Good day, ladies, and gentlemen, and a very warm welcome to the Pidilite Industries Limited Q3 FY 2019 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. Should you need assistance during the conference call, please signal an operator by pressing star followed by zero on your touch tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nimesh Shah from ICICI Securities. Thank you, and over to you, Nimesh.
Good afternoon, everyone. We would like to thank the management of Pidilite Industries for giving us an opportunity to host this call. From the management side, we have Mr. Apurva Parekh, Executive Director, and Mr. 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. This quarter saw gross margins being impacted substantially as a result of input cost inflation and rupee depreciation. Input costs are moderated. 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 standalone business. Net sales at INR 1,580 crore 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, 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 costs remained high during the quarter on account of high input prices and a weak rupee. Input prices have moderated.
The current spot price of our major raw material, VAM, is below USD 1,000 at present as compared to the Q3 consumption cost of over USD 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 non-operating income stood at INR 327 crore and declined by 9% over the same quarter last year. EBITDA margin for the quarter stood at 20.7%. The year 2014-15 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 INR 1,035 crore and was flat over the same period last year, given the input cost led contraction in gross margin by over 300 basis points and higher A&SP spends.
Profit after tax stood at INR 225 crore and declined by 6% over the same quarter last year. Profit after tax for YTD December 2018 stood at INR 736 crore and grew by 3% over the same period last year. Now I'll 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 1,838 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 Pidilite USA, Inc., which was divested by Pidilite USA, Inc. in June 2017 over the same period last year.
EBITDA before non-operating income stood at INR 337 crore and declined by 9% over the same quarter last year, given the input cost led contraction in gross margins by over 600 basis points. EBITDA for YTD December 2018 stood at INR 1,091 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&SP spends. Profit after tax at INR 220 crore declined by 8% over the same quarter last year. For YTD December 2018, profit after tax at INR 692 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. Nina, Percept, ICA Pidilite, and CIPY, which are our domestic subsidiaries, reported strong sales numbers. Nina'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 IL&FS 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 SAARC, 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. Anyone who wishes to ask a question may press star and one on the attached phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Avi Mehta from IIFL. Please go ahead.
Hi, sir. Congratulations on the great sales growth performance. Just wanted to understand, has these demand trends that we've witnessed in Q3, have they sustained or are there any risks that you think we should be concerned about on demand?
See, as you have seen, Avi, that we have had almost now six quarter of consistent double-digit volume growth. 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. It's difficult to forecast, but based on our recent performance, we remain cautiously optimistic.
Oh, okay. Sir, no, I was just understanding cautionary because now it's, as you rightly said, six quarters of great performance.
See, do we foresee anything? We cannot foresee anything of that nature. However, it is always good to be cautiously optimistic. That is just the way we think.
Fair enough, sir. Sir, lastly, just on the gross margin front, I'm a little confused about the quarter-over-quarter contraction. We saw price increases that you had clearly announced in the Q2 call as well, and you had highlighted that VAM prices also had started to moderate. From an USD-INR terms as well. Could you highlight what exactly is the reason for this moderation? Because there seems to be a sharp quarter-over-quarter moderation and just correspondingly question, had the price increases taken are they enough for where VAM prices stand right now, or do you need any more?
You're right. On a quarter-over-quarter basis, the gross margins have contracted by about 200 basis points. 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. While VAM 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. All of this put together meant that there was a contraction as far as gross margins on a quarter-over-quarter basis is concerned. Of course, on a year-over-year basis, the contraction is much higher at more than 500 basis points. We have taken some more price increases in Q3 as well.
With the softening of VAM prices, generally the input prices and VAM being the major one for us, while the average consumption cost was upwards of $1,300 for us in Q3, the current spot prices are less than $1,000. With the softening of input costs coming in, with the rupee dollar also seeming to stabilize at relatively lower levels, of course, it's too early to predict anything in terms of which way the rupee dollar will go. 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 us getting back to somewhere close to the normal levels, as far as gross margins go.
Sir, as far as the gross margin or the EBITDA margin, you had indicated your last quarter, I don't know if that is correct. My understanding was the normal EBITDA level is 22%-23%. Is that correct?
Absolutely. Yeah.
EBITDA level will also depend on what sales growth we achieve, advertising and promotion expense. In a quarter-to-quarter basis, that number can fluctuate a bit. 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 see both in conjunction. If you see last quarter for us every year, the EBITDA margin are lower because the sales base is also lower. This is just to add, on a quarter-to-quarter basis, the sales growth and other expenses will also have an impact on the EBITDA margin. Leverage comes into play when you look at EBITDA.
Okay. You think gross margin is what you are talking about, but EBITDA will depend on how the leverage plays out. Okay. Sir, lastly, what did you say in the first semester? Some sales got impacted by competitive pressure in market conditions. Was that YTD sales or what was that, sir?
As for our IP division. In our IP division, I would just like to add, 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. 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. That was the reason. In addition to that, in a rising raw material scenario, the competition is significant on price, and hence, also that causes some impact on the market share. This was about IP business. The comment was regarding the low growth of IP business.
Okay, sir. Perfect. I will come back to you for other questions. Thank you very much, sir.
Thank you.
The next question is from the line of Abhijeet Sharma from Edelweiss. Please go ahead.
Sir, my question is on the IL&FS exposure. One is this in the IL&FS subsidiary? Second, when was this done? Apart from this INR 8.8 crore, is there any more exposure in any subsidiary or at the parent level?
Yeah. The total exposure at Pidilite Group is INR 8.8 crore, and it's entirely in our subsidiary, Nina. This exposure was taken more than three years back. 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. Therefore, as a conservative measure, we have provided for half the amount. This was done in very early days of Nina. At that time, the management invested based on the rating, but this was done at very early stage of Nina's integration with Pidilite. Other than this, we don't have any other exposure to the IL&FS Group.
This exposure is to IL&FS parent or the subsidiary?
Partly to parent and partly to subsidiary.
Why was it not taken right off as in the previous quarter? A lot of companies took in the Q2.
This is something which we review on a quarter-by-quarter basis. Given that clarity hasn't emerged as yet, it's where we have taken this provision.
Sir, coming to the business side, if you see paint company, the results, whatever has come, they have managed the margins much more better. This is something this is not only this year. Every time we see high volatility, Pidilite's margins are more volatile. My question is, why not change it? Going ahead, do we see the price hikes becoming more frequent? You have much more market share in your key categories versus the paint company. Why you don't want to take more frequent price hikes if warranted?
First of all, paint business and our business is very different. It is not comparable, number one. Second thing is, if you look at our overall margin, we are significantly higher than paint companies, including Asian Paints. We have a different approach of managing our margin edge. Like we have always said, we like to operate in a margin band. 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 band. If you really see last three years, the way our margin has shot up, we have been consistently saying that some correction is possible. This correction greatly depends on the sudden changes that can happen in prices of key raw material and dollar. We as a company, we do not believe that we should respond quarter-to-quarter.
To maintain very strong market position, we need to be judicious about making the price increases. As you have seen over a 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. Our approach is to follow in a particular manner. We are into large number of diverse segments, for us to do continuous kind of a price increase, we believe is not the most judicious way to manage the business. We have our approach, we believe our approach is doing quite well. Once in a while, this can happen if there is such a sudden sharp rise in the increase of raw and some of the other raw materials.
Last quarter, your YOY price hike was 3.5%, you mentioned too, Abhi, that further price hike has happened. How much is the portfolio hike?
We have not done price increase in all the categories, if you see many of the major product category, the price increase is in the order of about 5%.
From 3.5, further 1.5 has been added.
1.5, 2%. In some products, a bit more as well.
Yeah. Sir, coming to the international part of the business, if you could elaborate. Brazil, more competition. Is it short-term? What are the key players? Is it the market leaders? In U.S., the adult coloring, what is the issue here? We keep seeing this issue coming back again and again. What is the solution long-term?
Okay. Brazil, the key competitor is Saint-Gobain. Saint-Gobain has acquired a business in Brazil, Henkel is the second company. These two are the major competitors in the segment in which we operate. Brazil economy, as you know, has been going through a difficult period, hence, people have been fighting for share in that kind of market, hence it is competitive from the view of pricing and margins. While we as a company took a call a few years ago, because we want to make sure that we do not lose money, it is important that we don't do the kind of pricing strategy which may result into losses. Hence, we have been conservative with the focus that, let's maintain the business and let's make sure that we do not incur losses.
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, a lot of effort in terms of cutting our costs and improving our efficiency, which is allowing us to maintain break even or a little better than that. However, long term, we are evaluating various options in terms of strengthening the economy. There was fairly bad. We are seeing some signs of improvement as the new government has come in. We have also found, we have taken some initiatives further in terms of sourcing and cost reduction. We will now closely see what goes forward. Compared to what was the situation three, four years back, we are in a better position.
As far as U.S.A. goes, in U.S.A., if you recall two, three years ago, this adult coloring trend had very significantly taken off and the sales growth was very high for a couple of years. That trend has moderated significantly, and hence we are seeing the carry forward impact of that, which will continue hopefully, now going forward, the impact may not be much. That was an impact that we saw because of very sudden growth in sales because of this new trend, which on moderation is now resulting into reduction in sales. Again, chart in chart, we run in an efficient manner whereby we are making some profit while evaluating the strategic options. 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 some way to have more strategic options evaluated.
Right. The last question, volume growth was quite strong, domestic. In region-specific, do you want to highlight something? Kerala, was it much stronger in terms of volume growth?
Kerala may have been better than all India, but it's not that anything there has created a big impact on the all India growth. We saw that in our main product categories like adhesive and sealant and construction chemicals, there has been good growth across most of the markets. Most of our brands in this portfolio, across most of the markets, they've done well.
Competitive intensity in sealants remains not a big concern, right? From the other organizers.
We don't believe it has created an impact on our share. As of right now, it's like that, but we watch everybody very closely. We do not believe it has had material impact on our share.
Okay, sir. That's all from my side. Thank you.
Thank you. The next question is from the line of Anand Shah from Axis Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. 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 paint, but…
Right.
...some impact could have been there, but we are not that closely linked to paint cycle or to the Diwali cycle. However, as Ganesh mentioned earlier, there will be some impact because we had some price increases in some key products towards end of December, and hence the channel may have bought a bit more inventory ahead of the price increase. That could have played some role in the growth.
Okay. You think manual upstocking would have been ahead of prices.
Yes. Upstocking would have happened. Yes.
Okay. Are you seeing underlying demand trend picking up in general? We see this across building materials. Any comments that you can add?
We don't have comment except to say that we are seeing fairly consistent demand across many parts of India. We are seeing that. I don't have any comment beyond that. Anything, Ganesh, you would like to add?
No. Across our categories, we are seeing fairly good growth, and that's the position.
Okay. What about art materials specifically? Has that stabilized and is back on growth trajectory?
Art materials, the hobby, and craft. Hobby color business is stable, and that's doing okay. Maybe the question that you are asking is about our handicraft adhesive portfolio, which has seen difficulties in last couple of years. 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. Overall, at a company level, the contribution of this business is fairly small. We are not seeing significant improvement. Maybe some improvement, but not significant.
Okay. On this international business, obviously, the volatility in crude and INR would have impacted the margins and there'd be a lag in price hike and all as well. As we begin now, given that both crude and INR have reversed to an extent, do you see that margin stabilizing or improving 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 levels of palm. Their margins should certainly improve.
As regards currency, while the INR has stabilized, the Sri Lankan rupee, for example, has deteriorated a bit during the quarter. Country to currency impact will need to be watched.
Just lastly on the domestic subsidiary, they are doing quite well, specifically on ICA. That piece is now completely stabilized and back on growth trajectory.
On ICA, we must add one point that last year, we had some supply disruption in December of last year, and hence the sales growth is a bit higher because of the lower sale in December of last year. Having said that, the business is stabilizing well. We have commissioned a new manufacturing plant in Gujarat, now we will be making these products in India. Many of those were imported earlier. That is a big step forward. This business we have stabilized well, all of them, Nina, Percept, ICA, and now even CIPY, which has been the most recent acquisition. We feel that the domestic subsidiaries are on right track. There is a lot of work to do there, but the initial start has been good.
Okay. The post commencement of this manufacturing facility for ICA, you do see margins also improving for ICA?
Yeah. As we ramp up manufacturing, we should start seeing margins improve.
At 2020-2021 onward, at least over the next four quarters or so, you should start seeing better margins in ICA.
Yes.
Okay.
Yes.
Okay. Thank you, Apurva.
Thank you.
Thank you. The next question is from the line of Kartik Mehta from HDFC Mutual Fund. Please go ahead.
Hi, sir. Thanks for the opportunity. Sir, my question is pertaining to the price hike what we have taken. Was to considering the VAM prices of $1,300 or we actually took the price hike little lesser than what was required, now the crude has corrected, we are balancing out?
I think depends on both dollar and crude. The price hike we had done was not to fully mitigate the impact of $1,300 plus dollar VAM and dollar at INR 73–74. It would have mitigated lot of that cost increase. 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 Tejash Shah from Spark Capital. Please go ahead.
Hi, thanks for the opportunity. 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 that we would have gained share, yes. In some of our product categories, we would have gained market share.
Yes. This is against organized players or this is unorganized players losing market share?
I would say it will be mix of both.
Again, 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 ACNielsen, for example. Having said that, with these kind of growth, yes, it's possible that we could have gained market share.
In many of the markets we see that we probably have gained share. There is not some firm accurate data to support our conclusion, we hesitate to say it.
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. Which all categories, if you can call out where you are at least based on your anecdotal understanding you believe that you would have gained market share, top three categories just to give some color?
The two big categories, adhesives, and sealants and construction chemicals. Within that there are subcategories and other details, but our two broad categories, the large categories are adhesives and sealants and construction chemicals.
Okay, we are seeing overall categories would have been market share but subcategories we are not sure whether how to approach that.
We have some general idea but I would not like to sort of share it because the reliable accurate data is not there. We generally are positive about the sales development that has happened over last six quarters. We have made good progress and we have certainly gained share in some of our product categories.
Sure. Second, there's a lot of trust in last two years on NPD pipeline and we have been talking about this emerging portfolio or core versus the growth portfolio. 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 to 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 here we are here changing habits of majorly craftsmen. 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. 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 Fevicol Hi-Per which is an advanced type of Fevicol which is an anti-bubble type of Fevicol. Now that product is now doing really well.
There is another product called Fevicol C Tex which is a fast setting Fevicol but with heat resistance property. That product is also doing very well. We brought a sprayable Fevicol which we advertise on television called Fevicol Ezee Spray. That is also doing very well. 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. In our case the gestation periods are a bit longer and it does take a little bit time to grow. We've launched a set of tile and stone products which are doing well.
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.
Sure. Sir, any update on Parivartan project? We were talking about putting up factories and focusing on cost efficiency in mind just wanted to know.
Regarding Parivartan project we have identified and we are going to open a new manufacturing plant in South of India. 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. In addition to that, Parivartan project was also about identifying other cost-saving opportunities in packing material, raw material, manufacturing process, et cetera. In many of those identified areas, we have made progress and implemented some of the initiatives.
Sure. Sir, lastly, based on some of the previous questions also, looking at where VAM prices have stabilized QOQ, and dollar has also moved in 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? Or you believe that you will reinvest anything above that threshold number?
If you look at the three years that we saw, that FY 2015-2016, FY 2016-2017, FY 2017-2018, if you really look at that kind of a range, that is an upper end of our margin. If really we start going above that, we would certainly like to invest to accelerate sales growth. Those three years, the kind of margin that we had is towards the upper end. We would like to invest more if we are really able to have higher gross margins.
Sure. That's it. Thanks, Apurva. Thanks a lot.
Thank you. Before we take the next question, we would like to remind participants that you must press star and one to ask a question. The next question is from the line of Avi Mehta from IIFL. Please go ahead.
Hello, sir. I had a question on the Nina project. What we do understand from the market is that we had undertaken this focus on The pricing was revisited. I'm not sure if that was across the board. I was told that there was a revisit on the pricing, which has aided growth. Clearly that has borne fruit for us. I s that understanding correct? If you could help clarify that for us, sir.
I'm not clear exactly what you are referring to, but maybe there are a couple of strategy in Nina. One is, of course, we take a close look at the margin and the way we are doing business so that we don't end up doing a lot of projects which are at very low margin. 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. 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. Overall, in this type of businesses, we need to have a proper financial management. 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.
Maybe rephrasing. Is there a margin moderation that we have seen versus last year? Isn't that the case? If that is the case, or is that just more one-off?
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. They have also faced the cost increase, and also, it is a challenge, as I said, to manage a proper margin mix in this. Some of when you have an accelerated sales growth, it is possible that some of the orders are at a lower end of the margin.
They have also taken certain fast-track projects which are at a relatively lower margin. It's a combination.
However, we are very conscious of the fact and that we want to make sure that we continuously work towards improving our margins. That is clearly a focus, and it is not that we just want to grow without earning reasonable margins.
Okay, sir. Sir, even the Percept subsidiary, the moderation is obviously sharper over there. Is that also got to do with input cost only, or is there also something which has got to do with mix?
For size of company, it is mix and it could be some one-off carry forward from quarter to quarter because for this size business, quarter to quarter is not a reliable indicator at all.
[crosstalk] If you look at YTD December and compare it with FY 2018, it's not as indicative.
Okay, sir. That clarifies it on my side. Perfect, sir. That's all from my side. Thank you very much.
Thank you. A reminder to the participants, anyone who wishes to ask a question may please press star and one at this time. Participants, to ask a question, you may press star and one. 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. 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.