Somany confident of improving margins going forward

The EBITDA margin of Somany Ceramics in the second quarter of FY17 came in at 8.7 percent compared to 6.6 percent year-on-year. The company bettered Street's expectations of 8.3 percent. Abhishek Somany, Managing Director of the company, is confident the company will be able to sustain margins and says the margin will improve going forward.The margin improvement was led by glazed vitrified tiles, says Somany.The company reported a 10.8 percent rise in volume growth in the second quarter of current fiscal. The net profits also increased to Rs 23 crore in the quarter from Rs 10.6 crore year-on-year.Below is the verbatim transcript of Abhishek Somany’s interview to Reema Tendulkar and Prashant Nair on CNBC-TV18. Prashant: Could you categorise the quarter and how you see it in terms of the numbers you have put out? Numbers look good. A: The quarter has been slightly better than the Q1 which we concluded in June. So, we have a 10.8 percent growth in both value and volume. So, that has been pretty heartening to see that the volume has kicked back again. There has been slight improvement in the retail sales since September, that is what we have noticed. So that has lead to this particular growth. Coupled with the new glaze vitrified plant which we had started of which only the June sale kicked in the last quarter. This quarter the plant was stabilised and we were using pretty much 75-80 percent of that capacity. So, that would continue to improve over the next few quarters until it comes to 100 percent capacity. So, that also lead to the volume growth and contributed in also the bottom-line. Reema: Could you tell us what the exact volume growth was in Q2 and what are you forecasting for the rest of the year by way of volumes? A: 10.8 percent was the volume growth in Q2 and if you take as H1 it was about 8.6 percent was the volume growth as far as H1 was concerned and going forward Q3 would be similar. Q4 we are a little tentative because Goods and Services Tax (GST) would be kicking in April 1. Therefore we are not too sure as to what the rate would be and how the dealers will react in taking in stocks but that is going to be purely a situation where the March sales if at all that happens would probably be slightly lower and then it would pick up in April. So, I am a little uncertain about that. I would be able to comment a little more with surety maybe after the Q3 results. Prashant: Could you talk to us a little bit about the full year number as you see it? What would that in your assessment come in at? A: Like I said if the GST kicks in then the full year number we are looking at is similar about 7-8 percent growth. If the GST gets postponed for any reason from April to a little later we would probably be able to better the growth then that case the March sales would be much better than what it would be if GST had to kick in. Reema: On your margins you have expanded your margins by nearly 210 bps on a year-on-year (Y-o-Y) basis, 8.7 percent. What lead to that and margin sustainable around 8.5-9 percent mark? A: That is right, margins will only get better, it is sustainable at this level. It is purely lead by the glazed vitrified tile which has kicked in and also our continuous efforts to sell more of the value added tiles and also a continuous effort to sell more of a vitrified tiles as a segment. Coupled with that we have also done fairly well in the sanitary ware and faucet segment. We have had a reasonable growth in the sanitary ware and faucet segment. Approximately 36 percent growth in both these put together. So that also has lead to better margins. Like you know the sanitary ware and fittings segment has a slightly better margin than tiles as it is in steady state. Prashant: In a way if you step back would you say growth has essentially bottomed out, revenue growth with or without GST has bottomed out and if you could talk a little bit about how much would you have to spend on advertising for example given challenges and competition etc? A: Advertising, generally a benchmark in this industry is about three percent of revenue. We have stepped that up a little bit. We have about 3.2 - 3.3 percent of revenue this quarter but that would even out to approximately 3 percent at the year end and yes you can say that the volume and value both to an extent have bottomed out here where we are seeing improvement in retail. Apart from retail we are also looking at the government spending on infrastructure. So, if you see steel and cement which has started picking up in terms of price steel and cement has started going up, the consumption is going up which is a great sign for us because generally when steel, cement goes up between 12-15 months as a lag for tiles we are the last in the building material as far as finishing is concerned. So, therefore it is only better times for us going forward. So, you could be right in saying that we have bottomed out here and it will only get better from here.