Thanks, Faizan. Good afternoon, everyone. On behalf of Axis Capital, I welcome you all to the Pidilite Industries Q2 FY 2021 earnings conference call. We have with us the senior management of the company represented by Mr. Bharat Puri, Managing Director, Mr. Apurva Parekh, Executive Director, and Mr. Pradip Menon , CFO. With this, I would just like to hand over the call to the management for opening remarks. Thanks, over to you.
Good afternoon, everyone. Thank you, Anand. I'll begin with a summary of the business and financial performance for the quarter and half year ended 30th September 2020 for the standalone business. There has been sequential improvement in demand conditions during the quarter. Rural and semi-urban areas recorded double-digit growth. Performance in metros, while improving sequentially, have still to reach pre-COVID levels. Overall, consumer and bazaar segment returned to growth, reaching at pre-COVID levels in most geographies. Growth was healthy in construction chemicals and DIY products. B2B segment continued to face headwinds. However, it showed signs of recovery in the latter part of the quarter. The profitability for the quarter was aided by benign input costs and strong cost optimization measures. While we are seeing signs of input costs hardening, we remain cautiously optimistic on steadily improving demand recovery.
Our plants are operating at a capacity utilization of approximately 90%, and operating efficiencies of our warehouses have been impacted on and off. On 3rd November 2020, the company has completed the acquisition of 100% stake in Huntsman Advanced Materials Solutions Private Limited, HAMSPL, for a cash consideration of approximately INR 2,100 crores, excluding customary working capital and other adjustments. HAMSPL manufactures and sells adhesives, sealants, and other products under well-known brands such as Araldite Karpenter, and Araseal. Now moving to financial performance. Net sales grew by 3.7%, with underlying sales volume and mix growth of 3.6%. This was driven by growth of 7.4% in sales volumes and mix of consumer and bazaar, and a decline of 7.2% in sales volume and mix of business-to-business, B2B segment.
Net sales for the half year ended stood at INR 2,388 crores and declined by 28% over the same period last year. Material cost as a percentage of net sales is lower by 283 basis points over the same quarter last year and 200 basis points versus the previous quarter. Due to availability constraints, our major raw material, vinyl acetate monomer, VAM, spot prices have moved up and have already breached the $900 mark. Consumption cost for Q2/21 of VAM is approximately $765 per ton as compared to $901 in Q2/20. Going forward, as I said earlier, we see this cost increasing. EBITDA before non-operating income at INR 473 crores grew by 35% over the same quarter last year on account of lower input costs and advertising and sales spends.
EBITDA for the half year ended stood at INR 570 crore and declined by 26% over the same period last year. Profit before tax and exceptional items at INR 455 crore grew by 22% over the same quarter last year. PAT at INR 339 crore grew by 5% over the same quarter last year due to tax reversal in the prior year with a reduction of corporate tax rate. On a like-to-like basis, PAT grew by 27%. Consolidated performance numbers. Net sales at INR 1,857 crore grew by 3% over the same quarter last year. EBITDA before operating income at INR 514 crore grew by 39% over the same quarter last year on account of lower input costs and low advertising and sales promotion spends. About subsidiaries' performance.
International subsidiaries have reported double-digit constant currency growth during the quarter. Domestic subsidiaries continue to witness a challenging business environment due to the pandemic. However, signs of revival are observed towards the latter part of the quarter. We are encouraged by the quarter two performance. However, we remain cautiously optimistic on account of the risks associated with the ongoing pandemic. Our focus would be to continually drive volume growth via investment in our brands, in sales and distribution, and in consumer-relevant innovation. That completes the statement from our side. I would like to hand over to Anand and the organizing team for the questions.
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 their 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. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah. Congrats, sir, on great numbers and the recent acquisition. My first question is on Huntsman. What was the thought process behind this? Huntsman is also into adhesive sealant, and you are obviously the dominant player there. Is it to get essentially lead over any other player entering if someone else would have acquired, that is the main reason, or it adds to your distribution or brand or product technology? That is the first question.
I'll obviously give it a response, and I'm sure Apurva will also chip in. I think in any kind of consumer business, when we look at a business, there are a couple of elements to look at. One is the kind of the brand that it has, the business model, and the kind of distribution opportunity. We have looked at all those elements. If you look at Araldite, which is the brand as part of the Huntsman acquisition that we've got in the process for the Indian subcontinent, this has leadership position in the epoxy adhesive segment. This is essentially very high-performing adhesives used in marble stone, metal, and bonding purposes.
Therefore, with the leadership position that that company has and the opportunity to improve distribution in the geographies, given the way we operate, the Pidilite model, connect with users and all that, these are the two primary elements. Of course, in terms of the business and the nature of the particular business that we have, it is in a shape which is obviously in the right box in terms of profitability, in terms of opportunity to grow from a distribution perspective, and these are the reasons why we have looked at that brand. Apurva, you want to just chip in on this?
I think you have covered most of the points, Abneesh, Araldite is obviously an iconic brand, an extremely well-known brand in its particular segment. Acquiring Araldite completes our adhesive portfolio in some manner. We were always present in epoxy adhesive for many years, but Araldite was the market leader. With the acquisition of Araldite, we have now a portfolio of very strong brands, including Fevicol, Fevikwik, M-Seal, and now Araldite. The acquisition, the main purpose was this. It was a very strong brand with a very strong position in epoxy adhesive segment.
That was my question that now in epoxy you will have your own brand and Araldite. Similarly, Araldite Karpenter or AeroSeal, you will have your own brand. How does brand architecture work in the medium long-term? You will retain both brands or there will be a price laddering, which will distinguish between the two, or region-wise, there could be some difference.
The overall strategy and business plan will evolve over a period of time. Generally, in all brands that we acquire, we maintain the brands, and each brand has its own position in our portfolio. Certainly, we will maintain and strengthen Araldite and the related brands like Araldite Karpenter. The exact positioning of that and how exactly we will grow them is something which we will develop over the coming months.
Just to last small follow-ups from here. Will there be a royalty which is required to be paid? Similarly, you have the trademark license for Middle East, Africa, ASEAN. In these geographies already, is Araldite present, or you would need to go there and tap into your own distribution, which might be there?
Araldite brand in Indian subcontinent has been assigned to the entity which we are acquiring, so no royalty will be payable. As far as license goes for Middle East, Africa, and ASEAN, it is a business that we will have to study and then decide how to grow. It's not a very large business. I'm talking about the segment for which we have got license. We will have to assess that market and then grow it, and we will have to determine the appropriate distribution network for that.
Right. My second and last question is on your waterproofing businesses. There, this quarter also, the services business you had acquired. There, this quarter also, there is a big dip. Obviously, Q1 was a washout. Nina Percept I'm talking about. What is the way forward there? What are the issues, if you could discuss? This was an acquisition done a few years back, and now suddenly things are looking quite different from your main business and your international business, et cetera. Is there any specific issue here, or it's more of a competition or efficiently spent?
Pradip, you want to talk about it? I'll just go ahead.
Yeah. I'll go ahead. See, there are two, three things here about Nina Percept. One is that, as you rightly said, it's waterproofing services. In a way, it is one entity of ours which has a absolutely direct link with the real estate sector and the performance of the real estate sector. Real estate sector, even prior to COVID, was going through significant challenges, and those challenges have actually got accelerated during the last six to seven months.
Having said this, while the quarter two performance, what you are seeing, obviously, is the performance in terms of revenue growth and profitability. The positive side that we are seeing is that there has been sequential improvement in performance of that entity even during the quarter. That is something that is giving us much more confidence going forward. Having said that, it is too early to say whether things are going to be a complete turnaround. It will be linked with the overall sort of performance of the real estate and the speed with which that sector recovers. While the consumer and bazaar segment, et cetera, you've seen the recovery in that segment. We are not obviously seeing the same pace of recovery there, and therefore it's still a watch-out. Yes. Do you want to add, Apurva? Yeah, essentially, this is new homes.
How much % of sales is to new homes for Nina? Apurva, you want to just take this?
Yeah. Virtually, for Nina Percept, the entire business is new homes. See, Nina Percept, their business model is to provide waterproofing services largely for new projects. There may be some repair and rehabilitation work, but their work is related to largely new buildings, new commercial complexes, infrastructure. A significant part of their revenue is from new construction activities. Just to add, of course, this segment is going through very difficult time, but Nina Percept is a strong market leader in this segment. Of course, this segment is stressed, but if you go back to, we had a very good performance in 2018/2019. 2019/2020 had difficulties ending the year with Corona. Of course, this year there has been lot of difficulties.
Inherently, it is in a unique, strong position. It is a market leader in segment where people require specialized waterproofing services for large projects. It has very good synergy with Pidilite. We are hopeful that as economic conditions improve, as the construction activities pick up, this business should also start performing better.
Thank you. Mr. Roy, may we request that you return to the question queue for follow-up questions. Thank you. The next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Yeah. Hi, team. Thanks for the opportunity. My first question was, again, on Araldite. If you could elaborate a little more on what kind of revenue growth profile, what kind of margin profile has this business seen so far, and what kind of revenue or cost synergies do you anticipate here? Any quantification, if you could share, that will be useful.
In our press release, we had already covered the calendar year performance of the brand. It was about INR 400 crore for that business in 2019. As far as the synergies on revenue and cost is concerned, I think it's a bit too early. Obviously, we have some internal thoughts and things. It's too early for us to really talk about it in a public forum for the simple reason that we need to take some time to understand the business. We believe that in about between 3 to 6 months' time, we'll be able to come back with a clearer picture to the external investors on where we see the opportunity. At a very principle level, the strength of Pidilite is, of course, deeper distribution and penetration across markets and across geographies.
Obviously we see some opportunities there, but it's too early to call that out at the moment. Latika, just to add to it, we know, obviously, this business very well. Araldite business with its distribution structure or with its end user profile, we understand this segment well, and we have also been a participant in epoxy adhesive for a very long period of time. We understand this segment well. We have good understanding and expertise in terms of both distribution and end user activities. We believe that all of this should help us to accelerate growth of this brand. In addition, we did the valuation at both reasonable revenue and EBITDA multiples. We are hopeful that as we accelerate the growth, this should be beneficial to the company.
Sure. What I was actually looking was for any kind of revenue growth in the past that you could share, but probably with your distribution footprint and initiatives, maybe that growth might not be relevant. Yeah.
The past period growth is not relevant.
Yeah
I think the last three, four years in India also has been through a little sort of a different kind of a situation in India, where the growth rate of almost all big companies were impacted. I would not really look a lot at last three, four years. I think going forward with the value that we will add, we are hopeful that we can accelerate the growth rate.
Sure. My second question was, you touched upon the waterproofing services segment, but there has lot of focus on initiatives to scale up presence in the other growth and pioneer categories which you outlined over the last few years, like floor coatings, wood finishes, tile adhesives, joineries. How do you assess your performance in these categories so far versus your own internal benchmarks? We'll exclude the COVID impact here. How should one think about growth for these segments going forward?
Pradip, you were saying something? Should I answer that?
No. Please carry on, Apurva.
I think, Latika, amongst the segments that you talked about, some of the segments are doing quite well. For example, tile adhesive with our brand, Roff, and joinery adhesive where we sell a variety of high-end adhesive for joinery market. Both of these segments are doing quite well. We have focused hard on developing the right products, building route to market, and doing other activities. We are good in those two segments. The other segment that you talked about was floor coating. That was the acquisition which we did of a company called CIPY. This company, like Nina, is impacted somewhat because of the new construction-related activity. A lot of their business is into new construction, including flooring for various projects, parking lot, the large buildings.
That segment is impacted, again, like Nina, CIPY is also in a unique position as far as market position goes, and we believe that as market improves and some of our initiatives take shape, we should be able to improve the performance. That is on CIPY, otherwise both the tile adhesive and joinery business are doing well. There is some COVID impact, both businesses are doing well and have started to recover very well.
Sure. Thank you so much.
Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question was on, you mentioned that the India recovery has been led by waterproofing and DIY. I wanted some trends on how the woodworking adhesive business is doing. Is that still relatively weaker because of the higher linkage to real estate? We do hear that there is a pickup in the real estate market, a lot of registration, at least in the bigger cities, starting to happen. Are you seeing trends where this woodworking adhesive segment is now starting to see good improvements?
Thank you for the question. As I said in the opening remarks, we are seeing a sequential improvement in demand conditions during the quarter, and it's like every month has been better than the previous one, and that is also true for the woodworking adhesives. We are seeing a similar trend in those segments as well. Having said that, what was the second part of your question? Whether you are seeing any other trend? What was the second part?
No, I was talking about the talk of a potential pickup.
Yeah
in the real estate market. Any sales types you are seeing that is happening in the larger cities?
Again, real estate, it's too early to really take the call. Certainly from a demand situation, we are seeing things where there was no demand or there was hardly any offtake. We are seeing that improvement in the quarter. There are certain projects which were sort of stopped. There could be also, frankly speaking, there is also an impact of Q1 where there was no offtake at all, and when things open up, there will be some bit of pent-up demand also coming through. I think that is something we have to be cognizant of. Having said that, we are not seeing any very clear signs of a real estate pickup or a recovery. Too early to call that out.
Okay. My second question was on margin. A couple of questions here. One is the VAM hardening, despite crude being low, is it a short-term supply issue that you feel is there, or is this now that prices are going to, in your sense, it is not driven by any supply kind of a issue right now? Second is the other expenses which have seen a big reduction this quarter year-on-year. How much of this is kind of a permanent reset of your cost structure due to cost efficiencies, and how much would you say would come back in the due course of normal business?
Yeah, I think they're good questions. I think on the VAM, I think when COVID happened, there was a sort of a sudden abnormal drop in the prices of VAM in terms of spot prices. We are seeing the cost going back to the pre-COVID levels. That is really what is happening. We are not saying there is an inflation over last year or something. At $900, last year, similar time, the VAM prices were about $900 as well. It is more a movement from the current low going back to the previous situations. Sustainability or otherwise of these prices, very difficult to say that. There have been certain force majeure lockdowns of capacity in parts of the world where the production is happening, which has impacted it.
Whether all of that will come back, supply will come back, prices will come back to lower levels due to lower crude, very difficult to predict at this stage. We are right now operating on the assumption that the prices have gone up, and obviously we need to run our business, et cetera. There will be an impact going forward from the higher prices. As far as other expenses are concerned, there is some element of cost control, which may take, for example, travel and so on, because all of the original way of operating and the physical meetings and the travels have not gone back to the same stage as it happened pre-COVID. The bigger impact is coming from the lower amount of spends that we've had in the advertising and marketing space, and that will obviously come back now.
We want to invest behind both advertising and sales promotion going forward to drive volumes. A lot of that drop in costs will not be sustainable. It will come back in the coming quarter.
Okay, thanks. That's it from my side. All the best.
Thank you.
I just want to add one more point before we move to the next question. We have always said that we like to operate in an EBITDA range of between, let's say, around 21%- 24%. That's the kind of range we want to operate. Obviously, this is well above those ranges, and we see an opportunity to invest behind the brands which we have not been able to in the past few months. Of course, the costs coming back.
Thank you. The next question is from the line of Jaykumar Doshi from Kotak Securities. Please go ahead.
Hi. Thanks for the opportunity, and congratulations on a great quarter in context of the environment and acquisition of Araldite. I have a couple of questions on Araldite, and I know you've answered some of it. How big is epoxy adhesives market in India? Can you give us some color, whether it is under index versus polyvinyl adhesive and rubber-based adhesive as compared to other developed markets? If you can give some idea about distribution of Araldite today, how does it compare versus your distribution? That's my first question, and I have one more, which I'll ask later.
Yeah. Apurva, you want to take this?
I think you asked three questions in that, but I think first I'll address about distribution. Certainly, the distribution reach of Pidilite is much higher, as even Huntsman in their press release said, they could bring it to a certain level, and they expect us to take it forward with our distribution reach. Clearly, Pidilite as a company has a far deeper distribution reach. We don't have-
Any color you can give in terms of the towns that they reach or any information?
No. As you know, this kind of information is not shared during acquisition stage. Generally from our idea, our distribution reach is far more deeper. They will have direct and indirect reach, but our direct reach is far greater. We'll have much greater clarity on that as we take hold of this particular business. As far as usage and penetration, Araldite, like PVA, the epoxy adhesive as a category, has similar kind of penetration level, I would say, like PVA, because it has been in market for a long period of time, and there is a widespread understanding and usage of this as a product category. What was the third question? The market size.
Yes.
The market size, it is difficult to estimate. Like in PVA also, we sort of shy away from saying what is the estimated market size, because there is no official or there are no well-known figure to state that. Araldite had good market share. I would not again like to say what is the kind of market share, but Araldite had a fairly large market share. You can derive based on the Araldite share as a company, the sales figure that we have shared. It is not as big as PVA kind of a market, but it's a fairly sizable market.
Just a small one. Would this need Competition Commission approval, or it won't be required?
No. The transaction is already closed. Transaction is already completed, so it did not require any regulatory approval and transaction is already completed.
Understood. Got it. Thank you so much.
Yeah.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, sir. On the margin side for Huntsman, just wanted to understand how should we look at your thought process on their EBITDA margins. Is there scope for expansion or is it going to be largely sales driven that you are initially thinking? I know a lot of it might change, but I just wanted to get your first thoughts on how are you kind of looking at this acquisition, sir?
Yeah. I'll give it a shot, and I'm sure Apurva will have additional points. I think one is that it is a profitable business. I think the focus at this moment is to make sure that how do we identify the opportunities on growing the business. The profitability is not really the number one agenda as far as we are concerned. Having said that, if as we go along, we identify any opportunities of optimization of cost, we'll look at that. Driving distribution and operating and bringing the Pidilite way of working, that's the kind of focus that we'll have.
Okay.
What I would like to add is, Araldite business already has very healthy margin. In addition to that, we believe that there will definitely be lot of cost and revenue synergy. Araldite is a very strong brand, there is multiple ways in which we can use the brand to grow the business. We can potentially add new products. We will expand distribution. A number of initiatives are possible because this is in our product category and segment, which is very well known to us. Number of ways. The primary thing would be to grow the top line to accelerate the growth rate. Once we do that, it will result in overall higher EBITDA. As far as profitability goes, it is a very profitable business. That is something which is good. Our primary focus would be to accelerate the top line.
Sir, who would be the next biggest competitor after Araldite?
In epoxy adhesive segment, there is Astral and Pidilite. Astral and Pidilite are the other two competitors other than Araldite.
It would probably be Resinova after that only, right, sir? I mean.
What I meant by Astral, Resinova is owned by Astral, so that is what I meant.
Correct. Yes. Okay. Sir, secondly,
There are number of others, like in PVA also, number of other.
Regional and other players. There are large number of players in any adhesive category. epoxy adhesive is also similar, but top three are likely to be Araldite, Astral, and Pidilite.
Okay, sir. Sir, just to add a few bookkeeping questions. One was on the reduction in inventory. I just wanted to understand, was this largely raw material rate or was there any finished good or is this sustainable, this inventory reduction that we have seen on year-over-year as well as from versus 4Q?
Typically, the inventory numbers this quarter versus, let's say, March or even previous year, may not be strictly comparable because if you just look at from a balance sheet perspective, if you look at March, we did have a lockdown where sales were not there for last 10 days of the month and therefore inventories were higher. That's strictly not comparable. Having said that, the levels of inventory that we're having in and around these levels are sustainable.
Okay, sir. Lastly, sir, I missed the VAM price data. If you could kind of give me 1Q, 2Q as well as current, sir, I missed that. I joined a little late.
Sorry. Yeah. The quarter two consumption was $765 per ton, quarter one was $823 a ton, and current spot prices are going around $900.
Okay, sir. I will come back in the queue for the other question. Thank you very much, sir.
Thanks.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one. The next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead.
Hi, good afternoon. Congrats on a good set of numbers. My first question is on the consumer and bazaar products. The sales growth there is quite robust at about 9.5%. If you can give some flavor within that. Basically, which sub-segments are growing faster than average, which sub-segments are lagging, and if there's any sub-segment which is actually not yet in positive territory?
Yeah. We did give a color in the opening statement, I'll just repeat some of those points. I think one is, we called out from a geographical perspective that the rural and semi-urban areas have recorded a double-digit growth. This is within the consumer and bazaar segment. We are seeing tier two cities, sort of while urban overall is recovered, but the metros are still not yet at the pre-COVID levels. The tier three cities, the smaller cities, obviously come back to positive territory. This is from a geographical perspective. If you look from a business perspective, construction chemicals and do-it-yourself products, these are the ones where you've had growth momentum. In fact, this we had also called out in our previous quarter commentary. That momentum continues.
Even as far as woodworking adhesive is concerned, as I said earlier, that has also gone into a positive territory. Albeit, of course, not at the same level as the construction chemicals or the DIY. That's the overall color of the growth.
Sir, construction chemicals, just correct me if I'm wrong, is mainly the waterproofing segment, right?
Yeah. You've got tile adhesives as well in that. Together.
Waterproofing would be a fairly large part of the construction chemicals.
Yes.
You mentioned earlier that, in some respects, it is linked to the real estate cycle, and the real estate, there's no sign of sort of revival yet. How do we tally these two statements and how do we sort of make sense of this growth in construction chemicals? What is really driving that? Is it not linked to new asset creation and is it just people redoing their houses which is driving the growth or what is it?
Yeah. There are two, three things playing out here. One is, typically, these waterproofing, there is a significant amount of work done in Q1 before the monsoons. Because Q1 was a lockdown kind of condition, there was a lot of, obviously, things in terms of demand which slipped in from Q1 into a subsequent period. Once the monsoons retreated, obviously the demand has come back. What part of the recovery or what part of the demand is coming exactly from new construction or from repairs and renovations is difficult to exactly pinpoint. It could also be certain constructions which are ongoing, where work has stopped and now recommenced. Difficult to put a finger on it. That's the way you have to read this.
Let me add to that, Pradip. Sorry to interrupt you.
Yeah.
Just to sort of help you reconcile. When we talk about real estate, we are talking about these multi-story, large projects in bigger cities, metros. That segment, particularly that segment is impacted. When we look at NCR, Mumbai, that kind of market was multi-story, large construction. That is what typically people talk as real estate, and that segment is impacted and that is showing in the lower growth or decline in sales of our subsidiary like Nina. A large amount of construction in India is one story, two story construction, which happens outside of metro, and that is a much larger share of the market. It is a very significant share of the market in terms of if you see construction, cement consumption, and everything else. That segment is doing well. That is not impacted.
When we all say what is impacted, is this real estate in larger cities. Otherwise, this smaller one or two storey construction or construction activity in smaller town or rural area, that is doing well, and that is aiding the growth. I hope that allows you.
Very helpful, sir. My second question is on the margin. You did mention that you would like to be within a 21%-24% band, and right now this quarter is much higher at 27%.
Okay.
Just wanted to understand whether this reversion to your guidance is something which will happen at some point of time in the future, or is it something more concrete and palpable, which we can see that the reversion can happen within nearer time frames?
Yes. Obviously very difficult to put a number and a month where it will happen, but certainly in the next six months, within this period, we do see this coming back. As I said, because the input prices have gone up, and that will have an impact on future consumption from a raw material cost consumption perspective. We are going to start to invest behind our brands in the coming months. You will see that coming back within the next six months.
Very helpful, sir. Thanks and all the best.
Thank you. The next question is from the line of Mohit Pandey from Citigroup. Please go ahead.
Yes, sir. Thanks for the opportunity, sir. Just needed some data points on the acquisition. If you could share the 2019 PAT number, that would be helpful, and also the current gross block.
Okay. I'll start with the gross block. You're saying gross block in terms of assets?
Yes, sir.
Yeah. This entity is having a very minuscule amount of fixed assets. The arrangement that this entity has is in terms of tolling. The assets Hello? Yeah. I think they have tolling arrangements, and the assets are not necessarily in their books, but the assets are through the conversion cost route. Asset block is not a material number to look at. Coming from a PAT perspective, et cetera, I don't know whether we can really have that specific number to share. Suffice to say, as we have said earlier in the call, that it is a profitable business. The PAT would also be quite a healthy set of numbers. Whatever we had in terms of external communication, we have given in the press announcement.
Okay, sir. Secondly, how is the acquisition being funded? The INR 2,100 crores.
Yeah. The acquisition has been funded from internal resources. As you know, we have a large treasury, and so essentially it is through liquidation of the treasury investments.
Okay, sir. That's it from me. Thank you so much.
Thank you. The next question is from the line of Anand Shah from Axis Capital. Please go ahead.
Yeah. Hi. Thanks. Just a question on the construction chemicals market. We've seen this sort of a market expanding quite well even in such times, and we've seen a lot of players now, especially in the organized segment getting very active in this space, especially the paint players. This time we are seeing growth all across broad-based for everyone. What kind of underlying drivers are you seeing for this market? Is it now at an inflection point? Is it that all of these guys are spending a lot and you are seeing big uptakes for categories across?
Yeah.
Yeah.
Go ahead, Anand.
Sorry, Anand.
Okay. No, I think, see, we would not like to talk about things like inflection point or what about what others are doing. If you know what consistently we have been saying for many years, that this is a very large market, and this is a market where there is a great opportunity to expand consumption, and that is what we have been working at. We believe that, and we continue to believe that this is a large market which requires serious effort to really grow the consumption. We have been doing this, and we will continue to do that. We would not like to comment on the state of the market or whether it is an inflection point or not based on the current quarter or anything. We continue to remain very bullish on this market.
We continue to invest in building brand, expanding distribution, introducing new product. You have seen various activities from us in last couple of years, including some tie-ups, joint ventures. We are very committed to the market. We continue to invest in the market. We are hoping that this market will continue to grow at increasing growth rates over the coming years. We would not like to comment on the activities of others or whether it is at some kind of an inflection state.
Sure. Thanks. Just a question for Mr. Puri. You've always referred to the growth in the pioneer categories within the portfolio. Any comments, especially if you can give on some of the pioneer categories, how they're doing? Sort of growth plans over the next two, three years.
See, we are clearly well-positioned in the pioneer category. Some of them are already on the high growth path. If you look, for example, at our tiling adhesive businesses, they're already in the high growth path. The others, for example, two of them, we are in factory construction phase, which will be complete by the middle of next year. Absolutely in line with our plans, as we've always said, we will have a set of growth businesses that will be firing for growth today and a set of pioneering businesses which will start firing for tomorrow. Absolutely in line.
Okay. Perfect. Just lastly, on any new launches that you have done or sort of planned out for the next year within any of the categories that are doing well?
See, we have an innovation program that runs across each of our divisions. As we speak, for example, each of our divisions will be rolling out a set of products. For example, we've rolled out a whole range of sanitizers, et cetera, for the trade as well as for our masons, plumbers, carpenters. We will leave the end consumer to the large FMCG companies. We believe there's a larger opportunity with the trade and therefore with our intermediaries. We have a range of products there. In each of our divisions, we have sets of products. We've got a whole range, for example, of sealants that we've launched under the Feviseal brand, which is across divisions. We have an innovation program that is ongoing.
We've recasted in the context of the current pandemic, but that's an ongoing program and on a regular basis, we're very clear that about one-third of our growth should actually come out of new products or products under launch.
Okay. Thanks for sharing this. Thank you.
Thank you. The next question is a follow-up question from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah. Hi, Mr. Puri. Congrats to you also in person for the acquisition. My question is because you also have the FMCG experience, Cadbury experience. Wanted to ask two questions related to that. One is, all FMCG companies have doubled, tripled their online sales within one year because of the COVID crisis. How is Pidilite catering to this by bringing exclusive products on online or maybe much higher focus on online, more partnership, maybe even at some stage, your own e-commerce site. Could you elaborate on that?
We've obviously absolutely ramped up online. Remember, for us, online is largely in the context of our consumer product businesses. The intermediary-led businesses or the large Fevicol-led businesses currently still don't have an online component, even outside India. In these businesses, we've ramped up. We've done very well in the last four months, we have a set of plans on how to make this, in a sense, an independent large channel. Some of the products, for example, if you look at WD-40, the online sales has now become significant. We're learning from that, moving on. In the interest of keeping some of the things confidential for our competition, you will see that for us, this will become a significant channel over the next 12 months.
You would have also doubled your online sales in one year?
Sorry?
Would you have doubled your online sales in one year? Last one year.
Much more than doubled.
My second one, again, related to FMCG background, if you see HUL or even maybe Cadbury, I don't know. HUL, for example, in same product category will have multiple brands. Huntsman and Pidilite, can they also play a similar role? I had asked this question earlier in today's call only. Now my question is more in terms of different price points, because they will obviously be competing with each other. They would need to have a different price point, different proposition. Is that something you'd be thinking of?
Absolutely, yes.
This is the operator. Sorry to interrupt you, sir. The audio is breaking from your line.
Okay. Let me try and figure out a better location for that. Can you hear me better now?
Yes, sir. Please go ahead.
Yes, Abneesh, absolutely yes. Based on our own consumer goods experiences, we will keep looking at certain offers which are exclusive for e-commerce, some which we believe are certain audiences may be introduced through e-commerce. There is a whole set of plans you will keep watching as we go forward.
Sir, one question on cement sales and putty sales for the industry. The cement sales numbers have been also quite decent for the industry, and putty sales, you must have seen the paint companies, most of the growth is coming from putty only. If you benchmark against those numbers against your own adjacencies, how does Pidilite compare? We don't have the numbers, that's the reason why I'm asking this question.
See, very difficult because remember, putty is really a commodity business, and it's not, therefore, a business that I would say is a long-term brand building business, so as to say. If you are transporting large amounts of calcium carbonate, a little bit of polymer. I leave that aside. As far as we are concerned, as we look at our adjacent businesses, we are clear where we can add value, where we can create brands, and that's where our focus is. We are not interested in operating at the low-value end of the market where over time, commoditization will happen.
Right. Sir, last question. Nina had asked questions, but last one follow-up there. Nina has been struggling because of the exposure to new homes. Essentially, it's that only. Why isn't Nina targeting the standalone properties, the old properties? Because that's a much, much larger universe. In Mumbai, I see so many players addressing that part. What is the reason for that?
See, that business is not what I would say, a good margin long-term business. What we are doing with Nina is, as real estate is suffering, we're pivoting the business a lot more towards larger corporates. For example, we did the new Kia factory in Andhra Pradesh, we did the Samsung factory in Noida. What we are doing is we are pivoting the business again towards larger customers, but towards larger customers who are not dependent only on real estate, but are across the whole, what I would say, the larger construction and infrastructure sector. For example, we've done some tunnels now in Jammu and Kashmir. We're actually turning the business where there is value, there is technology required, and therefore there is a long-term value proposition.
What happens in the repair, and this is a commodity business which is good for the very short term, but not good beyond that.
Yeah. Thank you, Mr. Puri. Thank you, Mr. Parekh.
Always a pleasure with you, Abneesh.
Thank you. The next question is from the line of Farhan Amlani from SBI Life. Please go ahead.
Yeah, good afternoon, everyone. I have basically two questions. First is, like many paint companies, for example, Berger Paints are actually entering the waterproofing space, and they have better synergies. How do you take the competition from that? The second question is what are your future plans? Like, mainly they'll be inorganic or you are looking for organic growth opportunities. Thank you.
I think firstly, let me just, Mr. Amlani, take a little exception with you. I don't think Berger has better synergies than us in this business. Remember, construction chemicals is about new construction and repair and renovation. In most markets, new construction is 70% of the market, 30% is repair and renovation. Where the paint companies play is in repair and renovation. Largely, new construction goes via the steel and cement channel, where a lot of the times the paint companies are not present. Having said that, to win in waterproofing, what you require is strong brand, great service delivery, and a great network. Now, in all three, remember, we have a 10-year lead. We've always said that given that three out of 10 Indian homes do any form of waterproofing, competition will actually help expand the market, which is what is happening.
Please remember, in a large marathon, we are at the halfway stage. A lot of these companies, such as Berger, are just going around the first bend. Let's see. Let them come and participate in the race, and after some months or after some years, you can ask them the question. The fact is, if we look at our last quarter, our fastest growing business is the construction chemicals business. If we were getting impacted, then it would not be our fastest growing business. Remember, for us, we are growing at a base many times our, in inverted commas, newer competitors.
Okay, yeah. No, I was talking about, like, they have an upper hand in painting.
No, in painting, yes. Remember, the painter does repair and renovation. A painter cannot do waterproofing for a new construction. He doesn't understand it.
Yeah, I get it.
It is done during the stage of construction. That is 70% of the market.
Okay. Thank you.
Welcome.
Thank you. The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead. We'll move to the next question. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Sir, first question is, can you break down the transaction value? I think it's $285 million, which includes a closing amount of $158, and the balance is subject to certain milestones. Can you provide some more color on this? That's the first question.
I'll leave that to Apurva.
Hello? The transaction value, the question, the breakdown of transaction value?
Yes. I think its total is INR 285, which we indicated. It is INR 157 million on closing, and the balance is subject to certain milestones.
Correct. 90% is paid upfront, and the 10% is linked to a deferred consideration, which is linked to the revenue achievement over the next 18 months. 90% of the transaction value has been paid upfront.
Okay. This revenue achievement, can you provide certain numbers over here? Is it something product specific or how should one understand it?
No, it is a very simple thing. For any six-month period, the annualized sale for any six-month period, once it exceeds the 2019 sales figures, then the earn-out is payable.
Okay. Sir, how should one understand this? Will we be having control of Araldite's retail chain, or how should one look at it?
No. See, we have bought the entity in India which owns the Araldite trademark for India. They own the Araldite trademark for India and that particular entity we have bought. We have the control on the trademark in India. We have given trademark license to Huntsman for certain usage in manufacturing industry. Otherwise, we are the owner of Araldite trademark, and we have the full control on the business. Earn-out is just a mechanism by which the part of the consideration is paid on a deferred basis. We are running the business effectively day before yesterday, since closing. Okay.
We are now managing. The closing has already happened, and the business is now in our hands.
Okay. If at all the top line doesn't come, we probably get the business at a lower price. Would that be a fair conclusion?
That would be a fair conclusion, but that is not the objective. The objective is obviously to accelerate the growth and to pay out the deferred consideration. Because of the current uncertainty, this is how it was structured, which was mutually acceptable to both parties. The objective, of course, would be to accelerate the sales growth, and that would result into payout of deferred consideration.
That's wonderful. Sir, my second question is, we have a rich proven history on acquisitions and all. I was just thinking about it, like, we already have Fevitite, we already have a quite deep penetration, which you indicated it's one of our core strengths, and we have a solid brand. What was the need for Araldite? The Fevitite product itself, we could have made it into Araldite or when it comes to market share. If one had to retrospectively look at things, how would you look at it? The reason I'm saying is we have all the ingredients to actually consolidate the marketplace. Why is there a need to acquire such a brand? Because we are a larger brand when we look at things optically. Thanks.
I'll take that question, Apurva.
Yeah, go ahead, Bharat. Yes.
See, I think that's a great question. I mean, the simple thing is Araldite is an old, established, and iconic brand. For us, it will take us a certain Yes, can we win with Fevitite over the longer term? The answer is yes, it will take a number of years and a great amount of effort. We felt for the price that we are paying for the Araldite brand, it actually accelerates our leadership in that segment. It gives us a brand on which we believe we can build substantially, both from a brand as well as a sales and distribution perspective. We thought the value works for us, and therefore, we've gone ahead with Araldite. We will still keep our portfolio of brands. In a sense, it now gives us a full portfolio in the one chemistry where we were not leaders, we become leaders.
Otherwise, it probably would have taken us a large number of years to do the same. Really, what we've done is we've bought the accelerated position via the acquisition.
Correct. Sir, that's helpful. Sir, if I had to ask you, if you had to quantify it in numbers from a capital allocation decision, like we have a solid balance sheet, we can easily afford to achieve this acquisition. If one had to look at it from a payback period or from a IRR point of view, what is our internal thought process when it comes to something inorganic or organic? Taking this Huntsman transaction into perspective? Thank you.
You take the Huntsman transaction, we are a conservative management. A lot of these now, what I call your cousins in private equity, are paying very large prices. We believe we work with our internal benchmarks so as to say where we can generate a decent IRR, we can generate, in our view, good revenue and cost synergy. If all of that adds up, then therefore it makes a substantial difference to us and is much higher than our IRR benchmarks. That's when we go ahead. That's the formula that has worked for us over the number of years. If you look at our successful history on acquisition, that's our formula. There's no secret to it, and we believe the same applies to this Araldite acquisition.
Okay. I'll join by the queue. I have more questions. Probably I'll follow up with a separate call. Thank you so much.
Welcome.
Thank you. The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.
Yeah. Hi, sir. A couple of questions, mainly on the Huntsman acquisition. The first one being that, like the earlier caller also talked about the kind of money which we have paid. We already have a presence there. Is the size of Araldite bigger than the sales which we have got in these epoxy adhesives? That is my first part of the question. Secondly, is its EBITDA margin accretive for Pidilite? Thirdly, what will be happening to these intangible assets of goodwill? Will Pidilite be writing it off in the balance sheet or will they remain as such?
All yours, Apurva.
Yeah, I think, the first question you said was in terms of the size, or what was the first question?
Sir, we are already present in the epoxy adhesives, is the size of Araldite bigger than our existing presence over there?
Yes, of course. As we said earlier, Araldite is a strong market leader, iconic brand, and a strong market leader. The sale of Araldite is higher than our brands in this segment. Yes, it is much higher.
Okay. Sir, is it EBITDA margin accretive?
EBITDA margin, yes, it is a very profitable business, and its EBITDA margin is comparable to Pidilite's EBITDA margins.
Okay. Thirdly, sir, what will happen to the intangible assets which will come along with this acquisition?
Right now, we have acquired the shares of this company. We have right now invested and bought the shares of the company. The intangible value remains in that company. Going forward, we would determine the right structure of it, and that would then determine the write-off of the intangibles. As of right now, it's a standalone company, and the investment, it will be shown as an investment in our books.
No plans as of now to merge this Huntsman into.
As of right now, plan is to run it as an independent entity and to grow it well. Then we will take a consideration in terms of what needs to be done. In short term, we will run it as an independent company, that is the current plan and thinking. Okay, sir. Thanks a lot.
Thank you. The next question is a follow-up question from the line of Latika Chopra from JP Morgan. Please go ahead.
Yeah. Hi. Just one clarification. You mentioned that you're running at capacity utilization levels of 90% in the beginning. Are there any thoughts of any significant CapEx around the corner? Thanks.
Yeah. I'll take that. As you know, we operate with a CapEx in a range of about 4%-5% of our revenue. That is going to be the kind of spend that we'll have. As we speak, there are almost nine plants in India, which are right now work in progress. None of these are going to be beyond this range of 4%-5% of revenue that I mentioned. All the spends that we will be doing will be within this range. Therefore, that's a continuous process of evaluation of our capacity versus our ability to service. That process continues, it's not going to be a significant amount of differential spend. Hope that clarifies, Latika.
Yeah. Thank you so much.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi. Thanks for the opportunity again. I'll just continue where I left. Sir, my question specifically was on capital allocation. Now, specifically for the Huntsman transaction, if one looks at the INR 2,100 crores, 35% margins, it would essentially imply, if on no growth basis, we are looking at a 15-year payback, a rough math. Sir, I would like to understand what are your internal numbers, or how is your thought process when we go for something inorganic? The question bounces back to we are a solid company, brand, distribution. We know the market better than probably anybody else on the street. How should one justify the multiples that we are paying over here?
Apurva, you want to take that? Or should I give a basic introduction? Hello?
Apurva, your line is in talk mode. Please go ahead.
Sorry, my line was on mute. I think, Ritesh, no valuation is done based on a fixed growth basis. A payback period of 15 years, assuming no growth would not be right assumption. Certainly, we expect Indian market to grow, we expect our business to grow, and we expect growth to accelerate. We have a proper internal valuation methodology for evaluation of all our acquisitions. We believe that we have done the acquisition at right valuation and having reasonable growth assumption. Besides that, it is a market leader, and it is a iconic brand, which also allows us to have number of other cost and revenue synergy. Overall, we believe that our valuation has been reasonable. Bharat, if you want to add to it.
Yeah, Ritesh, we've always said, even if for a moment I consider Araldite, it'll probably fall somewhere between a core and a growth category. Even if I call it a core category, our objective would be to grow it at one and a half times GDP at a minimum, then add on synergies from a revenue point of view. The fact that obviously Araldite today, given its limited presence, does not reach two-thirds of the places that Pidilite as a company does is an obvious opportunity. Like that, we also believe the brand has opportunities. I think the best time to, again, revisit this question will be 6 months later when we see what we're doing with the brand. We've got our arms around it and what we're doing with it.
That's useful. Sir, just to add, would it be possible for you to scope at what rate is the market growing at? Basically, it will help us understand-
Right now, if you leave aside the pandemic, the market for this has been growing at between one to one and a half times GDP on a regular basis.
Okay. Araldite would probably have 1/3 market share?
Probably more than that.
More than that. Sure. Thank you so much for the answers. Appreciate it.
Welcome.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead. Avi Mehta, your line is in talk mode. Please go ahead.
Hello. Sorry. Can you hear me? Hello?
Yes, we can.
Yeah, we can hear you.
Yeah. Sir, actually on the epoxy adhesives market, which is what Araldite is all about, I just wanted to understand, is the applicator very different from either the construction chemicals or the Fevicol kind of key business?
There is a certain amount of overlap and there is a certain amount of, for example, the patti contractor when he does stone application, et cetera, it's our waterproofing guys who deal with him, the construction chemicals. He is the consumer. There is a lot of wood-to-wood consumption, which is via the carpenter. There is a certain amount of glass and PVC, so on, which is another set of contractors. I would say there is a fair degree of overlap, and there are some newer customers.
Sir, is my understanding correct that large portion is non-wood in nature, current consumption, or is that understanding wrong?
That would be correct. A large part of it is still in new construction.
No, non-wood I meant. I meant more non-wood for Araldite.
Yes. Non-wood would be greater than wood to wood.
From good to good. In that context, would it be more of a plumber or something of that sort that we are kind of comparing?
It is actually all four. It is the cozy contractor, it is the mason, it is the glass fellow, it is the carpenter. It's the granite and stone/tile layer, so it is all of them. Apurva, you want to add?
I think these are the major user. There is a user like mechanic, auto mechanic, some small handicraft type of industries. What Bharat said are the major four or five end user segments.
Where I was coming from is one of our strengths has been to meet these. We obviously have a very strong brand here. The handicap, or if I'm wrong in that understanding, the handicap would be the applicator is quite different. Is that the hurdle that we are going to be kind of focusing on, or is that understanding incorrect in the first place?
That's not a handicap. Yes, now that we are now approaching him with our formula of handling the applicator, but with the brand that he trusts and has used for years, makes it much easier.
Okay, sir. Okay. The second part, sir, is that, the understanding that I had is Araldite is operating from a pricing perspective is at the premium end, and the products are kind of focused on that segment. Would there be a thought of kind of Fevicol, in contrast, has almost completely covered the market in terms of pricing, in terms of usage? Is that an opportunity that currently does exist in Araldite that's a low-hanging fruit? Is that a fair understanding or no?
It's too early to say. Avi, give us a little bit of time. Let us understand the market. Let's understand how we'll play the portfolio game. Yes, at Pidilite, we always make sure that we have a product for each kind of customers. Right now, too early to say how will the portfolio evolve.
Okay. Lastly, sir, see, as you highlighted there, not just Araldite, but if I'm correct, in contrast when you had Dr. Fixit, there was a manufacturing footprint that came with it. Is that a big driver over here or not really? Would you kind of look to invest in that or how is that concept?
See, it's not a big driver. We obviously get the knowhow and the technology along with it. There are current rollers. Again, remember we make Fevitite, we make Bluefix, we know this technology. If we need to invest, we will invest in further manufacturing. I think again it's a question six months down the line.
Okay, sir. Okay. That's all from my side. Thank you very much, sir. Thanks.
Welcome.
Thank you. Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Yeah. Just on behalf of the Pidilite team, a big thank you to all of you for attending the meeting. Please stay safe. As we approach the festive season, best wishes to you and your family. Thank you.
Thank you all. Thank you.
Thank you and yeah.
Thank you.