Somany Ceramics Limited (SOMANYCERA) Q3 FY23 Earnings Concall Transcript

Somany Ceramics Limited (NSE:SOMANYCERA) Q3 FY23 Earnings Concall dated Feb. 07, 2023.

Corporate Participants:

Navin Agrawal — Head – Institutional Equities, SKP Securities Limited.

Abhishek Somany — Managing Director

Analysts:

Viraj Mehta — Equirus PMS — Analyst

Sujit Jain — ASK Investment Managers — Analyst

Ritesh Shah — Investec — Analyst

Nikhil Agrawal — VT Capital — Analyst

Alisha Mahawla — Envision Capital — Analyst

Sailesh Raj Kedawat — Chief Financial Officer

Dhwanil Desai — Turtle Capital — Analyst

Gurneet Singh — Countercyclical Investments — Analyst

Achal Lohade — JM Financial — Analyst

Keshav Lahoti — HDFC Securities — Analyst

Karan Bhatelia — Asian Markets Securities — Analyst

Aasim Bharde — DAM Capital Advisors — Analyst

Presentation:

Operator

Good evening, ladies and gentlemen. Welcome to the Somany Ceramics Limited Q3 FY ’23 Earnings Conference call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Navin Agrawal, Head Institutional Equities and SKP Securities Limited. Thank you, and over to you, sir.

Navin Agrawal — Head – Institutional Equities, SKP Securities Limited.

Good afternoon, ladies and gentlemen. On behalf of Somany Ceramics Limited and SKP Securities, it’s a pleasure to welcome you to this financial results conference call. We have with us Mr. Abhishek Somany, Managing Director; along with Mr. Sailesh Raj Kedawat, CFO; and Mr. Kumar Sunit, AGM Finance.

We’ll have the opening remarks from Mr. Somany, followed by a Q&A session. Thank you, and over to you, Abhishek ji.

Abhishek Somany — Managing Director

Thank you so much. Welcome, ladies and gentlemen, to the earnings call of FY ’23 Q3. We’ve had muted quarter. Our sales stood at INR612 crores, and consolidated INR618 crores. Tiles volume increased by 3.7% to 16.5 million square meters in this quarter.

EBITDA was under pressure. And as a result, the PBT impact was also under presssure. We have done a tile segment revenue, if I look at, we’ve done about 38% of sales in ceramics, 29% of sales in PVT, and 33% of sales in GVT.

Bathware, we had a very nominal growth, very, very small growth of just 2% between last year and this year. However, over the year, we have grown at about 20%. The tiles volume also, on the nine-month, we’ve grown at about 11%. The pressures on the on the EBITDA was on three accounts. One was that it was a muted sales, there was a muted quarter in terms of volume and value of sales. On a normal course, this quarter, quarter three would have been a much better quarter from a historical point of view.

Coupled with the muted demand outlook in this quarter, we also had pressures of sales where there was an extra discounting, which was done to get the material in the market. There was no reduction in prices per se, but we discounted a couple of percent more to put the material in the market. Other than that, the gas prices were also tapering off, but were still fairly high in this quarter. And we had festivities, all coupled together in this quarter.

And we also had pressures of the various Morbi players, which were selling at whatever price need be to get their cash flows in order. So, on one hand, it was muted demand. On the other hand, it was the fuel prices. And on the third hand, it was these festivities, which was the problem from a market standpoint. From our standpoint, we gave an extra couple of percent of discount in the market, and also we had a little extra advertising spend than normally we would do in quarter one and quarter two. So, all put together, this resulted in a lower EBITDA margin, largely impacted by the fuel.

If I come to the fuel cost, the fuel cost is — overall fuel cost for about INR59, INR60, it was slightly down over Q2 FY ’23, about INR4 to INR5 lower overall than the FY ’23 Q2. So later if somebody would need, we could give you the breakup of Kassar, Morbi and South plants, and also the West plants. The average capacity utilization in Q3 was 87% in tiles, about 67% in sanitaryware, and about 62% in faucets. The brand spend was a little up, like I said. Normally we do 2.5%, 2.6%, this was a little above 3%.

The network did very well. We added — we’ve already added about 225 net dealers in the nine-month period, a large part of it has come in Q2 and Q3. Other than that, things were very normal, apart from what we’ve just discussed. Another thing I would like to mention here is that going forward, we are seeing tapered gas prices, which are coming off, and we are expecting the exports to pick up in the Morbi region, due to which there would be lower pressure on the Indian market.

So, these were the highlights for our results of Q3. I would now like the floor to be open to Q&As. Thank you very much.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Viraj Mehta from Equirus PMS. Please go ahead.

Viraj Mehta — Equirus PMS — Analyst

Yeah. Hello, Abhishek. My first question is regarding exports. Now, the competitive intensity in the domestic market seems to be much higher because the export volumes seem to be suffering. Do you see any change in that and near-to-medium-term? Hello?

Abhishek Somany — Managing Director

Hello, sorry. I am saying — the export volume has not gone down. it has in fact gone up, but it’s not gone up in the tune of the manufacturing setup which came up in Morbi in the last one year. So, the export volume has gone up from about INR1,100 crores to approximately INR1,400 crores a month. And this is expected to grow up even further, closer to approximately INR1,500 crores, INR1,600 crores a month. So definitely this has picked up, a big steam [Phonetic]. And this is lowering the pressure on the Indian domestic front. So, I think, with the freight rates now going down, exports seem to be clearly picking up. It was just that November-December, mostly in Europe, the destocking happens looking at Christmas. And therefore, the come back again alive after the holidays. So that was the lag effect, but otherwise exports has picked up and it’s only going up further.

Viraj Mehta — Equirus PMS — Analyst

Sure. And then, I talked to some of the payers. For them, the fuel prices have gone down from INR53, INR54 in Q2 — in Q3, my expectation is INR46, INR47 in Q4. We are already at a higher range of that, like INR58, INR59, as you said. What kind of reduction do you see this quarter?

Abhishek Somany — Managing Director

So, the INR54, INR53 is the rate only for the Northern plants, I would think, nowhere else. Everywhere else, the rate is INR59, and this has reduced. Very clear. This has reduced from January onwards. So, if you look at the Northern plant, it has reduced to approximately INR50. And the Western plant, it has reduced to slightly under INR50 because GSPCL has slashed its rate, and South plant still remains around INR60. And this is for pretty much the industry, there could be one or two players who have other baskets also, like the Henry Hub GSPC. Maybe there rates only for the North would be INR2, INR3 lower, but that’s it.

Viraj Mehta — Equirus PMS — Analyst

But so, for the combined entity, do we look at a 6%, 7% reduction this quarter?

Abhishek Somany — Managing Director

Yes, I would think so. It already has happened. From January, I’m saying that the North rate has gone down from the INR55, INR56 to about INR50. So that’s about 10%, and West rate has gone down even further, South hasn’t come up as much. South was at INR62, INR63, and that’s gone down to around INR60 — INR59, INR60.

Viraj Mehta — Equirus PMS — Analyst

Right. And sir, my last…

Abhishek Somany — Managing Director

The overall weighted average, it will go down by 6%, 7% or more.

Viraj Mehta — Equirus PMS — Analyst

Sure. And my last question would be regarding market share. This year, we have grown significantly better than the market because we know how market has grown, and Somany has definitely grown faster than the market. What is your aspiration for next year, let’s say, if the market leader says the market is to grow at 11%, 12%, what will be your aspiration of growth in volumes if that were to happen?

Abhishek Somany — Managing Director

I don’t think the market is going to grow at 11%, 12% domestically. That’s a correction, the tile industry may grow that much.

Viraj Mehta — Equirus PMS — Analyst

Yeah, total.

Abhishek Somany — Managing Director

Yeah, yeah. Total, sure. But let’s not talk of total, because all the branded players don’t export, right? So, where I’m not competing, what’s the point of really looking at any market share? So from an export point of view, if I double my export also, don’t want to move the needle for me in terms of total revenue. It’s such a low base. You understand what I mean? So let’s talk about basically the domestic. In the domestic, we are fairly confident of again achieving double-digit figures — a decent double-digit figures. So I won’t say it would be the 20%-odd figures, but it would be on the mid-teens higher-teens is what something we could think of in value terms.

Operator

Thank you. Mr. Mehta, may we request that you return to the question queue for follow-up questions.

Thank you. We’ll take the next question from the line of Ritesh Shah from Investec. Please go ahead. Mr. Ritesh Shah, your line is in talk mode, please go ahead with your question. Mr. Shah, please unmute your line from your side if muted. As there is no response from the current participant, we’ll move on to the next question from the line of Sujit Jain, ASK Investment Managers. Please go ahead.

Sujit Jain — ASK Investment Managers — Analyst

Just one question.

Operator

Mr. Jain, your audio is breaking.

Sujit Jain — ASK Investment Managers — Analyst

I can’t hear you. Can you hear me now? Loud and clear?

Operator

Yes, yes, yes. Loud and clear.

Sujit Jain — ASK Investment Managers — Analyst

Yeah. So, I just want to ask you how much for you would be demand, which is coming from replacement? Just to have a general sense, and how much would be from new projects?

Abhishek Somany — Managing Director

Sir, it’s always been very difficult to figure out that. But our best guess scenario is, the replacement demand in the tile industry, not for us, but the tile industry per se is between 15% and 20%.

Sujit Jain — ASK Investment Managers — Analyst

And because — and would you be more urban-centric overall in your distribution?

Abhishek Somany — Managing Director

Urban, yes, but not Tier 1 and Tier 2 towns. Our — large part of our sales, 75% and more — you can say 75% is coming from Tier 3, 4, 5 towns, maybe some bit of Tier 2. So, urban, yes, I don’t think Tile has really gone very, very rural. That’s something to look forward to in the future. As of now, we would be in concrete towns and not in the hut town. So that’s what we mean by urban and rural.

Sujit Jain — ASK Investment Managers — Analyst

Got that. So, similar percentages would be for you as well, most likely in terms of replacement versus new projects, right?

Abhishek Somany — Managing Director

Yes, sir. So, I — the second part of the question, which was urban. And the Tier 2, Tier 3, Tier 4, that was for Somany Ceramics, that was not for the tile industry. We are very in Tier 2, Tier 3. But as far as the replacement, that’s an industry phenomena, which I told you, which is between 15% and 20%.

Sujit Jain — ASK Investment Managers — Analyst

And number of distributors for you as things stand today?

Abhishek Somany — Managing Director

So we have approximately — on record, we have about 3,900 or 4,000 dealers. But what we’ve built to is approximately 2,400 to 2,500. And when I mean, when we build to, that means there’s a regular billing with these parties.

Sujit Jain — ASK Investment Managers — Analyst

And one last question. While we’ve seen pickup in real estate, there is some slowdown in terms of bookings of the numbers that real estate companies give out. Do you sense any hampering in terms of real estate demand because of that going forward?

Abhishek Somany — Managing Director

I think, the real estate has finally come back after a 10-year lull. And if I see across India, there have been new projects which are launched. And in real estate, we are the last to be consumed. So, therefore, whatever project gets launched today, we only come into the picture or in a sales situation, 18 months from inception — 18 to 24 months. But — and real estate is a large play for a lot of the Morbi players. So we will see a lot more of the Morbi players supplying to the real estate guys.

Sujit Jain — ASK Investment Managers — Analyst

One last question. I joined the call a little late. So, pardon me if this is a repetitive question. In terms of your guidance, in terms of volumes and over medium term as well?

Abhishek Somany — Managing Director

Sir, medium term is something which — it’s already on quarter four really. But for next year, we are guiding a mid-teen growth.

Sujit Jain — ASK Investment Managers — Analyst

And you think you can continue that over a three-year time frame?

Abhishek Somany — Managing Director

It depends on how quickly we grow next year. I don’t think I can predict three years. And again, the base would have increased, but I do believe that it would be in double-digits — obviously teens, not double-digits as [Indecipherable]. But obviously, in teens, we should be able to do at least for the next 24 months. And then, I think we are on a call every quarter, so I would recalibrate that for you. But next year at least, we are very sure of mid-teens.

Operator

Thank you. Mr. Jain, may we request that you return to the question queue for follow-up questions.

Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Hi. Am I audible?

Abhishek Somany — Managing Director

Yes, absolutely.

Ritesh Shah — Investec — Analyst

Yeah, yeah. Hi, sir. Sir, a couple of questions. First is, in your initial remarks, you indicated giving a certain percentage point discounts to drive volumes. I just wanted to understand your thought process from a perspective of price elasticity demand. We are a solid brand we have pan-India distribution. So, how is it that you take a call on a certain percentage discounts structurally push volumes? I would like to have a thoughts really.

Abhishek Somany — Managing Director

Really, discounts for the terminology are used generally incentivize the dealers. So you generally put in schemes to incentivize the dealer to pick up material in a muted market. So there has been no price reduction. Mind you, there has been no price reduction. It is just that we’ve given schemes. Now schemes goes in forms, which could be [Indecipheable] schemes, it could be the wide good schemes that could be credit not given to the dealer. So, all encompassing, it’s been approximately 1%, 1.2% extra discounting, which we’ve done to incentivize the dealer to pick up material in a muted market.

Ritesh Shah — Investec — Analyst

That’s helpful. But sir, when we do this, what is the competition that we look at? Is it the organized sector or is it Morbi?

Abhishek Somany — Managing Director

Always the organized sector. We have a 25% — 20% to 25% difference between us and the Morbi player. So if we start looking at that, then there’s no bottom.

Ritesh Shah — Investec — Analyst

Thanks. Perfect. That’s very useful. Sir, my second question is, can you detail on our fuel mix, say, LPG, long-term, medium-term contracts, biofuel, if at all, there is any mix on a quarter-on-quarter basis, that would be very useful.

Abhishek Somany — Managing Director

So last quarter, we ran a reasonable amount of plants, approximately 60% of our plants on LPG, right? And biofuel is only used for our spray dryer, nowhere else. That’s been used from inception. So we continue to use that. In the Northern plant, we used to use — pre the NGT orders of two years ago, we used to use coal in our spray dryer in a chain store. Now since the last two years, we’ve stopped using coal, and we’ve had to move to biofuel due to the NGT order. So, in the North, it is all biofuel to run spray dryer, and so is the case in most of our other plants. But as far as our kilns is concerned, which is the 85% of our energy goes into firing our kilns, 80% of our energy goes into firing our kilns. That we ran 60%, once again, I would repeat, of our total production on LPG last quarter.

As we speak, the LPG is virtually out because the gas prices have come down and LPG generally goes up in the winter months, that’s been the practice. We did not know that because we’ve never used LPG earlier. But right now, as we speak, I think about 10% to 15% of our plants are running on LPG, and the rest of the plants have moved to natural gas because natural gas has become at par or cheaper than LPG. And going forward, the way it is looking, I think in the months of February and March, most of the plants will go on natural gas, until LPG comes down further in the month of April and May, and this is completely fungible. So therefore, if LPG comes down a substantial amount than gas, we would move back to LPG. It takes only six to eight hours for us to move.

Ritesh Shah — Investec — Analyst

Wonderful. Sir, last question, how should one look at the pricing trends incrementally? So there is cost deflation. Do you think we’ll be able to maintain prices or how should we look at this?

Abhishek Somany — Managing Director

Yeah. So what has happened is that in quarter two end and quarter three, pretty much the whole amount of the quarter three, Morbi had already moved to LPG, which means that the reduction in gas price which we are seeing in LNG, especially in the Morbi area, that was already factored in because it was INR60, LPG was then costing them INR51, INR52. That INR51, INR52 has gone down to about INR49. So it’s not a big difference. So this was already factored into the pricing. Therefore, any further — in our Northern plant and our Southern plant, that is something we would be able to keep because Morbi’s pricing has already factored in about INR50 or INR49 a standard cubic meter of gas. In the entire quarter, it has already happened. So I don’t see any other further price corrections going forward because gas hasn’t fallen under that price.

Operator

Thank you. Mr. Shah, may we request that you return to the question queue for follow-up questions.

The next question is from the line of Nikhil Agrawal from VT Capital. Please go ahead.

Nikhil Agrawal — VT Capital — Analyst

Good evening, sir, and thank you for the opportunity. Sir, I was worrying like there was a [Indecipherable] on Saudi Arabia is about to be removed.

Operator

Mr. Agrawal, please use the handset mode. The audio is…

Nikhil Agrawal — VT Capital — Analyst

Okay, sure. Hello, is it better now?

Abhishek Somany — Managing Director

Yes.

Nikhil Agrawal — VT Capital — Analyst

So, sir, I was hearing that Saudi Arabia, they’re planning to remove the ADD, Anti-Dumping Duty, on Indian tiles. So just wanted to know, like do you have anything on that? And like how much would it benefit the organized players? Like if you could give some groundwork figure or something?

Abhishek Somany — Managing Director

So organized players never really exported to the Saudi when the antidumping was not there and when the antidumping was there. So it’s a Morbi play. So we don’t get affected either ways. But for India Inc., from a tile perspective, it would be a great advantage if this has to go. And you’re very right, even we’ve heard the same that they are planning to remove it. So, UAE has taken the lead. They have already removed the antidumping as we speak.

Nikhil Agrawal — VT Capital — Analyst

Okay. Sir, actually I meant that like — since anti-dumping is removed, so the players, they start exporting more? So indirectly, it would benefit the organized players, right?

Abhishek Somany — Managing Director

That’s right.

Nikhil Agrawal — VT Capital — Analyst

Okay. And anything from US as well? Like are they planning to remove the antidumping duty on there? Like India, they don’t have but on China or anything?

Abhishek Somany — Managing Director

No. Antidumping life duties are generally levied for five years, and it’s a definitive antidumping duty, of which only a year or maybe 15 months is over. It was put last January, if I’m not mistaken, the anti-dumping on China. So India has a good headroom. In fact, as we speak, the largest — single largest export to a particular country has now become the US, which earlier used to be the Saudi.

Nikhil Agrawal — VT Capital — Analyst

Okay. So when is the antidumping duty expected to expire on US — on Chinese tiles in the US?

Abhishek Somany — Managing Director

I just said, five years, only 15 months have got over.

Nikhil Agrawal — VT Capital — Analyst

Okay, okay. [Indecipherable], sorry. And sir, just one more question. Like — regarding biofuel, so you said that you like — your factories won’t shift to biofuels going forward?

Abhishek Somany — Managing Director

No, biofuel, you can only use for spray dryer. You cannot use biofuel even if you want to in kilns. So kilns are only fungible between propane, LPG and natural gas. — the radiata fungible between coal, biofuel, various kinds of biofuel and gas. So whichever is cheaper, we use in most of the plants. In the North, it is fungible, but I can’t use coal. So in the Northern plant, it is fungible between gas and biofuel.

Nikhil Agrawal — VT Capital — Analyst

Okay, okay. Got it, sir. That’s it from me. Thank you so much.

Operator

Thank you. The next question is from the line of Alisha Mahawla from Envision Capital. Please go ahead.

Alisha Mahawla — Envision Capital — Analyst

Hi, sir. Good evening. Thank you for the opportunity. Just wanted to understand the increase in finance costs. So, sequentially, the number has gone up quite substantially.

Abhishek Somany — Managing Director

Yeah, I would let Sailesh take that question. Finance costs.

Sailesh Raj Kedawat — Chief Financial Officer

Regarding increase in finance costs, it remains the same quarter-on-quarter.

Alisha Mahawla — Envision Capital — Analyst

The INR10 crores has become INR12 crores, which was INR7 crores in the first quarter, and similar amount in Q3 of last year.

Sailesh Raj Kedawat — Chief Financial Officer

Okay. Okay. You’re referring to the consumed number.

Alisha Mahawla — Envision Capital — Analyst

Yes. Sailesh Kedawat-C: There are some additional projects we put, right? There is a new project which has come. The finance cost is on account of that project. We’ve also seen sharp — hello?

Sailesh Raj Kedawat — Chief Financial Officer

Yeah.

Alisha Mahawla — Envision Capital — Analyst

Yeah. We’ve also seen a sharp increase in inventory on nine-month number versus March of ’22.

Sailesh Raj Kedawat — Chief Financial Officer

There is a muted demand. I think, inventory increased across the industry. You will see it across the industry. There’s a muted demand. And we have ensured that our production units are not shut down. We have continued running them at an optimal capacity, right, because we believe that demand is going to go up.

Abhishek Somany — Managing Director

Yeah. So, the manufacturing has run at 87% capacity, like I mentioned. So to that extent, the October, November, December were a muted demand. And as I said again, we’re getting into quarter four. So we don’t want to be in a situation where we don’t have enough file. So there’s been a little bit of a mismatch last quarter of approximately four to five days. If you see historically, our inventories in quarter four would have been approximately at the 50-day level, which is currently at the 60, 62-day level. So maybe four, five days was a mismatch. The rest of it is on the account of pure muted demand.

Alisha Mahawla — Envision Capital — Analyst

But when do we expect this to normalize? Because even for next year, they are saying in value terms mid-teens growth, which means that the volume growth will be slightly lower and the buildup of inventory looks kind of sharp from 275 to 400-odd is the number in the presentation on consolidation.

Abhishek Somany — Managing Director

Even this year — over last year’s square meterage, we’ll put in nothing less than 6 million, 7 million square meters extra this year in the market. So, next year, if you put in another 6 million, 7 million, so they see inventory is very easy to control. You lower your capacity utilization, you can control the inventory. So that’s very simple to do. But again, that eases the pressure on sales and marketing.

Alisha Mahawla — Envision Capital — Analyst

Okay. Any guidance on the margin, sir?

Abhishek Somany — Managing Director

Just to clarify, beyond the point, it’s a very voluminous material. So beyond the point, I can’t keep inventory. So at the end of the day, the plants do go into shutdown like I did in COVID times, because you can’t hold more than — it’s only this much inventory you can hold in the plant.

Alisha Mahawla — Envision Capital — Analyst

Sure, understood. Any guidance on when the margins can go back to the double-digits that we used to do for the previous two years and the aspiration of improvement.

Abhishek Somany — Managing Director

So I don’t think I can make any forward-looking statements there because there’s a serious amount of volatility in the gas pricing. But I do believe that if the gas pricing remains the same, and we are able to push in the amount of value volume we are planning to, obviously this would keep increasing a couple of hundred basis points over time, but I can’t make any forward-looking statement as to when this would happen, owing to the extreme volatility in the gas pricing.

Alisha Mahawla — Envision Capital — Analyst

But with gas now with INR53-, INR54-odd, like you said, and assuming it stays at this, can we expect sequential margin improvement?

Abhishek Somany — Managing Director

Sure.

Alisha Mahawla — Envision Capital — Analyst

If it stays at this INR53, INR54?

Abhishek Somany — Managing Director

But I would suppose that it would only keep going down month-on-month hopefully. So yeah, we can. We can assume that.

Alisha Mahawla — Envision Capital — Analyst

Okay. So sequentially, we can, or it will take some time? Got it. Thank you.

Abhishek Somany — Managing Director

Thank you.

Operator

The next question is from the line of Dhwanil Desai from Turtle Capital. Please go ahead.

Dhwanil Desai — Turtle Capital — Analyst

Good evening. My first question is the market leader in the call was indicating that the savings, which industry may get from the lower gas cost, may be passed on as a discounting. So are we likely to follow that? Or will we have to follow to ensure that we get the volume growth? Any sense on that?

Abhishek Somany — Managing Director

What did you say? I’m sorry, I missed you. You were not clear at that.

Dhwanil Desai — Turtle Capital — Analyst

Yeah. So essentially, market leader was saying that some of the benefits of lower gas cost will be passed on as a higher discounting. So, I mean, are we likely to follow that or we think that we’ll be able to hold on to our pricing and realization?

Abhishek Somany — Managing Director

So, I think they were at a higher cost than us. So I would think that they would be right in saying that in terms of South and West because South and West, we are at the same gas pricing. But any advantage which flows through in the North, because North power gas pricing is slightly higher than what we are in the West plant. Therefore, we should be able to get some benefits from the Northern plant.

In the Southern plants, we are at a much higher gas price than in the West plant. So from that point of view, we have anyway having to discount it further because we’re producing at a higher cost and the material which is coming in at Morbi, is coming at a lower cost because the gas pricing is lower. So until the South gas price also doesn’t start correcting sharply, there we will have to discount. And the rest, it’s a pass-through any which ways. But in the North, I do not think we would have that kind of pressure. We should be able to retain some margins after lowering of gas price.

Dhwanil Desai — Turtle Capital — Analyst

Sure, sure, sure. And second question is, you indicated that next year also, we are expecting mid-teen kind of a volume growth. And whatever that we hear from various industry peers, is that even in the current quarter, the demand environment quite muted. So what gives you that confidence that next year you’ll be able to get that mid-teen kind of volume?

Abhishek Somany — Managing Director

So I think what gives me the confidence for the demand to be picking up is, a, we the festivities, which happened in October all bunched together is behind us. And I think there was an extreme winter which is also behind us. And another thing is that a lot of the focus had moved as the economy opening up, especially with weddings, managers, etc, that also is something which is behind us. And coupled with that, we are seeing a revival in the real estate Coupled with that, we’ve seen that the inflation has also peaked out. So people were waiting the earlier gentleman had asked that there’s muted demand in terms of real estate being booked. Obviously, because the real estate gets hit when the interest rates go up, I think that interest rate cycle also, you will see in the next couple of quarters start going down, so buyers would start coming in again.

So overall, I think we should be in a much better position as what we were this year. And this year, there was another major issue that the dealer was buying only as much as he wanted, because gas prices were moving up and down pretty much on a 15-day basis. That kind of volatility I, at least, haven’t seen in the 25 years of my career. If do I voluntarily not there, the dealer is also that much more secure when it picks up the stock. So all of these combined, I think we’re definitely looking at a much better next few quarters. However, at the same time, I do believe that India, we are looking at the global scenario, at least for the next four year, rural India and a lot of the other parts of India are going to be under pressure. There is clear indications of money market being tight. However, our receivables have been very good. But generally, money market is tight. Secondary sales are not happening. So all those do effect, but those things will start getting eased out because last year has been a fairly exceptional year in terms of pretty much all commodity prices going through sky-high pricing. So those are the indicators which we feel that the worst is over and things can only get better from now unless otherwise another war happens.

Dhwanil Desai — Turtle Capital — Analyst

Just a follow-up on that. So I mean, do you think that in this entire thing that you have that next year, we’ll be able to grow at mid-teens kind of volume growth? Morbi holds the wild card in terms of export. That doesn’t happen as per plan. We may have really look at those assumptions.

Abhishek Somany — Managing Director

Sorry?

Dhwanil Desai — Turtle Capital — Analyst

Morbi, exports, if that doesn’t pick up as expected, then will we have to relook at those 15% volume [Indecipherable] number?

Abhishek Somany — Managing Director

No, I don’t think so because this year also, we’ve grown reasonably well. And I don’t think we can be as pessimistic as that because while China has an antidumping pretty much in the world, there is no reason for Morbi not to go up over there. Also, we are seeing that freight rates have absolutely gone result last year, which have come off in the last three months. Every month on month, it has started going down. There is no reason for credit rates to go up any further. So from that point of view, there is no reason for Morbi not to export, unless and otherwise there’s an antidumping initiated in India, on India, which currently that [Indecipherable] of Europe, that also has gone away. Europe has only levied a 6% antidumping. So we’re very safe there. So from that point of view, I don’t see any reason by India not to do exports.

Dhwanil Desai — Turtle Capital — Analyst

Got it, got it. Thanks, very helpful. Thank you.

Operator

Thank you. The next question is from the line of Gurneet Singh from Countercyclical Investments [Phonetic]. Please go ahead.

Gurneet Singh — Countercyclical Investments — Analyst

I would just like to get some sense on the advertisement and sales promotion expense for the nine months and also for the last year, financial year 2022.

Abhishek Somany — Managing Director

Last year, we did about INR46 crore, INR47 crores. This year, we’ll do close to about INR58 crores to INR60 crores.

Gurneet Singh — Countercyclical Investments — Analyst

All right. Is the spend also related to the muted demand that we’re seeing or is it just a routine increase?

Abhishek Somany — Managing Director

As a percentage, obviously, because we didn’t want to take off anything off the table from advertising because this is a long-term investment. But as a percentage, obviously, if we would have put in INR50 crore of revenue in quarter three, my percentage would have been pretty much okay. So, somewhere indirectly directly, you’re right. It does have an effect. The muted demand has an effect.

Gurneet Singh — Countercyclical Investments — Analyst

All right. That’s it from my side. Thank you.

Operator

Thank you. The next question is from the line of Achal Lohade from JM Financial. Please go ahead.

Achal Lohade — JM Financial — Analyst

Yeah. Good evening. My question was with respect to AMP. Can you help us with the 3Q spend in 3Q FY ’23 and Y-o-Y last year, same quarter?

Sailesh Raj Kedawat — Chief Financial Officer

Yeah. So in Q3, it’s INR13 crores current quarter. And in nine months, we reached to INR40 crore plus, and we are expected to reach to a level of INR58 crores, INR60 crores for the year. So, our spend is much higher in the current quarter, Q3. The corresponding Q3 was lower base for various reasons. So that was on a lower number, around INR10 crore, INR12 crore Q3 last year.

Achal Lohade — JM Financial — Analyst

And nine months?

Sailesh Raj Kedawat — Chief Financial Officer

Nine months last year was approximately INR25 crores, INR27 crores.

Achal Lohade — JM Financial — Analyst

Got it. With respect to the demand part of it, Abhishek ji, you mentioned that basically the hope is driven by the inflation and interest rates and the macro part of it, if I hear you right, and exports are expected to remain robust, right? So, from pricing scenario perspective, I know it could be a repetitive question, but is it fair to say that the further pricing pressure is unlikely from Morbi in terms of realization?

Abhishek Somany — Managing Director

So, currently, yes, you’re right. Because like I mentioned that they had already factored in a lower gas price because they were running on LPG. Therefore, they’ve only moved from LPG to natural gas because it’s an easier fuel to handle. But the pricing really hasn’t changed for them. So currently, there is no reason for them to reduce pricing.

The other reason they were reducing pricing was basically — so the problem is not in the top 20 Morbi players. The problem was at the bottom 400, 500 Morbi players who were basically so strapped for paying GST, paying for gas, paying for salaries. They were willing to sell the tiles at any price, even at a loss, to keep running their cash flows. It was level on the deep sea, one side it was shutting the plant and X amount of loss, one side, it was discounting it and reducing the loss. So I think that was the phenomenon happening. And as you very rightly know that in Morbi, everything happens on two accounts, on cash and on check. So I think they had never envisaged that the gas pricing would go so high.

So all their books had gone completely haywire from that point of view. And therefore, they started selling. So there’s a new terminology in Morbi. There’s a separate pricing, which is called a one-time pricing. So that’s what really plays spoil sport. I think that seems to be over us because the gas volatility is kind of behind us. I hope so.

Achal Lohade — JM Financial — Analyst

Okay. And with respect to channel inventory, how do you see has the channel already stocked up as Morbi has been pushed and if the other peers have also pushed.

Abhishek Somany — Managing Director

No. I think the month-end pushes are always there, but I doubt. I don’t think the channel is anywhere close to where it used to be in terms of stocking for two reasons: A, it’s been very, very early in the days where gas prices have started coming down. So, they are anywhere we’re very skeptical of rice price is going up or going down. Now that it’s going down, they are always scared that tomorrow the prices may come off even more. They’re not sure how much the gas prices would come down. They’re not sure of who was using LPG and who was using LNG. So I think they are skeptical and they are tentative to not stop too much and then having a problem of next year — next month lifting to be at a lower price and the previous month would have been money stuck. So number one is that.

Number two is that great indicator is that my receivable cycle is not under pressure, touch wood. My receivable has only become better. So on one side, I’m saying that it’s muted demand and money market is tight. But on the other side, my receivable cycle is the same or slightly better, which is a clear indicator that the dealer is buying only as much as he can do in secondary sale. So he’s not stocking too much. The minute the dealer started stocking, that’s when you start seeing the receivable cycle deteriorating. So these are the two indicators which is — with a reasonable amount of confidence, I can say that the dealers are not hugely stopped. Obviously, month end, they get a little extra stock but not hugely stock like how it used to be earlier.

Achal Lohade — JM Financial — Analyst

Got it. If you could help us with the nine months, what is the cash flow from operation and the capex number, consolidated level?

Abhishek Somany — Managing Director

Sure. Sailesh, do you want to take that?

Sailesh Raj Kedawat — Chief Financial Officer

Yeah. So, largely, actually it is in tandem to the cash profit generated by the consolidated P&L because there is no major movement as far as working capital cash flow is concerned. In fact, almost INR100 crore is locked in, in additional inventory at a consolidated level. So adjusting that, we are at the similar level of cash flow generated from the cash profit of the P&L.

Achal Lohade — JM Financial — Analyst

Any numbers, Sailesh, you could help us with?

Sailesh Raj Kedawat — Chief Financial Officer

It’s not readily available in front of me. We can connect offline.

Achal Lohade — JM Financial — Analyst

Sure, sure. And just the last question, if I may, with respect to capex. How do we look at what capacity addition there? And what kind of capex we would look at for FY ’24, ’25?

Abhishek Somany — Managing Director

Yeah. So, as you know, the Somany Max plant, which is coming up in Morbi at a cost of approximately INR170 crores. That is the only capex which is there. Partly it has already been done. Some part of it is still to be done in the next year. So that is one capex which we are doing. There could be, obviously, routine capexes around the existing system. And as we have just announced, we are looking at setting up a JV. We’re exploring to set up a JV in Nepal, which would — which I think I would be in a better position to tell you exactly what the capex needs would be and how that would be structured, maybe in the next call.

Achal Lohade — JM Financial — Analyst

Got it. Thank you, and wish you all the best.

Abhishek Somany — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Keshav Lahoti from HDFC Securities. Please go ahead.

Keshav Lahoti — HDFC Securities — Analyst

Hi. Thank you for the opportunity. I just want to understand why have you increased the ad spend in this tough quarter of quarter three when fuel prices were already high? What was the idea behind this?

Abhishek Somany — Managing Director

No, it’s a long-term investment which we do in any way generally in the quarter three, quarter four, expense are larger because we typically in the tile industry start advertising after the clutter of the Diwali season. So, a little part of advertising happens in that window, which we get after the rains and before the Diwali season, and then most of the advertising kicks in after the Diwali season. So, it generally blows up, if you’ve seen historically also, in quarter three and quarter four.

Keshav Lahoti — HDFC Securities — Analyst

Got it. And what sort of margins you would be looking in next quarter? And whether the dealer discount will also further increase in quarter four as fuel prices are coming down?

Abhishek Somany — Managing Director

No, the dealer discount is not related with fuel prices. The dealer discount and schemes are all generally related to how the market is. So, the way it is looking is not soup [Phonetic] of the market. So maybe a little bit of discounting continues in this quarter to push in that extra material. We’re all also sitting on a decent amount of inventory and capacity utilization is always number one on our card. So, to that extent, dealer discounting may happen a little bit, not discounting in terms of cash discounting, but probably in terms of schemes and incentives.

On the other hand, as far as margins are concerned, it obviously would be better than the quarter three, but how much better, it would only depend on how much the dealer discounting and how the market performs and mostly to do with fuel. Because fuel goes down, but we don’t have 100% BI as to — we’re not sure exactly how gale really builds us. It’s normally on a three-month moving average of the Brent. But there is a little bit of a slip between the lip and the cup. So, as and when, we would know, but yes, definitely, margins would be better. A, there would be better volume in the quarter and also there would be slightly better margins if the gas prices remains the same.

Keshav Lahoti — HDFC Securities — Analyst

Okay. Got it. Although we have discussed the fuel targets, is it possible for you to share reason why it’s primed for Q3, fuel prices?

Abhishek Somany — Managing Director

Sorry?

Keshav Lahoti — HDFC Securities — Analyst

Region-wise, trend of fuel prices for Q3, not less than South.

Operator

Mr. Lahoti, sir, please use the handset…

Sailesh Raj Kedawat — Chief Financial Officer

Region-wise fuel prices, I think…

Abhishek Somany — Managing Director

I don’t hear you.

Sailesh Raj Kedawat — Chief Financial Officer

Hello?

Keshav Lahoti — HDFC Securities — Analyst

Yeah, just on region-wise trend of fuel prices.

Abhishek Somany — Managing Director

Okay. In the North, it is approximately INR57 in Q3. In the Morbi area, it was INR62, and in the South, it was INR61. Now as we speak, the Northern plant from INR57 has gone down to approximately INR52. And the Morbi area from INR63 has gone down to INR50, and the South area remained the same.

Keshav Lahoti — HDFC Securities — Analyst

Okay. So South is at INR50 right now. Perfect. Hello?

Abhishek Somany — Managing Director

Yes.

Keshav Lahoti — HDFC Securities — Analyst

Yeah. So South was INR61 in Q3, you said. Perfect.

Abhishek Somany — Managing Director

Yes, yes, yes. And it remains the same, plus or minus INR50.

Keshav Lahoti — HDFC Securities — Analyst

Got it. One last question from my side. So, there is talks about Morbi going for a further one-month shutdown. So what is the scenario? And what is your take on this, whether this is materialized or not?

Abhishek Somany — Managing Director

That’s news to me. I haven’t heard it. And when were they talking about the shutdown, if you — if whatever you heard.

Keshav Lahoti — HDFC Securities — Analyst

So they shut a few weeks back.

Abhishek Somany — Managing Director

And when? What was the timing of that? What were they saying?

Keshav Lahoti — HDFC Securities — Analyst

So we heard there is an extra stock in Morbi. So possibly, they might take a further one-month type of a shutdown to lower the inventory levels.

Abhishek Somany — Managing Director

I’ll find out. First time I’m hearing this in the last couple of months.

Keshav Lahoti — HDFC Securities — Analyst

Okay. Thank you.

Abhishek Somany — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Karan Bhatelia from Asian Markets Securities. Please go ahead.

Karan Bhatelia — Asian Markets Securities — Analyst

Hi, sir. Thank you for the opportunity. Sir, how do we see our bathware portfolio shaping up in terms of revenue and in terms of margins as well for the next two years?

Abhishek Somany — Managing Director

Yeah. So revenue, we were expecting a much better growth this year. We should be able to manage a plus 20% growth for sure. But the margins are flat than last year at about 12%, 13% EBITDA level, and it continues to be the same. Next year, we are — we would be focusing a lot more on Bathware. So we should be able to grow at the same pace or even better in the next one year at a higher base.

Karan Bhatelia — Asian Markets Securities — Analyst

Right, right. And what kind of dealer overlap do we see in terms of tiles and Bathware going ahead? And then SKU addition with respect to the same?

Abhishek Somany — Managing Director

Yes. SKU addition keeps happening quarter-on-quarter, any which we recently we launch with some new SKU additions in colored faucets and some other pieces of sanitaryware. As far as dealer overlap is concerned, well, 90% of the dealers stock sanitaryware, like they stock tile. But not all of our dealers are dealing with our sanitaryware. The current dealer overlap is approximately — if I’m not mistaken, I would want to get back to you. But what I remember, last — I mean I had asked them is, I think about 600 dealers is an overlap, which we have. So good headroom over there to convert other tile dealers who are loyal to us to sanitaryware.

Karan Bhatelia — Asian Markets Securities — Analyst

Right. Right. And so sir, one bookkeeping question on gross debt and capex outlook for this year.

Abhishek Somany — Managing Director

Yeah. So, capex outlet, I just mentioned, the balance amount of the capex of the Somany Max plant is something which will happen during the course of the year. That plant, we hope to start in August, September of this year, rather fire up in August, September of this year. And as far as the other cuts concerned, other than routine capex, we are looking at a proposal to set up a JV in Nepal, very early stages. A little more of that would be available for you in the next call. But yes, we are thinking of putting up a JV in the Nepal.

Karan Bhatelia — Asian Markets Securities — Analyst

And gross debt numbers as one did.

Abhishek Somany — Managing Director

Yes. So gross debt number, Sailesh, I would let you answer that.

Karan Bhatelia — Asian Markets Securities — Analyst

Consol numbers.

Sailesh Raj Kedawat — Chief Financial Officer

Yeah, consol gross debt number today is INR523 crores.

Karan Bhatelia — Asian Markets Securities — Analyst

Okay. Thank you.

Abhishek Somany — Managing Director

Thank you.

Operator

Should we move on to the next question?

Abhishek Somany — Managing Director

Yeah. Go ahead.

Operator

Ladies and gentlemen, we will take the last three questions. The next question is from the line of Aasim Bharde from DAM Capital Advisors. Please go ahead.

Aasim Bharde — DAM Capital Advisors — Analyst

Yeah, hi. Good evening. Just wanted two clarifications. First, on the FY ’24 guidance, the mid-teen growth you talked about was volume, right? And value should be a similar level? Or would that come off despite the product mix improving?

Sailesh Raj Kedawat — Chief Financial Officer

So no, Aasim, so just a clarification. The mid-teen growth was with respect to the overall growth, though it would be primarily driven by the volume, but that was for the overall number of growth.

Aasim Bharde — DAM Capital Advisors — Analyst

Okay. Okay. Got it. And just — I don’t know if you mentioned it, but did you talk about FY ’23 volume growth, nine months? You have done 11%. Would be able to do the same or better for the entire FY ’23?

Sailesh Raj Kedawat — Chief Financial Officer

I think we have given a directional guidance. Let’s keep with that for the time being.

Aasim Bharde — DAM Capital Advisors — Analyst

Okay. Sure. And just last clarification. What was the reason for higher financial costs in Q3? I missed that.

Sailesh Raj Kedawat — Chief Financial Officer

I think it was clarified earlier also. It was primarily on account of two. One, the increasing interest costs whatever increase — continuous increase happened quarter-on-quarter over the last 12 months, that would be broadly an external factor and link with the repo rate, which is consistently going up. And second, the additional few debts, which is coming in our two subsidiaries, two JVs with respect to the expansion. So, these two things put together resulted in the additional finance costs Y-on-Y.

Aasim Bharde — DAM Capital Advisors — Analyst

Okay. Just what was the gross debt number for a six-month period? You said INR523 crores for nine months? How much has that increased in Q3?

Sailesh Raj Kedawat — Chief Financial Officer

So Q3 is by and large intact, there is no major change in that number as far as September versus December. But the finance cost, which you are comparing is Y-on-Y, that was which is one year back. So these is additional…

Aasim Bharde — DAM Capital Advisors — Analyst

Also there has been some increase, I think, INR2-odd crores. And I think it has increased from Q1 levels as well. So actually, that was basically what I wanted to know.

Sailesh Raj Kedawat — Chief Financial Officer

So that’s primarily because of the rising interest costs, which is happening on every bimonthly basis. So that’s primarily because of that. Otherwise, gross number movement is not more than INR20 crores, September versus December.

Aasim Bharde — DAM Capital Advisors — Analyst

Got it. Got it. Okay. Thanks, Sailesh [Phonetic]. Thanks, everyone.

Operator

Thank you. The next question is from the line of Viraj Mehta from Equirus PMS. Please go ahead.

Viraj Mehta — Equirus PMS — Analyst

Sorry. My questions had been answered. Thank you.

Abhishek Somany — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Sir, I just wanted to know your thoughts behind Nepal, if that’s possible. That’s one. And in notes to account, that is point number 5, which talks about Board had approved INR115 crores towards Somany [Indecipherable] Private Limited. Sir, if you can just explain those two points, that would be great, sir. Thank you.

Abhishek Somany — Managing Director

So, Nepal, we have a decent sale, and there has been a recent increase in duty in Nepal for Indian building material products, a lot of them. And tiles being a voluminous product, we saw an opportunity to put up a small plant there. The market size is nothing very large. So, therefore, we will put a small plant, and we’re looking at a decent market size going forward. And we are also exploring the possibility that 75%, 80% of the plant gets consumed in Nepal, and maybe 15%, 20%, depending on how the plant is structured and what product we make, 15%, 20% of that plant can also come back to India and some border towns. But largely, the plant will be focused towards Nepal. So that’s the view which we took in the past.

We are in exploratory stage. I think figuring out which product to put reasonably advanced stages as far as the other thing is concerned of identifying land area, etc. So I will have a lot more data for you, what we are doing in Nepal by the next call. So obviously, before that next call, but the next opportunity we will get to speak to you is in the next call.

And the second question, I would like Sailesh to take that up, please.

Sailesh Raj Kedawat — Chief Financial Officer

Somany [Indecipherable] today current structure of funding is that this company is fully funded by the holding company, Somany Ceramics only. The current mix is a mix of debt and equity, where we have infused INR115 crores of unsecured loans to the company. We had a relook at the funding of the company. And having regard to the current market scenario, we found it to be prudent to be funding it more through equity structure. So, this INR115 crore predominantly is for restructuring of the loan which is there. So this money will go, and a substantial part of this money will be reused for repayment of outstanding unsecured notes.

Ritesh Shah — Investec — Analyst

Sir, any specific figure for us to revisit the capital structure for this particular entity?

Sailesh Raj Kedawat — Chief Financial Officer

So, today, the funding is INR10 crores of equity and INR115 crores of loans, right? We are putting additional INR115 crores in investment in this company. Predominantly this INR115 crores will be used for repaying the INR115 crores of unsecured.

Ritesh Shah — Investec — Analyst

Okay. But was there any specific figure for us to do that?

Abhishek Somany — Managing Director

The trigger was to basically make sure that on the other one. On one hand, you’re servicing the likely very likely said, 100% of the loan was given by Somany, so there is no bank loan. So it was going from one pocket coming to the other pocket. So, the only reason for this was to give that particular SPV a little bit of a breather in a muted market and very high gas pricing.

Ritesh Shah — Investec — Analyst

Sure. This is helpful. Thank you so much.

Operator

Thank you very much. That was the last question in queue. As there are no further questions, I would now like to hand the conference over to Mr. Somany for the closing remarks. Thank you, and over to you, sir.

Abhishek Somany — Managing Director

Thank you, ladies and gentlemen, for joining us for the Q3 FY ’23 earnings call. I hope that this quarter is slightly better and the volatility of gas and various other inflationary pressures hopefully are behind us or starting to taper off. We do believe in the India story, and the India growth story. So, continuously putting in more capacity, and we’ll continue to strive to do better margins and better sales. It’s going to be a tough quarter, and it’s also looking at a tough year ahead, but we are quite sure of doing a mid-teen overall growth, value-add volume. So, hoping for the best and look forward to an earnings call in May. Thank you so much.

Operator

[Operator Closing Remarks]