Shankara Building Products Ltd
NSE:SHANKARA
Shankara Building Products Ltd
NSE:SHANKARA
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Ladies and gentlemen, good day, and welcome to Shankara Building Products Limited Q2 FY '25 Earnings Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Varun Jain from Dolat Capital. Thank you, and over to you, sir.
Thank you. Good morning, everyone. So today, we have been joined by the management team of Shankara Building Products. So we have Mr. Sukumar Srinivas, Managing Director; Mr. C. Ravikumar, Director; Mr. Dhananjay Srinivas, Vice President; and Mr. Alex Varghese, CFO, who I would now hand over to Mr. Dhananjay for opening remarks, followed by them. We'll have the Q&A. Thank you. Over to you, sir.
Thank you. A very good morning and a very warm welcome to Shankara Building Products Limited Earnings Conference Call for the quarter ended 30th September 2024. Joining me today are Mr. Sukumar Srinivas, Managing Director; Mr. C. Ravikumar, our Executive Director; and Mr. Alex Varghese, our CFO.
I would like to remind everyone that this call may contain forward-looking statements, which are predictions, projections and other estimates about future events. These statements are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially.
Our presentation for this call has been uploaded to the exchange. I hope you've all had the opportunity to review it.
The first half of the fiscal year saw some micro weakness -- macro weakness amid election-led slowdown in construction activity compounded by a severe rain in several parts of India and softening in steel prices. Despite this, we are pleased to report that Shankara Building Products has demonstrated a resilient performance.
We achieved a healthy steel volume growth of 25% year-on-year and a robust non-steel revenue growth of 35% year-on-year. Our overall revenues grew by 15% year-on-year, reaching INR 2,620 crores for the half year. Our Q2 revenue was INR 1,329 crores, a growth of 16% as compared to Q2 FY '24.
As India's largest steel tube marketplace, Shankara continues its strong hold in the steel tube segment. We saw volume growth of [ 25% ] year-on-year, reaching 0.25 million tons in H1. Historically, steel tubes and pipes has been our key strength where we command our sizable market share. We have, over the last few years, started focusing on other steel segments such as flat, long, long products, roofing and TMT. Our overall steel volumes were at 0.4 million tons in H1. We are confident of achieving 0.8 million tons in FY '25 with an aspiration to grow to 1 million tonne volume by FY '25-'26.
We have a strong distribution network in tiles with leading, including APL Apollo, AM/NS and JSW, which will help us achieve these numbers.
Our non-steel portfolio also showed robust growth with 35% year-on-year growth in revenue in H1. A growth across all subsegments, including plumbing, sanitary ware, tiles, electricals, paints, hardware and accessories. Notably, our sanitary ware and tile segments grew by 33% and 46%, respectively. The strength of our existing brands and expansion of our -- marquee domestic and international brands continues to yield results.
Our private label, Fotia, particularly grew in excess of 30% year-on-year. We are also excited to announce in operation of our 18,000 square feet experience center in Morbi under our brand Fotia in September, which offers an extensive collection of innovative designs and sizes.
This center was set up as a strategic hub to enhance visibility of our brands as well as help us to expand our presence Pan India in the coming years with the long-term intention to explore opportunities in exports.
In Q2, we launched new products such as sinks and adhesives under the Fotia brand. We continue to explore more opportunities as we move ahead. Overall, we are confident of the achieved -- we are confident of achieving a sustained growth momentum with at least 30%, 35% CAGR growth in the segment for the coming years.
In order to sustain our growth momentum, our company has identified 10 strategic locations to set up fulfillment centers in this fiscal. We are happy to inform that we have successfully operationalized 4 new fulfillment centers in H1, which include our Fotia Center in Morbi, a nonsteel center in Bangalore, a hybrid store in Kerala and a nonsteel center in Hyderabad.
In the first half, we have grown rapidly in the Western and Central regions, around 60% and 40% year-on-year, respectively, in H1, together contributing to 18% of our top line. In this quarter, we also upgraded our e-commerce platform, www.BuildPro.store. We added a number of products including steel to the platform. The team is continuously working to strengthen our digital presence and provide a comprehensive building material solutions platform.
Despite a tough macro environment, an approximate 10% downward correction in steel prices, we were able to maintain our operational profitability in H1. Our EBITDA for the half year was at INR 79 crores, a growth of 11% year-on-year with an EBITDA margin at 3.01%. Our EBITDA margins in the nonsteel segment remained steady at 6%.
Q2 was a challenging quarter. The quarter witnessed a slowdown in the construction and infra segments. This was primarily due to heavy rains witnessed in most of our [ annual ] operations. Steel prices softened substantially over the quarter. This was due to a subdued national and international demand, increased supply from China, which led to a steep fall in steel prices in the international market. This had an immediate impact in the domestic markets, too.
The falling prices impacted our profits for the quarter. EBITDA for Q2 FY '25 stood at INR 38 crores and at stood at INR 15 crores. Our PAT for the half year FY '25 was INR 31 crores. Our profitability is impacted by the inventory loss due to falling fuel prices and certain costs incurred in branding, advertisement and marketing towards long-term sustainable growth of our nonsteel business.
The company continued its discipline in managing working capital. This is reflected in a reduction in our interest cost by INR 2.5 crores over the previous quarter. Our [ cycle ] was sustained at approximately 30 days.
We are well on track to demerge our Building Materials marketplace business, which has consistently delivered significant value. To simplify our business structure and pursue our focused capital allocation strategy, the marketplace business generated INR 2,417 crores in revenue, and the manufacturing business generated INR 672 crores in revenue in H1. The Marketplace business continues to be a superior generator of returns with a ROCE of -- for H1 at 28%. We are -- working towards optimizing operational efficiencies and competitiveness in the manufacturing business, which has led to a 50% growth in capacity utilization in H1.
The demerger scheme has been filed with NCLT, and we have received the creditor consent. We expect the scheme to be implemented before the end of this fiscal.
Going forward, Shankara continues to remain bullish in our steel business. Historically, November to March is the positive month season for building materials. In this environment, we are confident of sustaining our growth momentum for our steel as well as our nonsteel segments. We believe that steel prices are stabilizing. This will help us improve our margins and close the year on a better note.
Shankara remains a unique business model, being the only organized player as an integrated marketplace, combining retail and wholesale business in the building materials space. We have over 126 fulfillment centers, including 92 retail counters. We have over 1 lakh customers spanning 10 states. We have a strong physical presence in Tier 2 and Tier 3 cities apart from metros.
We represent all the leading brands from JSW, AM/NS, APL Apollo in Steel to Jaguar, Color, Kajaria, Simpolo, et cetera, in fitting, sanitary ware and flooring. We represent have Jaguar lighting in the Electrical segment as well as Nippon in Paints & Adhesives. We have recently added Norton appraisers, a subsidiary of Singobin and many more.
We probably represent the largest number of brands and are present in the most number of verticals in the building material industry. We have a dedicated sales force who are in the field, meeting and onboarding potential customers on a regular basis. Apart from this, our last physical presence, we have a comprehensive e-commerce platform. This hybrid model set us apart from the competition.
With this, I would now hand over the call to the moderator for Q&A. Thank you.
[Operator Instructions] The first question is from the line of [ Viyesh ] from Stallion Asset.
I just wanted to understand more about your marketplace business. So just to reiterate your guidance, do we believe that we can grow at 30%, 35% in FY '26 and '27? And our EBITDA margins can be north of 6% here?
So just to clarify, when we talk about EBITDA margins of 6%, that's exactly in our nonsteel segment, and we are looking at that 30% to 35% growth in the nonsteel segment. Overall, we're looking at the marketplace having the 20% to 25% CAGR in the coming years. And we're hoping that EBITDA would be anywhere up of 3%.
Okay. And how many number of fulfillment enters do you intend to add in the next 2 years here?
So currently, we have about 126. We will be adding about 6 this year further. We've already added 4. So in the next 2 years, we will certainly be adding another 10.
So I'll come back in the queue, sir. Just -- maybe just one more questions, sorry, if I can ask. In your balance sheet, I'm just looking at the interest-bearing trade payables. So I think you paid some interest on your trade payables, right?
Sorry?
Are there some trade payables which are interest-bearing in your balance sheet?
[indiscernible] our management generally, from time to time, keeps evaluating the options of debt financing versus creditors as a means of funding working capital, which is very good. So we do have acceptances largely in our trade payable partially. So I think the -- yes, to your question, the answer is yes. [indiscernible] only.
Okay. So these are all acceptances, right. Right. But I mean, why have the margins gone higher if you pay them early, just so I understand.
Margins in terms of -- is it gross? Is it EBITDA?
No, gross, gross level, I'm sorry.
The gross margins, if you really see, we have maintained a steady pace. There has been some impact in the gross margin, primarily because of the inventory valuation, some of the hits we have taken because of the steel price has come down. So that is one area where we have seen some. Otherwise, the gross margins have remained quite steady if you compare H1 last year to H1 this year.
Okay. Okay. Okay. And what is -- just last question. What is the number of trade acceptances in total trade payables, if you have that data?
[indiscernible] [ supposedly around ] [ INR 450 crores this year. ]
Okay. INR 450 crores. Okay. Okay. Got it.
The next question is from the line of Amat Soni from [indiscernible] Analytical Advisory.
Am I audible?
Yes, we can hear you.
My question is, what is the company demand outlook for the industry in Q3 and Q4 of FY '25 and there any specific trends and external factors that you anticipate will significantly impact demand in this quarter?
No. In the coming 2 quarters, we anticipate that it should be good because there is an infra revival. I mean, generally now, if you look at it, as we have mentioned in the opening speech that generally the quarter 3 and 4 post the monsoon is generally a strong demand quarter. So I do see that there would be a strong demand revival in the coming 2 quarters vis-a-vis what we saw in the last 2 quarters.
The next question is from the line of Jatin Damania from Swan Investments.
Sir, a broader question, I just want to understand, you indicated that these -- on the nonsteel, our margin is in the range of 6% to 6.5%. And in the previous call, you indicated a margin of [ net ] about 3% on the steel business. So just wanted to understand, if you look at the current quarter, despite the improvement in the operating leverage and the growth in the nonsteel business, we have seen the sequential decline in the margin. I mean, did we have any one-off cost or inventory write-down during the quarter. Can you help us with that?
Yes. We did have a one-off write-off on the inventory costs in the last quarter. [indiscernible]
Sir, can you quantify that?
Quantification is approximately around INR 12 crores.
INR 12 crores. Okay. And sir, are you [indiscernible] operation definitely INR 617 crores of the revenue that we did in 1H. Can you help us understand what was the capacity utilization in [ half 1 ] in terms of the margin for the manufacturing business?
Yes, sure. So now if you really look at the manufacturing businesses, which is probably the most changed because of the -- the manufacturing largely in the line of steel. So now coming to the capacity utilization, we have improved the capacity utilizations, so our primary focus in terms of the manufacturing is, a, first, we start improving the capacity utilization, which we have -- it's been languishing at around 30-odd percent over the last some years. So the first target was to take it up to at least 50%, which we have achieved in the first half. This is particularly in the last quarter. So that was number one is the strategy.
Number two, we do see that, going forward, definitely, as the second strategy was to get it out. If you look at the first quarter versus the second quarter, manufacturing is in the positive side, which is, again, very, very important. So I think that the 2 clear objectives the company had, we have achieved in quarter 2.
So now going forward, we will sustain the manufacturing capacity at this level. This may be a marginal growth further, a; b, there will be greater focus on improving the margins, which is what we hope to achieve in the coming 2 quarters.
So what margins are one to assume for the manufacturing business?
I think at an EBITDA level, our immediate target would be to achieve 3.
3%?
Yes.
Sir, lastly, I mean definitely, I mean, if you have it, can you give us the number of the EBITDA in terms of the nonretail? And what was the revenue contribution from the Ceramica and the collection of Ceramica in Karnataka, Maharashtra and Tamil Nadu?
See, the Ceramica, the tiles, there has been a growth of around 30% in Q2 compared to the earlier quarter. That is number one. Number two, as far as the traction in Tamil Nadu and Maharashtra, just a minute, we'll just give you the numbers in a moment. Specifically, Maharashtra...
Tamil Nadu was in line with the overall. It was at around 35%. Maharashtra was a tad lower. I think it was around 20%.
Sir, how [indiscernible] look at it because our key focus was on these 3 states, Karnataka, Maharashtra and Tamil Nadu. So are we seeing any significant improvement because, I mean, I agree the last 2 quarters was the election quarter and the slowdown in the overall building materials segment, but going ahead also going to look at the performance in terms of risk rate and the Ceramica going ahead.
I think we will see good traction in these states that you mentioned. We are also now focusing on Telangana and Anda Pradesh, which is also, again, a south-based state so which is our geographical comfort always. When we start any new product, we tend to focus more on the -- our comfort on geography, and then we move forward. So yes, there would be continued renewed effort in the states that you have mentioned as well as we are adding Andra and Telangana.
And sir, lastly, what was the APL volume in the last quarter?
I'll just give you the number. Just give me a moment. We did close to around 1 lakh tons with them in the last quarter.
The next question is from the line of Madhu Rathi from Counter Cyclical Investments.
Sir, it seems that our steel volume is growing quite well. And like we have mentioned, [ we have total ] growth expectation for -- in the volume terms for [ FY '26. ] So when can we expect to achieve the upper end of the [ 2.53 ] [ million ] [indiscernible] industry because H1 is -- which have been around [ 2.54 ] million of margin. So [indiscernible].
Just to repeat on the last question, will you just speak a little louder because ending the question as such. You talked about steel that is growing. Then what was the question, please?
Yes, sir. So we have given a guidance of around 2.5 to 3 [indiscernible] [ million ] margins will achieve in this segment. So when can we expect -- like can you expect the upper end of the 3% guidance for this year or the next year in the segment? Or what were drivers [indiscernible] the 3% margin in the segment?
Yes. I think in steel, if you are looking at margins at an EBITDA level, we'll be sustained going forward at the 2% to 3.5%, but we are very bullish about the growth. So growth will consistently keep happening.
Okay. And sir, sir, you are guiding a 3%, 3.5% margin on steel and 6%, 6.5% on the nonsteel. So can we -- you have given a 3% -- upwards of 3% margin for our market-based business. So is this on a conservative basis? Or do we have some kind of margin threshold? Do you do inventory correction going forward? Or is there a competition increasing from [indiscernible] other peers in the second -- in our main market in business?
Yes. No. I mean what is the connection with us to MGM, I didn't really get that.
Sir, I just want to understand like when you are sharing that your margins, your estimation of more than 3% margin in the main business this year. So why you are giving a margin of upwards of 3% a year earlier going for FY '24, a margin of 3.5% to 4% margin in the market business. So I'm trying to understand, are we lowering our margin estimate because of some kind of competition in [indiscernible]? Or with these inventory losses coming in, we are making it on a conservative basis our margin estimates?
Okay. If you see the -- one is the competition, of course, is extremely strong. There is no -- now we have an extensive competition from many new players as well as. However, I think their competition is likely on a different scale. They are more on [indiscernible] while we do have a blend. So that's number one.
Number two, we are expecting this steady state. See, last quarter, if we really look at the steel part of the business, the EBITDA were really lower. It was not even at 3%, 3.5%. It was at [ 2 plus. ] So it was lower. So which was impacted, as I mentioned earlier, because of the steel prices softening over the last quarter, et cetera.
So I think given the current market scenario, given the competitive intensity and what we expect in terms of the competition to, I mean, be there, so I think this will be a very steady state. And I think the clear strategy is to push for volume growth.
Okay. Sir, my next question, when I look at our loan business, sir, for the past 4 quarters, the revenue, although we have shown a Y-o-Y growth, and when we look at on the past 4 quarters business, sir, our revenue has been stagnant on INR 130 crores to INR 140 crores range. So is this that like why does -- can you expect the growth? So your guidance for us might be there is a positive growth, but in the past 4 quarters, it has been stagnating -- at a stagnant level. So if you could just help you understand this, sir.
So in the nonsteel growth, we were seeing, from quarter 1 and quarter 2, we are running around [ 35 percentage. ] So normally, second half will be on the higher turnover. So we are expecting that the second half, our turnover will grow in nonsteel. There is a similar [ 30, 35 percentage ] income.
Okay. So the second half, sir, more than cover the [indiscernible] growth that we are [ winding ]
Yes, yes.
Sir, as the final question, sir, when I look at [indiscernible] Ceramica, sir, we have given a gross margin [indiscernible] of around of [ 13%, 15%, ] but sir, on a PBT level, is it profitable? And what kind of margins from the gross margin can you expect to move to operating profit level? That's the final question.
So at PBT, we are profitable at Fotia. And like we have guided, we are at 12% gross margin. We are aiming with [indiscernible] center coming up and with more marketing and other avenues that we can increase the gross margin. Currently, we stand around 7% EBITDA at Fotia. And we are looking at increasing the EBITDA and the gross margin. And...
Okay. Sir, that was very helpful. Sir, just as a final clarification. Sir, [indiscernible] there was some kind of inventory loss and higher marketing expenses for this quarter. So what was the marketing expenses that were higher on a Q-on-Q or Y-o-Y basis for Q2 FY '25?
Yes. The marketing expense was around [indiscernible]. The marketing expense was approximately around INR 3 crores to INR 4 crores -- INR 3.5 crores to INR 4 crores to the total marketing expense we had in the first half.
So this one higher by INR 3 crores to INR 4 crores or it was INR 3 crores to INR 4 crores H1 to H1?
All around INR 3.5 crores we have spent for marketing any of our staff.
[ Was it H1 of -- what was that? ]
Normally, we don't spend much on marketing efforts. And so this time, we've had a fair amount of product launches across the country, particularly in Kerala and the South, and we've had a certain [indiscernible] expenses, which we have incurred in this last 6 months. So I think there were a lot of influence events. We had brand launches, so on. So I think normally in the same period, we have barely spent about maybe around [ 50 lakh ] kind of a budget in the first half. So we have gone up by more than INR 3 crores compared to the [indiscernible].
And we also did this year sponsor part of the CREDAI National Conference that was held in Sydney. So we were part of that because we wanted to increase our presence with the builder community.
The next question is from the line of [ Katie Ancheta ] from -- an individual investor.
If I look at your marketplace revenues and EBITDA that you have shown, it comes to about 2.8% for the first half of this financial year, 2.8% EBITDA margins. Now I think if I heard correctly, you are saying that your nonsteel margins would be around 6% or better and your steel would be 3% or better. So can you explain me why are we so low in this first half of the financial year itself? Because based on what you're saying, we should have achieved more better margins in this first half.
Yes. So I think primarily, if you look at quarter 1, we were largely on track. Quarter 2, I think the price of steel is very critical. 90%, 88% of our business is steel based. So when you look at the averaging out, though in the nonsteel we've maintained steady at the 6-plus kind of an EBITDA where it has not gone down, in steel, I think we took an impact in Q2, which we have mentioned in our opening remarks as well as we have talked about it over the last -- I mean, a few questions.
So steel price has softened. There has been a fair amount, a 10% to 12% kind of decrease, which has approximately about INR 12 crores kind of an impact on our margins. So I think that is the reason why if you look at Q2, EBITDA per se was only around INR 2.73 [indiscernible] 2.83 will be EBITDA for Q2. So that explains the decline in Q2.
So do we hope to recover the margins in the steel business in the upcoming quarters and upcoming years?
Yes. So I think we believe that the steel prices are bottoming out currently. We have seen a rollover in the month of October as well as November, as we speak. So we are fairly confident that steel prices will remain flat over the next -- at least this quarter. And there is a scope of a marginal increase going forward, but that is something that we cannot really predict. But the only thing is we are reasonably confident the steel prices will remain relatively stable in the coming quarters.
Okay. And with respect to the acceptances that you've had since Q1 and Q2 of this financial year, I just wanted to know, in the previous years, ever did we have this kind of an acceptance-related costs in our finance cost item? Or it is only this financial year that you had this?
In the previous year also, we had -- interest-bearing acceptance were there.
Okay. But then they are lower in quantum.
Yes, the quantum was lower.
Okay, okay. And if you also could explain if I compare H1 of last year and H1 of this year, the employee expense has also increased by 16%, if I look at your Slide #13. So could you help understand, is this because of addition of manpower and staff? Or how much it would be because of the price hikes and appraisers that you have given to this half?
Yes. The thing is in this financial year, we had around 80 additional staff we have taken, so which has resulted into a higher employee costs. Apart from that, the regular yearly increment were there. So those things have affected the increase in the employee cost.
One of the key things we have done this year, particularly in the nonsteel, we have added a few senior level people to handle our -- to handle our Fotia brand, et cetera, et cetera, at multiple levels. And we have opened up in Gujarat in a big way. In Morbi, we have added a number of people.
So these are all -- and there has been a substantial management bandwidth also addition. So I think these approximately have led to the [ about ] 16% that you mentioned, out of which about 9% was the increments that have come in, and the balance is the addition of staff.
Okay. Okay. And one question I had with respect to the Morbi experience center. If you could just help me understand how are we going to benefit by opening an experience centers in Morbi because I understand for the market, this business, I mean you would have a lot of your customers visiting your stores. So if you open an experience center in Morbi, which is, I understand it's a tile hub of the India, the country, but how does it help us improve the sales because most of your customers would be visiting your stores which are spread across different states and different locations.
Yes. So I think Morbi is where we also get all our manufacturing done, number one. Number two, there are lots and lots -- Morbi straight away reaches all India. It gives all India exposure, a; b, it also gives us an international exposure because Morbi, being the hub, you have this number of buyers who come from all over the country to Morbi, particularly at a tradable at even at a builder level, and there are a lot of international buyers who come in.
So I think this is the most compelling reason why we need to have a base at Morbi where you have a much larger experience center. We've got 18,000 square feet over there vis-a-vis at our various retail stores, et cetera, which could be 2,000, 1,000, 1,500, et cetera. So the larger space attracts larger crowds. It is a sourcing hub. It is where a lot of visitors come in, larger space, more design to show. So I think Morbi is very compelling for us to have an experience center.
Okay. And if I may ask, how much of the cost we have incurred in setting up the experience center? And is this part of the CapEx? Or it has gone as the operational expenses?
I think we have spent about INR 3 crores in the setting up of the center, and it has largely gone towards CapEx.
The next question is from the line of Neil Bahal, an individual investor.
Just wanted to check, I'm a new investor here, so I'm like trying to get a better handle on everything. Just wanted to check on the interest cost. I saw till December, the interest cost was about INR 8 crores to INR 9 crores, which is certainly spiked, and I understand it is because of payables having interest outgrow. You mentioned in the last call that it's likely to revert to normal at some point. Do you have any better clarity as to when this interest cost could go back to INR 7 crores, INR 8 crores per quarter?
The first thing is the normal as taking at INR 7 crores, INR 8 crores could be a challenge. However, if you look at the progress from Q1 to Q2, there has been a decrease of around INR 2.5 crores between the 2, quarter 1 and quarter 2, in the interest cost. So we are working very hard to see that can we bring it back to a much more controllable level, bringing it back to about INR 8 crores, INR 9 crores is a challenge. If you look at Q4 last year was around INR 9 crores. So there is a strong -- about INR 9.75 crores, almost INR 10 crores.
So I think there is a very, very concerted effort from our side. So if we can stabilize at least maybe around INR 11 crores, INR 12 crores in that region.
So for the next financial year, FY '26, can I assume that it could be in the region of INR 11 crores per quarter?
That's our objective. I mean any forward-looking statement from my side, we'll always try to work towards the best. So that is a very, very serious attempt that we are trying.
All right. And from your presentation post demerger, I see that most of the payables are going to the marketplace. That means most of the debt is also going towards the marketplace. Am I correct in my estimate that large part of this debt or interest costs are going to move to the Marketplace business?
Yes, yes.
So it's not clearly mentioned, but if you could -- or the CFO could tell me what is going to be the exact debt post demerger in marketplace and in manufacturing?
So what is happening is the figure what we have given is as on H1 of this financial year. So going forward, in the Marketplace, we'll be in the manufacturing place, we'll be having the debt of approximately around INR 100 crores. And including acceptance in the new company, we'll be having around INR 450 crores, INR 450 crores will be there. That's around INR 550 crores of the bank that will be there.
Yes. And so this would be accepting that. And plus the [ 100 ] debt of normal term loans that you have.
No, we are saying about acceptance and [ total debt ] we are saying.
So the total debt is right now INR 550 crores is what you're saying?
Correct. Correct.
Okay. So INR 450 crores there and then goes there. And just again, I'm so sorry to ask a basic question. The Marketplace is the business where there are no assets. It's an asset-light business, right? But it will also be selling steel products? Or it will only be selling nonsteel products?
It will sell steel products also.
Right. So the things that you produce at your manufacturing will be sold in the Marketplace also? Is there some transfer pricing policy like cost plus something that you sell over here?
Going forward, we would like to sell most of our products that we produce directly, and we will bring it down to -- for our Marketplace, we will reduce the quantum of what we sell from our own production, a.
B, yes, there is a very clear ambulant pricing when we do get the transfer from our manufacturing to our marketplace.
Got it. Also post demerger...
If I may add another point to your earlier question on interest costs going up. Also, we have to keep in mind that most of the basic rate of interest itself have been increasing. So about 0.5% of the increase in interest cost has come because of the share factor it has caused it [indiscernible] increased. So I think that itself adds, if I'm not mistaken, to around INR 1.5 crores, INR 2 crores over the half year compared to the previous year.
Got it. Got it. Also post demerger, now the whole point is efficient capital allocation. Let's say, this happens by Q4 or Q1 of next year, the complete demerger happens, we don't expect the debt in the marketplace to increase, right, because then it will be completely separated from the manufacturing. So if there's any growth in manufacturing that you wish to do, the debt would be only over there increasing? And if the ROCE and the cash generation in the Marketplace is going to be strong, should I expect that the manufacturing -- sorry, the Marketplace side the debt would keep reducing every year?
That is the attempt, yes, definitely.
Could you -- I know it's forward-looking and you can't really say, but a range or an estimate of what kind of debt can reduce every year?
Can we work that out and come back to you? I mean we'll take your contact from the call. And probably, I mean, the attempt certainly is to go ahead with a reduction. But if I have to quantify it at this stage, I will revert to you on this.
Okay. If anybody from the team could just send me an e-mail or just call me and would tell me would be great.
Definitely. Definitely. Can we just get your e-mail ID right now so that we don't have to waste any time on getting it from the sources.
Yes, yes. It's N-E-I-L-N-E-G-E-N-C-A-P-I-T-A-L.com, [email protected].
The next question is from the line of Parikshit Gupta from Fair Value Capital.
Hello, am I audible?
Sure, you are, loud and clear.
Congratulations on a good set of numbers. I have a couple of questions on the nonsteel segment of the business. My first question is on sanitary ware. So I understand that it contributes to about 44% of the nonsteel revenue. However -- and you reported around 35% of growth in this revenue number. However, when we look at the sanitary ware companies among -- the listed ones are showing a very mild growth in terms of the top line to the tune of, say, mid- to mid-single-digit numbers. However, we understand that there are many private players that also exist in this space. So I just wanted to understand if this 30% plus growth is skewed to certain players?
You can -- so our market share gains and the expansion of our product portfolio and the other fulfillment centers, I think our increasing strength in Karnataka, Tamil Nadu, now with opening the center in Hyderabad and Kerala, I think all of these are contributing to growth for us sanitary ware. We still feel there's a huge potential for our growth in sanitary ware, mainly most of the growth has come from marquee brands like Jaguar, [indiscernible]. So you can say that with these brands, along with our additional centers and more marketing efforts, we are grabbing more of the market share, and we are able to both the high double-digit growth in this industry.
Okay. I mean, just so I understand this correct. So this is more from brands which are private, not publicly listed.
No, no, no. I mean, most of the growth has come from the largest...
Right. They are private because Jaguar as well as Color are privately listed. They are not publicly listed companies. You're right. Yes. So if you look at sanitary ware listed brands like Cera, Indo Wear, [indiscernible], even [indiscernible] is a privately held company. You're right. I think we are with more of the privately listed companies. Yes.
Understood. Very helpful. Can I also please understand the real split of revenue in the SaaS sanitary ware segment? You did mention growth in West and I think North regions. However, can you just please articulate it again?
So just to clarify, the growth in Western and Central regions has been completely steel growth. It has been the growth of our core business of steel. When you ask for the breakup of sanitary ware, most of our work of sanitary ware is between Karnataka and Tamil Nadu.
Understood. That's helpful. Just a follow-up on this, if I may. So we understand that at least construction activity was experiencing a slowdown due to the heavy monsoon in South. However, building products are also used for remodeling and refurbishing of houses. Does the company cater more to those kind of demands? Just a fundamental question.
I think that is also shown in the way if you look at the growth, steel is predominantly used in foundations and in structures, which do require applications where ground and activity of weather has to be good. But India works like a tiling and bathroom and [indiscernible] renovation has what has also helped us contribute to our [indiscernible] in the nonsteel.
And we do focus on all segments. I think our retail centers and counters focus on in-home users, small tank contractors and plumbers who are predominantly in renovation and basic construction business.
Understood. So the second question is on the Tiles business. Again, similarly, listed players showing very miniscule growth numbers. However, [ 31% ] -- the numbers that we see here are super high. So just some comments on that also, please?
I think one is partly whatever we have already given you the reason. Second, I think our base is also lower. So I think both this has helped. Being a new kid of the block, I think the aggression, the kind of marketing effort the team has put in at a very micro level, we, as we have mentioned in some of our closing remarks in the opening speech, the biggest advantage Shankara has is we still are maybe a listed player of INR 5,000 crore top line, but the company acts and behaves as an absolute grounded down-to-earth, asset-sharp level kind of an entity. I think this is what really sets us apart from many of the other larger companies. So I think the ground level kind of focus really helps us sustain our growth.
The next question is from the line of Varun Pinto from Needham Capital.
Am I audible?
Yes.
I just actually wanted some guidance on like the growth prospects and the margin for the manufacturing business. Now that we are going to be like separating both of these businesses, what is like the management's plan for the manufacturing business? I know you guys have said that you want to increase capacity utilization. But in terms of revenue and margin, if we could have some sort of guidance on what is going to happen with that business, that would be great.
Our targets as far as revenue goes, we would be looking at in the next year. Definitely, we have to keep growing in the manufacturing. Like I mentioned earlier, we are looking at around the 50%, 50% plus capacity utilization is the first target, number one.
Number two, we are very clearly looking at that achievement of a 3% kind of an EBITDA and in the manufacturing. I think these are the 2 very clear objectives and thoughts that we have as of now.
And sir, this interest-bearing debt of payables that we take, is that something that we do for the manufacturing business as well? Or is that only for the marketplace business?
This is majorly for the Marketplace business. And in some of the raw material suppliers, we are offering that as well giving it. So there is mix of both.
Okay. Sir, could you give me a bifurcation of how much of that goes to the Marketplace? And how much of that is in the manufacturing, the acceptances?
So out of INR 450 crores of acceptance, approximately around INR 350 crores will be towards marketplace and approximately around INR 100 crores will be for manufacturing.
INR 100 crores, sir. And sir, in the presentation, you have said that you have reduced INR 100 crores of debt in this quarter, INR 100 crores of debt. So is that the payables, the acceptances, which have been reduced?
Yes, both, both delta as well as [indiscernible], both we are reduced INR 100 crores in this quarter.
Last quarter, you said it was somewhere around INR 620 and [indiscernible] INR 450 crores, right?
INR 440 crores to INR 540 crores, INR 100 crore reduction is there.
Okay. Okay. Understood. That's it for me.
The next question is from the line of Viraj from Alliance Capital.
Congratulations on these set, sir. Actually my question has been answered but just wanted to dig a bit deeper in the nonsteel segment where you have an amazing growth. Although you've said it is on a lower base, but then to broadly, we see all the players in tiles or sanitary ware, there is no growth. And I still am trying to navigate through that what other reason is there that the trading growth is possible over here because all the other players have seen are not showing growth. Is there any other particular reason?
I think 2 or 3 reasons. I think one reason is, like we said that this is small, we are very aggressive. We are grounded as a team. We are running across with our field work and marketing efforts. And with the amount of centers we have, we have seen good growth in this.
Second, too, is, we do have a large number of brands. We are not a single-brand company. So we're able to cater to multiple diverse customer needs from luxury to premium to mid-segment to lower segment as well. So that I would see definitely helps us gain more market share and more customers as well.
And I think thirdly is the dedicated expansion which we are doing. And I think the focus on sanitary ware which we've always had has been one of our key drivers in nonsteel. So I think that's kind of what has contributed and attributed to our growth for the segment.
But sir, in tiles, you only have [indiscernible], we don't sell any other tiles to [indiscernible].
No, no, no. We do, do a lot of tiles with other companies. We do a good number at Kajaria, Somany, NITCO, Apollo, just to name a few. So we do have that direct segment in Tamil Nadu, especially. So -- and in Karnataka as well. So it's not just Fotia. We do have a mix of brands there as well.
Okay. And could you just specify how much the tile segment grew year-on-year?
Tile segment grew around 40%, 40% -- 30% year-on-year. 30%.
Tile grew 30%. Okay. And sanitary ware would be then somewhere close to 40%?
35%.
The next question is from the line of Keshav Garg from Counter Cyclical.
Sir, I'm trying to understand that you mentioned that we took a INR 12 crore inventory loss on -- in the second quarter. So our EBITDA was INR 37 crores. So is it safe to assume that from the third quarter onwards, once this INR 12 crore inventory, it is not there, we'll do upwards of INR 50 crores EBITDA per quarter?
So we are [ currently approaching around ] [ 3% to 3.5% ] of EBITDA [indiscernible]. With the [indiscernible].
Yes, you can. I mean, broadly, I mean, that's only a hopeful assumption that -- yes, I mean, that's always our attempt to keep that focus on. Yes.
So because, I mean, since Q2 was even seasonally due to the monsoons, so the revenue should also be higher quarter-on-quarter and if the inventory hit is all -- and sir, one more thing, sir, the interest on acceptances that we are giving, sir, are we giving it primarily to APL Apollo?
So there are some nuances there. No, it's not primarily for APL Apollo. It's a mix of in all purchases.
Okay. Sir, actually, if we see then if you compare the first half year-on-year, our revenue is up by 15%. And sir, if you look at core working capital, which is just adding inventory receivable and subtracting the payables, so basically, year-on-year, it has increased from INR 576 crores to INR 583 crores, which is almost flat only. There is not much increase in the working capital, core working capital. Sir, but the interest cost has actually gone up significantly. It has actually doubled year-on-year. Sir, so what that means is that for the same, basically, working capital not having gone still, so basically the competitive -- the terms of trade have deteriorated from the company, so basically. Sir, why is it that, I mean, it seems that...
Hello. Hello.
Sorry to interrupt, sir. The current participant has been disconnected. We will move on to the next question. It's from the line of Anuj Jain, an individual investor.
A couple of questions from my side. Can you throw some light on the point which you have mentioned in your presentation distribution of JSW and AM/NS, like Ceramica on sale? What kind of products we are distributing for these companies?
JSW, it is both JSW and the M&A. JSW is largely HR coils and HR sheets as well and in the case of AM/NS, we are across the board. We do deal with the charge coil sheets, we have the GP, we have the value-added -- products, GC, CR, et cetera.
And for which territory it is?
I think AM/NS is across our areas of operation. JSW is only currently in Karnataka.
Okay. Got it. And can you -- help me in understanding one thing, how these fulfillment centers are different from stores? I mean...
Yes. The fulfillment center, you see the stores primarily cater to a retail kind of a walk-in, et cetera. While the fulfillment centers, we are catering to a much larger audience where it could be wholesale customers, it could be the end customers, project customers, et cetera. So I think it's a mix of the entire thing. So if you look at fulfillment centers, the definition would be mix of the store plus the warehousing and processing units, too.
Okay. Okay. So it's kind of big format stores, kind of?
[indiscernible] necessarily large format stores, so to speak. I would say it's catering to a larger customer profile.
Got it. Got it. And one last question. I mean, how we are doing in this online marketplace business, I mean, kind of portal, which we have launched that online sales? Any numbers we are driving from there? And any plans?
So they were around, you could say, INR 1 crore a month kind of sales that is coming out of it. That is purely from sanitary and fitting. But we are now added to the platform as well. We are adding a few more products as well. So we are looking to see how much more revenue we can generate out of this. We are also using our online store as a discovery platform as well as an experience center as well. So companies can see the various brands and products that are available at BuildPro. And we do get a lot of offline footfalls and walk-in stands to our online presence as well.
The next question is from the line of Keshav Garg from Counter Cyclical.
So I was -- I think I lost you last time. So what I was trying to make the point that, sir, even though our H1 revenues are up by 15% year-on-year, our interest cost has doubled. Even though our net working capital is flat from INR 576 crores in H1 of FY '24, it has increased to just INR 583 crores. Sir, so what it seems is that we have started paying interest on acceptances of payables to parties that previously we were not paying. Sir, so can you just explain that? Is that thinking correct? And sir, if so, then, sir, basically has our basically terms of trade deteriorated for the company?
No, I don't think that is so. If you look at first is in terms of trade, when you look at the raw material costs plus the interest cost, you will see that the margins have really not deteriorated at all. It's more or less same. Whatever impact that in quarter 2 would have happened or in the first half could have happened, the slight deterioration will easily be attributable to the raw material kind of rate that we took in the first -- the second quarter, particularly, number one.
Number two is whenever the management will always take cost when we see options of debt financing versus taking the creditors as a means to fund working capital largely. So last year, the call was more to take on with the creditors wherever possible. This year, we find that wherever sometimes the creditors will draw certain terms, the cash discounts may not be lucrative enough. So where we do find that financing is much better.
So I think that is one of the key reasons why we led to some extent in the acceptances area has gone up. And that is -- broadly, I can -- I mean that is the answer that I can give you.
So basically, we have not started paying interest to parties that earlier we were not paying?
No, no, no, not at all.
Okay. Sir, also, sir, we are barely doing INR 5,000 crores revenue, and I'm assuming most of it is coming from South India and South India contributing 40%, 50% of the GDP. Sir, so why is there a need to then expand into new territories? Why not saturate the area which is our core? So possibly, there will be some synergy if we expand in South India, sir, because INR 5,000 crores is hardly like -- it's not that we have totally penetrated the southern market and now we need to go to new states. So what are your thoughts on that?
So we have always reiterated your point. Thank you for reconfirming our stand that has been sold for the last many years. So one of the things that we -- if you look at even our breakup of sales, largely our 80-plus percent is in South India even today. We have grown in the steel area in the Western region. So if you look at, again, from a GDP perspective, if you add South and West, I'm looking at Maharashtra and Gujarat, I think I mean, going on your statistics, probably 70% of India's GDP then comes from these 2 states, though I believe it's closer to 65%. So I think getting a little bit of a foothold in the Western region is very critical also because there are a lot of infra. Maharashtra still remains the largest state in terms of GDP in the country. Gujarat is also very developed in a forward state in terms of contribution towards GDP. So I think it's very, very important that we keep a foothold and more than a foothold in these kind of states, number one.
Number two is we've also moved into Central India. That is Madhya Pradesh. We also believe that going forward, these -- some of these states, the Central states like Madhya Pradesh, going northwards, maybe towards Uttar Pradesh, Rajasthan, we do see that there is going to be a lot of growth potential in the future. These are states which are starting at a low base. They have a lot of infra projects. There has been a lot of focus from the central government in some of these states. So I think it is imperative, even if we don't have a very -- we don't -- I mean, it's not that we are growing in these states when the cycle [indiscernible] south, we will continue to saturate and keep most of our new fulfillment centers, et cetera, et cetera, the plan is to grow in the South. [indiscernible] planning [indiscernible]
Sir, also, sir, since we are an organized retailer-cum-wholesaler in the building material space, sir, now the ordinary, let's say, tile manufacturers like, let's say, Kajaria, or for that matter, tiles and steel in APL Apollo, sir, they are already well established, they have their own distribution network, they have their own brand pool. So if we are selling their material only from our stores, then, sir, obviously, they will not give us good terms. I mean if we are able to sell like, let's say, sir, there's a huge overcapacity in tiles, so if we can basically sell unorganized sector, the small players, which are unbranded, if we can sell their material from our store and we can do quality control, so that is where I think the real opportunity is because then we can really get good margins also and we can expect good credit terms or working capital terms also from those suppliers. So basically, what are your thoughts on that? So I mean don't -- sir, should we not reduce our dependence on the established players and try to sell the material of basically small players?
I think this answers -- there's 2 parts to this. I think one would be regarding steel and one would be regarding nonsteel because both industries work differently, which is Ravikumar will talk about steel. But for nonsteel, I would say that Fotia is spun out of this. I think there is a niche opportunity in the tile industry where we could find a space and that's where we did come in.
I think when it comes to sanitary and fittings, since the brands are visible and all the market brands are spending huge in marketing, customers do come in for brands. I think there will still always be a pull for Jaguar compared to an unknown brand coming out of any other manufacturing. So I think a good mix going forward would be good for us in this -- in the nonsteel segment. For steel, I asked Mr. Ravikumar can answer this.
As regards to steel, the -- most of the manufacturers who are assembled, they have to route their materials through distributors like us. It is very important for them, and it is equally important for us also to have them in our portfolio. It helps in a very big way for both of ourselves.
The second, I mean, when you are saying about brand, like why you only do Apollo and why not others, see today, there is a brand pull from the end customer. See, India is a very peculiar country where most commodities are branded. So the customer -- I mean, you look at it, India is probably the only country where steel is branded, cement is branded, plywood is branded. A lot of commodities are branded across the board. And when we do talk to some of the even multinational manufacturer of glass, various things, they're quite surprised and amazed that the way the branding has come -- is being done in India right now to our TMT steel, so on and so forth.
So one cannot really disregard the brand pool in this country. So I think we will have to find a balance between brands as well as nonbrands. And I think when it's nonbrands, like you rightly said, we'll have to have quality monitoring, and it's a phased step-by-step process.
Right, sir. And sir, lastly, sir, if we look at the competition like, sir, infra dot market or [indiscernible], those people, so their cost of equity is so low because they are able to raise capital at a multiple of sales. So then -- so sir, does that not -- basically, sir, how do we compete with these people, I mean, since the cost of equity is so low, and whereas for us, it's not the same?
See, A, you yourself answered the first part is, fortunately or unfortunately, we are not a start-up. So clearly, we do not have money to burn. So every look, every way we look at it, we have to account for our expenditures and ultimately, the bottom line. That's number one.
Number two, these guys are looking at their whole business model very, very differently. They are at a much larger scale in terms of wholesaling and so on. We have the unique model where we've got retail. We have, I mean, a very vast number of end customers. We've got a huge, huge customer base. And I think our 40-year-old legacy is not going to waste over there.
We are very grounded. We've got a strong presence in Tier 2, Tier 3 kind of cities. So I think our very, very expanded wide network is holding us in good stead. So those guys will raise capital at a lower price, we will have to bear that cost. But I think in the long run, the kind of base, the kind of expansion of customer base, I think, will hold us good in the long run.
Sir. And lastly, sir, you think that in the second quarter, sir, our performance has bottomed out under sir, let's say, profit after tax level after interest and everything? And going forward, sir, things should pick up from here at least on a quarter-on-quarter basis?
Definitely, yes.
Okay. So thank you...
[indiscernible] back to your earlier question, you [indiscernible] falling from our interest cost. But if you look at it even from an RoC level, I think in this context, probably RoC could be the final arbitrator. So when we look at -- when we get into the marketplace model, which is very -- is something we are driving towards, I think then our comparisons should go to that maybe at that time.
The next question is from the line of Neil Bahal, an individual Investor.
Sir, I just wanted to check on the manufacturing business. I had 3 questions for that. You said that your aspiration is to get to 50% plus in utilization level and from -- in sort of a 3% EBITDA margin. Where do you stand currently in your utilization level? And by when do you think you can get to, let's say, 75%, 80% utilization?
See, we have -- currently, we have just about hit the 50% mark. That was our target number one. So as far as 70%, we'd like to sustain this 50-plus around 50, 50-plus for the next -- this coming 2 quarters, that is objective number one.
Number two, after that, once we sustain at that level and we are able to focus and get our EBITDA up, I think that then we will look at the 70%, 75% kind of capacity utilization, probably after the demerger process.
Understood. Now I want to understand like this when you said 3% EBITDA target, that's at 50% utilization? Or that will happen later at 75% utilization? Because when does the operating leverage play out here?
I think the operating leverage, to some extent, has already started playing out. If you look at the profitability of Q1 to Q2, we have actually dropped the -- at least from a break-in level. It's slightly improved. I can't say a substantial improvement because we were impacted because of the raw material prices, et cetera, in Q2. So I think we are nearing there as far as the leverages and the profitability should start kicking in. And certainly in the 3%, 3.5%, we will see if we can get that growing by around 50%, 60% kind of capacity of leverage.
So [ 3 ] can come back 60% utilization.
Yes, broadly.
And that is like mostly post the demerger sometime in [ FY '26? ]
Yes, yes.
How -- what is the maximum? What is the peak revenue here?
Can you please fall back in the question queue for further questions?
This is extremely important what I'm trying to ask. Can I ask one more question?
Sure. Please go ahead.
I want to understand what is the peak revenue of our manufacturing setup?
Our peak revenue should be in the region of around INR 1,400 crores, INR 1,500 crores.
INR 1,500. And the peak margin is also 3%? Or the peak margin can be more than 3%?
I mean, I -- we will guide at this point of time to 3%. Always the aspiration is to build up.
Obviously, because if at 60%, we can get to 2.5%, 3%, then at peak, we should be at 4%, probably 4.5%. Is that doable in your estimate? Like just as a theoretically speaking?
The [indiscernible] is always there, Mr. [indiscernible].
The next question is from the line of Amit Mendali from Robo Capital.
I have a question on the growth of steel business. So currently, we have been growing really well. But how do you see the growth 2, 3 years out? And what are the key drivers there, growth drivers?
I think we do see a sustained growth of -- I mean our target is from a volume base, definitely at 20%, 25% kind of growth. We are very clear. We've already guided in our presentation itself that we would like to hit the 1 million mark in terms of the steel tonnages in the next year. So that is something that we have already given an indication for '25 -- '24 -- sorry, '25, '26. So that is something we certainly aspire.
And coming to the drivers for growth, I think there is a huge infra trend overall in the country, which is led by railways, by road, by ports, then there's an enormous building and the construction boom that is happening in many parts -- pockets of the country. So I think it is a multifaceted growth push that is driving the demand for steel.
I mean if you look at the number of stores or the fulfillment centers that you're adding, those numbers are fairly modest in terms of growth rate of where we are today. So what type of market share gain are we factoring in? Or can you talk a little bit about market share?
Market share of steel?
Yes, on the steel revenue.
Steel business, honestly, if you look at the entire demand of steel in this country is upwards of 100-odd million tons comfortably in the country, and it's only going forward. Looking at the kind of expansion that some of the big JSW, Tata Steel, et cetera, are going about, I think they are projecting -- I mean, the government as well as the organized sector as well as the secondary sector and steel manufacturing, et cetera, want to take India to about 250 million tons kind of a consumption market.
So I think if you look at the very big picture in India, I mean, we are still a dot on the firmament. So the runway is huge, huge, huge.
The next question is from the line of Varun Pinto from Negen Capital.
Sir, am I audible?
Yes.
So sir, currently, we are giving our segmental revenue like steel and nonsteel, right? But post the demerger, how much is going to be the contribution of steel in the marketplace business?
In the -- you're asking about the immediate near future? I think our target is about 80% of steel will be in the immediate future in the marketplace business.
Okay. So when the demerger happens, 80% of the revenue will be coming from the steel business and 20% from the nonsteel business and the nonsteel business is going to keep increasing over the years, right?
Correct.
The next question is from the line of KT [indiscernible], an individual investor.
So I just wanted to understand for this year, what is the revenue expectation or guidance that you could give for the marketplace over FY '24 and also the margins guidance, if you can give, please?
I think the broad growth this year, we can expect in the region of around 15% to 20% in the volume of steel and 30%, 35% in the nonsteel. So I think blended growth will be in the region of around 20% or so in terms of the revenue uptake.
Okay. And margins, sir, if you can give some indication?
I think we definitely will be in the region of upwards of 3. [indiscernible]
Thank you.
I think we've gone up to around 12:15, 12:20 now. So are we still having any questions in the queue?
No, sir, there are no further questions. You can go ahead with your closing comments.
Yes. So thank you very much. And it's been a real pleasure attending this investor call. Thanks to all the people who have attended here today, and I hope we, at Shankara, have been able to give you satisfactory answers. And we look forward to your continued participation with us. Thank you so much. Bye-bye.
Bye-bye.
On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.