Cera Sanitaryware Ltd (BOM:532443) (Q1 2027) Earnings Call Highlights: Revenue Surges 19. ...

Negative Points

• EBITDA margins declined to 10.1% in Q1 FY '27 from 13.1% in Q1 FY '26, impacted by one-time and transitional factors.

• Input costs, particularly brass and gas, remain elevated, with gas costs up from INR33.17 to INR48.43 per cubic meter year-on-year.

• The project business has not yet reflected price increases, with contracts expected to transition to revised pricing only post-Q2, delaying margin recovery.

• A one-time provision for long-term worker settlement (INR6.3 crores) and under-absorption of fixed costs due to single kiln operation (INR3.7 crores) negatively impacted Q1 profitability.

• The company faces ongoing uncertainty in raw material prices, with brass prices rising to INR900 per kg, potentially necessitating further price hikes.

• The resignation of a key management personnel (Mr. Baliga) responsible for Sanitare and Polyplus could pose transition risks, though the company has a succession plan.

• Capacity utilization in sanitaryware remains low at 61%, indicating underutilization and potential inefficiencies.

Q & A Highlights

Q: Can you explain the margin dilution despite strong revenue growth, and is the 13.5%-14% EBITDA margin guidance for FY '27 still intact? A: Deepak Chaudhary, VP Finance and Investor Relations, clarified that the Q1 margin of 10.1% was impacted by several one-time and transitional factors totaling approximately 4.35% of revenue. These include a one-time provision of INR6.3 crores for the long-term worker settlement (1.3% impact), under-absorption of fixed costs due to operating a single kiln (0.75% impact), accelerated closure of old project orders at lower prices (0.8% impact), and the delayed effect of price hikes (1.5% impact). Excluding these, the underlying EBITDA margin would have been around 14.5%. The management reaffirmed its full-year FY '27 EBITDA margin guidance of 13.5%-14%, with recovery expected from Q2 onwards as project contracts transition to revised pricing.

Q: What is the volume and price growth breakdown for the sanitaryware and Faucetware segments in Q1 FY '27? A: Vikas Kothari, CFO, provided a detailed breakdown. For sanitaryware, the 14% revenue growth was driven by 10% volume growth, 2% price impact, and a 2% favorable mix. For Faucetware, the 25% revenue growth was driven by 18% volume growth, 4% price impact, and a 3% favorable mix. The growth is predominantly volume-led, reinforcing confidence in the improving demand environment.

Q: What was the impact of the one-time long-term settlement with workers, and what is the expected run-rate for staff costs going forward? A: Deepak Chaudhary explained that the company entered into a new four-year wage agreement with its workers, effective retrospectively from September '25. The one-time provision for the previous period (Sept '25 to March '26) was INR6.3 crores, booked in Q1. The current quarter also absorbed INR3 crores for the current period. For the full year, the incremental wage cost is expected to be around INR18.3 crores (INR6.3 crores one-time plus INR12 crores for the current year). The total staff cost for FY '27 is projected to be around INR300 crores.

Q: Given the recent resignation of the head of Sanitare and Polyplus, how will these new brand initiatives be managed, and are the targets intact? A: Vikas Kothari confirmed that the resignation is due to personal reasons and the responsibilities have been handed over to an existing national head under the succession plan. The outgoing executive will support the transition until September 30. The management emphasized that both businesses have dedicated teams and established processes, so there is no expected impact on execution. The long-term targets for Sanitare and Polyplus remain unchanged, though the company will not provide quarter-on-quarter updates as these brands are still in their build-up phase.

Q: How is the company managing the internalization of outsourced SKUs, and does this signal a strategic shift away from outsourcing? A: Deepak Chaudhary stated that internalizing certain SKUs is a continuous process, not a strategic shift. The company typically manufactures complex SKUs in-house and outsources simpler ones. Due to recent operational challenges in the Morbi cluster, Cera proactively internalized some high-selling SKUs to ensure supply security. This required only small investments (INR2-3 crores) as part of routine capital expenditure. The long-term strategy remains to keep complex SKUs in-house and outsource simpler ones, with the flexibility to adjust the mix as needed.

Q: With brass prices at all-time highs, what is the outlook for gross margins, and will further price hikes be necessary? A: Deepak Chaudhary noted that gross margins were severely impacted in Q1, particularly in Faucetware, due to rising brass costs. The average brass price has risen from INR665 in December to around INR900 in July. The company has taken cumulative price increases of 16% in Faucetware, which protects margins up to the current price range. If brass prices continue to rise beyond INR900-950, the company will evaluate further price increases. Gross margins are expected to recover to historical levels of around 51% from Q3 onwards, assuming input costs stabilize.

Q: What is the status of the greenfield sanitaryware expansion plan, and how close is the company to maxing out its current capacity? A: Vikas Kothari stated that the strong Q1 volume growth is a positive signal for reviving the deferred greenfield project. While reported capacity utilization was 61% in Q1 due to temporary gas supply issues, operational utilization is now around 80% with both kilns operating. The company will review the greenfield expansion decision by the end of FY '27 if demand momentum continues. If approved, the project would take approximately 18 months to complete.

Q: Can you provide details on the change in revenue presentation and its impact on margins? A: Deepak Chaudhary explained that turnover discounts, previously reported as an expense, are now presented as a deduction from revenue from operations, per Ind AS requirements. This change reduces reported revenue by approximately 2.5%-3% but has no impact on absolute profitability or cash flows. Consequently, the EBITDA margin percentage will appear slightly higher on the reduced revenue base. The company's FY '27 margin guidance of 13.5%-14% remains intact, adjusted for this presentation change.

Q: What is the progress on the Faucetware brownfield expansion, and are there any supply constraints given the high capacity utilization? A: Deepak Chaudhary confirmed that the Faucetware expansion is on track to come into effect from Q4 FY '27. The company is currently operating at 96% utilization but can stretch beyond 100% if needed. There are no anticipated supply challenges in Q2 and Q3, as the company has flexibility to increase outsourcing to meet demand until the expanded capacity is operational.

Q: What is the planned advertising and promotional spend for FY '27, and is there flexibility to increase it? A: Deepak Chaudhary confirmed that the company plans to invest approximately INR85 crores in brand-building and marketing initiatives for FY '27, including the new "Your Moment of Cera" campaign featuring Kriti Sanon

For the complete transcript of the earnings call, please refer to the full earnings call transcript .