Q3 18/19

Jan 24, 2019

Good day, ladies and gentlemen, and a very warm welcome to the Pedalite Industries Limited Q3 FY 'nineteen Earnings Conference Call hosted by ICICI Securities. As a reminder, all participant lines will be in the listen only mode. 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 mister Nimit Shah from ICICI Securities. Thank you, and over to you, Nimit. Good afternoon, everyone. We would like to thank the management of Pedalite Industries for giving us an opportunity to host this call. From the management side, we have mister Apoorva Parekh, executive director, and mister P Ganesh, the chief financial officer on the call. Thank you, and over to you, sir. Good afternoon, everyone. We have delivered another quarter of double digit volume growth. However, this quarter saw gross margins being impacted substantially as a result of input cost inflation and rupee depreciation. Fortunately, input costs are moderated. Overall, we remain committed to our strategic agenda of delivering consistent profitable volume led growth. I'll begin with a summary of the financial performance for the quarter and nine months ended December 2018 for the stand alone business. Net sales at INR $15.80 crores grew by 16% over the same quarter last year. The underlying sales volume and mix grew by 11%, which is a double digit volume plus mix growth for the sixth quarter running. Though in the current quarter, price increase did play some role in sales growth. This was driven by a 13% growth in sales volume and mix of consumer and bazaar products and a decline of 2% in sales volume and mix of Industrial products. All of our key product categories registered good sales growth. Our IP sales during the quarter was impacted by competitive pressure and market conditions. Net sales for YTD December 2018 stood at INR 4,681 crore and grew by 16% after adjusting for GST impact over the same period last year. During the quarter, the gross margins contracted by over 500 basis points given the high input costs. Major raw material cost remained high during the quarter on account of high input prices and a weak rupee. Fortunately, input prices have moderated. The current spot price of our major raw material RAM is below $1,000 at percent as compared to the Q3 consumption cost of over $1,300. The price increases taken during the quarter, coupled with softening input prices, should aid in margins getting back to near normal levels. EBITDA before nonoperating income stood at INR $3.27 crore and declined by 9% over the same quarter last year. EBITDA margin for the quarter stood at 20.7%. The year twenty fourteen-fifteen had witnessed input costs similar to the levels seen during the current quarter. The EBITDA margins during that year was at about 17%. EBITDA for YTD December 2018 stood at INR1035 crore and was flat over the same period last year, given the input cost led contraction in gross margins by over 300 basis points and higher ANSP spends. Profit after tax stood at INR225 crore and declined by 6% over the same quarter last year. Profit after tax for YTD December 2018 stood at INR $7.36 crore and grew by 3% over the same period last year. Now I move to a summary of the financial performance for the quarter and nine months ended December 2018 for the consolidated business. Net sales at INR $18.38 crore grew by 20% over the same quarter last year. Net sales for YTD December 2018 stood at INR 5,404 crore and grew by 20% adjusting for GST impact and after excluding the sales of Cyclo division of USA, which was divested by Fidlight USA Incorporation in June 2017 over the same period last year. EBITDA before nonoperating income stood at INR $3.37 crore and declined by nine percent over the same quarter last year, given the input cost led contraction in gross margin by over 600 basis points. EBITDA for YTD, December 2018, stood at INR1091 crore and grew by 2% over the same period last year, given the input cost led contraction in gross margins by over 400 basis points and higher A and S business. Profit after tax at INR $2.20 crore declined by 8% over the same quarter last year. For YTD December 2018, profit after tax at INR $6.92 crore declined by 4% over the same period last year. Moving on to our subsidiaries performance. Our domestic subsidiaries recorded a growth of 47.6% on a like for like basis, while international subsidiaries grew by 1% during the quarter. Neenah, Percept, Aika Pedolite and Citi, which are our domestic subsidiaries, reported strong sales numbers. Neenah's EBITDA for the quarter was impacted on account of a provision of INR 4.4 crore made against an FD of INR 8.8 crore placed by the company, Nina, with the ILFS Group. Many of our focused international geographies, including Sri Lanka and Bangladesh, have also 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 SARC, Middle East and Africa markets in our international business as our growth drivers. We can now open the floor for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Questions. The first question is from the line of Abhi Mehta from IAFL. Congratulations on the great sales growth performance. Just wanted to understand, has these demand trends that we witnessed in 3Q, have they sustained? Or are there any risks that you think we should be concerned about on demand? See, as you have seen, Abid, that we have had almost now six quarter of consistent double digit volume growth. So again, we continue to remain cautiously optimistic. It's difficult to say whether there are some external or macro factors which can impact the growth. So it's difficult to forecast, but, you know, based on the our recent performance, we we remain cautiously optimistic. Oh, okay. So, no, I was just understanding the cautionary because I mean, now it's early, like, you said six quarters of great performance, sir, would've Sir, it is it is like it's you know, do we foresee anything? We cannot foresee anything of that nature. However, it is always good to be cautiously optimistic. That is just way we think, you know. Fair enough, sir. Fair enough. Sir, lastly, just, you know, on the gross margin front, I'm a little confused about the Q o Q contraction. Now we saw price increases that you had clearly announced in the q q call as well, and and you had highlighted that VAM prices also had started to moderate. Now, you know, from an you have the IR terms as well. Could you highlight what exactly is the reason for this moderation? Because there seems to be a sharp Q o Q moderation. And, you know, just, you know, start correspondingly, Krishan, had now the price increases taken already enough for where bank prices stand right now? Do you need more? Yes. So you're right. On a Q o Q basis, the gross margins are contracted by about 200 basis points. And what we also need to bear in mind is that the input cost scenario continued to be high in Q3, also to some extent impacted by high cost inventory, which we are holding. And also the rupee dollar exchange rate had also deteriorated during the quarter when compared to quarter two. Then while plan is taken as a yardstick given that it's the single largest raw material, there are other raw materials also which have seen an increase. So all of this put together meant that there was a contraction as far as, gross margins on a Q o Q basis is concerned. Of course, on a Y o Y basis, the contraction is much higher than more than 500 basis points. So we have taken some more price increases in Q3 as well. Now with the softening of WAN prices, generally, the input prices and WAN being the major one for us, while the average consumption cost of upwards of $1,300, for us in q three, the current spot prices are less than 1,000. So with the softening of input, costs coming in, with the rupee dollar also seeming to stabilize at relatively lower levels, but of course, it's too early to predict anything in terms of which way the rupee dollar will go. And also the full impact of price increases, which we have taken will be seen in Q4. All of these things put together, we should see, Arthur getting back to somewhere close to the normal levels as far as gross margins go. Sir, far as the gross margin or as the EBITDA margin? Because you had indicated your last quarter, I don't know if that is correct. My understanding was the normal EBITDA level is 22% to 23%. Is that correct? Absolutely. Absolutely. Yes. No, EBITDA level will also depend on what sales growth we achieve, advertising and promotion expense. So in a quarter to quarter basis, that number can fluctuate a bit. And it could also very greatly depend on the top line growth and the advertising and promotion expense in that quarter along with the gross margin. You need to support in conjunction. Also, if you see last quarter for us, every year, the gross the EBITDA margin are lower because the sales base is also lower. So this is just to add on a quarter to quarter basis you see then, you know, the sales growth and other expenses will also have an impact on the EBITDA margin. Because leverage comes into play when you look at EBITDA. Okay. So you think gross margin is what you're talking about? The EBITDA will depend on how the leverage plays out. Okay. And sir, lastly, what did you see in the first three months? Some sales got impacted by competitive pressure in market condition. Was that YTD sales, or what was that, sir? So that's for our IP division. See, in our IP division, I would just like to ask you. First of all, our IP division is made up of lot of different verticals serving lot of different type of end consumer, both in India and outside of India. So some of the product segments like leather, footwear and some textile business got impacted because of demand scenario. Some overseas countries, the demand conditions were not so great. So that was the reason. And in addition to that, in a rising raw material scenario, the the competition is significant on price, and hence, also that causes some, you know, impact on the market share. But this was about IT business. The comment was regarding the low growth of IT business. Okay, sir. Okay. Perfect. I'll come back in with you further questions. Thank you very much, sir. Thank you. The next question is from the line of Abhish Roy from Edelweiss. Please go ahead. Sir, my question is on the ILSX exposure. So one is is this in the ILSS subsidiary? Second, when was this done? And apart from this 8.8 crores, is there any more exposure in any subsidiary in the at the at the tenant level? Yeah. So the total exposure at Prednis Group is 8.8, and it's entirely in our subsidiary, Lina. And this exposure was taken more than three years back. And at this point in time, we have made a provision of 50% of the amount given that there is uncertainty in terms of where this is headed. And therefore, as a conservative measure, we have provided for half the amount. This was done in very early days of Meenah. At that time, the management invested based on the rating, but this was done at very early stage of the Innav integration with Pirimai. Other than this, we don't have any other exposure to the IFS tool. And this exposure needs to IFS parent or the subsidiary? Partly to parent and partly to subsidiary. And why was it not taken, write off as in in the previous quarter? A lot of companies took in the q two. So this is something which you review on a quarter by quarter basis. And given that Clarity hasn't been worked as yet, is when we have taken this. Sir, coming to the business side, if you see paint company, the results, whatever has come, they manage the margins much more better. And this is something this is not the only difference. Every time you see the high volatility, PIDI Lite's margins are more volatile. Now my question is why not change it? And going ahead, do we see the price hike becoming more frequent? You have much more market share in your key category versus the paint company. So why you don't want to take more frequent prices if warranted? No. I think, see, first of all, paint business in our business is very different. So, you know, it is not comparable, number one. Second thing is if you look at our overall margin, they are significantly higher than paint companies, including Asian Paints. So we have a different approach of managing our margin. As we have always said, we like to operate in a margin bank. And when I say like to operate, doesn't mean every quarter. Generally, on a year to year basis, we like to operate in a margin bank. Now if you really see last three years, the way our margin has shot up, we have been consistently saying that some correction is possible. Now this correction greatly depends on the sudden changes that can happen in prices of key raw material and dollar. Now we as a company, we do not believe that we should respond quarter to quarter to maintain very, very strong market position. We need to be judicious about making the price increases. But as you have seen over a very, very medium to long term period that we consistently are able to get back to the right kind of margin level even though we may have an impact for a short period of time. So our approach is to follow in a particular manner. Plus, we are into large number of diverse segments. And for us to do continuous kind of a price increase, we believe it's not the most judicial way to manage the business. So we have our approach, and we believe our approach is doing quite well. But once in a while, this can happen if there is such a sudden sharp price in the increase over and some of the other raw materials. So last quarter, your Y o Y price hike was three and a half percent, and you mentioned to Adi that further price hike has happened. Now how much is the portfolio hike? Since many of the if you if you can we have not done price increase in all the categories, but if you see many of the major product category, the price increase is in order of about 5%. So from three and a half further, one and a half has been up? Two and a half, 2%. In some products, a bit more as well. Yeah. That's right. Yeah. So coming to the international part of the business, if you could elaborate Brazil, more competition. Is it short term? What the key players? Is it is it the market leader? And in US, the adult coloring, what is the issue? Here, we still keep seeing the issue this issue coming back again and again. So what is the solution long term? Okay. So Brazil, the key competitor is St. Gobain. St. Gobain has acquired a business in Brazil, and Henkel is the second company. So these two are the major competitors in the segment in which we operate. Pragir economy, as you know, has been going through difficult period, and hence, people have been fighting for sharing that kind of market. And hence, it is competitive from the view of pricing and margins. While as we as a company took a call few years ago, we want to make sure that we do not lose money, and we will you know, it is important that we don't do the kind of pricing strategy, which may result into losses. And hence, we have been conservative with the focus that, you know, let's let's maintain the business, and let's make sure that we do not incur losses. So with this approach, some businesses, we have to let go where the price, competition and intensity has been more. Now our effort, we have taken, if you see lot of effort in terms of cutting our costs and improving our efficiency and which is allowing us to maintain breakeven or a little better than that. But however, long term, we are evaluating at various options in terms of strengthening the economy there was fairly bad, but we are seeing some signs of improvement as the new government has come in. And we have also found we have taken some initiatives further in terms of sourcing and cost reduction. So we will now closely see what goes forward. But compared to what was the situation three, four years back, we are in a better position. As far as USA goes, in USA, if you recall two, three years ago, this adult coloring trend has very significantly taken up and the sales growth was very high couple of years. Now that trend has moderated significantly. And hence, we are seeing the carryforward impact of that, which will continue hopefully now going forward, the impact may not be much. But that was an impact that we saw because of very sudden growth in sales because of this new trend, which one moderation is now resulting into reduction in sales. Now again, Sachin Tart, we run-in an efficient manner whereby we are making some profit while evaluating the strategic options. So as far as overall strategic objective, we are not investing more money in both of the subsidiaries. We are trying to manage them efficiently till we find to find some way to, you know, have a more strategic options evaluated. Sir, last question. Volume growth was quite strong. Domestic flow in the region specific, do you want to highlight something? Kerala, was it much stronger in terms of all in growth? No. Like Kerala, which Kerala may have been better than All India, but it's not that anything that has created a big impact on the All India growth. We saw that in our main product categories like the DC West, c West and construction chemicals, there has been good growth across most of the market. So most of our brands in this portfolio and across most of the market, they have done well. Competitive intensity and credit repair payments are not a big concern, right, from the other other organizers? We don't believe it has created an impact on our share. So enterprise now is like that, but, you know, we we watch everybody very closely. But we do not believe it has had material impact on our share. Okay, sir. That's all from my side. Thank you. The next question is from the line of Anand Shah from Axis Capital. Please go ahead. Yes. Hi, sir. Thanks for the opportunity. So just a few questions on the top line growth. So firstly, is there any element of festive timing shift that would have propelled growth a little bit higher, like it happens in Paints? Small impact. We are not as linked to Paints, but some impact could have been there, but we are not that closely linked to Paints cycle or to the Diwali cycle. However, as as Dinesh mentioned earlier, there there there will be some impact because, you know, we had some price increases in some key product towards December, and hence, the channel may have bought a bit more inventory ahead of the price increase. So that could have played some role in the growth. Okay. So using manual upstocking will happen in the price, right? Yes. Upstocking would have happened. Yes. Okay. Okay. And are you seeing underlying demand trend picking up in general? I mean, we see this across building materials. Any comments that you can add? Sir, we don't have comment except to see that we are seeing fairly consistent demand across many parts of India. So we are seeing that. I don't have any comment beyond that. Anything, Dareesh, we'd like to ask. So across our categories, have seen fairly good growth, and that's the question. Okay. And what about Art Materials specifically? And has that stabilized and is back on growth trajectory? See, Art Materials, the hobby and craft hobby color business is stable, and that's doing okay. Maybe the question that you were asking is about our handicraft adhesive portfolio, which has seen difficulties in last couple of years. So that segment is still facing some headwinds in terms of the way in which the handicraft segment should have picked up. We don't see that level of growth. But overall, at a company level, the contribution of this business is fairly small. But we are not seeing significant improvement, maybe some improvement, but not significant. Okay. And on this international business, obviously, the volatility in INR would have impacted the margins and then the lag in price hikes and all as well. And we indicated now, given that both crude and INR have reversed to an extent, do you see that margin stabilizing or increasing a bit in the next few quarters? Some of the subsidiaries like Bangladesh and Sri Lanka will see clear immediate improvement. Egypt will also see some improvement because they all consume good level of BAM. So their marching should certainly improve. And and as regards currency, while the INR has stabilized, the Sri Lankan rupee, for example, has deteriorated a bit during the quarter. Right? So currently, currently, fact, we'll need to wait too much. Okay. Okay. And then just lastly on the domestic subsidiaries, mean, they are doing quite well, specifically on ICA. I mean, that piece is now completely stabilized and back on growth, Harik. Sir, on ICAR, we must add one point that last year, we had some supply disruption in December And of last hence, the sales growth is a bit higher because of the lower sale in December. But having said that, the business is stabilizing well. We have commissioned a new manufacturing plant in Gujarat. So now we will be making these products in India. Many of those were imported earlier. So that is a big step forward. But these businesses have stabilized well. All of them, MENA, Percept, Aika and now even Citi, which has been the most recent acquisitions. So we feel that the domestic subsidiaries are on right track. Of course, there is a lot of work to do. But but they have sort of they are you should start helping. And the post commencement of this manufacturing facility for ICAR, you do see margins also improving for ICAR? Yeah. So as we ramp up manufacturing, we should start seeing margins improve. So at 05/2021 onwards, at least over the next four quarters or so, you should start seeing better margins in Icar? Yes. Okay. Perfect. Okay. Thank you, Vasu. Thank you. Thank you. The next question is from the line of Kartik Mehta from IDFC Mutual Fund. Please go ahead. Hi, sir. Thanks for the opportunity. Sir, my question is pertaining to the price like what we have taken. Was considering the rand prices of $1,300 or we actually took the price hike little lesser than what was required? And now the crude has corrected, so we are balancing out. I think it depends on both dollar and crude. The price hike we had done was not to fully mitigate the impact of 1,300 plus dollar mark and dollar at $73.74, but it would have mitigated a lot of that cost increase. But now the cost has come down substantially, as we said earlier. All right. Fair point, sir. Thanks a lot. Thank you. The next question is from the line of Tejesh Shah from Spark Capital. Please go ahead. Sir, the kind of growth we have been witnessing for last six quarters, is it a fair assumption that we must be gaining market share in large chunk of our portfolio because industry growth can't be this high for this long? It is possible. It is possible that we would have gained share, yes, in some of our product categories. We we we would have gained market share. Yes. But this is against organized players, or this is unorganized players losing market share? I would say it will be a mix of both. And and, again again, this is this is, what we estimate, could be the solution because we also need to bear in mind is that we don't have authentic market share data like an AC Nielsen, for example. But having said that, with these kind of growth, yes, it's possible that we could actually gain market share. And in many, many of the market, we see that we probably have gained share. But what there is not some firm accurate data to support our position. So we had to take the side. And also in some of our key categories like Construction Chemicals, for example, it's more about creating the market and driving consumption than so much about market share. Sure. So which are categories, if you can call out, you are at least based on your anecdotal understanding, you believe that you would have gained market share, three categories, just to give some color? The two big categories, adhesives and sealants and construction chemicals. Now within there, there are subcategories and other details. But our two broad categories, the large categories are DCs and Siemens and construction capital. Okay. So you are seeing overall categories would have been market share, but subcategories, we are not sure whether how We have some general idea, but I would not like to sort of share it because the reliable accurate data is not there. But we generally are positive about the sales development that has happened over the last six quarters. We have made good progress, and we have certainly gained share in some of our product categories. So if you can give, there's a lot of trust in the last two years on NPD pipeline, and we have been talking about this emerging portfolio or core versus the growth portfolio. So what will be the share of this new portfolio in last two, three quarters? And has the share increasing as we are going along on that? See, the products introduced in last two three quarters will not have any meaningful contribution if that is what you are asking. Generally, in our kind of product category, the gestation period is fairly long Because you must understand, we are here changing habits of majorly craftsmen. So these are craftsmen who are using products for years together, and it takes lot of effort to convert them. There is a long gestation period. But once the change happens, then they remain with you for a long period of time. But to give you an example of some of the products that we have been sort of trying to increase the sales, there is this product called FERRICOL Hyper, which is an advanced type of FERRICOL, which is an anti bubble type of FERRICOL. Now that product is now doing really well. There is another product called FERRICOL ZTEX, which is a fast setting FERRICOL but with heat resistance property. That product is also doing very well. We brought us sprayable FermiCol, which we advertise on television called FermiCol, I know, SpeedX Easy Spray, sorry. That is also doing very well. So these are example of products that we have introduced, which are doing well in their respective segments. But some of them have been introduced three years ago, four years ago, two years ago like that. So in our case, the gestation periods are a bit longer, and it does take a little bit time to grow. We have launched set of tile and stone products, which are doing well. So in each of our products and categories, we have introduced products and some of that are doing well, but they take few years to really start changing the habit and achieving some kind of sales. And sir, any update on Parivatan project? We were talking about putting out factories and focusing on cost efficiency in mind. So I just wanted to know. So regarding Parivatan project, we have identified and we are like we are going to open a new manufacturing plant in South Of India. So there was lot of work done on the network design. And coming out of that, we are going to set up a manufacturing plant in South Of India. And in addition to that, Parivasan project was also about identifying other cost saving opportunity in packing material, raw material, manufacturing process, etcetera. So in many of those identified areas, we have made progress and implemented some of the initiatives. Sure. And sir, lastly, on some of the previous questions also, Looking at where VAM prices have stabilized Q o Q and dollar is also more than our favor and with all the cost efficiency program that we have been undertaking, do you think that the upper side of your guidance on margins can be revisited further on the positive direction? Do you believe that you will reinvest anything above that threshold number? See, if you look at the three years that we saw, that 'fifteen, 'sixteen, 'sixteen, 'seventeen, 'seventeen, 'eighteen, if you really look at that kind of a range, that is an upper end of our margin. So if really we start doing above that, we would certainly like to invest to accelerate sales growth. But those three years, the kind of margin that we had is towards upper end. And and we would like to invest more if we really were to be able to have higher gross margin. Sir, that's fine, sir. And thanks on all the risk, sir. Thank you. Before we take the next question, we would like to remind participants that you may press star and one to ask a question. The next question is from the line of Abhi Mehta from IAFL. Please go ahead. Hello, sir? I had a question on the Neena project. Now what we do understand from the market is that we had undertaken this focus on, you know, making it more the the pricing was revisited. I'm not sure if that was across the board, but I was told that there's a reason for the pricing which has aided growth. Now clearly, has kind of borne fruit for us. Is that is that is that understanding correct? And if you could help clarify that first, sir? Sir, I'm not clear exactly what you are referring to, but maybe, know, there there are couple of strategy in MENA. One is, of course, we we we take a close look at the margin and the way we are doing business so that we don't end up doing lot of projects which are at very, very low margin. So there is an increased focus on managing our margin better. That is clearly there. In addition to that, we want to also focus on sectors which are other than real estate, large buildings. So we want to look at manufacturing plants, commercial projects and lot of other type of construction projects where also, again, the margin profile could be better. So overall, in this type of businesses, we need to have a proper financial management. And we have been the team has been creating the framework to be able to do so. Other than that, I'm not sure what exactly are you referring to about pricing. So this is why what I was maybe you can then maybe, I was is there a margin moderation that we have seen versus last year adjusted for, obviously, the isn't that the case? And if that is the case, is that just more one off and hence No, no. There has been some margin moderation because they have also faced the cost increase. They, as a company, use both material and labor to do a job. So they have also faced the the cost increase. And also, you know, it it is a challenge, as I said, to manage a proper margin mix in this. So some of when when you have an accelerated sales growth, it is possible that some of the orders are at the lower end of the market. And and they have also taken certain fast track projects, which are at a relatively lower margin. So it's a competition. However, however, we are very conscious of the fact that we want to make sure that we continuously work towards improving our margin. So that is clearly a focus. And it is not that we just want to grow without the earning reasonable margins. Okay, sir. Okay. And, sir, even the perfect subsidiary, the moderation is obviously sharper over there. Is that also what to do with input cost only? Or is there also something which has got to do with mix? No. But for size of company, it mix, and it could be some one off carryforward from quarter to quarter because the for this size business quarter to quarter is not a reliable indicator at all. So I would I would If at if you at YTD December if you look at YTD December and compare it with FY '18, it's not a significant. Okay, sir. That that's that's clarified. It's on my side. Perfect, sir. That's all from my side. Thank you very much. You. A reminder to the participants, anyone who wishes to ask a question, please press star and 1 at this time. For reference to ask a question, you may press star and 1. As there are no further questions, I now hand the conference over to the management for their closing comments. I'd like to thank everyone for coming on the call. Thank you. Thank you, everybody. Thank you very much. Bye bye. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.