Ladies and gentlemen, good day and welcome to Pidilite Industries Ltd 1Q FY 2021 earnings conference call hosted by B&K Securities India Private Ltd. 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. Please note that this conference is being recorded. I now hand the conference over to Mr. Ranjit Cirumalla from B&K Securities. Thank you and over to you, sir.
Thank you, Inba. Hi. Good evening. We at B&K Securities welcome all the participants who have logged into 1Q FY 2021 earnings call of Pidilite Industries. We have with us today Mr. Apurva Parekh, Executive Director, and Mr. Pradip Menon, CFO of Pidilite Industries. We thank the management of Pidilite for giving us the opportunity to host this call. I would now request Mr. Apurva Parekh to take us through the company's performance during 1Q and the outlook. After which the floor would be open for a Q&A. Over to you, sir. Thank you.
Thanks, Ranjit. This is Pradip Menon here. I will give the opening statement, and then we will take questions. Good evening, everybody. I'll begin with a summary of the financial performance for the quarter ended 30th June 2020 for the standalone business. This quarter's performance was significantly impacted by the lockdowns as a result of the pandemic. April sales was completely impacted, we saw a partial recovery in May and a significant recovery in June. The recovery has continued in July. The profitability of the business was helped by softer input costs as well as stringent cost control measures undertaken across the organization. Near-term demand appears uncertain as a result of the continuing pandemic and the resultant restrictions across several parts of the country, we remain focused on restoring volumes and ensuring profitable growth. From a geographical perspective, the metros have been the most impacted.
The Western and Northern regions have been more impacted than the South and the East. Consumer & Bazaar businesses have seen a swifter demand recovery, especially in rural areas and semi-urban towns. We are seeing a strong recovery in construction chemicals and DIY products. Business-to-business segment is seeing a slower recovery. As a result of periodic restrictions, our plants are operating at a capacity utilization of 75%-80%, and operating efficiencies of our warehouses have been impacted on and off during the quarter. Most of the employees are working from home and necessary office connectivity is in place. Versus June, July had stronger sales performance, largely driven by Consumer & Bazaar segment. Our retail construction chemicals and Emerging India, Emerging India is covering our rural and small town business, have returned to double-digit growth over the last two months.
Our B2B business in construction chemicals continues to be impacted negatively due to the ailing real estate sector. Net sales at INR 768 crores declined at 57% over the same quarter last year, with underlying sales volume and mix decline of 58.3%. This was also driven by a 58.6% decline in sales volume and mix of Consumer & Bazaar and 53.7% decline in sales volume and mix of business to business. Material cost as a percentage to net sales is lower by 297 basis points over the same quarter last year. However, it is higher by 134 basis points versus the previous quarter. Current spot price of our major raw material, vinyl acetate monomer, is around $650 to $700 on account of low demand and stressed market conditions. We do not believe prices at these levels are sustainable in a post-pandemic environment.
The consumption cost for Q1 2021 is around $825 as compared to Q1 2020 consumption cost of $965. Benefits in input cost as compared to the prior quarter is neutralized by adverse currency movement and change in product mix. During June, the performance in terms of profitability as well as absolute EBITDA has been at levels of prior year. We have taken adequate measures to keep costs under control. EBITDA before non-operating income stood at INR 97 crores for the quarter and declined by 77% over the same quarter last year. Profit before tax at INR 78 crores declined by 82% over the same quarter last year. PAT at INR 58 crores declined by 80% over the same quarter last year. In terms of consolidated performance, net sales at INR 873 crores declined by 56% over the same quarter last year.
EBITDA before non-operating income stood at INR 67 crore, a decline of 85% over the same quarter last year. Profit before tax declined by 92.7%. Moving on to our domestic subsidiaries performance. Performance of subsidiaries was heavily impacted on account of nationwide lockdown in most parts of the quarter due to COVID-19. During the lockdown, the focus of the subsidiaries was towards collections and improvement in working capital. Moving on to international subsidiaries performance. While performance of our international subsidiaries have been impacted due to the pandemic, more so in the SAARC region than the rest of the world. We have seen a recovery in June and July. We focus on D&E markets, as you know, and our global business is split into three main areas, Asia, Africa and Middle East, and Americas. As such, we have commenced our reporting into these three broad groups from the current quarter.
To sum up, we believe that normalcy will return to our business when consumer confidence is back, and that is linked to the pandemic coming under control, and two, the consumer has money in his pocket to spend. So far, we have seen the markets recover faster than we expected, especially in the regions where lockdowns are eased. As such, when the pandemic subsides, we could return to normalcy quite quickly. Pidilite is driving a big initiative to educate the contractors on basics of hygiene and related workplace and personal safety practices, that the contractor is able to convince the consumer that it is safe to allow him into the house. There are online certification modules and also videos that are being circulated for this purpose.
We believe that our strong brands, extensive distribution network, robust balance sheet, and connect with consumers and end users will help us in restoring volumes and ensuring profitable growth. However, going forward, we would like to remain cautiously optimistic, primarily on account of external constraints such as probable lockdown extension, uncertainty about consumer confidence getting back to normal spending levels, and availability of higher consumer disposable income. We expect commodity prices to remain soft and the full benefit of the downward movement in prices to impact largely in the second half of the year after considering the inventory impact. Extent of adjustment to price or schemes discounts will be determined by the premium to be maintained versus competition. Our cost management actions have been effective, and this can be seen by the reduction in discretionary costs affected during the quarter.
We will remain watchful over our discretionary spend in order to ensure profitable growth. That concludes our opening statement, and we can now open the line for questions.
Thank you very much, sir. Ladies and gentlemen, 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. Anyone who has a question may press star and one. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Tushar Sundrani from Edelweiss. Please go ahead.
Yeah. Hi, this is Abneesh here. Thanks for the opportunity. My first question is, you have given for May and June how many shops were open. Does it also correlate with the business? Was the business in May broadly 50% of May last year, and June was 80% of June last year? Is it correct to understand like that?
Abneesh, we have given you obviously the quarter broad market conditions in terms of outlets opening and so on and so forth. We have not really given a month-by-month progression of sales. Suffice to say, as I said, that it has been a positive momentum from a situation where April was near zero, to a part recovery in May, and to a much more significant recovery in June. We have seen that recovery momentum continue into July. I think that's the broad sort of sense that we can give you.
July, has it further accelerated? Because now most shops.
Yes.
It has further accelerated.
July has accelerated. As I mentioned in my opening statement, we are seeing on two fronts. One, as the lockdown eases, we are seeing the return to growth faster than at least we had anticipated. The second element is our Emerging India business, which is covering rural and small town, that is recovering very fast. In fact, growing, as I said, double digits over the last two months. Similarly, an important portfolio, which is our retail construction chemicals, is also growing double digits. There are several pockets where growth has returned, and the momentum is continuing into July. July has been a better month than June.
Sir, you invested in the e-commerce furniture companies and the home decor e-commerce companies. Obviously now corona has changed things significantly, maybe a bit more on the adverse side. What is the learning and what will be the thought process on further investments in these companies or into similar new opportunities? Is there something, a change in terms of thought process because of the COVID?
I would say I'll give you a sort of a broad picture, and I'm sure Apurva will have something to add here. In our view, it's three months or six months, et cetera, may or may not be a right timeframe to really take a call in terms of strategy. The reason why we were investing in some of these companies is, it is a fact that we want to be in the right place as a pioneer, as a company where we have really built some of the categories. There are changes happening in those categories and the ways of doing business. We want to be in the know of things and be clear on the developments in the marketplace. Therefore, any such development which happens, we want to be sure that we are really up to speed and we are able to respond accordingly.
The fact that a particular quarter something has happened may not necessarily change our point of view. As I said, as a responsible corporate, we'll be, of course, very cautious and we'll be very measured in the kind of investments that we'll make. Our overall long-term strategy remains unchanged. The rationale for investing in these companies have not undergone any drastic change. Apurva, you want to add on?
No, I think just as you said, our rationale of investment in this company was to get a close look at these emerging companies in our space as well as to collaborate with them for mutual benefit. We are working with them in this direction. We are also seeing closely that what is the impact of COVID-19 on these kind of companies. Once we have a better sense of it, then we can decide about future investments.
Right. My next question is, you are seeing a stronger recovery in construction chemical and DIY. What is the reason for that? Paint companies are also getting aggressive here and DIY also. Is that a cause for concern?
Yeah. Obviously, I think we've said that the construction chemicals, there is a season here. Some of the regions there is pre-monsoon, some region monsoon, of course, completely set in. There is a pent-up demand also coming through in this space. From a broader perspective, it is a fact that the entire construction chemicals and waterproofing area, the kind of size of our market is significantly less compared to more mature markets. The market is also growing, and there are players who are there in that space. We believe it'll be good for the market itself. The market itself grows. Competition is helpful in such scenario to build usage and consumption. That's the way we look at it. As I said, we are seeing strong demand, particularly, as I said, in the rural, semi-urban area.
We are also seeing wherever the lockdown ends, even in the metros, we are seeing demand returning quite sharply. At this point of time, we don't see a concern from that perspective, from a particularly competitive or any other perspective. Apurva, you want to add something here?
No, I think you also asked about DIY. DIY products, we have a fairly good portfolio, strong brands. We have been in markets for a very long time. On and off, there have been various companies which compete with us in this segment. We have not seen or noticed any significant change in competition dynamics.
Two follow-ups here. Do you need to address some of the gaps because the paint companies have come up with, for example, spray for the tiling and anti-rust, all these are DIY. I wanted to understand if you already have this.
No, we don't have a spray paint. If you are asking, do we have a spray paint in our portfolio? We don't have a spray paint in our portfolio. See, DIY, when we say DIY
Spray for tiling. Sir, spray for tiling and anti-rust. Not exactly paint, I think.
Yeah, these are different types of product. DIY is a very broad category of DIY. We are focused on DIY adhesives and sealants. Products like Fevikwik, M-Seal, Steelgrip, and products of that nature. The products that you just referred are different than what we have for different products for different applications.
Sir, waterproofing, just one, and this is my last question, just one follow-up. In adhesives, for example, I don't think there is any credible pan-India competitor to you. In waterproofing, you have got all these paint companies, which are much more aggressive. In your waterproofing, would you need to be much more agile, much more aggressive than adhesives because the competitive profile is very different?
Abneesh, just to answer, and then Pradip you can add, is because, generally, in any segment, we need to be agile and we need to be watchful of any competition. I would not say that we should not be that in adhesive or some other segment. Being agile and watchful is very important. Within construction chemical, as you well know, construction chemical is a very broad category with a large number of different end user. There is a certain consumption by painters, but there is a lot of consumption which is by masons or construction contractors or waterproofing contractors, large contractors. There are very different type of end user, and there is a very wide portfolio of construction chemical product. Products which are used by painters, yes, paint companies have certain advantage.
Also what paint company has done is try to convert some of their traditional products like primer or top coat into waterproof products, in a way upgrading their own products. Clearly, they are trying to educate their painters to use more value-added products, and they have a significant strength amongst the painter. This is again, a very large market, as I said, with very large number of end user, very different end user. Small part of that is occupied by painters. We are, pardon me.
Are you targeting the painters and is it a small portion? You said it's a small portion.
We also target. Abneesh, I think we can separately cover the construction overall strategy. Otherwise, our quarter recall will just go in that. Yes, we have a range of product for painters as well. Maybe we can cover separately this, about how we are approaching this segment.
Sure, sir. That's all from me. Thanks a lot.
Thank you.
Thank you. Our next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance. Please go ahead.
Thank you. My question is on the Consumer & Bazaar.
Mr. Pandya, sorry to interrupt. We're not able to hear you very clearly, sir. If you're on a hands-free, please switch it to handset.
Hello. Sorry. My question is on the Consumer & Bazaar segment. If you can dissect the growth within Consumer & Bazaar, say in adhesive and sealant and construction chemical as you show in the pie chart, how the recovery has been in these two sub-segments and the current trend among these two, then it would be helpful.
I think we covered broadly these points in the opening segment. What we are calling out is, as far as the quarter is concerned, we know that there is an impact, right? Across all categories and across all regions. What we are talking about is, how has June and July been in terms of a recovery. There we are clearly calling out to you two aspects. One, the fact that our Emerging India business, which is our rural and small town business, that has returned to double-digit growth. That is across a number of segments, which includes adhesives and because that is more driven by region and size of the smaller markets.
They are covering or straddling across a number of product segments, and there the growth has returned across all of these elements, whether it's adhesives or whether it is construction chemicals and so on and so forth. The point we are saying is the overall performance of the business, if you look at it, the one to call out, and where we are seeing strong demand and growth, that's where we called out DIY and retail construction chemicals. All of our categories have improved month-on-month and that's the kind of message that we want to give as far as June and July. July has been much better than June, and June, as we have already called out, has been significantly better than May. Yeah. That's the kind of detail.
As far as the individual sub-segments within Consumer & Bazaar is concerned, that's not something we really talk about in a quarterly conversation because it just creates confusion. Then quarter-on-quarter, you'll have always huge variations that will happen in a market like this. It won't help you in getting a trend or a proper analysis.
Okay. Just one follow-up on this. What is the size of this Emerging India as a segment or cutout? How large it would be as of now for us?
Yeah. See, last year on a full year basis, broadly 30% of our business was Emerging India in the Consumer & Bazaar segment. This year, of course, given that it has performed better than the other parts of the business, its share would have gone up. On a sort of longer-term trend basis, it's about 30%.
Okay. Understood. Just last question from my side. The basic point I just wanted to understand is that apart from construction chemicals, one of the large cash cow for us is the adhesive, dominated by FEVICOL brand. How that has performed, because if I am not wrong, even before COVID, because of the real estate-led challenges, the growth was not as high as some other segments. What is the situation there? I just wanted to understand that.
Yeah. Again, even as far as adhesive is concerned, the similar story of whatever we called out in our opening statement is valid in terms of recovery between April, May, June, July. There is absolutely no doubt, in terms of the fact that when you have requirement of furniture making, let's say, inside the house, there will be certain hesitations of the consumer to bring the contractor in or to bring labor into the house. Therefore, that is the action that we're driving there. It is recovering slower than the construction chemicals, which has already moved into a double-digit category. However, the challenge there is how do we, A, educate the contractors to follow hygiene and workplace safety measures, and then we are also in a way linked with the consumer confidence around the pandemic, right?
That's the other element which we have to have in our mind. Which is why that recovery will not be at the same pace as the construction chemicals one. Apurva, you want to add something here?
No, I think your reply was proper. Nothing to add.
Okay. Thanks a lot. All the best.
Thank you. Our next question is from the line of Prashant Kutty from Sundaram Mutual Fund. Please go ahead.
Yeah. Hi. Thank you for the opportunity, sir. Just one question from my end. In terms of, you said that July has also seen a fair bit of recovery. How much of it would be pipeline filling? If you could probably highlight over here, because like you said, we only started up only around May, mid or May end. How much of it would be actual regular growth which is happening? If you could just tell us what would be the share of, let’s say, a rural or let’s say a tier 2, tier 3 town versus let’s say metros and Tier 1 for us.
The second part of the question I didn't understand because I thought I just answered the rural part just now.
Okay. I just missed out that part, if you just spoke.
Oh, okay.
about it. I'm sorry.
Okay. your question is in.
No, I was understanding in terms of, let's say, how much of it probably has been filling as far as the primaries part of the business is concerned around June and July. Because I believe there would've been some pent-up demand. How much of it, let's say, is pent-up demand or regular demand for that matter, and that's what I was basically trying to understand.
Sure. See, I think, obviously it's a difficult question to really answer explicitly in terms of whether it's pent-up or not because you can never get a clear answer till you see a trend for a longer period. We've seen just June and July, two months to really have a point of view.
Having said that, just two, three points I want to make on this. One is wherever the pandemic has sort of retreated, the recovery has been quick. That is the one sort of reassurance for us as a business. The second is that from a stock in the market or We don't have large pipeline of stocks in the market.
Okay.
Our stock levels in the market between the distributor and the dealer. We sell into the distributor and the distributor in turn sells to the dealer. The overall pipeline of stocks are also very limited. It's not like we are having any sort of stock movements.
Dynamic of the stock.
Pre-pandemic and now. In fact, our levels of stocks in the market would be at the same level pre-COVID or maybe even less. That is the second point of reassurance. The third is, really I agree with you that unless we see August and September, maybe another two months of performance of these various markets, you can never arrive at a complete conclusion whether is it pent-up demand or return. Certainly, when we are seeing multiple markets the same thing happening, that does give us some confidence.
Okay. I'm sorry, I just missed out. You said what will be the share of, let's say, Tier 2, Tier 3, Tier 4, maybe rural versus let's say Tier 1 metros?
Yeah. We call it the rural and small town India, which is-
Yeah.
-obviously the Tier 2 towns. These ones are approximately 30% of our business.
Okay. You're saying this is growing at double digits?
Yes.
Okay. Second question is on the gross margin side. I believe this quarter, if you look at the sequential decline while the VAM continues to be benign for us. Sequential decline, is it anything to do with the fact that the scale of operations was lower or maybe anything to do with that as to why the gross margin came off on a sequential level?
Yeah.
More sustainable level, what should one assume the gross margins to be?
Yeah. Really speaking, there are two or three points here on sequential gross margin. One is that we did say that there is a trending down of spot prices.
Okay.
In the commodity prices. Those have not yet reflected in our P&L purely because of inventory, the raw material and finished goods. This is one point. Second is even where we have seen in the case of VAM, a drop in dollar price of around $20, that has more than compensated by the impact of the rupee devaluation which happened between Q4 and Q1. It's more a timing thing. You shouldn't look at the spot prices of rupee dollar just now. The time when we've done the deal and the foreign exchange contracts, there is a devaluation which has hit the P&L, and therefore our costs in some of the materials, including VAM in Q1 is higher than Q2 in terms of rupee, in rupee terms. This is the second point.
The third point is that we did have in Q4 certain one-off sort of credits coming more from annual discount that we get for our sourcing from vendors, and that has come into Q4 base which obviously doesn't repeat in Q1. Depending on the volumes, et cetera, you get credits.
Okay.
That is not-
That's more volume-oriented, actually.
Volume-oriented, yeah. Now what we'll have to see is the level at which we are seeing Q1 margins. These are obviously the margins that we see going ahead. We don't give really a guidance at this stage. It's difficult to guide in this kind of a market. The point we wanted to say earlier also in the opening is, even if the dollar prices fall or even the rupee impacted prices of our raw materials drop, we really can't say in terms of EBITDA margins how this will finally translate our gross margins. It'll exactly translate because we will need to also drive volume.
We need to have a sustainable volume growth as well. What part of the drop in material costs we will pass on in terms of price reduction, in terms of discounts and schemes, et cetera, and what kind of premium we need to maintain versus competition, all of these factors are a bit obviously difficult to gauge. Suffice to say that we are expecting raw material prices to be soft in the second half of the year. What part we'll pass on, what part will get retained, et cetera, is difficult to envisage at this point.
Your mix, correct me if I'm wrong over here, but mix that I'm talking about, let's say the likes of DIYs and the likes of construction chemicals, would be higher margin as compared to, let's say, the likes of adhesives. Isn't the mix favorable? Just correct me if I'm wrong over here.
No, it will be very minuscule. The impact will be very minuscule in this.
Okay.
All of the various categories are all operating at quite substantial margins.
Okay.
Decent level of margins. Yes.
Sure. Thank you so much. All the very best.
Thank you.
Thank you. Our next question is from the line of Avi Mehta from IIFL. Please go ahead.
Hi, Apurva and Pradip. I just wanted to understand the consumer trends witnessed in the post-COVID world, especially in terms of the willingness to allow applicators into homes and how do basics versus premium products, how are they behaving? If you could share that.
Yeah. I think the first part I'll take, and I'll request Apurva to cover the second. As we said, the consumer behavior, there is no doubt that there is, as you said, two parts to this. Really there is a part around the pandemic and the consumer confidence, right? To allow labor inside the house. There is no doubt about it. Our job as a company is to make sure that we connect. During this entire period, we have really invested a lot on our digital connect through our sales teams, with our end users, to make sure that we even do outlet visits remotely. That is the kind of connect now we have with our end users.
Therefore, what we have been trying to do during this period is to educate our contractors, educate the various end user connects that we have on hygiene and certification. The certification is such that that gives a confidence to the consumer that the person follows all the right methodologies and can then be allowed inside the house for the work. We are seeing success. The way I would say is that it is very difficult to say what part is success and what is not. The fact that we are getting growth back in June and July gives us some confidence that this is indeed working, and our connect with our markets and our end users is really working, and therefore, we are seeing improvement in confidence from the consumer in allowing people inside.
Of course, the complete confidence will only be back when the pandemic is under control, and that, your guess is as good as mine. Second part, Apurva.
Sorry on this side. Just to kind of clarify, you are saying that there's an increased confidence in allowing applicators back into homes for new applications. Is that what you are seeing?
Yeah. When you say new applicators, I didn't get that point.
Towards the start of the call you said part of it maybe pent up in nature, and I was not really clear on that part. Was this that the person was also just wanted to get his job done and you kind of trail it, or was it more that you're seeing that people are actually willing to now explore and get these reconstruction activities back online? That part.
Look, you see, we are seeing construction activities more, as we said, in the rural small town. Those areas we are seeing the new construction pieces also progressing. Less in the metros, to be frank. The jobs to be done wherever they are to be done. In some cases, it could be urgent repairs or something which gets the priority. We are seeing that as the pandemic recedes, those jobs are also coming. Obviously the bigger share of jobs are coming in the small town and the rural space. Less in the large metro towns where there is a pandemic.
Okay. The basic versus premium?
Yeah. Apurva, you want to just take it?
Yeah. I'll just also add to the first part, is still it is very early days. It is very difficult to get any clear sense of what consumer behavior is and how will it be going forward. From early signs of what we see that the areas which were less impacted by pandemic, the areas which had shorter period of lockdown, seem to be appearing faster. Essentially, as period of time passes, we will see that the consumer behavior may again start returning towards normal. Today it is anybody's guess. We have to see how thing evolves. As we all are right in the middle of the situation. Many parts of India, the way they have recovered, is a good sign. Clearly we have to be cautiously optimistic and watch how it evolves. Base versus premium also.
First of all, our entire portfolio is of good premium sort of products. Some of our premium products are meant to get work done faster, people clearly prefer them just to get the work done faster, even before COVID. I cannot say that we have seen some noticeable change which we can attribute to this. There could be some change happening. However, again, it's very early. We barely have had two months of sale recovery going on. As months pass, we will see.
Okay. Just to follow up, the increasing Emerging India salience, does that in any way imply either a lower gross margin because of mix or that doesn't have any impact?
No, that doesn't imply that at all. Our portfolio is more or less similar. When we say Emerging India, it covers all the small towns and the rural area. There is a fairly vast population there. All our lead brands sell there, and there is no significant change which would impact the gross margin.
Okay. Lastly, from the commentary that you have given, it seems that obviously waterproofing recovery has been ahead of our estimates. Is the impact that you are seeing or this aversion of consumers to allow applicators more in the adhesive side, is that a thing that we should be concerned about?
I think we should not read so much into such a short trend. As we all know, even one quarter is a short period. Some of these comments are based on only June and July. Out of that, also in some product it could be seasonality, in some product there could be a greater pent-up demand. I would really not like to guess or comment on it. I think we need to let the time pass. Only thing, as Pradip covered, is that the recovery pace has been good in June and July in many parts of India. Essentially, we would not like to read too much into it. We would like to let another few months go to get a better trend of what is happening.
Okay, perfect. I'll come back in the queue. Thank you very much.
Thank you. Our next question is from the line of Anand Shah from Axis Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. Just one thing, can you comment on the domestic subsidiaries, Nina and CIPY, how they are progressing? They had a much tougher Q1, are you seeing any recovery there?
You're absolutely right. I think even before the pandemic, Nina and CIPY, both of them have got exposure to the real estate sector. In the case of CIPY, there is a connect with the auto sector, and therefore, both of these sectors have been under pressure. We are obviously seeing challenges there. Again, very difficult, the real estate to predict how this is going to emerge. I think we need to just wait and watch. Right now we are trying to make sure that we get the basics right, we get the business, do the fundamentals right, make sure that we have the people on board. The kind of work we do, including waterproofing, these are relatively specialized kind of work.
We also want to make sure that we have some of those people and labor available, so when the demand recovers, we are in a position to respond to the requirements. Given the nature of that subsidiary and the nature of exposure, it will be a longer sort of recovery path is what we see. Very difficult to predict exact timelines.
Okay. We also saw a substantial erosion in profitability there. Any steps there you are taking there for tail losses or improve profitability there a bit because it is going to be a sort of a slow build up in terms of revenues.
Yeah. I think in all the subsidiaries, the same approach that we've taken Pidilite as a group, all discretionary costs under close scrutiny. At the same time, we are trying to balance between taking structural actions because the danger of doing that is when the recovery comes, then we will not have the right resources to respond.
Yeah.
We are just waiting and seeing at least a couple of months to see where things are going to return quicker. All fundamental things like discretionary cost cuts and tightening of belts, all of those are being done in the subsidiaries.
Okay. Just on international as well, how things are progressing there? They literally perform better than both domestic and subsidiaries. I'm assuming because the COVID set in in different parts of the world, different time. Is that now on full path to recovery? Would it now be, let's say, flatlining or growing, at least in some parts?
See, in fact, two parts to it. One is the pandemic had a bigger impact in the SAARC region than the rest of the geographies, actually.
Okay.
Even there we have seen recovery in June and July. Overall, we've seen growth in June, and we're seeing that coming back, that similar trend in July as well. We are seeing the companies in our international business in kind of a situation where I think the story from the past, even last year if you recollect, it was a double-digit growth and a significant improvement profitability performance, and we are seeing that trajectory continuing at this point of time. Yeah.
Okay. That is great to hear. Just lastly, just some maintenance on this other expenses, can you just highlight as to what would be the kind of advertising cut you would have taken in this quarter on YoY terms?
I'll just give you an overall picture.
Sure.
You've seen that in terms of our reduction in overall sales, our overall drop in revenue has been in the region of about odd 56 %.
Right.
We have tried to make sure that barring the
costs like staff costs, et cetera, which obviously cannot respond in a similar manner. There'll always be some certain costs like admin expenses, et cetera, which cannot respond. All other costs, we have made cuts largely in proportion with the sales.
Okay. Now as your revenue progresses, you're calling out that June and July are looking much better relatively in terms of recovery and all. You would see a proportionate increase in the other expenses as well, right? You will start investing back.
Yes. Absolutely.
Okay. Any part of these expenses would be like a structural savings? I'm assuming you would have actually hit the cost cut push, at least some part would sort of come down.
Quite difficult. Most of these are things like travel, et cetera. If people are not traveling and therefore there is a reduction. Once travel restrictions ease, there will be travel back. Whether it'll be the similar level as pre-COVID or not with all the various digital actions we have taken or actions we have taken in terms of more digital connect, difficult to fathom at this point of time. A large part of it may not be fully sustainable, but some parts could stick. Very difficult to predict the proportion.
Okay. Just last thing. This June, you called out that 80% outlets are now open. This would be across your channels, right?
Yes.
Dispersed channel, as in different channels and all. This would now be back toward 90- odd in July or so?
Yeah. +90 .
Okay. Thanks a lot.
Thank you.
Thank you. Ladies and gentlemen, we would like to request you to please limit your questions to two per participant. Time permitting, you may come back in the queue for a follow-up question. Our next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.
Yeah. Hi, Apurva and Pradip. My first question was on the woodworking adhesives. Any sense of how much does this commercial real estate construction use woodworking adhesives in terms of, let's say, retail shops, offices? That is one segment where we could see continued impact even for the next few quarters. Is it a very small part of, in your sense, woodworking adhesive demand, and any sense on what's happening there?
See, I don't have an exact figure because never before we had to track it that way and the channel being common, it's very difficult to segregate. I would not think it is a very large part because if you see the amount of consumption across various different end users, I don't believe commercial real estate by itself would be a very large consumer.
Okay, understood. My second question was on this July recovery. At least in some industries, we've seen the second round of lockdowns having a negative effect on the momentum that was building up. Have you not seen any impact of that, or is it that there are other cities which are recovering, which are kind of making up? Any sense on how the second round of lockdowns has played out for demand?
You're right. It's a very difficult situation to predict. We were seeing a stronger recovery in the south. Some part of it has sort of gone back in July because of the fact that we've had multiple lockdowns in some of the key locations in the South, as an example. We are seeing some pluses and minuses. Overall, we are seeing things moving forward, which is why we've called that out in our opening statement.
Just one follow-up on this. In terms of the restocking question somebody had asked, I think definitely today, as you said, stocks are not above pre-COVID levels, but versus where they were in early June, I am assuming things would have recovered. Any sense of how much could be the restocking in the month of June and July? Is it something which is very large, which could have upped the number? You feel reasonably comfortable that the trends are more or less in line with optics in the market?
No, no. We don't have any significant stock. Even during this period, we've not had significant stocks increase in the market. There is no such. See, the way we work is the process is that it's a replenishment process to the distributor. There is a certain cover, and based on that cover, we replenish. It's not like a push system, and therefore, the secondary sales is what sort of drives the movement in stocks at the distributor end.
Okay. Thanks so much, and all the best.
Thank you.
Thank you. Our next question is from the line of Jaykumar Doshi from Kotak Institutional Equities. Please go ahead.
Yeah. Hi. Thanks for the opportunity. My first question is during this COVID period, is there any changes in the way your sales engages with the distribution? The question comes from the perspective that your employee cost as a percentage of revenues is almost twice what it is for paint companies, and that is partly because of the breadth of the portfolio and the verticalized sales structure you have for different verticals. Do you think that post-COVID, have you relooked at your sales organization and structure, and do you think there are more efficient ways of engaging with dealers and the entire channel with a much leaner organization?
See, I'll give you a sort of initial response and request Apurva to chip in on this one. See, I think the percentages can be misleading because obviously in a quarter like this when the revenue itself is low.
I was generally referring to, not specific to the quarter, but overall your FY 2020, I think employee cost as a percentage of sales was about 11.5% for India business, and which is usually about 6% for paint companies. This is more that has COVID changed the way you engage with, or will it change the way you engage with your network and dealers?
Yeah. I think the first point here is that, obviously the way we're just comparing it to paint companies which have a particular model. We have got an aggregation of businesses here and our model, including the fact that we have to focus on multiple products and a fairly complicated portfolio does add to the overall requirement of a structure. Having said that, during COVID, obviously, we have had to connect with our distributors, with our end users in a form of digital format. Obviously there are some lessons and learnings coming out of that. At this stage, again, it's very early for us to say, is this a sustainable way of operating? Does it change the model we are operating? I think too early days to really give a response.
Obviously like we said before, we are looking carefully at all of our costs and including our organization structure costs. If we find that there are opportunities for optimization, we will certainly take those actions. They're not really the priority at this moment. Our focus is to get the growth back on track, make sure all our fundamentals, which is getting the volume growth back, make sure costs are under control and also respond to the new environment. These are three sort of focus areas that we are looking at. Apurva you want to chip in on this?
Yeah, no, I think just a little bit I will add. I think, Jay, clearly we are changing the ways in which we work, using digital and other technology to engage with both channel and end user. That is happening and in future it could result into some evolution of the structure. As Pradip said, this is not the priority right now. The current priority is to be ready to service the market as the normalcy returns. We are not doing anything which is immediate, but certainly we are making our working far more efficient by using the technologies which are available. Pandemic has sort of forced us and many other companies to start using more and more technology in terms of how we work with end user influencers and the dealers.
That's helpful. Second question is, you have a very strong sort of capabilities on waterproofing in Nina and Percept in terms of services capabilities. Is there an opportunity for you to use those capabilities or expertise to sort of strengthen the retail side of the services business also in waterproofing, particularly because we are seeing quite a lot of weakness in Nina and Percept overall from demand perspective? Do you think you can use that expertise to strengthen your Dr. Fixit services? When we call up customer service care we are attended by a third party contractors, waterproofing experts. Do you think there is room for Nina and Percept experts to participate in all?
Jay, no, I understood your question. Currently, our focus on Nina and Percept is on the large construction. We believe there is a very significant opportunity in terms of large construction, specialized high technology, waterproofing related work. Nina occupies a very unique position in that market, being the largest and the strongest. Hence, it is going to focus on that market segment. As far as the retail, the service-oriented construction work, that's a very different market. Here we work very closely with waterproofing applicator and we can recommend applicators to people, but it is a very localized work. As of right now, we believe it is best served by the local waterproofing applicators, and we work very closely with them. Currently there are no plans for Nina to enter that segment. It is going to service the opportunity which it has.
The final one, a very quick one. Actually, VAM prices at $650 per ton is probably the lowest, at least in dollar terms that we may have seen in the past five, seven years. Are you considering some opportunistic buying or sort of stocking up of inventories or material inventory in this scenario?
Yeah. I think, on this one, what we normally do is that, ultimately it is the requirements driven by the business and the need for a particular level of stocks. As I said, the inventories, the buying timing, et cetera, will be determined by the demand from the market and our current raw materials, finished goods inventory stocks, and therefore that is the way we look at it rather than buying without a requirement. We will buy when there is a requirement and accordingly consume rather than We can always, of course, contract for a future date. Those are the things that we will do.
Thank you so much and all the best for the coming quarter.
Thank you. Our next question is from the line of Chirag Shah from CLSA. Please go ahead.
Yeah. Hi, Apurva and Pradip.
Thanks for taking my question. My question is a bit on the long-term strategy. First, on our manufacturing and supply chain capability, correct me if I'm wrong, but we currently have about 23 manufacturing plants, and we are in the process of setting 12 more plants by 2022, if that number is right. What are the long-term efficiency gains that we are looking at in terms of logistics cost and supply chain efficiency? What is the overall CapEx that we have for the next three years?
Yeah. In terms of supply chain, I think as you rightly mentioned, we continue to invest behind our supply chain to make sure that obviously we meet the demand requirements in the market. In terms of the efficiencies that are coming through from the supply chain, it's a consistent process. It's a consistent improvement process that we follow. We have, across the various supply chain factories, we have got a number of parameters to evaluate performance in terms of cost, in terms of dashboards. That process, that continuous improvement has been happening over the years and will continue. It's very difficult to put a number as to how much will that give us benefits in terms of cost. We're not really able to give a particular number at this point in time.
In terms of CapEx, you would notice from our historical trend, typically in a normal year, we would spend between 4%-5% of our revenue, that's the kind of CapEx that we have spent. In a year like this, it could be difficult to put a percentage because we may need to spend for the future. For example, in terms of powder plants or in terms of any other categories that we are investing. Even though we are also investing, we have JVs which are underway, where we will need to invest, where the JVs are signed up, we see potential into the next financial year. We would spend the CapEx based on those requirements. Typically long term, we end up spending about 4%-5% of our revenue as CapEx.
Sure. Just to be clear on that part, 12 plants on 23 plants, I am assuming that it is not a proportionate addition, but it is a fairly large addition to the capacity. Are we looking at also more in-sourcing going forward?
See, as we are expanding and getting into adjacent categories, you would have seen the number of joint ventures we have got into in the last one year. We need to operationalize those entities. We need to invest and get those new categories underway. There are plants and there are investments that we need to make. These need not be large spends. Each of these plants may not be large spends. These are spends which are for a particular category or subcategory, which at this stage could be relatively smaller in terms of demand, but these will in turn pick up, expand as time goes. Don't read too much into the number of plants, whatever we have communicated earlier. It is more the CapEx spends in a long-term basis.
These are the kind of numbers that you should look at from a planning or from a sort of a trend.
Sure. The second question is on the number of SKUs that we have. We have +500 SKUs right now. Just connecting that to the earlier question also in terms of having more efficiencies in terms of servicing the market and employee cost. This is a good opportunity to rationalize some of the SKUs. Are we looking at SKU rationalization and bringing in more efficiencies from that?
This is a continuous process. You are right that when you have a long tail which doesn't give enough revenue, then that can lead to inefficiency. This is a continuous process in Pidilite, and we have formal reviews which make sure that these kind of number of SKUs or non-performing SKUs are weeded out. We need to be a bit patient. Many of the investments we make and many of the categories that we are in, that requires a little bit of patience to get growth. What we don't want to do is weed them out too early or too soon. We make that balance, and we want to obviously make sure that those non-performing SKUs over a longer period are weeded out, and we do that. That's a continuous process.
For sure. Just one last question, if I may ask. In terms of the pioneer categories, we have Roff, Jowat, et cetera. As Apurva rightly mentioned earlier, the construction chemicals is like a very broad category and with very different end users. Two questions here. Are there opportunities to address some of these white spaces through inorganic growth? Secondly, on some of the categories like Jowat, which apparently appears to be like a B2B category, but there is a B2C market, how do we address the branding part over there?
Apurva, would you like to take this?
Yes. I think in terms of white spaces, as you know, in construction chemicals, just in last one year, we have done three inorganic things. We did two joint ventures, one with the two companies in Europe in terms of construction chemicals. We also did a majority acquisition of a tiling and stone chemical company in India with brand name Tenax.
Yeah.
Clearly opportunity and white spaces, and we have been active in that, and we continue to scan the market for suitable opportunities. For the second question, the Jowat products are largely B2B related product. They are joinery product, but they have a very strong brand recognition in that segment. Largely their consumption is B2B, which is largely by joineries. There is not much B2C kind of a consumption opportunity. It is not a retail kind of a product. It is a product which is used by joinery, so there is no branding related conflict or any issue that we see.
I completely agree, Apurva, but as we have discussed earlier as well, if you look at the MDF market, there is part of the MDF market which is also becoming more B2C. From that perspective, long term, is there an opportunity to brand some of the Jowat products in line with FEVICOL brand portfolio?
We don't see that as necessary. We will evolve the strategy as and when it's required. As of right now, we don't believe that there is a need of that brand in a retail market. In future, anything can be done. We have FEVICOL in retail service in most of the applications.
Yeah.
As
Thank you so much.
Issue.
Sure. Thank you so much.
Thank you. Our next question is from the line of Ritesh Shah from Investec Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Sir, in the initial remarks, you made a point of extent of discount versus premiums. Sir, how should one read into this balancing aspect going forward?
Discount versus premium products?
Yes, sir. I think in the initial part.
I think you were asking about premiumization of products. There is nothing called discount. What I was trying to answer is our entire portfolio, all brands are premiumly priced, premiumly positioned. It's not that we have a discount or anything of that nature. I think the question earlier was, are we seeing the trend moving more towards regular or more towards premium?
Okay.
Did you have a follow-up question?
No, not on that. I have another question. Sir, adhesives and sealants is a significant part of the sales mix. From a chemistry point of view, how do you see this evolve going forward? We understand PVA is something which is big. What is the thought process of chemistry-wise evolution of adhesives and sealants as a basket product going forward?
Chemistry-wise, the adhesive and sealant, new chemistries time to time, and then we introduce various products to beat the evolving chemistries.
Right.
Over a period of time, if you see Pidilite's journey, which we started with one product, which is polyvinyl acetate based white glue. From there today, we cover a wide number of chemistries which have been introduced over a period of time.
Right.
That process continues. As you know, R&D and innovation is very important for Pidilite. We have an R&D center in U.S., Singapore, and a large R&D center in India as well. We continue to keep track of new chemistries, work on them and develop products.
Correct. Sir, do we have any targets in mind to reduce the exposure that we have to FEVICOL? It is our mainstay. If one had to de-risk or diversify into this particular segment, chemistry-wise, do we have any targets over here or any new product launches that one should expect?
Over a period of time, as I said, over a period of time, when the company started really with FEVICOL, over a period of time, the dependence on FEVICOL has come down significantly. We have now large number of product portfolio, product categories. Within adhesive and sealant, we have several large brands with different chemistry. Like Fevikwik is a different chemistry, M-Seal is a different chemistry. Even within FEVICOL, there are different chemistries which operate. We are no longer dependent on any one chemistry or one product.
All right. Fair enough. Thank you so much for the answers.
Sure.
Thank you. Our next question is from the line of Arun Baid from BOB Capital. Please go ahead.
Hi, sir. You did mention that we have seen double-digit growth in within India, which is like 30% of business. Can you just throw some light on the remaining 20% of the business? How that has panned out in the last few months, particularly?
Yeah. Obviously what we wanted to give you was the highlights. Obviously we are in the new quarter, in July. Obviously the details of this quarter we will be covering in the following quarter's presentation. Really what we wanted to give out are the areas where we are seeing positive momentum coming through. We also said that there are parts of our business, like the metros, where there has been an impact and there has been a continuous impact, though even there we have seen recovery happening. These are the two parts from a geographical lens. From a product sort of portfolio lens, the two areas like DIY and construction, where we have seen significant growth return in the last two months, we've called that out.
The remaining portfolio has recovered, but it's not at the same level that we would say as the remaining part of the portfolio, which is why we have called those two out. Right? There is nothing further we have in terms of split, in terms of information.
You know why I asked this? Last year in Q2 specifically, we did see de-growth in our PCP business. We had negative growth in that business. The base is favorable, and on that context, the question was more interesting is that, are we seeing some more traction because of the lower base still? What I get from you is that despite the lower base, it doesn't sound that the overall portfolio has come back to some sort of stability. Is my inference correct, sir?
No, I didn't exactly understand your question.
You are saying last year, Q2 was the base. We had a negative volume growth in last year, so the base is very favorable for us for this Q2. Is that helping to some extent, the numbers to be bit better for us?
I think what we called out was June and July together. We are not really talking about Q2 as a guidance or anything. We're just giving you the signals of what we are seeing in the market. We said, again, August and September, how it will pan out is anybody's guess, but whatever we have seen and whatever we have experienced, we have called out here.
Okay, sir. Thank you.
Thank you, ladies and gentlemen. That was the last question. I now hand the floor back to the management of Pidilite Industries for closing comments. Over to you, sir. Over to Mr. Parekh and Mr. Menon for closing comments.
Yeah. Just want to thank everybody for taking the time out and wish you and your extended groups, please stay safe and good luck. Thank you.
Thank you, everybody. Thank you.
Thank you, members of the management. Ladies and gentlemen, on behalf of B&K Securities Ltd, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.