south plant, this is at INR 50 a standard cu m. This is all gone up by INR 2- INR 3 as we speak. Does that answer your second question, Ritesh?
Yes, sir. When we say it is INR 43 for west, should we read this that this would be a broad ballpark number for entire Morbi as well? Or will they be
Whatever gas we are getting, we are getting contracted gas. So this is a ballpark number for everybody who is on the contract gas. Whereas some people in Morbi are not contracted, they are INR 2, INR 3 more expensive, but that is very few people.
Okay. Sir, if I have to just give a follow-up over here, I think one of our peers, the number what they indicated for west was significantly lower than INR 43. It was lower by almost INR 6- INR 7 per SCM. Probably I can check on that or circle back to you on this question.
Yes. In the west, it's impossible.
Okay.
Without a communication there.
Sure. That's helpful.
We're getting from the similar single source, Ritesh. We're getting from GSPC. Unless that peer has access to some gas, which is the ONGC gas that I'm not aware, but 99% of Morbi is on GSPC, and their gas will be anywhere between INR 40 and INR 42, depending whether they're using propane or LPG or natural gas. So it's not going to be more than an INR 1, INR 1.5 difference.
Sure. And sir, on a blended basis, north, west, south at a company level?
44.
44. Perfect. This is helpful. And sir, on the first question on working capital, specifically payable
Yes. I will have Sailesh take that question.
Sir, Ritesh, on working capital, I think you are seeing a substantial jump in trade payments, right? Close to INR 100 million, if my numbers are right.
Sorry.
I think that is your question around working capital.
That is right.
Okay. So Ritesh, what we were earlier doing was, till last year, those vendors who wanted to get early payments from us, we had opened facilities from banks where bill discounting was enabled for vendors, and vendors used to come get their bills discounted using our lines. This was there till last year. Interest was on the vendor account. Now we have discontinued the facility this year.
What we have done is we have done a paying arrangement for the vendors. Any vendor who wants to avail an early payment, they can reach the payer, they can get the payment, and we make payment to the vendors on the due date. There is no change in payable date for vendors. The payable date remains the same. It is only a change of arrangement which has happened where vendors are not utilizing our lines. If they want to get early payment, they utilize the payer arrangement.
Sir, sorry, you went a bit fast. You said what we are doing, we are paying, the payable days remain the same for the vendors. I could not connect that, sir.
See, the payable date for vendor remains the same. Any vendor who wishes to get an early payment, earlier they were using our bank lines. They were getting their bills discounted using Somany's bank line.
Correct.
Whenever they use your bank lines, our borrowing was going up and the payable was going down. Interest was on vendor account.
Now what we have done is if any vendor wants to get an early payment, there is a paying arrangement which is made. They go to the payer funds the vendor, and we make payment to the payer on the due date. There's a shift which has happened from borrowing, the short-term borrowing which was there earlier, our bill discounting line to vendor payable. That's the shift which has happened. The vendor's payable days remain the same. There is no change there.
Just to clarify, the meaning vendor payable days remain the same means there is no change in credit period as such. Whatever credit period we are getting from supplier, it is as it is. Without any geo-political suppliers arrangement, it is the same. If anyone wishes to get early payment, they can go and use that arrangement which we have done, and they can get the early payment at their own cost. This is what I was trying to say.
Will there be any change in interest cost and interest-
Request you to join the meeting, sir.
No. It was not on our account. It was not on our account, Ritesh. Earlier also, now also.
Okay, that's helpful. Thank you so much. Thank you. I'll join back with you. Thank you.
Thank you, sir. The next question is from the line of Viraj Mehta from Equirus PMS. Please go ahead, sir.
Yeah, hello, sir, and congratulations for the set of numbers. My first question is, sir, regarding the demand outlook. Obviously, in your opening remarks, you have cut your guidance in terms of what you are thinking and what will happen. But sir, as far as exports are concerned, they are doing very well. So the whole industry was expecting second half to be better. That seems to have been pushed out. What factors do you think have played out for that to happen?
So Viraj, I still maintain second half will be much better. If you've seen, we're looking at a 6% average growth for industry leader and us in the first half, correct?
Yes.
In H2, we are saying we are looking at high single digits, which means that we will grow at a much more significant pace in second half to get my average down to that high single digit. I still maintain H2 will be good. Exports is a completely different animal.
Sorry. Morbi is complete, sir.
Morbi is the significant exporter from India. The branded players do not export even a fraction of what Morbi does. If you look at the INR 20,000 crore, the export, the top three players, which is Somany, Kajaria, Johnson, would collectively not even export about INR 2,250 crore, which is out of the INR 20,000 crore. Export for us is still building up. We do not give any open credits, or we do not work on very long LCs. We do not work with LCs from unheard-of banks. All of those restrictions, we are very careful while we export, because for two reasons: A, we don't want to disrupt our balance sheet. B, we are also producing far better quality and we get a brand premium in India. Export is doing very well. Domestic probably will remain completely flat as far as India is concerned.
Right. What I meant for exports was if exports do well, then the capacity in Morbi gets shifted there, and then we face lesser competition domestically. That was the whole point. I know we don't export, or Kajaria doesn't export.
You are right. Let me correct you. If you remember, about a couple of hundred companies came up in the last 18 months after COVID, which started in Morbi. All of them were for export-focused. They got in a catch-22, because by the time they had started to fire up and come into production, the Ukraine war pushed the freight prices absolutely to a skyrocket figure. In the last 18 months, these freight rates have started coming down. All of that capacity, which was actually built for them, it started getting consumed today. It is not that we had a lot of capacity which was 100% utilized, and that is getting exported. It is the unutilized capacity which is now getting exported.
Right. Thank you so much. Sir, when you say that you are looking at high single digit, that means for the second half, you still have to do 12%, 13%, 14% kind of growth. How much of-
It is a steep path, but we are going to try and achieve that.
Hello, sir.
I'm saying that's a steep path. You're absolutely right, but we're going to try and achieve that.
How much, sir, would be realization growth and how much of that would be in growth?
Realization growth, there is going to be out of the value-added segment. I think in fourth quarter, you will see a little more of that because the MAX plant would have started contributing to the realization, which is a product which is significantly higher in the economy. So I do maintain that with the exports taking a lot of the load off Morbi, I don't think realization is under serious pressure.
Thank you so much, sir, and best of luck.
Thank you. We take the next question from the line of Dhvaneet Savla from Savla Family Office. Please go ahead, sir.
Hello, sir. Congratulations on-
Hello?
Hello.
Dhvaneet, sir? Sir, the line from Mr. Dhvaneet is disconnected. We take the next question from the line of Mr. Nikhil Agarwal from VT Capital. Please go ahead, sir.
Good afternoon, sir, and thank you for the opportunity. My question was on what is your margin. What is the difference between margins between outsourced and your JVs and your own manufacturing? If you could help me on that.
Sure. Nikhil, as far as our product margin is concerned with respect to sourcing mix, our own plant versus the JV or source, which include JV at a standalone level and at consolidated level, own plant means JV and own plant together.
Obviously, cross margin would be higher as far as own plant is concerned, because traded offshore volume comes at a total purchase cost plus a manufacturing margin of the offshore partner. But if you talk about the bottom level, which is more of a PBT level, which is the right net lease to value, then it is more of a product which makes the difference and not the sourcing mix, largely. If I manufacture the same product and if I outsource the same product, then obviously it will make a difference. But if I manufacture a low-end product and outsource high-end product, then it will be other way around and my margin will be better in outsource.
Okay.
It cannot be generalized that much. You have to take the cognizance of both sourcing mix as well as product mix. Then only you will understand it properly.
The reason why I am asking this is because your outsourcing and JV mix has increased and your own manufacturing has reduced quarter on quarter, but still your margins have improved. Going forward, if your own manufacturing as a percentage of the mix increases, do we expect more margin expansion now?
I will tell you what is happening. When you are seeing the revenue mix in own JV and outsource. Here, JV is [inaudible], but when you look at the margin, which is operating margin at a concern level, JV is not dilutive because JV is here treated as own plant, in case of consolidated operating margin. You have to correct the investment and then interpret it.
Okay.
When you say JV in sales revenue mix graph, which is in our investor deck, it is not JV for the sake of consolidated financial. It is actually owned because it is line when consolidation is happening and entire manufacturing margin is getting captured, including our own margin.
All right. I think I did my part. And sir, you spoke about the realization from the brokers. This was related to mental financial services, right?
No, no, no. Sorry.
SREI bond.
Okay.
We have a bond of SREI equipment of INR 18.5 crore. Resolution plan is approved, and that was the update was shared.
You expect to realize INR 6 crore from that?
Yeah, expected. That is likely an expectation. Let's see when we get the final project.
That's what the authorities have told us.
All right. Got it. That's enough. Thank you so much.
Thank you, sir. We take the next question from the line of Sneha Talreja from Nuvama. Please go ahead.
Good afternoon, sir, and congratulations on great balance sheet improvement. Just a couple of questions from my end. Just wanted to understand the demand front. This particular quarter, in fact, we've seen strong show by both panel players, including plywood demand is up. Plastic pipes, we've been continuing to see wires and cables are doing well. Where is it that tile demand has not been able to pick up some sense there?
Yeah, I think it's to do with all the inventory which is got sold was all made inventory. In the real estate, now that a lot of new launches have happened, tile demand generally picks up maybe 9- 12 months from when the real estate starts getting built. You'll see a lot of the tile demand coming in next year. In India, there has been, I guess the traders have diverted their funds to various other investments in properties, this, that and the other in the last 12 months. That has also reduced the demand a little bit, but otherwise there is no threat in the long term of any demand. It is short-short term.
Is there any trend to the demand like metros are doing well, the smaller cities are not doing well, or the new residential is doing well and renovation is not doing well. Some of those trends, in case you can highlight.
This time the demand has been tepid or a little less pretty much everywhere. There is no specific trend that South is worse than North or North is worse than South. Neither has there been a trend between big cities and small cities. It's an overall demand, which is lower, which is across India. When demand picks up, it will pick up in the smaller cities which are for IHBs, individual homes. As far as big cities are concerned, that will pick up for the builder market. The cheaper builder market is more controlled by Morbi, but the IHBs are controlled by the better brands.
Understood. We're recently also hearing that around INR 4,000 crore of investment is again happening in Morbi with some 40 players now coming in. Is that on the basis of real estate demand pickup that they are investing or is it the continuous strong exports that we're seeing and you were talking about it hitting INR 2,100 crore a month last month?
A large part of that is for export. The balance is for renewing old equipment. They are getting rid of older equipment and putting new equipment. This is not really a large capacity addition. For example, let us say they have a 7,000, 8,000 sq m kiln that will go down and a 10,000- 12,000 sq m kiln will come up. It is not going to be a massive increase in capacity. The third reason is of course looking at the demand in India. If they are looking at so much more capacity being added, obviously we are going to be looking at more tiles to be sold in future.
Understood, sir. That was helpful. Thanks a lot and all the very best.
Thank you. We will take the next question from the line of Amit Purohit from Elara Capital. Please go ahead, sir.
Thank you for the opportunity, sir. Just continuing with the same question on the demand profile, I wanted to understand what is the class of customer which is witnessing a good growth. We reported a 6% kind of a volume growth. What has led to this growth?
I did not quite get your question, I am sorry. Could you repeat it?
Yeah. I am trying to understand the profile of the customer which is witnessing a good growth since the overall growth has been about 6% in volume terms. What is it, which segment would have witnessed a good double-digit growth for you?
The answer to that is that our class of customer does not change. 80% of our products go into retail, which is in IHB and some renovation for the upper middle class and that area. The balance goes into projects and government and the rest of it which is left goes into the corporates, which is the organized retail, et cetera. I do not think any specific area they have grown. All I can say is that this is a continued trend where the larger brands keep continuing to take market share from Morbi in the domestic sector.
Okay. Broadly, almost all of these three segments that you highlighted would have grown at a similar pace, you are saying?
Yeah, absolutely.
Okay. Second, on the capacity that you talked about last lap. The big tiles which you are indicating, what is the total capacity in that?
Depending on what, it is rated as a 4 million square meter plant, but then it all depends on our product mix between the 15 mm tile and the 9 mm tile. That is yet to be seen as to what orders kick in for us. As you can imagine, 15 mm obviously is a larger mark, so it will produce lesser square meters. I cannot answer that question right now. However, the plant is rated for 4 million square meters at the 9 mm level.
Okay. What would be the realization difference between this on a per square meter basis versus the normal realization that we report?
There are two things to it. Again, it would depend on how much the 15 mm and how much the 9 mm. I would want to answer that question with more clarity next quarter when we start getting the orders and selling. It would be only guesswork at this time because I do not have the product mix.
Okay. Lastly, just wanted to know what is our current dealer count and sales team strength in the organization.
The dealer count is approximately 3,200 if I am not mistaken, Sunit.
The last dealer count.
Addition?
No. Total dealer count.
Total dealer count.
Yes.
About 3,200 is our dealer count and the number of salespeople across sanitary ware, bath fittings, and tiles is approximately 600, 650 people.
600- 650 you said.
Yeah. I don't have the exact figures.
Yeah, no problem. And dealer you said 2,200, right? Or 32-
3,200.
3,200. Okay. Thank you, sir.
Thank you. We take the next question from the line of Keshav Garg from Counter PMS. Please go ahead, sir.
Firstly, on behalf of all the shareholders, I want to thank you for the share buyback. Sir, we hope that this is the first but not the last share buyback. Sir, secondly-
Absolutely.
Sir, coming back to the demand question. Sir, if you see all real estate companies, the volumes that they are doing are at all-time high. Their revenues are at all-time high. Sir, the concern is that, sir, is the polymer flooring substituting ceramic tiles? Sir, because Welspun and many other companies have gone into polymer flooring. Sir, what are your views on the same over the long term?
We are extremely fortunate, and if you're a shareholder you should be extremely fortunate that it's a tile company and not a vinyl company. It cannot substitute. I'll give you three pointers. A, vinyl has a restriction of size. They cannot make a size larger than, I believe, little lesser than 2 ft by 4 ft. Whereas tiles are now being produced on a normal basis which is 3 ft by 5 ft and on a very large basis 6 ft by 10 ft.
So that's an issue. Apple to apple, per square meter, the cheapest vinyl, which is really pathetic quality vinyl coming in from China and this that and the other, not the Welspun types, is between INR 80- INR 120 a sq ft. Whereas Welspun is closer to INR 150 a sq ft. Tiles, apple to apple comparison is between INR 30- INR 40 a sq ft.
There is absolutely no comparison. The designs, the textures, the finishes, the top surface and all of that is greatly superior in tile. They cannot replicate so many of the natural stones and natural fabrics, natural woods which tiles can do. It's not a substitute. In fact, I would think that we are going to be seeing tiles taking over a larger part of most of the flooring materials and very soon even the wall paneling material in the coming days. No threat at all.
Great, sir. That was really reassuring. Sir, also wanted to understand, the faucets and the other non-tile business that we have started, sir, is there any product line which is basically making losses at operating level?
None at all. You've asked a pointed question. The geysers is the latest introduction, but the losses there are so insignificant that it's not worthy for mentioning. The losses in geysers on an annualized basis will be about INR 30 lakh-INR 40 lakh if at all. It's insignificant and that also should start improving next year.
Great, sir. Thank you very much.
Thank you.
Thank you.
Thank you, sir. Ladies and gentlemen, before we take the next question, a reminder to all the participants. If you wish to ask a question you may press star and one on your touchtone telephone. We take the next question from the line of Jyoti Gupta from Nirmal Bang. Please go ahead.
Good afternoon, sir. I have two questions. One question is, we have a huge dealer network of 3,200. Is there dealer per dealer productivity which you could look at? Because compared to Kajaria which has got 1,800 odd you're almost double in terms of the dealer network. I was expecting a very good tile performance number but we didn't see that. So this net addition of dealer, how are we seeing that in terms of improvement in terms of the sales and distribution in the Tier 2, Tier 3, Tier 4 cities?
One is that. Second is, usually tiles come at the tail end of the construction and while we've had good numbers in the construction side, I'm hopeful that since tiles also require drier season to facilitate. Do I see quarter four numbers performing better than the third or will both the quarters be better at par? Because it looks like, again we'll have a single digit number in the third quarter as well. Just wanted to understand your point of view on that.
Yeah. The first one, yes, there is a historic reason why there are lesser number of dealers but much larger dealers in terms of number of crore which each dealer does. That's what your question was between Kajaria and us, and they have been sales tax exempted until up until 2014. They historically had very large dealers, unlike ours. But if you look at the total count of the footprint at the ground level, their dealers and their sub-dealers, which is retailers, are a good 3,000- 4,000, maybe a little more than us. We have 3,200 dealers, but approximately 10,000- 12,000 touch points. They have about 2,300, 2,400 dealers, but they have approximately 15,000 touch points. So their touch points are much larger than us. But the historic reason does have an effect on the number of dealers and the efficiency.
But that will start correcting out because they are also now aggressively making more and more dealers, and the bigger dealers' percentage is coming down. The second question is that, yes, quarter four is a far better number than quarter three. You're largely right, although we are hoping that quarter three will be slightly better than our quarter two, but quarter for will be batting the maximum as far as the growth is concerned with you. That will also be coupled with our MAX plant, which will again, give us whatever it gives us, that will be an extra amount which will come to us in quarter four. So all in all, quarter four, you're largely correct, will be far better than quarter three.
So do you-
I hope I answered both the questions.
Yes, you did. Do you expect a double-digit growth more in FY in the quarter four and maybe a single digit in quarter three? Because I personally feel that since you have financial year construction closing activities, therefore, tiles should be posting a very good number. Second quarter, while I wasn't really expecting this number because monsoon, because of high moisture, anyway, selling doesn't work that well. Third and fourth should be good, but then I don't know, the confidence in terms of performance seems to be lukewarm again in terms of tiles, despite such strong real estate.
It is. A large part of it is exported. Whatever growth you see is exported. Otherwise, tiles, I think, we should be looking at much better growth quarter four, one, two, three for next year, and thereon. Clearly, tiles has been muted as far as demand is concerned in the current scenario. It is under pressure. The only saving grace is that our capacity utilizations have gone up. Margins we should be able to maintain margins. Please don't also forget that we have added 25% capacity. The utilization which we're talking is on that capacity.
Therefore, we showed poor margins and poor utilization in first quarter. If that starts improving, at least one piece, the balance sheet and the margin should start getting better and improve or sustained. Growth will kick in. I am not worried about the growth in the medium and the long term. In the short term, you're very correct. There is pressure. The reason to say that, I've said that earlier in the call, in the next 10 years, we are looking at about 150 million- 170 million people getting urbanized. All will need homes, and tile is the preferred material today. I'm really not worried on the medium and long term.
Okay. A very happy Diwali to you, sir. Thank you so much.
Thank you so much, Jyoti. A very happy Diwali.
Thank you. A reminder to all the participants, if you wish to join the question queue, please press star and one on your touchtone telephone. Ladies and gentlemen, if you wish to ask a question, please press star and one. We take the next question from the line of Rahul Agarwal from InCred Capital. Please go ahead, sir.
Hi. Good afternoon. Thank you so much for the opportunity. Abhishek, I had a question on all the new businesses. Basically, if I talk about, and these are all which you are incubating right now. So Bathware , this is in the Nepal joint venture as well as a large slab. If you could help me understand the next three-year plan, largely in terms of how you want to build these businesses. I also assume that these businesses have higher margins than what we do right now in terms of the entire existing scale, what we have. And they also have better payback periods. Just wanted to understand how does this business, when they increase in terms of revenue share, how does Somany look like three years out?
Sure. Number one, the MAX plant, that is a tile plant. The payback will largely depend on how much of value-added I will be able to make out of the MAX plant. So if I very quickly scale up the value-added segment, then the MAX plant can pay back within three to three and a half years. If I don't, then it'll be maybe closer to five and a half years. So if it's a five and a half, it's a long payback, but it's a question of putting it versus not putting it. You've got to have this capacity. So it was one of those things where the responsible brand needs to put in that investment and be ready for the future.
So that MAX plant, if we scale up capacities fairly quickly, we have enough land there to put up another MAX line, in that location. Which will come at a much, much lesser cost than what it is today. That is number one. That's the trajectory that we have to, first utilize the MAX plant at 100% capacity. Whatever we make there, let's say we don't make 100% value addition, but whatever we want, we want to keep running the plant. The second one would be to start substituting and removing the non-value-added from the MAX plant and keeping on beefing up the value-added segment to get my payback much easier. That's as far as the next 18-24 months would be concentrating on the big slabs 4 million square meters of big slab, easier said than done.
The same 4 million square meters, as far as wall tile is concerned, or my normal 2 ft by 4 ft vitrified tile is concerned, would have been consumed within 12 months. This is going to be a tough one as far as value added is concerned. That's the 24-month outlook for the MAX plant, and once we do that, we would want to double that plant in the same location. As far as the new businesses is concerned, sanitary ware, we are changing the value mix in the plant, and the idea is to scale up sanitary ware in that plant with a better value-added mix, in which case we would be ready in the next 12 months to put another sanitary ware line.
In the next 2-3 years, you would expect that we would be doing some investment in the sanitary ware segment to scale up that capacity by at least 50% of what it is today. As far as bath fitting is concerned, we have already made a reasonable amount of investment, and we are in a position where in the next 24 months, we should be able to double the revenue as far as bath fitting is concerned. And we have made an investment. There may be balancing equipment required while we chug along for making quality better and also for enhancing the product mix again over there. That's as far as the bathware is concerned. These are the three primary businesses as of now, which is where the outlook is.
To answer your question in another way, tiles, we do not see any requirement of any expansion in the next 24 months. However, in sanitary ware, we do believe that there would be an expansion need in the next 12-18 months from today. Bath fittings, again, we do not need any expansion in a very large way. Small balancing equipment will be required.
Anything on adhesives?
Adhesives is something which is from the plant. That's something which is a byproduct, kind of a byproduct as far as we're concerned. We're using our tiles to make the adhesives. That will keep improving as and when the tiles keep getting used, because a lot of players have also got into business.
Perfect. Very nice. Secondly, just one last thing on margins. Apart from you increasing your manufacturing utilizations, the energy cost benefit is largely done with for H2 at least in terms of percentage of sales. Is that a fair statement?
I'm sorry, I didn't get you. I lost you there in between. Could you please repeat?
My question is, apart from increasing manufacturing utilizations, which can increase your EBITDA margins further, this 9.8%, most of the energy cost benefit is largely done with for H2?
Well, energy cost benefits, it is to do with price of energy and also capacity utilization. So it goes hand in glove. The three levers for EBITDA margin increase other than energy cost, because that is something which is not under our control, but the other two levers are capacity utilization and product mix in favor of value-added products.
Yeah, I am pretty clear on that. What I was asking was, the energy benefit is largely done with because you are seeing some increase in pricing anyway, right?
Yes. I do not remember last year, same time, what was the energy cost. Just give me a second. Yes, so last year, Q3. I am not too sure of the Q3 energy cost, but I think if you compare it to last year Q3, we still are at a much better position than last year Q3. But there are pressures on energy owing to winter. Until February, March, prices may go up another INR 2-INR 4 a standard cu m, and then they will start softening.
Perfect. Got it. Have a very good festive season, sir. Thank you so much for answering my question.
Thank you.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Hi, sir. Thanks for the opportunity again. Sir, I just wanted to delve into the energy cost. Would it be possible for you to explain what is the thought process to actually optimize the cost? There are various variables available, right? Basically, you have Henry Hub which is there, you have biogas, you have coal, you have spot, you have LPG. So what is your thought process and will it be possible for you to give some sense on how our mixes or how it has evolved in the past?
Yes. In Morbi, we have one on our head with GSPC. We have three options there as far as our kiln is concerned. Let's break it up into two segments. Let's break it up into the firing kilns, and then let's break it up into the spray dryers. In the kilns, there is no option but to use any gaseous fuel, which is LPG, propane, natural gas. At one time, there was coal, but that's history. Right now in a kiln, we can only use natural gas, LPG or propane. Currently in Morbi, with the propane and LPG taxation which has gone up, it's almost at par with natural gas, which means we have only two sources, GSPC or then one of the suppliers of LPG propane, which could be HPCL, BPCL, et cetera. We do not have access to any spot.
We do not have access to any IGX exchange gas. GSPC does not allow that. PNGRB has not come up with any transportation tariffs. Therefore, we are only restricted to buy from GSPC. That's as far as the west is concerned. All our west plants are in the same boat. All of Morbi is in the same. In Morbi, the spray dryer can still run on coal/biogas. They are using either or, depending on what is cheaper in a seasonal way. Let's move to the north. In the north, we have access to GAIL gas and we also have access with GAIL every now and then gives us cheaper gas, which is from the exchange.
That is something if we don't go to the exchange, but GAIL is able to offer us at every given time, every quarter- on- quarter, that price fluctuates. They're able to give us some cheaper gas. But we do not have access to Henry Hub or JCC. I can't go and contract a Henry Hub than a JCC. They may be giving us the same gas, but I'm liable to take only from GAIL in a larger sense. I do have a little bit of gas which we buy from IGX. Last year we did that.
We do have access to IGX in the north because the PNGRB has clear tariff which has been defined here. Again, in the north, let's break up the spray dryer. Spray dryer, after the NGT order in the north, all our spray dryers are now on biogas. Coming to south. South, we do not have access to any gas other than spot currently, which we are buying from Indian Oil Corporation or a city gas distributor, whichever is cheaper currently. The spray dryers in the south, again, are running on coal or biogas, depending on what is cheaper in which city. This is the breakdown.
This is very useful. I really appreciate it. Sir, is there any policy framework to optimize the cost or we decide this on the weekly, fortnightly basis based on the demand projections, how should we understand that?
Which cost?
Sir, basically whether you will go for coal or biogas. Also, you indicated GAIL or a little bit of-
Ballpark. If gas is INR 2, INR 3 more expensive. Let's say if it's within 10% more expensive, I would rather use gas. It's a cleaner, more efficient fuel, and also it gives me slightly better quality. If any of those coal/biogas/gas, if I have an option, in the kiln we don't have an option, we go for gas. But in the spray dryer, we flip-flop between any of the three, depending on what the prices are. The policy is very clear, not to be foolish, penny wise, pound foolish to buy the cheapest fuel and disregard quality and disregard life of the equipment. So 10% is kind of the ballpark, after which we need to make choices.
Sure. This is very helpful. Thank you so much. I appreciate it. Thank you.
Thank you. Ladies and gentlemen, we take the last question for the day from the line of Aasim from DAM Capital. Please go ahead, sir.
Yeah. Hi, good afternoon. Just wanted clarity on how the three elements within working capital will move from here on. Receivables, I think you always said there is scope for improvement, but maybe a fresh stance on all the three line items over here.
I think our receivables today are at optimum level. In fact, if we give a little leeway, we can always do a little bit more sales, but we are very tight on receivables. That, I think, that is the first one which is mentioned on the balance sheet strengthening. So receivables cycle is at an optimum level. It is not going to go down from here. Maybe one or two days it can still increase because we are at an optimum level.
As far as inventory go, we are at 56 days today. I think this is slightly higher. We are trying to reduce this. I think quarter four is where this should come down by one or two days or so. Creditors, once again, they are at optimum level. We are paying everything on due dates, so there is no leeway there. Everything is paid on due dates, so whatever you are seeing as payable days will probably remain constant.
The sharp rise that we've seen as of H1, that would continue to persist or would that at least come off?
Actually, I explained that in the beginning. For your benefit, I will once again explain it very briefly. There is no change in payment terms for creditors. Till last year, creditors were using our bank lines for getting their bills discounted and getting early payment. That facility we have discontinued now. So the payable days what you are seeing today is the correct payable days. All those creditors who wants to get an early payment today, there is different pay arrangement which is done, which is at their cost. So they use that pay arrangement, get their bills discounted.
Fine. Basically it will persist. Okay, fine.
Yes.
The second and last question basically was on the bathware business. I don't know if you guys have ever mentioned it, but what is the EBITDA margin of this business currently, and if you have any goals of where that can settle on the future?
Both of them blended is slightly better than tiles and that would only get better as and when that scales up.
Okay. Thanks, sir and Happy Diwali to all of you.
Thank you.
Thank you very much. That was the last question in the queue. As there are no further questions, I would now like to hand the conference over to Mr. Somany for closing remarks.
Thank you everyone. I wish you a very happy Diwali and looking forward to the earning call in Q3. Thank you.
Thank you very much. On behalf of SKP Securities Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.