Ladies and gentlemen, good day, and welcome to the Q4 FY 2022 earnings conference call of Pidilite Industries Limited, hosted by Motilal Oswal Financial Services Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Krishnan Sambamoorthy, Lead Consumer Analyst, Motilal Oswal Institutional Equities. Thank you, and over to you, sir.
Thanks, Rituja. On behalf of Motilal Oswal Institutional Equities, I welcome you all to the 4Q and full year FY 2022 post-results conference call with the Pidilite Industries management. We have with us Mr. Bharat Puri, Managing Director, and Mr. Sunil Burde, Vice President, Accounts. Over to Mr. Burde for opening comments, after which we will take the Q&A.
Good evening, everyone. The current year registered a robust sales growth aided by strong volume growth across categories and geographies. Growth was broad-based across Consumer & Bazaar and business-to-business segments, with both segments reporting volume growth of over 20% each. This was strongly enabled by the focus on digital initiatives, innovation, and building a resilient and agile supply chain. The current quarter witnessed price-led growth, with volumes remaining subdued on account of pandemic and persistent inflation impacting consumer demand over previous year higher base, 45% growth in the same quarter last year. The margins remained impacted adversely by unprecedented inflation in key raw materials as a result of volatility and increased input costs. This was particularly mitigated by calibrated pricing actions. In this difficult macro environment, we continued to make adequate investments in our brands.
Now, I will begin with a summary of the financial performance for the year and quarter ended March 31st, 2022. On consolidated basis, net sales at INR 9,880 crores for the year grew by 36.3%, with growth in C&B by 34.2% and B2B by 44.6%. Net sales for the quarter stood at INR 2,498 crores and grew by 12%. Material cost as a percentage to net sales for the year is higher by 853 basis points over the previous year, and for the quarter is higher by 738 basis points over the same quarter last year. Due to the increase in price of key raw materials and the gross margin continued to get adversely impacted, we are continuously monitoring the input cost and necessary pricing actions, if any, will be taken.
EBITDA before non-operating income for the year is at INR 1,869 crores, grew by 11.1% over the previous year. Profit before tax and exceptional items at INR 1,614 crores grew by 5.7% over the previous year. PBT for the current quarter stood at INR 346 crores and declined by 16.6% over the same period last year. Now, moving to the standalone financial performance. Net sales for the current year is at INR 8,298 crores, grew by 34.1% over previous year, with underlying sales volume and mix growth of 19.9%. This was driven by 20.2% growth in sales volume and mix of both C&B and B2B each. Domestic C&B grew by 20.9% in volume.
Net sales for the current quarter stood at INR 2,075 crore and grew by 12.1% over the same period last year. The prices of our key raw materials, VAM, have continued to increase during the quarter. Current procurements around $2,500 per metric ton. Q4 2022 VAM consumption rates were at $2,420 per metric ton versus Q4 2021 of $1,180 per metric ton. Compared to Q3 2022, it was $1,968 per metric ton. Gross margin impacted on account of inflation in input costs, resulting in all-time high prices for most of the principal raw materials.
Material cost as a percentage to net sales is higher by 960 basis points over previous year, and for the quarter is higher by 922 basis points over the same quarter last year. EBITDA before non-operating income for the year is at INR 1,612 crores. It grew by 4% over the previous year. Profit before tax and exceptional items at INR 1,627. It grew by 11.7% over the previous year. Profit before tax for the current quarter stood at INR 397 crores and grew by 5.6% over the same period last year. On a like-to-like basis, excluding dividend on subsidiary, profit before tax declined by 1.5% for the year and 20% for the current quarter. About our subsidiary performance, the subsidiaries in Asia continued the growth momentum.
Americas declined on a higher previous year base. During the previous year, sales were higher on account of pent-up demand as well as benefits passed by the governments to consumers during COVID. Margins continued to remain under pressure due to higher input costs. Domestic subsidiaries in C&B reported good sales growth. Performance of domestic subsidiaries in B2B are showing signs of revival on account of recovery in real estate and construction-related activities. During the year, the company had filed two merger applications with the National Company Law Tribunal with respect to the merger of its wholly owned subsidiaries, namely Pidilite Adhesives Private Limited
Cipy Polyurethanes Private Limited. Consequent to the filing of the NCLT orders approving the merger with the registered companies, mergers have become effective from appointed date of first February 2022. As a result of merger being an event happening after balance sheet date, no effect of merger given in the financial results. While there are near-term concerns around significant inflation and the impact of this on market growth, we are confident of the medium to long-term prospects of the home improvement sector and will remain focused on delivering consistent and profitable volume-led growth. Thank you.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah, thanks, sir. My first question is competitive intensity in adhesives from regional players. Could you talk about in the last one year, have you seen any big change there? You have been extremely aggressive on M&A in the last many years. Does this open up more inorganic opportunities in India, in the regional space? Do you think you can acquire some players there? Is there good valuation opportunity? Or mostly you have already covered up most of the white spaces?
Thanks, Abneesh. Relevant question. See, the competitive intensity, frankly, over the last 12-24 months, has actually been lesser than normal, largely because of two reasons. I think a large number of regional players have suffered as a result of their supply chains being impacted, as well as, you know, the impact of this whole input cost inflation on them. On competitive intensity, we have new competitors coming in. Frankly, every quarter there is, you know, somebody getting revived or a new competitor coming in, given our share and position in the market. Obviously, if you were a consultant, you would tell fellows that, you know, even if you get 10% of this market, it's a very attractive proposition. So, we've had a fair amount of people entering.
From an intensity point of view, the large amount of competition tends to be at what I call the discount end of the market. Where, you know, based on high dealer discounts, high contractor allurements, lower pricing to the trade is really where a lot of the action has been. As far as M&A is concerned, when we find the right players who frankly have a brand or a route to market, it’s then we will look at them. Obviously, you know, that will be opportunity dependent.
Sure. One follow-up on this. Globally, every RM has been extremely inflationary. For you also RM has doubled in the last one year. Could you discuss, in the last few months, what is the reason? It is the same old issue of container shortage or geopolitical. If the geopolitical issue gets resolved, do you see a big crash coming, given in China there is such a big slowdown? Do you see that happening at some stage? I'm not asking when. I'm asking will that happen given the supply demand scenario?
See, given the supply demand scenario currently, frankly, a large number of these shortages are happening because of force majeure where, you know, I mean, from the outside, and obviously I cannot say definitively, but there definitely seems to exist almost some cartelization where, you know, plants seem to coordinate their closing so that the amount of stock that is available in the global market remains almost constant. That being said, you are right that if plants were to operate normally and China was to remain depressed, you will have suddenly an excess of supply over demand, but we don't know when that will happen.
Sure. Bharat, sir, last question on the demand side. In Q4, there was one month obviously of the Omicron impact. Was that substantial in any of your demand industry segments? Similarly, in terms of FY 2023, do you think real estate, which has done really well in last one year, wherein you supply lot of products to the real estate players, do you see a slowdown coming at some stage given interest rate hike? Real estate prices are again going up in the last one year. Have you started picking up some signs on impending slowdown there?
See, coming to the first, as far as demand is concerned, Abneesh, you know, you've had a lot of local stoppages as a result of, you know, January had Omicron, then you had some amount of supplies stoppages. You had lot of shop closures. Some of it extended to February. If I look at a longer period of time, frankly, largely demand has still been good. There is some amount of slowdown. Now I'm purposely looking at a longer period. Even if I look at post-Diwali right till today, overall demand is still good. There is some amount of strain in rural and semi-urban India. Inflation is a massive tax that any emerging economy and common consumer pays.
Having said that, we are hopeful that, you know, if you have a good monsoon, the government actually does spend what it has projected to spend in the budget and front load some of it. You will have a lot more money coming into the economy in the second half and therefore into people's hands. I think demand. I would use my usual phrase of being cautiously optimistic. On the input costs, very difficult to say because, you know, geopolitics has definitely impacted it. You can see the price of crude oil, so on and so forth. Right now it's not clear as to where is the light at the end of the tunnel and when will it emerge.
Sure. One last follow-up, Bharat sir. You are a FMCG veteran, so FMCG companies are ramping up on bridge packs because INR 5, INR 10 is a big challenge. In your case, also, INR 5 has been extremely strong product, and it's a great draw for the consumer. But are you also thinking of bridge packs in the INR 5, INR 10, INR 20 range? Any bridge packs you're coming out aggressively?
See, we have been very conservative and in, you know, actually it's almost an oxymoron, Abneesh. We've been conservative and aggressive. We actually haven't moved any I mean, you know, having been a, one of the pioneers of the INR 5 price point in chocolates, I must tell you that on things like Fevikwik and so on and so forth, we have not moved our price point now for 15 years, and even in this inflationary situation, we have not moved the price point. Frankly, we don't see the need for bridge packs for two reasons. One is, obviously we already straddle the price points that we want to. The second point is, you know, in items of mass consumption where there is down trading, you would obviously need bridge packs. In our case, you know, most of our consumers tend to be middle class and above.
Therefore, you know, when you are doing a house, your smallest, you don't need a bridge. There are very little minor jobs that you do. Your smallest pack tends to be at least a 5 kilo pack.
Right. Okay, sir. That's very useful. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Sir, if we look at the growth and margin pressure from the lens of core, pioneer, and growth categories or the way.
Tejas Shah, please go ahead with the question. Your line is unmuted.
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Mr. Tejas Shah, can you hear us?
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Yes, sir, you are.
Sorry for this. Sir, if we look at growth and margin pressure from the lens of core, pioneer, and growth categories the way you divide the portfolio, segregate the portfolio, are there any divergent trends on growth and margin pressure?
Actually, the largest margin pressure, I mean, and it's a coincidence, I don't think it is anything that is part of a trend, is actually on the core category. The growth and pioneer tend to have at least in the last 12 months while there's been pressure. There is pressure across the portfolio, but the highest pressure has been on the core portfolio, little less on the growth and pioneer.
Okay. Now sir, in your opening remarks, you mentioned that this is an unprecedented inflationary scenario, and the closest reference that we can make is somewhere around 2009-2010, when we had taken very slightly late but aggressive price hikes over a period of time. When the crude correction happened later on, we actually retained a lot of that price hike in our P&L. Hypothetically, if that scenario has to play out in FY 2023, do you think that competitive pressure as it stands today will allow you to retain a lot of this price hike that you have already taken or you'll take going ahead in coming quarters?
See, what will happen, Tejas, is why we always indicate a margin range is largely because of that. If the situation turns benign post our having taken the price increases, obviously we will give back a large part of it to the consumer, but we will then obviously end up at the top end of our margin range, is what my presumption is.
Sir, even in the interim, you won't allow margins to cross that upper range that you have given for long term?
See, they may cross for one or two quarters, but you know, we would prioritize growth. Our experience, Tejas, has been that if you take margins a little too high, you open the back doors and a lot more competitors start pulling at the carpet before you realize it, and then you're slipping. We like to make sure that our price premiums and pricing remain, you know, focused on growing volumes rather than in the short run growing margins.
Fair point, sir. Sir, any CapEx guidance for this year and next year?
See, as far as CapEx is concerned, I must tell you know, one of the things, and I have spoken about this earlier, we were very clear that use this period to build the next generation supply chain. I must tell you that. Over the last two years, we have expanded or put in 10 new facilities. In addition to these 10 facilities, we have 12 facilities currently under construction, all of which will be complete in the next 12 months. We will be frankly ready for the next phase of next three-four years of growth. We will be completely ready from a capacity perspective. Our CapEx still remains at the traditional 3%-5% of sales. That's not going to go up.
Because our sales has gone up, obviously now our number of the amount of investment we are making in the supply chain, be it new facilities, be it new warehouses. Separately, the investment we are making in digital, for example, we would regard ourselves as one of the companies at the leading edge of digital as far as both consumers and dealers are concerned. I mean, today we are now getting almost 20% of our dealer orders via Genie app, where dealers don't actually know salesmen, no distributor comes in. It is all done via an app. The same thing is getting extended to contractors. There's a massive amount of investment in an agile and resilient supply chain. There's a massive investment in the whole digital piece, which we've in a sense learned during COVID and we don't want to use.
Innovation has traditionally been a strength area of Pidilite. This has been an area where in the last two years, obviously we were focusing on the core because of the situation on ground. In the next 12-18 months, you will practically from each of my divisions see one new product every quarter. The innovation machine is also ready to fire. I mean, you know, while in the short run, yes, the inflation situation, the input cost situation is something of concern. Frankly, we are long-term players and we are quite, you know, confident about not just the long, but the medium-term prospects of the whole home improvement sector, and we are ready for the next phase of growth.
Very, very detailed answer, sir. Thanks a lot and all the best, sir.
Thank you, Tejas.
Thank you. Participants who wishes to ask a question may press star and one. The next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah, thanks for the opportunity. So just one question. Basically, how have our market shares moved in waterproofing in past one year and three years? Also if you can indicate any market share trends, even if it's indicative in the four regions, west, east, north and south. Yeah. Thanks.
Okay. As far as waterproofing is concerned, Aniruddha, it has been one of our strong drivers of growth, and not just this year or last year, but for the, you know, therefore over the last, I would say 12, 24-36 months. Given our growth rates, it's I would say the market is consolidating. The number of players in the market is becoming, you know, a lot of the small and medium sector is suffering and the larger fellows are getting larger. I would suspect at, you know, we would have gained some market share or, you know, the market would have grown aggressively and therefore our market share would be constant.
It is, you know, it's a market that in our view, what is most important is the market grows faster rather than, you know, you take share from others, because obviously the largest single opportunity is winning against non-consumption. You know, given that pretty much six out of ten consumers in India don't do any proper waterproofing. That's the overall situation as far as waterproofing is concerned. On overall Pidilite also, if you look at our growth rates, so on and so forth, our belief again is in our core categories, be it White Glues, be it Fevikwik. We have gained some share largely because in, you know, times when, times are difficult, both from a inflation and input cost point of view as well as a supply point of view, the leaders tend to gain and consumers tend to gravitate towards brands that they trust.
It would not be a substantial movement, but there'll be a steady increase in market share. There is no substantial difference that we find in our performance across regions, which tends to show that, you know, we could have gained more in some area or so on and so forth. Our performance is largely secular. You know, one state, one year may have some issues, et cetera. If I look at a two-three-year basis, we are moving steady. The ship is moving steadily forward pretty much across the board.
Sure, sir. No, because multiple paint companies have been gaining market share. I mean, again, I believe that they are gaining market share again from the small-scale unorganized sector itself.
See, plus remember that most of the paint companies participate in the, what I call the renovation and the repair segment. A lot of them don't participate in the new construction segment because there the whole channel tends to be different. Plus paint companies tend to, you know, add their exterior paint sales to waterproofing to show a greater waterproofing number. I mean, in our books that is actually exterior paint which may perform some amount of protective function. If you add exterior paints, et cetera, then the paint company figures look nice. They have had exterior paints for 25 years, and earlier it was never called waterproofing.
Oh, okay. No, sir. Understood. This is fairly clear, sir. Yeah. Very helpful. Thank you.
Thank you, Aniruddha.
Thank you. The next question is from the line of Thilok from Dymon Asia. Please go ahead.
Yeah, hi, good evening. Thanks for the opportunity. Sorry for the, you know, background. You know, I just want to check on the volume growth with consumer business. Although we understand it's from a high base, what sort of trends are you now seeing? Are you perhaps, you know, focusing perhaps on the common trends that you observed with consumer?
Hello, but we cannot hear you. There is a lot of disturbance from your background.
I'll come back in soon.
Thank you. The next question is from the line of Mr. Krishnan Sambamoorthy from Motilal Oswal. Please go ahead.
Yeah. Hi, Bharat. Hi, Sunil. Bharat, from a technology perspective, what have been the efforts in reducing the pipeline inventory over the last few years? What are the benefits that you got from reduction in terms of, can you quantify those?
See, basically what has happened, Krishnan, I firstly, good to hear from you. Secondly, very good question. See, what we have done over the last two years is we have virtually taken the salesman out of the equation as far as inventory is concerned. Today, across Pidilite division, 80%, and therefore pretty much all of the major distributors are on a replenishment model, which therefore means that no salesman takes orders. The concept of, you know, month end or, you know, period end, stocking up, et cetera, is all, you know, something of the past. Everything is based on replenishment. Salesmen don't take orders. Dealers can order directly, which goes via the distributor. We've now, in a sense,
You know, while obviously during COVID, in some cases, we actually built up inventory because of the supply chain shortages, plants being closed in certain affected areas, so on and so forth. You know, given normally that, April, June tends to be a big period for us, especially in the areas of waterproofing, et cetera, what we build up a little inventory. The dealer pipeline, frankly, over the last 24 months is now firmly in our control and not an issue of concern at all for us. Very big, I mean, it's not something where I would say, "Hey, listen, major reduction has happened," because we've actually made this reduction now over a number of years.
It's again an area where we are clear that, you know, based on, again, product, I mean, we have a fairly well-defined algorithm based on the speed of the rotation of the product and how much stock a distributor carries, and that is now standard for all our divisions.
Got it. Bharat, one more question. While you did indicate earlier that there is less or lesser margin pressure compared to in the growth and pioneer categories, what about working capital? Is that proving to be longer than you had expected in some of these categories, or they are very much in control?
No, we are not finding, I mean, you know, with our retail footprint and our ability to influence in retail, we're not finding a substantial difference in working capital across the categories at all.
Sure.
I mean, where we find the difference, Krishnan, actually is the difference between B2C and B2B. B2B tends to have longer working capital, but that's always been the case. That's not something new.
Got it. Staying on working capital, Bharat, anything to call out on the international business? Is that, I mean anything unusual?
I mean, right now, of course, the issue of concern, of course, it's not big for us, it's fairly small, but it's still an issue of concern, is the closure in Sri Lanka. We were actually doing quite well in Sri Lanka over the last 24 months. Bangladesh has been a massive success story for us. You can see the numbers, and you can see that Bangladesh is, you know, virtually becoming another West Bengal for us, which is very good. Overall, you can see that what we have done, or, you know, and we had talked about this a number of years ago, that we are going to be an emerging market specialist, and we will keep gaining in emerging markets.
You can now see that all of our international operations are profit-making, are operations that are now, you know, in a sense synergistic with what we do and are doing fairly well. You know, today, over INR 1,000 crores of our sales comes out of exports plus international, and it's growing at a steady rate. There are no sudden ups and downs, and that's a matter of, you know, a fair amount of quiet pride for us.
Okay. Nothing to call out on working capital in this, any of-
No. No issues on working capital, absolutely.
Very clear. Thanks, Bharat.
Thank you. The next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Hi. Thanks for the opportunity. I would like to hear a little bit more about, you know, you mentioned that every quarter there will be an innovation from Pidilite. You know, are you referring to some big bang innovations, the likes of? Is there even an opportunity to, you know, on, in the core Fevicol portfolio, the way we had seen in the past Marine, then HiPer, Heatx? Is there an opportunity of innovation on that front? You know, you're referring more towards, you know, innovations within the construction chemicals portfolio, such as tiles, adhesives, and other such products?
Thanks, Jai. I think that's a great question. I must tell you unequivocally, we are referring to innovation both on the core as well as the growth categories. Just as in the past, we've done the Marine, HiPers and Heatx, now, obviously, for confidentiality reasons, I can't tell you what you will see coming because that will, you know, give a red flag to my competition. You will see innovations across both our core as well as our growth categories.
You will see a lot of these, obviously we are looking that have to be, you know, innovations that move the needle for us. At an organization level, you know, the numbers that we set for ourselves is that one third of our growth must come out of innovation, and we are well on our way, now, you know, we've got the pipeline ready to do that.
Understood. This, we'll start seeing from FY 2023, I mean, the next one or two quarters or still for FY.
You will start seeing from the second quarter of this year itself.
Second, I understand that, you know, you are catering to a different market when we think about waterproofing and paint companies are catering to a different market. When we compare the numbers, I think, you know, in scale terms, that value-added coatings, waterproofing with waterproofing functionality has probably exceeded the waterproofing portfolio that you have. Now, we are seeing similar trends in adhesives as well. I believe that, you know, paint companies are very aggressively selling low-priced tile adhesives. You know, that's a category that is growing very well for you. But my understanding is you're not participating in that commoditized tile adhesive product.
From a long-term perspective, you know, how do you think about, you know, the aspect that, you know, paint companies have always focused on mass, economy, scale, volumes, and you as an organization have always focused on high margin niche businesses, but they are entering some of your core categories, or future growth categories, you know, through that mass and volume game. How do you sort of think about that, you know, new competition in construction chemicals and waterproofing, where until maybe three years back, we thought that, you know, it's Pidilite and some of the international players. Now it's Pidilite, paint companies and of course the international players.
Again, great question, Jay. Let me answer the question in three parts. First, as far as waterproofing is concerned, frankly, the paint companies have just redefined their definition of waterproofing and added exterior paints and so on and so forth, which were coatings, which, you know, I mean, just as an anecdote, as a young marketing manager, I launched Apex in Asian Paints about 20 years ago, 25 years ago. We never saw it as a waterproofing product, right?
Correct.
Now to put it as part of your waterproofing portfolio, I mean, that's a choice that you make. If you look at pure waterproofing, we have always maintained that there is a right for paint companies to play in the repair and renovation segment, because in India, given the quality of construction, consumers tend to repair, renovate, and waterproof because there are leakages. Rest of the world, repair and renovation is, you know, 1/3 of the business, 2/3 is new construction. In India, it's pretty much, you know, the other way around, though now new construction is gaining. In new construction, the paint companies tend to play much lesser because, you know, in new construction, the consumer actually ends up at the steel and cement outlet and not at the paint outlet.
Paint comes only when, you know, when you have to do waterproofing when you're constructing, not after construction is complete. Now, therefore, when I look at the overall segment, frankly, I don't see any gaps in our portfolio. Yes, now a choice of whether we should play more aggressively in what we call paints rather than waterproof coatings is a choice we have to make, which we have up to now said that, listen, we still believe there is a massive market for us to address in terms of, you know, non-competition and converting people to using waterproofing, and that's where our focus has been. Paint companies have tended to rise to ride on our coattails and, you know, try and then look at how can they get a share of that.
Therefore, if you look at the institutional market, you look at the large market, the competition is still frankly the large multinationals and us. The paint companies largely don't play. Now, they would like to play there, but currently they don't. Similarly, if you look at areas like adhesives, in tile adhesives, see, the bottom end of the market is purely commoditized. It's like, you know what, if I was to give you a paint analogy, it was what dry distemper used to exist, you know, 30 years or 35 years ago, and slowly people went to oil bound and then acrylic distemper and then emulsion. We have basic tile adhesives too, but we begin at a level where we believe that there's a certain minimum quality that must be offered.
Frankly, when I look at my growth in both waterproofing and tile adhesives, without any doubt, we are gaining. We are not losing in any way. I think these are strategic choices that companies make. In the short run, you know, the volumes look good. I mean, you know, if I was to actually add back my tile adhesive volumes and, you know, equate the kilos of tile adhesives to the kilos of white glue that I do, my actual volume growth rate should go up by 10 or 12%. Frankly, I think that is, in a sense, doing a disservice to you people and to ourselves, so we don't do it that way.
Understood. One final question. You know, now Huntsman portfolio seems to have stabilized around quarterly run rate of INR 140-150 crore, which is about 50% higher than what, you know, at the time when you acquired it. Is the entire distribution synergy benefit captured or, is there any low-hanging fruit as far as distribution and top line is concerned for Huntsman?
There is definitely a low-hanging fruit and a distribution runway yet. We are still, I would say only two-thirds of the way there. There is still one-third of it still has to be captured. For a, you know, while Araldite is a leader, in my book, it is still a growth category and you will see in the results, hopefully in the next 12 months, that we're not going to come back to, you know, saying that, "Hey, this is a mature category." This is a growth category. We have shown over the last two years that we've beaten the acquisition case and what we had said by a large number, but we still believe there's a lot more to go.
Understood. Thank you so much.
Thank you.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi, sir. A couple of questions. Thanks for the opportunity. Sir, in the initial remarks you indicated volumes remain subdued on account of the pandemic and persistent inflation. Just wanted to understand this. If you can, bifurcate your portfolio into two broader categories. When we see demand, is this on back of, say, something like price elasticity of demand with the overall construction costs moving up? Or is it the inflation impacting discretionary spends? Sir, how should one understand this better?
Again, great question because to my mind, there are two different ways of looking at this. When we said, you know, demand was subdued, what tends to happen in an inflationary situation is whenever you are raising prices, the trade tends to stock up. One quarter looks much better than the other, you know. Therefore, while primary sales may not look so good, secondary sales frankly evens out. The second thing is in the pandemic, obviously what happens is there are closures. You know, cities are closed in March and in January and parts of February, we again had those, you know, you can't open on the weekend, you can only close on so and so times, et cetera.
That obviously impacts work and therefore work that should get completed in one month takes three months or, you know, more to complete, and that impacts the demand. The third thing is, you know, if you look at the consumer purchase basket, prices of everything. You know, while we are a very small part of home improvement, if a person is building a home in, say, rural India, and I was in rural UP two weeks back, and what the fellow was saying is, "Sir, if you look at the increase in cost of steel, cement, paint, so on," suddenly the consumer needs another 20-25% over last year to make the same room or to make the same two rooms. That obviously therefore like, you know, he tends to cut down, you know, because he's got a fixed income.
where we are seeing actually demand subdued is in small town, rural, and wherever there are, you know, economic challenges. The rest, frankly, in our view, will even out over a period of time.
Sir, this is quite helpful. Sir, when we say this is something which will even out, sir, what gives us that confidence, given I think food inflation is pretty steep. The actual discretionary spend is actually a question. It will come back. What gives us the confidence that probably say three months, six months? Sir, how should one understand that?
See, two things. Again, I think I share your concern because, you know, having seen this earlier, whenever there have been periods of high inflation, there is an impact on volumes, and it normally starts from the bottom end and then extends. Having said that, we are seeing some amount of tailwinds. You know, for example, Abneesh spoke about the real estate sector. Clearly there is a revival in the real estate sector, and Abneesh, up to now we're not seeing at least any signs of slow because suddenly you can see a slew of new projects being announced. Whether it is real estate, whether it's the consumer spending a lot more post the pandemic on home renovation, on home upgradation and the reopening, you know, of the whole commercial segment, be it hotels, be it restaurants, be it shopping areas.
Now a lot of these that were closed or were semi-closed have had to renovate and open. We are seeing that urban demand is still going decently. It's not, you know, depressed despite the kind of inflation we are seeing. I would, you know, to declare success, frankly, I would wait another three-six months before I declare success.
Sure, sir. Second question. In the scenario that we are in, what are the strategies one can actually adopt to beat or maintain margins? Are there any categories that we have wherein we even have an option to reduce grammage, given we have a formidable vast portfolio? Sir, if you can help me understand this a little bit.
Unfortunately, you know, you are reminding me of my good old confectionery days where every time prices went up, you know. I must tell you as a small anecdote, when we introduced the INR 5 Cadbury Dairy Milk chocolate, it used to be 20 g. I think it is now 5 g or 4 g. You can see the extent of pricing. Unfortunately we don't have many of those because as I said, if you're making a table at home or you're making a chair or you're, you know, making a wardrobe, the amount of product that you are going to use is never in the smaller quantities where the consumer is going to like, you know, downgrade substantially.
From a price point or margin perspective, really what we have to do is, while remaining conservative, keep making sure that we are slowly training the customer to the newer price points, to the newer prices, and getting her or him used to those price points. Because the way our product is used, where price points matter, we are obviously keeping those price points. Whether it be a Fevikwik, it be some of the children's art material, et cetera. The other places we have to just keep making sure that we're giving the consumer. We are being conservative and not taking it up too aggressively.
Sure. Sir, just continuing to the same question. Sir, how do you look at the margins when it comes to the industrial or the distribution channel in the current very inflationary scenario? Do we even look to tweak it, or we just wait for the demand to come and for the margins to improve with raw materials hopefully going down?
Could you just repeat that? I lost you for the last moment.
Sir, my question is, how do you look at the money that you put on the table for the dealer and the influencer, when the conditions are tough? Have you tweaked those variables, or do you intend to do that going forward?
See if, for example, as of now, you know, values are still actually looking good for the trade, so on and so forth, so we've not had an occasion to tweak. Whenever we do face, for example, like, you know, for example, during COVID, when we did face obstacles with influencers, et cetera, we actually did deals with Paytm and converted all of our points to money so that the person could literally get money. We have a lot of these other means available to us, which we keep working the trade.
You know, I mean, when I take a step back and you look at our business growth over the last year, if your business has grown, you know, 35%, then the trade is not so worried about margins as long as they are seeing that, you know, listen, the volumes will keep growing going forward. Therefore, our objective has to be to keep focusing and making sure that we grow volume in this inflationary environment because, you know, obviously you don't want just empty price-led growth.
Sorry to interrupt. May I request Mr. Ritesh Shah to please rejoin the queue? We have participants waiting for their turn.
Sure.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, everyone. Thanks a lot for this opportunity. I just wanted to understand, you highlighted that, you know, from a medium term or, you know, even if I kind of look at beyond the quarter demand environment as being relatively good, and the fact that pressures are primarily in core. In that sense, would you argue that the gross margin has probably bottomed out? Something that you had kind of highlighted that it'll bottom out in Jan-Feb in the last conference call as well. Or do you see some more near-term pain?
See, it's very difficult to say. Are we good to hear from you? In fact, if you look at it, in Jan-Feb, we thought will be, you know, a period where we will start seeing some amount of softening. Unfortunately, this whole geopolitical Russia-Ukraine happened and, you know, everything turned on its head again. If I look at the supply-demand scenario, I look at the overall scenario, at some point of time, it has to start evening out because, you know, capacities even today are far greater than demand. It's just that those capacities are not being realized. I would say in the next three, four months, you will still remain at elevated levels. It's probably only in the second half of the year that you will start seeing some amount of what I would say, softening.
That's when, like, you know, you would have to examine what the situation is. As of now, I don't see it going further. I mean, you know, unless there is one more black swan event. I do believe that we are at an all-time high. We've never seen raw material prices this high. In some cases now, you know, unless there are some special exigent circumstances, we do believe this is probably close to the peak, if not the peak itself.
Okay, perfect. I mean, and the commentary vice versa on margins as well, right? That is the right way to read it then.
Yeah.
We have reached the normalized levels, but it'll take some probably three, six months is what I hear you. We are kind of going.
It depends on what you define as normalized levels.
Your range. Okay. Actually, what the range that you say for EBITDA range, could you repeat? I mean, just for the benefit of everyone?
We say on a standalone basis, we should be in between 20 to 24.
Mm-hmm.
You know, we ended, I think, close to 20, 19.5, close to that. To my mind, we will still be in this 20%-24% range. Again, unless there are some, again, circumstances that are completely out of the blue. That will be our objective.
Okay, clear. Very clear. Just the last question is essentially from a more, you know, medium-term perspective. If you were to rank categories in the pioneer segment and, you know, which one would you say would be the most likely to hit growth, say, five years or three years down the line, which one would you call it out as?
Definitely tile adhesives.
Okay, perfect. Perfect. Where is the concern? I mean, where you were essentially arguing that the volume trajectory is something that you would still maintain. Commodity, commoditized players are not gonna be a concern as yet, is what I'm asking.
Absolutely. I mean, you know, in every market you will have, you know, when you're again creating a category, remember, world over, tiles are always put with an adhesive. You use sand, cement and adhesive. In India, eight out of ten are done with cement, so therefore the scope is like massive across the board, you know, across the spectrum.
No, no. Perfect. Yeah. Perfectly. Thanks a lot again for this, and look forward to hopefully meeting in person sometime soon. Thanks again for the opportunity.
Thank you, Avi. Thank you so much.
Thank you. The next question is from the line of Priyank Daga from Neeti Capital. Please go ahead.
Yeah. Hi. Thank you for taking my question, sir. My question is regarding the VAM prices. Can I get any idea about the price hike that you've taken in the last quarter and the inflation that you have faced percentagewise?
See, as far as price hikes are concerned, you know, over the last 12 months, depending again on the category, we, you know, we've taken different price increases. They could range from 5%-15%. In this quarter we've taken some pricing in some categories in May because we felt that the quarter one, which is the quarter four pricing really was at a peak which we had not expected, and therefore we needed to take price. The other thing, we're just closely watching this and seeing that, you know, what we need to do next.
All right. Where do you see the VAM prices going in the, let's say, in the next two quarters?
I wish I knew, my friend. You know, we thought $2,000 is the right area for VAM prices, but they are stubbornly at $2,500-$2,700. There are two major plants across the world that are closed, which are declared force majeure. I frankly don't see it going substantially above this, you know. It may be $100 above this at worst, but we do believe that it has to soften over a period of time.
All right. Okay. Thank you.
Thank you. The next question is from the line of Par Kishore from Keppel Capital. Please go ahead.
Yeah, hello sir. Actually, thank you for taking my question. Actually I see that the inventories have moved by a lot this year. Could you please explain that?
Just repeat your question. You were buffered a little, my friend.
Sorry, sir. Actually, I've seen that the inventories have moved up this year by around INR 460 crore. I mean, could you please explain that? I mean, why is the inventory build up being so high?
Yeah. Basically, this is in preparation for, you know, our biggest quarter in the year tends to be part the April-July quarter. Last year because of all of the issues around, the closures et cetera, et cetera and so on, we basically, had whittled down inventory. When you look at the comparison this year, we obviously had expecting a normal April to June, and we had built up the inventory substantially. Last year if you remember, the whole period was massively challenged in the, first quarter and therefore inventories tended to be low. A, it's comparison, B, it's an expectation of a better April-June.
Okay. Thank you, sir. It's not because, I mean, there's a build up in the at the company level or something like, build up at the dealer level or something like that the product is not moving itself.
When you will see this, when we will meet for the April-June, the first quarter numbers you will see that inventory will be back to normal.
Okay, sure. Thank you, sir. Thank you for taking the question. All the best.
Thank you. The next question is from the line of Saumil Mehta from Kotak Life. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Just one question on, from my side. Whenever, you know, in the past cycles over the last 10, 15 years, whenever we see large inflation and then it normalizes over a period of six-nine months, which should be the case this time around, the margin band for us, for strong leaders like us have moved up. Many years back, the normalized margin band used to be about 16%-20%, moved up to 18%, 22%, now about 20%-24%. I believe a part of that would be also-
Mr. Mehta, but you are not that clearly audible, sir.
Is this better?
Yes, please go ahead.
Hello?
Yeah. I heard your question about the margin band. Continue.
The participant has left the queue. We'll move to the next question, which is from the line of Ruchita Maheshwari. Please go ahead.
Hello. Yeah, my question has been answered. Thank you.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Thanks for the opportunity. Just one follow-up. Sir, just the question is partly academic in nature, but just wanted to gain some perspective from your vast experience on how the broader industry is evolving. Cement players are getting into paints are getting into adhesives, pipe guys are getting into adhesives and paints both. Has anything changed materially in terms of modes, how we used to know all this, in terms of distribution, branding advantage that incumbents had? Suddenly the way capital is flowing or getting fungible between the categories, it seems that some of those modes are no longer relevant. Just wanted to get your perspective on it.
No, you know, I think that's a great question. I mean, you know, while obviously all companies will look at adjacencies, it's always been the attempt of a large number of commodity players, whether they be cement, whether they be in, you know, equivalent categories, steel, et cetera, to try and keep moving up the value chain. In my view, Tejas, it doesn't matter whether it is paint or whether it is adhesive or whether it is, you know, pipes. Finally, the three factors that, you know, in a sense contribute to your moat is the strength of your brand, the strength of your, you know, customer relationship, and the strength of your user relationship.
If you are strong on all of these three, I mean, looking at other people's multiples and, you know, a lot of times, I mean, I keep hearing anecdotally that, you know, all these people look at the multiples of, you know, paint companies or companies like us and feel that if they entered our sectors, they would get the same multiples. But frankly, from a strategic perspective, you have to have a reason to win or you have to have a reason to disrupt. The moat in terms of the strength of the brand, the strength of the customer and user relationships and your, you know, hopefully ability to service via good supply chain. If that is strong, I mean, you know, competition will come and go, but it's not going to be easy for new players easily.
Fair point, sir. That's very helpful, sir. Thanks.
Thank you. The next question is from the line of Sachee Trivedi from Trident Capital. Please go ahead.
Hi, Bharat. Thank you for taking my question. I have a couple of questions. The first one is, you know, you mentioned about, you know, investments in technology and now that everything is on a replenishment model. Based on that, on first of April of any year, how much of, you know, your demand for the year do you already know?
I think that's a great question. You see, normally we will keep predicting and working based on, you know, we obviously have algorithms based on the last three months, based on the last one month, based on the last six months. We have a fair idea. You know, you would look at your secondary sales, not so much your primary sales. Look at any one-offs, like for example, when we will plan for this year's first quarter. Clearly we will look at last year's. Last year we had some amount of closures in May as a result of, you know, the wave of the pandemic. You will equalize for that. You will then add for innovation, so on and so forth, or any local factors, and then work that through.
I would say you have visibility hopefully at close to anywhere between 80%-90% of your demand.
Okay. The second question is in a sort of a similar context. You talk about innovation and, you know, you've launched very many products and some very good products, you know, over, like, over a period of time. How has training, you know, and educating your end user been, you know? How has it evolved? How has the difficulty of that evolved, you know, over the years? Particularly now with any number of, you know, competitors who are also trying to get to the same end user. Could you talk a little bit about that?
Yeah. I think again, absolutely relevant question. In fact, you know, one of the things we pride ourselves on is the strength of our user relationships and our ability to forge long-term partnerships with our users, which obviously therefore includes a fair amount of training, a fair amount of information dissemination on a regular basis. You know, I mean, just to give you an idea, we have 220,000 contractors, each of whom will have, you know, anywhere between 5 and 50 workers, who are pretty much in touch with us at least once in a quarter, dealing with us, so on and so forth.
This is frankly our bread and butter business and making sure that the user is, A, fully acquainted, B, sees our new products, and C, has a strong relationship with us, is frankly one of the reasons of our success.
Has that sort of education and training become more difficult over the years, or has it become easier maybe because of technology or because of, I don't know, do you reach them on an app? Do you like, how do you even reach them now? How do you even keep?
Actually, we have apps for each of our users. We reach them via apps. We reach them physically. Last year, for example, during COVID, we did over 1,000 user meets on Microsoft Teams. Now if somebody had told me two years ago that, you know, carpenters will be sitting and doing meets on Teams, you would have said, "Listen, guys, are you sure this is possible?" There has been that evolution. We actually use digital very aggressively. We have a very robust database, so we are able to push information on a regular basis. Today, a large number of the contractors have smartphones, and therefore you are able to share information. I mean, a large part of our digital effort is really around the user and the dealer.
Got it. Okay. You talked a lot about adjacencies and particularly, you know, your competitors moving into adjacent spaces. As an example of a paints company, you know, they are now also moving into, let's say, home decor and, you know, doing some of the painting themselves. In your case, you did take some strides and, you know, you took a stake in Pepperfry. Is that an area where you feel the need to enter, you know, sort of building your furniture?
We don't want to compete with our customers, so we don't want to build furniture. As the digital world changes, we definitely want to understand and remain close to the consumer. We have investments in Pepperfry, we have investments in HomeLane, we have investments in Livspace. We do that on a regular basis, largely to make sure that we are completely on the ground floor as far as the new age consumer is concerned, and our business is getting oriented towards being able to serve the customer in today's environment. We don't see ourselves as competitors to, you know, our customers in making furniture, et cetera.
Got it. Just one final question from me. What is it that you worry about, and what is the data points that you are looking at on a daily basis or a weekly basis, the macro data points or, even external, you know, sort of foreign data points or domestic data points? What are the data points you're looking at and what do you worry about the most right now?
I would say that's a great question. Two data points and one softer point, just to keep it simple. The two data points that I constantly worry about is, A, first and foremost, the price of oil, because everything in our category starts with the price of oil. You know, I think there's enough data now also in the Indian economy to show that I think over $80 a barrel, every $10 increase impacts our GDP by X. So really the two things I track closely is the price of oil and the actual inflation as far as India is concerned, because again, experience has taught us that inflation is the one thing that impacts demand over a larger period of time and keep a close watch on that. On the softer point, the thing I worry about is my people becoming complacent.
You know, as leaders you have to be a little more paranoid, and you have to keep looking over your shoulder and making sure that nobody's, you know, you're not taking anybody lightly or. We don't take any competitor however small or big, lightly. We, you know, obviously we will not make it easy for them in the market, but we treat them all with respect and saying that, "Listen, they must be having some strategy, and we must be clear how we want to tackle them." One of the things I keep telling my people is we must keep guarding against complacency because when you have more than 70% share in a lot of your core categories, that's a great danger.
Okay. Thank you so much. That's a brilliant answer. Thank you so much and good luck.
Thank you. Thank you so much.
Thank you. The next question is from the line of Suresh Maheshwari from Samco Mutual Fund. Please go ahead.
Am I audible?
Yes.
Yeah. Thank you for the opportunity. Sir, which business segments are we looking at for driving growth in the next two years?
We are very clear. We've always said we will grow our core businesses. The core businesses is where we already have a market leading position, and our job is to grow the categories. So whether it be White Glues, the wood adhesives, whether it be Fevikwik, whether it be M-Seal, these we would like to grow at rates of 1x-2 x GDP. The growth businesses where we are competing against non-consumption and we have to teach the consumer; we would like to grow at 2x-4 x GDP. Pioneer businesses that, you know, are very small or nascent today and we need to develop them, we want to make sure that each of them becomes at least INR 100 crores in three years. That's our simple formula on how we operate.
Sure, sir. That's helpful. Thank you so much.
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.
Again, let me begin by thanking all of the participants. I always find these situations or these calls stimulating as well as thought-provoking because given the range of questions, today we got a much wider range of questions and lots of new participants, so great to have that. At Pidilite, you know, our whole focus is we are a, you know, we see ourselves as they say, you know, a long-term player, a steady player who will make sure that we remain true to our strategy of being a pioneer, continuously evolving and growing categories, creating categories, being innovative and being a great place to work. That's really been the focus of how we've been moving forward. A lot of times things like this don't cover, get covered in calls, but for the third year continuously we've been voted a great place to work.
Culturally, we're seen as one of, you know, now a very attractive employer, as is visible from the quality of talent that is joining us. We're doing some really good work in the whole area of sustainability and CSR, which I will showcase at another time. As an organization, our objective is keep strengthening yourself, do the right thing, and frankly, the results will follow. You will have ups and downs. I mean, you know, we've had an extraordinary situation on input costs, but frankly that is also teaching us a lot and, you know, we will emerge stronger from it. I think the important thing is not to lose sight vis-a-vis your consumer, vis-a-vis your user and of course your investor. That's what I'd like to say. Thank you all for your time.
Thank you. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.