Ladies and gentlemen, good day. Welcome to the Pidilite Industries Limited Q4 FY 2019 earnings conference call hosted by Axis Capital. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by entering star then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Shah from Axis Capital. Thank you, and over to you, sir.
Yeah, thanks. Good evening, everyone. On behalf of Axis Capital, I welcome you all to the Pidilite Industries Q4 FY 2019 earnings call. We have with us the senior management represented by Mr. Apurva Parekh, Executive Director, and Mr. P. Ganesh, the CFO. With that, I'd like to hand over the call to the management for opening remarks. Thanks, and over to you.
Thank you, Anand. Good afternoon, everyone. The current quarter has seen some moderation in growth as a result of slower near-term market growth. We have delivered double-digit volume growth for the fiscal 2018-2019. Gross margins have improved sequentially and are now close to gross margins of Q1 FY 2019. Price increases taken during FY 2018-2019, coupled with softer input cost, is expected to aid further improvement in margins going forward. We remain optimistic in the medium term of delivering consistent, profitable, volume-led growth. I will begin with a summary of the financial performance for the quarter and year ended March 2019 for the standalone business. Coming to sales. Net sales at INR 1,367 crore grew by 8% over the same quarter last year, with underlying sales volume and mix growth of 2.5%.
This was driven by a 4% growth in sales volume and mix of Consumer and Bazaar products, and a 1% decline in sales volume and mix of industrial products. Volume plus mix growth for half year H2 FY 2019 is at 6.8%, driven by an 8.8% growth in sales volume and mix of Consumer and Bazaar products, and a 1.7% decline in sales volume and mix of industrial products. Comparable net sales for the full year 2018-2019 stood at INR 6,048 crore and grew by 15% over the previous financial year. Coming to the gross margins and EBITDA. EBITDA before non-operating income stood at INR 263 crore and grew by only 3% over the same quarter last year, given the input cost-led contraction in gross margins by 2%. However, gross margins have improved by 3.1% versus quarter three FY 2019 and is now close to gross margins of Q1 FY 2019.
The current spot price of our major raw material, that is VAM, is about $950 as compared to the quarter 3 consumption cost, which was over $1,100 on account of higher cost RM inventory. EBITDA for the financial year 2018-2019 stood at INR 1,298 crore and was flat over the previous financial year, given the input cost-led contraction in gross margins. Profit after tax stood at INR 243 crore and was higher by 2% over the same quarter last year. Current tax for the quarter includes INR 53 crore being excess provision of earlier years now written back. Excess tax provisions written back in Q4 FY 2018 was INR 46 crore. Profit after tax for the full financial year 2018-2019 stood at INR 979 crore and grew by 3% over the previous financial year.
I will move to a summary of the financial performance for the quarter and year ended March 2019 for the consolidated business. Coming to sales. Net sales at INR 1,631 crore grew by 11% over the same quarter last year. Comparable net sales for the financial year 2018-2019 stood at INR 7,035 crore and grew by 17%, excluding the sales of Cyclo division of Pidilite USA, Inc., which was sold by Pidilite USA in June 2017. Gross margins and EBITDA. EBITDA before non-operating income stood at INR 279 crore and grew only by 2% over the same quarter last year, given the input cost-led contraction in gross margins. EBITDA for the financial year 2018-2019 stood at INR 1,376 crore and grew only by 2% over the previous financial year. Profit after tax at INR 237 crore declined by 4% over the same quarter last year.
Exceptional items represent diminution and impairment in value of investments for the quarter ended March 2019, amounting to INR 11 crore, and for the full financial year amounting to INR 18 crore. Current tax for the quarter includes INR 53 crore being excess provision of earlier years now written back. Excess tax provisions written back in quarter 4 of the previous year stood at INR 46 crore. For the full financial year 2018-2019, profit after tax at INR 928 crore declined by 4% over the previous financial year. To our subsidiaries performance. Our domestic subsidiaries recorded a sales growth of 24.9% on a like-for-like basis, while international subsidiaries grew by 8.4%. Our subsidiary, Nina Percept's net profit was impacted by a provision of INR 4.4 crore made against a fixed deposit of INR 8.8 crore placed with the IL&FS Group.
The fixed deposits placed with the IL&FS Group now stands fully provided for. Many of our focused international geographies, including Bangladesh and Sri Lanka, have reported reasonably good sales growth. EBITDA across some of the international subsidiaries was impacted by high input costs and foreign exchange fluctuations. We continue to remain focused on SAARC, Middle East, and Africa markets as our growth drivers in the international business. We can now open the floor for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may enter star 1 on their touch-tone telephone. If your questions have been answered and you wish to withdraw yourself from the queue, you may enter star 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have the first question from the line of Avi Mehta from India Infoline. Please go ahead.
Hi, sir. Just two questions. First, I wanted to understand, could you help us understand what exactly is the reason that you saw such a sharp moderation from the Q4 levels? Has there been any improvement from those levels, which is what gives you the confidence to sell, or is it still very volatile? Just if you could give any color on that front.
If you look at Consumer & Bazaar growth in Q4, the volume growth was about 4%. One reason for lower growth was the price increase that we took in December, whereby in some of our key products, in Fevicol and Construction division, we have done price increase, that resulted into higher sales growth. If you look for second half, the growth of Consumer & Bazaar product, the volume growth was about 9%. I think, one quarter, we don't manage quarter to quarter. I think the second half is a better indicator of what we have. Going forward, I think it's too early to say in the new quarter. Currently, in short and medium-term, there is election and other factors. Overall, we remain cautiously optimistic about growth improving, and second half of the year is a better indicator than just the last quarter.
When you say second half is a better indicator, you're saying that would be the trajectory for the
I'm not mentioning the trajectory or anything else. That would be mean like giving a projection, I would say that's a better indication of how we have grown in the year, and not just look at the last quarter.
Okay, sir. Sir, second bit was on the pricing bit. Has there been any pricing action in the market during the quarter or till date in terms of given where the demand environment or the input cost is?
Avi, not in any of the major products. We have not had any price increases or decreases in the last quarter. The significant price increase was done in December of 2018. Now as you have seen, we have had a fairly significant sequential improvement in gross margin. Currently, there is no need to now further increase the prices.
Sir, how is the channel health? Any concerns or all is well over there, given liquidity, et cetera, concerns that other players are highlighting?
We are not highlighting anything significant other than by saying there is some near medium-term demand challenges that we have seen in the last quarter, some amount of it. When that happens, otherwise, I would not say that. Basically, it's the demand which results into lower off-take from the channel.
Okay, sir. Where I was coming from, sir, is the VAM 4Q average I didn't get. If you could just highlight that's all from my side.
Quarter four, our consumption cost was over $1,100.
Oh, quarter four was $1,100. There has been a significant correction from even that level. Okay.
Yes. From 11.
Quarter three was upwards of 1,300. There was a correction in terms of consumption cost versus quarter three. Quarter four is much lower, and we expect going forward it would be even lower.
That essentially gives us some room or headroom in the gross margin side as well to manage. Would that be a fair understanding? There should be some leeway, or how should I look at it from a gross margin going forward? Is there a cost element that was there?
What Ganesh is trying to say, in fact, the reduction which will happen from the current spot rate, that is not fully factored into the gross margin of the last quarter. Because our consumption rate of VAM in the fourth quarter is about 1,100 USD, while the current spot rate of VAM is about 950 USD.
There are more tailwinds over there in the gross margin side.
That's it.
Typically, since you also end up holding some inventory, any price reduction in spot prices will actually kick in a while later, typically into the following quarter.
Okay. Essentially that's where the trend trajectory is on the gross margin side. That essentially gives us some comfort.
At this moment, yes.
Perfect, sir. That's all from my side. I will come in the queue if there anything else. Thank you.
Thank you. We have the next question from the line of Abneesh Roy from Edelweiss. Please go ahead.
Sir, thanks. My first question is on the industrial product. I see in Q4 and full year, both the profits dipped. Has the entire industry not taken commensurate pricing increase, or only you have been cautious and tried to gain market share? Could you elaborate there?
In industrial product, any years, if you see historical also, when there is a significant increase in input cost, it does take an impact on the margin. We as a company are a little bit more cautious about not doing business which is very low in margin. It is not about us trying to take share or anything. The input costs have gone up. Whatever input cost that went up, had an overall impact. Also that business depends a lot on mix. You cannot exactly compare one quarter from other. If you look at year by itself, the increase in input cost had an impact on the margin of the business. As a company, we are now, for last few years, focusing on a better margin portfolio within the industrial product.
Sir, two follow-on. When does the mix change start impacting numbers? Second, you said VAM has corrected further from Q3 to Q4 and further now. Is that the main raw material we should track even for industrial products? When there is a sharp cut in the raw material price, being B2B, does this segment see a sharp pullback in margins or because it is B2B, the pricing power is very limited, you need to pass on the cut in the raw material prices?
B2B business, the pricing power obviously is lower than Consumer and Bazaar product. B2B business, when the costs go up, it does take a little bit time for consumer to accept the price increase. Also there is competitive factors at play. Overall, our leverage and our ability to pass on price increases is not as strong in Consumer and Bazaar product. However, we as a company are very clear of the margin range in which we want to operate, even within industrial product. It sometime can impact our business because we will not do business at lower margin. That is the answer on it. As far as when we will see the impact in product mix, I would urge you to go back over last five years.
If you see our business had fairly low EBITDA, I mean, the profit margin in industrial business, that has been steadily going up. Again, last couple of years, it has corrected a bit, but it is still higher than what it was four to five years ago.
Sir, I couldn't get full clarity. My question was when raw material comes down, what happens? You answered on not able to pass on the inflation happens. My question was on the other way.
When it goes down, the customers are more demanding in terms of asking for us to cut price. Also, competition is involved. Whenever there is a reduction in raw material price, it would generally help us, we would not be able to retain the full impact because the other competitors are also involved, consumer is aware that the cost has gone down, he immediately will ask us for reduction. However, still, if you see when material cost goes down, it would help us a bit. Not the entire benefit would flow into us. We will have to pass on fairly quickly some amount of the cost reduction.
Okay. Sir, second question is on Egypt and the MEA.
Just coming back and finishing that point on industrial, with our focus towards more specialty products and with our focusing towards higher end of the margin, the improving both customer and product mix is critical to improving the overall margin of this business.
Sir, that's helpful. Coming to international business, in Egypt and MEA, we are seeing this quarter loss, full year loss, and last year also, the same trend losses. For two years and quarter-on-quarter losses, what is the plan here long-term? Do you want to remain in these businesses? Especially Egypt is a very small business anyway. Would you exit also at some stage?
Let me answer the Middle East first and then come to Egypt, because Middle East has a larger loss. In Middle East, what has happened, and we had talked about this in the past call, is we had sort of made an effort to grow our construction chemical business. We had hired a set of people. We had commissioned a new part of our manufacturing plant, and we have been investing to grow in that construction chemical business in that market. That side of the business has not done very well because, again, a bit of slowdown in the market, significant competitive pressures. What we have done is we have in the last year scaled down the business, and we have reduced our expenses, and hence if you see the overall losses have come down.
However, we still believe it's an important market, and we want to continue to make effort to see whether we can succeed there long-term. In that process, we are incurring some losses, but it's a very large and important market, and if we succeed there, it can have a greater sort of benefit across other geographies as well. We still want to do a bit more work there. However, in the short term, we have reduced some of the expenses, and hence, the losses have come down. What is not showing in this number fully is the export that we do from India of our Consumer and Bazaar product to that market. That business is doing fairly well, but bulk of the profit of that business is captured in India. Where we export Fevicol and other products to that market, that business is doing well. Egypt business.
Egypt is a question mark. The country has gone through a lot of ups and downs. It's a difficult market. In terms of our long-term strategy of creating a successful business in Africa, I think we need to stay committed for a few more years. We are continuously trying to evaluate what strategy can help us succeed there. It's a small business, it's small loss, but I think it's important from a longer-term approach. As of right now, we are committed to Egypt as well. We have set up a good manufacturing plant there. That country has gone through a lot of ups and downs and difficulties. We want to persist for some more time.
Sir, my next question is on the new product strategies. Pidilite clearly wants to have a lot of growth coming from the new products launched in the last three years. Could you quantify how much of the growth or how much of the sales is coming from new products of the last three years? Which are the products you'd actually want to name in terms of success? Because that's the key growth driver, and that's difficult to track in your business because it is not that visible. If you could clarify.
As of right now, we are not quantifying the numbers, I will not share a number. Just to give you idea, and I may have said this in some of the earlier calls as well, if you look at a product like Gitex and Hi-Per are two new variants within Fevicol which have done extremely well. There was one more variant which was introduced last year called Fevicol Ezee Spray, which is a sprayable adhesive. If you look at these three variants within Fevicol, all with distinctly superior properties, have all done very well in last couple of years. Some new products we've introduced in our tiling portfolio, the tiling is growing as a fast emerging segment. Some of those products have done well. This is just to give you some examples.
These tiling and Hyper products will be higher gross margin than the company average currently in the Consumer Bazaar?
Both are comparable. I would not say they are higher, because overall our margin portfolio is quite good, but these both are also in that ballpark, in that range.
Sir, last question, VAM has corrected significantly. What would be your pricing currently based on the current scenario? Have you taken, in the past, some price cut also when sharp correction in raw material happens? Because that does disrupt the trade distribution channels. If no, will it be fair to assume sharp gross margin expansion in coming quarters in Indian Consumer & Bazaar?
In the past, when there has been significant reduction, if you remember when VAM had gone up to $1,600 three or four years ago, after that there was a sharp correction, we had passed on some of the price reduction. While it may create some channel disturbance, there is some expectation of channel that some amount of reduction is passed on, especially when there is a very sharp reduction. That is what we have done in the past. Going forward, we are closely watching, we are seeing what would be the demand scenario. If there is a need, we may pass on some of the reduction as discount or in some other manner. It is something that we very closely watch, if there is a need that we believe that it is necessary to pass on some reduction, we will do that.
Till now nothing has happened, right?
Till now, we have not reduced the price, no. We may have increased some discount in some products, there has been no reduction in price as such.
Okay, sir. That's all from my side. Thank you.
Thank you. We have the next question from the line of Amit Purohit from CIMB. Please go ahead.
Yeah. Good evening, sir. Thank you for the opportunity. Just on this construction chemical, based on your presentation, we see construction chemical growing a bit slower than the adhesive segment for FY 2019, and also on your comment, as far as the Nina business is concerned, you indicated that it did do well because, one, higher base, and some challenges in market conditions. Can you explain some more on this market condition? Are you referring to demand or you're referring to competition?
You are asking about our subsidiary, Nina and Percept?
Correct. I'm referring to actually the construction chemical market. Is it more to do with demand conditions being challenging, or is it competitive intensity that is-
Just to give you an idea of what Nina Percept does, Nina Percept are waterproofing services company.
Correct.
They are large contracting company which do large waterproofing projects in both the building segments, commercial buildings with real estate, with residential building, commercial building, factories, et cetera. It's a waterproofing contracting company.
Sure.
Yet in that segment, particularly large builder segment and some of the construction segment has seen some stress. We are a bit more cautious about the type of business to be done, and that has had some impact on the growth in the last quarter, because we do want to be cautious in this segment. Overall, if you look at year-by itself, the growth has been very good. Obviously this is a small business, and its quarter-to-quarter numbers are not very indicative, especially because it depends on the amount of work which is finished in a quarter. There is some stress, as we all know, in the large builder segment and some of the segment, there is a stress, and we are cautious about it, and that would have had some impact on the growth in the fourth quarter.
If you see the base of last year, the last quarter sale base was quite high, and that also had an impact on the growth. By itself, if you see the tail of the fourth quarter, it is comparable to first three quarters.
Sure. Thank you for this explanation. Would this have some effect on the overall construction chemical market also for FY 2019 or in the fourth quarter?
I would not link to Nina Percept to this because Nina Percept is largely involved in large construction as a segment. They are involved in large construction, while our CC retail, which is a part of standalone, is not into large project. There is some sale which goes into large projects, but bulk of their sale is retail and into medium and small project. There is no direct correlation between the two, but both will have some impact because of the stress in some segments of construction. The impact will be bigger on Nina Percept.
Sure. Thank you. Thanks a lot.
Thank you. Ladies and gentlemen, to ask a question, you may enter star and one. We have the next question from the line of Chintan Shah from Investec. Please go ahead.
Hi, sir. Thanks for taking my question. Sir, I wanted to understand how the industry has done. We saw the decline in volumes because of price hikes, have the other players also faced the same thing, or how is it?
Chintan, we don't have data of other companies, means what they have done, because they are not published in terms of what is the data. I would again urge is that we should not look at quarter is just a period of three months. If you look at second half by itself, the Consumer & Bazaar product business has grown by 9%. If you look at full year, our volume and mixed growth of Consumer & Bazaar product is 12%. If you look at any GDP growth and estimate it, we are almost talking about close to 2X of GDP growth. If you look at year by itself, we do not believe that we have lost share in any of our major categories, when our growth is almost two times the GDP growth.
Okay.
Even for second half by itself, the growth of Consumer & Bazaar product is more than 9%.
Okay. The industry growth is strong, right? Industry is growing.
Yeah. Again, I think quarter to quarter, it's very difficult because there are a lot of factors at play. Price increase is our internal factor that we have done, but overall economy can have some changes in terms of the consumption and demand. Lot of factors are at play in terms of channel, in terms of end user, in terms of overall demand scenario, labor availability. A lot of other factors can have a short to medium term impact. Hence, I would urge you to look at a slightly longer period, which is preferably one year, to get the right idea, or at least the last six months.
Okay. That's great. Thank you, sir.
Thank you. We have the next question from the line of Ashish Shah from Tara Capital. Please go ahead.
Sir, thanks for the opportunity. Sir, my question.
Mr. Shah, I'm sorry to interrupt. You may have to be a little loud, sir.
Sure. Sir, thanks for the opportunity. My question is that our VAM cost would be around $950 in Q1 based on the inventory we hold. What would be the spot price, sir?
The $950 price which we indicated is the current spot price. What we are saying is, while the consumption cost in Q4 was $1,100, given where the spot prices have been currently, you should see a sequential reduction from the levels we have seen in Q4.
Okay. The spot price as well as the price based on the inventory, both are at $950?
Again, see, $950 is an indication of what the current market price is.
What we are saying is that in Q3, our consumption cost was as high as $1,300-plus.
That's come down by more than $200 when we look at consumption cost of Q4. Looking at where VAM prices have been in the near term, we should see a further reduction when we get into Q1.
INR 950 is a new purchase price. It's a new spot price. Our closing inventory, the stock available would be higher than INR 950.
Got it. Fair enough.
Less than INR 1,100, but higher than INR 950.
Got it. Fair enough. Sir, my second question is that we have taken an impairment of around INR 11 crore this quarter, of which INR 4.4 crore, I understand, is related to IL&FS. What would be the remaining impairment for?
Remaining impairment is also impairment of some of the investments made by our subsidiaries.
Sir, can you highlight the names? Because the INR 6.6 crore of impairment apart from-
One of the investment is, we had invested a company, a waterproofing contracting company in Middle East. We had acquired a stake in a company there with a small investment, less than INR 5 crores, with an objective that if that company does well, we can increase the stake. That company has not done well. That is into waterproofing contracting. Similar to Nina Percept type of business, but operating in Middle East.
Okay. It's an equity investment, not a FD or something like that.
No. This is a strategic investment in a waterproofing contracting company. There, the first tranche of investment was small with the objective, if that business does well, then we can increase the investment. As the business not done well, we have impaired that investment and decided not to invest anything further into that business.
Fair enough. Thanks a lot.
Thank you. We have the next question from the line of Jaykumar Doshi from Kotak Securities. Please go ahead.
Hi. Thank you. Just a small bookkeeping question. On other crude-related raw materials, how has the index moved between March quarter and currently? Are you seeing similar tailwinds on other raw material basket also?
Generally, yes. I think if you look at other raw material item like acrylates or solvents like toluene, we are seeing reductions. There are some specific raw material like polyvinyl alcohol and all, there we are not seeing that reduction. Across the board, if you see, yes, we are seeing reduction in number of raw materials.
That is helpful. Thank you so much.
Thank you. We have the next question from the line of Pranav Venurkar from Rare Enterprises. Please go ahead.
Hi. Thanks a lot. Sir, can you elaborate little bit on proportion of industrial revenue as a total revenue? Because if you see global giants like Sika or Henkel or Bostik, their industrial proportion of revenues is much higher than the consumer or retail proportion. Would you see yourself going in that direction over, say, 10 years?
Yeah. If you are asking only about adhesives and sealants, we have that breakup in annual report. I think our adhesive and sealant consumer and craftsman adhesive and sealant is about 50% of our turnover. Just one second. It's about 56%. Industrial is about 4%. If you look at our total turnover of 100, the branded adhesives and sealants is about 56, and industrial adhesive is four. Yes, you are exactly right. Company like Henkel and some of the other company have greater focus on industrial adhesive, and hence, their contribution of industrial adhesive is much larger. While we as a company have become very successful in branded adhesives and sealants, our focus is more on consumer and craftsman market, and hence our proportion of that is much higher.
So-
Just the nature of the two businesses are very different. That is the case.
Sir, I actually understand that, I am just asking from a market sizing perspective, that is there a much greater opportunity in industrial adhesives and there is a glass ceiling in consumer adhesive. Is the case like that?
There are two ways to look at it. What I'm trying to say, industrial adhesive is, yes, it's a large market. It is not larger than consumer and craftsman in India. In India, consumer and craftsman market is larger. We have a more significant share in that. We believe that is a strength, and that market also will continue to grow at reasonable growth rate. Our share is lower in industrial adhesive, that doesn't automatically mean that there is a larger opportunity.
Okay.
That means that our market position there is not as strong in consumer and craftsman. We as a company are focused on both. Our greater focus is on consumer and craftsman adhesives.
Right. Per capita retail consumption in India is still a lot to grow.
Yes. We believe there would be steady growth. We have been seeing that also that There is, first of all, the penetration and consumption level in India are low, hence we believe that the branded or consumer and craftsman adhesive will also continue to grow at healthy rate going forward.
Okay. Thank you.
I don't want to say We continue to also work hard at industrial adhesive portfolio, and we are upgrading our technology and doing a lot of things in that space as well. That provides us a good growth avenue, but that is a segment with greater competition, both from multinational and Indian companies.
Right. Thanks a lot, sir.
Thank you. Participants, if you have a question, you may enter star and one. We have the next question from the line of Raji Korikad from Bay Capital. Please go ahead.
Good evening, sir. My question is related to the finance cost. On a full year basis, if you look at the finance cost, it's almost gone up by 70% on a consolidated basis. Can you tell us what is this related to?
Yeah. The primary reason for the increase is on account of the option valuation of our investment in CP, where we have the right to acquire the balance 30%. What Ind AS requires is that the potential liability on account of this 30%, this is valued and then discounted to the present value. It results in an interest unwinding as the years go by, because this right kicks in at a later point in time. While it is a non-cash item for the year, what it means is that it's actually bringing in the present value of the future liability through the P&L. It's a Ind AS adjustment.
Okay. Got it. The other question I had was on your industrial segment. Now in your last quarter, you had mentioned that there was a lot of price undercutting going on by the competitors in the industrial segment. Now that we're seeing the VAM prices cool off, do you think this would intensify further?
No. Industrial business by itself, the nature of it is comparative. Both when there is a raw material cost go up or go down, it's a comparative segment. The competitive intensity, I would not say It remains comparative. When it goes down, people have a greater room to be comparative.
Okay.
The nature of that business is more competitive.
Okay, got it. Just one more question. On the construction chemical side, could you give us a breakup of how much of it would be B2B and how much of it would be B2C?
Bulk of the business is B2C. I'll talk B2C standalone and the subsidiary separately. If you look at our subsidiary, Nina Percept, it's largely B2B.
Okay.
If you look at our other subsidiary called CP also, it's largely B2B.
Okay.
As far as our standalone construction paint and chemical business goes, bulk of it is B2C. By B2C, I mean consumer or craftsman.
Okay.
Some amount of it will be B2B.
Okay. Got it.
That's the idea.
Got it. Thanks. That's all from my side.
Thank you. We have the next question from the line of Aatman Najmera from Nordea Asset Management. Please go ahead.
Hi. Thank you for taking my question. I just have one from my side. My question is more on the long-term margins, not about this quarter or the next quarter. Structurally, when I look at the VAM prices, let's say in 2015 spot prices, the gross margin was close to around 45%. At a similar levels right now, your gross margins are significantly higher. Is it fair to assume that for the same VAM prices, you would structurally be able to increase your gross margin by product mix or something like that? Is that a wrong interpretation?
No, I don't think it's a correct interpretation. I think maybe the time of the same VAM prices may not be the same. Last time the VAM prices had gone to $800, $900, our gross margin was fairly high. Maybe there's a timing or a quarter or two quarter difference.
Okay. I can't assume that, let's say four years out right now, if we get the same VAM prices as today, we can't assume that the gross margin will be structurally higher. That's not the right way to look at it.
I think structurally is that whenever VAM is at this kind of levels, our gross margin generally are better. If you look at a five-year period and see the period of very high VAM prices versus low prices, it will have correlation with the gross margin. I am saying you may not have got the timing correct in terms of the spot price and the gross margin. There could be quarter-to-quarter difference because of inventory or something. Whenever the VAM prices go to $800, $900, our gross margins are at the higher end of the band.
Understood. I think maybe I wasn't clear with the question. I was saying, let's say VAM is 1,000 today and you have a gross margin of 45%, this is an example. The next time it's 1,000, will the gross margin again be 45% or maybe five years out for the same VAM price, we might be at 47%?
Five years out is very difficult to say about the product mix and what pricing actions we have taken and things like that. It's very difficult to say what would be there five years down the line.
Fair enough. That's all from me.
Yeah.
Thank you. We have the next question from the line of Keyur Pandya from ICICI Prudential Life. Please go ahead.
Thank you for the opportunity. Sir, as you mentioned that H2 is a better indicator for the business performance. From H2 situation, have we seen any change in momentum as far as business is concerned, either positive or negative? This is first question. The second question, any margin guidance range that you used to give and whether it would be led by gross margin expansion or operating leverage, if any?
I'll answer the first question. The first question, I think that the demand is just the new year has just started. It's barely 30, 40 days, plus also this is election period right now.
Hence, I think I would not like to comment on the demand scenario in the current year. Yes, on the first point that you made, the second half of the year is a better indicator. It smoothens out the impact of price increase and other things, and hence it's a better indicator of our growth scenario last year. Current year, it's too early to comment anything, you'll have to wait till end of quarter to get some idea and possibly end of half year to get even better idea.
Okay.
Regarding gross margin, Ganesh, you want to say about the range in which we operate?
Operating margins.
Typically, if you look at the EBITDA margins, we have over a medium term operated in a typically 21-24 kind of EBITDA margins. We have also seen years where it has gone a bit higher than this or a bit lower than this is the kind of range which we are comfortable operating in, and that's from a medium term that we have consistently guided.
Okay. Perfect. My point is the investment that we do, either through overheads or marketing spend. My point is, will we see any operating leverage or we'll continue to spend on marketing and employee strength? Margin expansion would be led by gross margin expansion or operating leverage?
It would be primarily led by gross margin because the material cost is our biggest cost head, which is almost 50%. Hence, the biggest benefit would be in the gross margin, would be both from pricing action or the raw material cost reduction. We will get some leverage, but as a company, we are still focused on driving consistent double-digit growth. We are investing in building up capabilities and building up our brands. We want to create new product categories to accelerate our long-term growth, and hence, we do not expect to get significant leverage out of, say, staff cost or advertising and promotion and some of those expenses.
Perfect. Okay. Thank you, sir, and all the best.
Thank you. We have the next question from the line of Amit Sinha from Macquarie. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. When I look at your presentation of last year same quarter and this year, especially the page wherein you have given the overall sales contribution of each of the category, I get an impression that, give and take, the adhesive segment has done better than the overall construction chemical segment. I am basing my argument based on the contribution sheet. Again, I might be wrong. Yeah, for the overall year FY 2019, have you seen better growth in adhesive and sealant sub-segment compared to construction chemicals in Consumer and Bazaar ?
Both of these segments have done well in the last year.
Yeah, done well, I understand. It looks like that adhesives and sealant has done better than construction chemicals.
What you're seeing over here is the marginal variation, where you see adhesives and sealants going up a little bit and art, craft material and others going down a little bit.
Let's talk about construction chemicals.
Overall, if you see, whether it's adhesives, sealants, whether it's construction chemicals, paint, they've all done more or less equally well. Across the board, most of our divisions have done well.
Right. Basically, in the context of your overall medium-term to long-term guidance of construction chemicals doing better compared to adhesives and sealant segment. Basically, my question was that, was there any kind of one-off, or was there any kind of moderation which you have seen in especially Dr. Fixit as a category?
No, if you look at construction and paint chemical, which was 20%, is again 20%, so there is no change in that. Adhesive and sealant has changed from 55 to 56.
That's a very minor change. Construction paint chemical has grown at the company level. Again, this doesn't have decimal. Maybe next time we will have one decimal here to give you a better idea. There is no significant change. This data does not indicate that construction and paint chemical have underperformed or anything of that nature.
Agreed, sir. You have guided for a better growth in construction chemicals.
It is both construction and paint chemical there. Yes, we do believe that construction chemical, we have guided better. Also one more thing in adhesive and sealant, last year the price increase element was higher than construction and paint chemicals.
Okay, got it. My second question is, while I understand that the current spot prices of VAM is $950, any kind of commentary you would want to give on the overall VAM prices expectation going forward in the next six months or next one year, depending on the demand-supply scenario globally?
Amit, you have seen how the VAM prices fluctuate. It's very difficult to give any projection. The VAM prices have some linkage to oil prices and also demand and supply scenario. There is a very active, like in Q3, Q4, we were at $1,300, $1,400, and now we are down to $950, $1,000. There is a significant fluctuation that can happen in VAM prices, and hence we would not like to hazard a guess over next six months to one year.
You are absolutely right. I mean, nobody can guess the prices. What we understand from some of the pockets is China has started opening some of the closed construction chemical plants. Just on that particular line, I'm sure you would have a much better understanding of the entire demand supply.
I don't see the impact on VAM price. You are thinking Chinese construction companies will consume VAM? What are you hinting at? I didn't understand.
What I'm hinting is the supply situation is getting better.
VAM is a different product. VAM is not made by those companies. That has no impact on VAM prices. VAM is made by other companies. They are not by Chinese construction companies.
Got you.
What I'm trying to say, VAM is made by few manufacturers in the world 2, 3 in Asia and rest in USA and Europe. Nothing in China scenario has changed anything in that. First of all, it is linked to petrochemical, means oil prices, and other demand and supply scenario.
Thanks a lot for the answer, sir. Thank you.
Thank you. Participants, if you have a question, you may enter star one. We have the next question from the line of Vibhooti Jain from Quest Investments. Please go ahead.
Yeah, sir. Thank you for the opportunity. If you could talk about ICA Pidilite and CP. In ICA, you've mentioned that you've procured some technical know-how and brand from the holding product. What are those products and what is the outlook for those products? Similarly for CP, one more for the wood-based joinery adhesives, what is the performance currently and what is the outlook do you see for those products? Thank you.
ICA Pidilite is a 50/50 joint venture between Pidilite and ICA, which is a leading premium wood finishes company in Italy.
Correct.
That joint venture has been in existence now for a couple of years. We have set up a new manufacturing plant for this in Jambusar in Gujarat.
Yes
which will improve the supply chain. Pidilite also had a trademark called Woodsin, which was a brand owned by Pidilite in wood finishes. That trademark was sold to JV so that all wood finishes business can be housed under the JV, which is Pidilite ICA.
That is the trademark called Woodsin, which was sold from Pidilite India standalone to our joint venture, ICA Pidilite.
Okay.
Overall, we feel good about this category. We have now excellent product portfolio. We have a manufacturing plant in India. We believe that this business has good prospect. CIPY Polyurethanes was a leading flooring company in India. All types of flooring, epoxy, polyurethane, and other types of flooring, which are used in various application in industries, healthcare, food, medical industry.
Yes.
That's a flooring company that we have acquired. That company had good performance last year. The last year was the first full year with Pidilite. We believe that this is a category which is likely to see good growth in coming years.
Okay.
Right. The last question, which was about the joinery business.
We don't separately give the figures of our sale in the joinery industry. Our adhesive for joinery industry. Now we have a full portfolio of product. Pidilite had a good range of product, and now we have tied up with this company called Jowat from Germany-
Yes
which is a leader in this space. We now have a complete portfolio for this segment, and we are strong in that segment. This segment is growing well and we are poised to benefit from that given that we have good distribution, and reach as well as now we have a good product portfolio.
Okay. Thank you. That's it from my side.
Thank you. Participants, if you have a question, you may enter star and one. We have the next question from the line of Kuldeep Gangwar from ASK Investment Managers. Please go ahead.
Just one question. What had been the advertisement spending in this quarter and the year, if you can please share?
Sir, can you repeat the question?
Advertisement spending in this quarter and for year.
Yeah. For the quarter, the spend was 4.1% of revenue, and for the full year, it translates to 3.6%.
Sure. Thanks a lot.
Thank you. To ask a question, you may enter star and one. We have the next question from the line of Vishal Punia from Motilal Oswal Securities. Please go ahead.
Hi, team. Just two bookkeeping questions. One is, what would be the CapEx for FY20 and the tax rate?
Yeah. The CapEx is typically in the range of two to three% of revenue, where we are getting into some additional capacities, we may have it at the higher end of this range, at other times towards the lower end of this range. Typically, this would be the range for CapEx from a near-term point of view. As far as tax rates are concerned, we should be in the 32%-33% range, because the couple of units which had tax exemption have also gone out of this bracket during this year. Current year as well as last year, the effective tax rate was lower because of write back of excess provisions of earlier years. On an ongoing basis, we should be in a 32%-33% effective tax rate.
Okay. Thanks.
Thank you. We have the next question from the line of Dhiraj Mistry from Emkay Global. Please go ahead.
Yeah, thanks for taking my question. My question is related to employee expense. What is the reason, if I see from a second half perspective, employee cost has gone up by 22%?
Yeah, as far as employee costs are concerned, we have had a couple of factors like ESOPs, which are given during the course of the year, which is not there in the base. That's one of the factors which has come in beyond the normal increments, as well as our investment in taking on additional resources from a future growth perspective. Also, retirement benefits, actuarial valuation has also had an impact in terms of higher provisioning because of actuarial valuation. These are couple of events which have actually increased the staff cost growth beyond the normal.
Okay. Can you quantify those amount, ESOP amount, is it likely to continue next year also?
ESOPs, again, what has been given in this year, it would start coming into the base. Going forward, depending on any change in scheme, et cetera, you could have an incremental amount coming in, because we have an ongoing ESOP program where annually ESOPs would be given to a certain set of employees, which would then vest, say, over a period of time. This is something which, in a sense, becomes part of the variable remuneration and from an employee retention point of view.
Okay.
Last year, ESOP expense was about INR 10 crores, right?
Yeah.
For the full year. For the full year. Also, last year, why there is a little higher increase is because of increase in variable pay. As a part of our compensation strategy, we have increased the variable pay to more levels of management in the company. Again, for full year, the total variable pay expense is about INR 31 crores. While variable pay and ESOP are not very large in terms of the overall staff cost, some of these are sort of new things that have come in and hence had a bigger impact in second half of the year.
Okay. It's likely to continue going forward also?
Yes. The compensation strategy would be similar, where we will have a greater number of people covered under variable pay and ESOP.
Okay. Second question related to other expense that has been flat this quarter. I am assuming that A&P spend has gone up on a quarter-to-quarter, this YOY basis. What is the reason being which cost item has gone down in this quarter?
If you look at other expenses, this has got a basket of a large number of items, whether it is clearing and forwarding costs, whether it's power and fuel, whether it's rent, so on and so forth. It's a combination of multiple items.
Okay. That's it from my side. Thank you.
Thank you. As there are no further questions, I would like to hand the floor back to the management for closing comments. Please go ahead.
I would like to thank everyone for coming on the call. Thank you.
Thank you, gentlemen. Ladies and gentlemen, on behalf of Axis Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.