Q2 18/19

Oct 31, 2018

Ladies and gentlemen, good day, and welcome to the Piddlite Industries Q2 FY 'nineteen Earnings Conference Call hosted by Ambit Capital Private Limited. As a reminder, all participant lines will be in a listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. Ronal Dalal from Ambit Capital. Thank you, and over to you, sir. Thank you, Rehumid. Good day, ladies and gentlemen. On behalf of Ambit Capital, we welcome you all to the earnings call of Piddalai Industries Limited. We have with us Mr. Apoorva Parekh, Executive Director and Mr. P Ganesh, Chief Financial Officer of the company. Now I hand over the call to Mr. P Ganesh for his opening comments, post which we can set the floor open to question and answer. Thank you, and over to you, sir. Thank you, and a very good evening, everyone. I'll begin with the financial performance for the quarter and half year ended September 2018 for the stand alone business. Net sales at INR $15.00 9 crores grew by 11.9% over the same quarter last year with an underlying volume and mix growth of 9.6%. This was driven by a 10.7% growth in sales volume and mix of Consumer and Bazaar products and 4.8% growth in sales volume and mix of Industrial products. Gross margins during the quarter was impacted by a challenging cost environment and saw a three sixty basis points contraction versus the corresponding quarter of the previous year. EBITDA before non operating income at INR $3.49 crore declined by 6.5% over the same quarter last year on account of higher input costs and higher A and ST spends. Profit after tax during the current quarter at INR $2.45 crores declined by 6.3% over the same quarter last year. For the half year ended September 2018, on a stand alone basis, comparable net sales at INR 3,101 crores grew by 16.8% adjusting for GST impact over the same period last year. EBITDA before non operating income grew by 4.3% given the input cost led contraction in gross margins by 2.1% and a higher ANSP spend. Profit after tax grew by 7% over the same period last year. Moving on to a summary of the consolidated business for the quarter and half year ended September 2018. Net sales at INR1748 crore grew by 15.5 over the same quarter last year. EBITDA before non operating income at INR370 crore declined by 1.9% given the input cost led contraction in gross margin by 3.4% and higher ANSP spends over the same quarter last year. Profit after tax at INR231 crore declined by 8.6% over the same quarter last year. The higher decline in consolidated PAT as compared to EBITDA is mainly on account of elimination of intercompany dividend and effect of tax theorem. For the half year ended September 2018, on a consolidated basis, net sales at INR3566 crores grew by 19.5% adjusting for GST impact over the same period last year. This excludes the sale of Cyclo division of Pidlite USA, which was sold in June 2017. EBITDA before non operating income grew by 8%, given the input cost led contraction in gross margins by 2.2% and higher A and ST spend. Profit after tax declined by 1.5% over the same period last year. The lower growth in consolidated PAT as compared to EBITDA is primarily on account of elimination of intercompany dividend and profit on transfer of certain intangible assets and effect of tax error. Moving on to our subsidiaries performance. Our domestic subsidiaries recorded a good growth of 49% on a like for like basis, while international subsidiaries grew at 5% during the quarter. Our Bangladesh and Sri Lanka businesses continue to perform well, and we remain focused on SARC, Middle East and Africa markets as our growth drivers in the international business. We had delivered another quarter and half year of double digit volume growth. However, a challenging cost environment as a result of crude oil inflation and the depreciating rupee has resulted in lower gross margins. We have initiated several cost reduction measures as well as taken some price increases to address this. Overall, we remain committed to our strategic agenda of delivering consistent profitable volume growth. We can now open the floor for questions. Sure. Thank you very much. We will now begin the question and answer session. Session. We have the first question from the line of Abhish Roy from Edelweiss. Go ahead. Yes, sir. Thanks for the opportunity. My first question is, this quarter, we have seen significant gross margin erosion both for India business and overseas. So what is the thought process now? Have you taken further price hike in q two and in q three? And second, in q three, there is further rupee depreciation and overall crude related inputs have turned a bit more adverse. So what's the thought process here? Before festive season, did you not want to take a price hike because you don't want to upset the distribution? What was that the reason for the strong margin compression? So so couple of points over here, Rakesh. We have taken some price increases between q one and q two. But given the overall input cost environment and also something which is accentuated by the depreciation of the Indian rupee, the price increases which have been taken are not adequate for fully compensating the input cost increase because input cost increase is something which is a sharp spike. Having said that, we will keep watching and monitoring the situation and it will require limiting further price increases. And one important thing to mention, as we have been saying, our gross margins were at very high level for the last two years and we have said some correction is possible. And hence, when there is a very sharp increase in material cost, it is likely to have some impact on our margin. So some impact was something that you were expecting, which has happened. And for quarter two, the margins remain at 23% as far as EBITDA margin goes. And we have in the past also indicated that over a period of time, this would fit in within the band of the EBITDA margin that we are looking at. Sir, now when I see your consumer bazaar business, industrial products, very different set of trends in profitability. When I see paint companies, they have seen industrial business compression much higher in terms of margins. In your case, on the other end, industrial has seen expansion. I saw your interview on the media channel wherein you said the mix has improved. Even if mix improves on a Y o Y basis in one year, it cannot be that spectacular wherein the PBIT grows by 28% while in industrial, while in consumer, it goes down by 5%. So I think there has to be more than just the mix change. Abnish, I would also like to Ganesh, and I would also like to add over here is that while there is obviously a very good improvement in in the profit margins also aided by a better mix, it's also on the back of base which had a degrowth. Abhish, I think one thing to add is our industrial portfolio comprises a lot of very different businesses with very different margin profile. So when I said about mix, it's because we have business like pigment, which are very different, which has very high export component as compared to some businesses like industrial resin and industrial adhesive. So the margin profile is very different and hence product mix plays a very, very important role. And some of the businesses have much higher export potential where this increase in input cost had a hedge by having a better realization on export. So in our case, mix does play an important role in specialty chemicals because it consists of several different businesses with very different profile. In terms of VAM prices, what is the average? So, again, if you if you look at the look at the current quarter, our average consumption price was about $13.25. And in q three, has it gone up further, taking rupee into account? So so in dollar terms, if you look at the current spot prices, they are closer to 1,200, but the rupee has depreciated much more versus where it was in q two. So in rupee terms, you don't see a benefit as it. Okay. And, sir, lastly, in terms of subsidiary, Nina, again, great performance in terms of sales, 72% growth. But in terms of EBITDA, again, 4% decline. So is it again the same raw material issue, or are you becoming more aggressive in terms of the pricing part trying to gain market share? So so, yes, higher input costs and ForEx impact is also something which has played a a part over here. And we also had certain fast track contracts, which came in at a lower EBITDA. It was a combination of both of these. And what would be the key raw materials here? It could be various, you know, various kind of construction chemicals. There is no key, you know, it could be very different, you know, different type of raw materials. Some bought from PD LITE, some bought from other suppliers. There is no one key significant raw material like it is for PD LITE. And sir, one last one. Ad spends are quite high this quarter also. We have seen some of the consumer companies cut down on ad spend because festive season has shifted. And in your case, gross margin got compressed. So normally, we do see when gross margin compresses, companies cut down on ad spend. So if you could take us through why you wanted to spend so much highly in Q2 in the context of this? And is it also because competitive intensity in Savi Quick has increased from the other player who is expanding and has a strong brand ambassador? No. In our case, festive season doesn't play a very big role. We are not like painting and where there is a very high where there is a greater correlation with festive season. So generally, our advertising does not have a very, very significant linkage with festive season. As we have said earlier, we do plan to spend more money on advertising and promotion in order to accelerate growth of some of our key brands. As far as spend goes, the spend has been higher on our construction chemical type of portfolio, and that has nothing to do with the competition from ResiQuick. And also to add over here, if you look at H1, the total spend is in the range of about 3.6% of sales and which is more or less in line with what we would expect to spend on an annual basis. So Astral hasn't been able to pick up, right, in in the Adhesives? So Astral is not pick up in Adhesives. You're referring to ResiQuick. Then, you know, ResiQuick is a recent launch. Three, four months have gone. So it's, you know, too early to comment on their sale or share or anything like that. The next question is from the line of Abhi Mehta from IIFL. Sir, just wanted to understand on the VAM price bit. You said there is a dollar led moderation, but is there any plant shutdown in China, Japan, which is likely to weigh on prices? How do you see that? If you could share your comments on that. So on just can you repeat the question about the shutdown? What exactly can you just please repeat the question? Sorry, I couldn't hear properly. Okay. Sir, so you highlighted that ma'am from $13.25 is close to 1,200, while INR is an issue, but clearly there has been some moderation. I just wanted to understand your thoughts on the trajectory going forward in light of the recent shutdown in Nanjing and Japan because of the typhoon, whether that is a concern or anything if you could share your views on it? That's what I was looking for, sir. I think it's very difficult to forecast on one trend because if any manufacturer can have an issue, a demand and supply issue can happen. As you have seen, VAM prices have fluctuated a lot over the last few years, going up to as high as $1,600 and correcting to $800 So there are several factors at play. As far as the recent typhoon, I don't think that is going to have any significant impact, at least not to my knowledge. I don't think there are major suppliers in that belt, which would have a significant impact on the price. But however, BAM prices have fluctuated a lot, and hence, any other factor also could impact it. So when you say any other factors, so I mean, what I was trying to get to is do you see the trend actually being more on the benign side or no? Because you are We can't predict the trend means recent prices have been lower, but the demand supply scenario and other factors could change at any time. So we would not like to hazard a guess on what is the likely trajectory. As Ganesh said earlier, the recent prices have softened a bit. That's all we would like to say. Okay, sir. Okay, fair enough. Sir, the second thing was on the price increases. You did mention about some price increases taken in the second quarter. Could you share the quantum? And also, you highlight whether that essentially takes care of the input costs seen because you said it's flattish on our INR basis on 2Q to 3Q basis. So does that kind of take care and moves it back to what how the decision was in January? Any comment on that would be useful. So we have taken price increases between quarter one and quarter two, and it would average about 3% to 4%. So another 3% to 5% is what you have done in the first quarter, so another 3% to 4%? No, no. No, I think what you said in some of the product category, did price increases in first quarter. Some of the other products, we did price increase in the second quarter. And each of the price increase would be in the region of about 3% to 5%. But he's talked about some product categories in first quarter and other some of the other product categories in second quarter. So you don't have a same set of products that there have been increases in Q1 The same way you had highlighted in the first quarter, some categories now you've just taken another set this time. Right. And secondly, again, would like to say that when you say it fully mitigate the impact of price increases, first of all, as we have been saying for last seven, eight quarters that our gross margins were significantly high. And we were okay if there is some correction in that. And hence, our price increases are unlikely to fully pass on the impact of recent increases in raw material. We had said our gross margin had gone to significantly higher level and some correction was possible and we were okay with it. Sir, but then on the EBITDA margin, what you had said is 21% to 26 you're almost at the lower end of that guidance. Would you believe that? I don't think we have given such a big range of 21% to 26%. We would have said, Kanesh, what kind of range? 20% to 20%. Steady state over a period of time, we would look at something like 22% to 23 And at this point in time, you look at quarter two, we are actually at 23% EBITDA margin. And again, as we had said, EBITDA margin, big factor is also what kind of top line growth we achieved, other expenses. However, gross margin correction was due, which was very significant in last two years. Okay, okay, sir. Okay. That's all from my side, sir. I'll come back in the queue for any other questions. Thank you. The next question is from the line of Rohit Pradam from Credit Suisse. Please go ahead. Hi, sir. Thanks for taking my question. So just wanted to get a sense on the demand trends you're seeing on the ground. I mean, obviously, for the last four, five quarters, you've delivered consistent volume growth. Are you seeing any signs of further uptick from these levels? Or you would say that similar demand kind of trend should sustain going forward? Also, if you could split it into any parts of the portfolio in terms of waterproofing, sealants, adhesives, Any segments which you think are firing more? Any other pockets where you think there is some weakness and can improve going forward? So by and large, if you look at the last couple of quarters, most of our major categories are doing well in terms of in terms of growth. So again, we have had another quarter of double digit growth, and there seems to be a gradual improvement in the overall demand environment and a little more consistency in that, we would say. But at this point in time, we will not really call out a demand recovery or forecast, what is it going to be in the future. It would be interesting to wait and watch how H2 pans out. Okay. All right. That's helpful, sir. Thank you. Thank you. The next question is from the line of Chirag Shah from CLSA. Please go ahead. Yes. Thank you very much for taking my question. We spoke about VAM prices, but can you also highlight how the other raw materials like solvent based chemicals and rubber, etcetera, are moving? And secondly, you mentioned about cost reduction measures that we are initiating. In the context of raw material costs being 50% of sales and employee cost being another 12%, 13% of sales, what are the cost reduction measures that we are looking at? If you can just elaborate on that. And my second question is around CP Polyurethane Private Limited. If you can just show throw some light on what is the business plan here. Yeah. So so again again, to your point in terms of password acceleration initiatives, the way we look at it in terms of in terms of margin protection, you have multiple levers. One, of course, is accelerating sales growth, which will lend to higher EBITDA margins purely through leverage. And there are other levers like reduction in cost, which can have a variety of components, whether it is on the manufacturing side, whether it's on packaging and so on and so forth. So the way we are looking at is that it's a combination of combination of multiple factors, sales growth, better sales mix through premiumization, through innovation and new products, as well as optimization of costs on multiple fronts. So it's a combination of these factors, which will actually lead to better margins. Sure. Okay. And non VAM prices, the way they are moving? Yes. So some of the other raw materials have also seen uptick over last few quarters. So it's not restricted just to VAM. We use RAM as a reference point because that's the largest raw material for us. Understand. But there is pressure on other raw materials as well. And that is largely because of the rupee depreciation? Or there is price inflation in those raw material itself in dollar terms? It's a combination of rupee depreciation for imported raw materials as well as being commodities that is inherent Crude price, no, most of these all of these are crude based. So crude and dollar have the biggest impact on the raw material cost. Understand. And quickly, Apurva, if you can just talk a little bit about CP Polyurethane Private Limited and what is the plan business plan here? CP Polyurethane is interesting. It's a flooring company, which makes high end flooring, which are based on polyurethane, epoxy, those type of chemistries. So they take up they supply products, which are used for flooring kind of application in various projects. The project can be commercial, manufacturing plants, health care facility, etcetera. So it has very good products and technology, which are comparable to multinationals. And the objective here is to obviously strengthen their business and to grow in this segment, convert the user to better floating technologies, expand the geographical presence, increase the product portfolio, increase the customers and basically accelerate the growth in this segment. This is very adjacent to our waterproofing business, a little bit like MENA and Percept, but here CP manufactures these flooring products, which were not present in our portfolio. Yes. I understand these flooring products. My question was around what is the distribution game plan here? Are we right now restricted to a few markets? And is there an opportunity to take it Pan India? Or are we already selling that product across the country? So they have presence in many parts of the country, but today the penetration of this product is low. So the bigger objective is to increase the penetration and usage of this product. And obviously, are geographical gap. They have presence in several parts of India, but there is definitely a potential to increase the geographical presence to increase the customer base. Apurva, I'm sorry if I can just slip in one more question. If you can just also talk a little bit about the ramp up in the joinery business, please? The ramp up in joinery business, there is nothing new to report except for the fact is that we have reported earlier that we did tie up with Jovat, which makes the hot melt adhesives, which strengthens our portfolio for joinery segment. So as I've said earlier, we are market leader in joinery segment. We continue to invest in that segment in terms of new product tie up with Johat is in that direction. And we continue to make sure that we increase our sort of coverage of this market and increase our presence and share. But we are clearly the market leader in this segment. And with Joach coming in, it significantly strengthens our product portfolio. And we continue to make sure that we have accelerated growth in this product segment. Is there an import substitution opportunity here? There is some import substitution, yes, Mitch. If you say there is some of the overseas companies do have market share. Some of the Juwad products were also imported into India. So yes, there is import substitution, which has been happening for last several years. Earlier, if you go back ten years ago, many of these products were imported. Now we have started manufacturing some of the products here. And with Jubad Triad, we will manufacture more products in India. So yes, there is clearly an import substitution opportunity. Sure. Thank you very much and thanks for being patient with my questions. The next question is from the line of Kunal Shah from IIFL. Yeah. Thank you for taking my question. I have three questions. First is on the working capital. So if you see this quarter versus 2Q last year, our inventory levels have increased, which is partly offset by payable days. So I mean, what is the reason for this shift? I mean, working capital has remained similar. Yes. So as far as the working capital position is concerned, there is some increase in inventory as you have rightly pointed out. It's a combination of a couple of factors with raw material costs moving on the higher side, there is some impact of it as well as some amount of inventory increase by way of strategic sourcing. And which is why you are seeing that payables has also moved up in corresponding fashion. Okay. Okay. And just wanted to get a tax rate guidance for the full year because we have seen tax rates at 30% to 34% now. So do you expect that rate to sustain for the full year as well? Or Yeah. Yeah. So those rates should sustain for the full year, and these are marginally higher than what we have seen last year because a couple of our facilities now are now moved out of the tax exemption period. Okay. Okay. And my last question is, I think I missed out on this one. What were the ad spend for the quarter? So ad spend for the quarter is about 2.5% of sales. And any guidance for the full year number? 2.5%. First quarter. And as far as the full year guidance is concerned, we expect to be in the range of 3.5 to 4%, which has been our normal range. And for the half year, again, we are at around about that level. Thank you. The next question is from the line of Ronil Dellal from Ambit Capital. Please go ahead. Hi. So my question is in the Industrial Products, how do you see growth going ahead? See, in Industrial Products, as I earlier mentioned, we have different type of products and each has a different strategy. We have this business of pigment preparation, what we call as pigment and pigment preparation. There we have a healthy mix of domestic business and international business. And there the strategy is more to develop more specialized product and to convert larger customer both inside India and outside of India. In industrial resin, industrial adhesive, we have greater share of domestic business. There again, the objective is to develop more specialized product and to work with the various companies, convert them, get OEM approvals where required. So it's a very, very different strategy. And there is a different strategy for each of our product group. But basically, overall, if you say then the focus is to ensure is to strengthen our product technology and then to really work very closely with customers and sometime when the specifications are required to gain a greater share. In industrial product, our market share in some of the categories are very good. In some categories, they are not so good. So there is a different strategy based on the product segment and product category. There is no one simple answer that I can give again for this. But the greater focus is to continuously to strengthen the technology so we have the right product as per the changing requirement of customers. Sir, but would industrial be growing faster than the consumer products going ahead? No. I would not say that it would grow faster than industrial. Our consumer and product is our core business. And hence, we expect continued good growth from that product segment. Traditionally, if you see our consumer and bazaar product portfolio had grown significantly higher than industrial products. We continue to focus on both, but I would not say that industrial would grow faster than consumer and bazaar. Sure. Sir, and one last question that sir, if you can just comment, if anything, about the competitive environment? And also how much premium would Pedalite products be selling versus competition? If you can give some sort of color on that. Again, as you know, we have a very wide product portfolio. So there is again no simple answer to both competition and product and price premium. If you look at some of our larger categories in consumer and baja products like adhesives and sealants, we have fairly good market share, very strong presence in retail waterproofing or adhesives and sealants. In Industrial Speciality Chemicals, there are some product segments product categories or market segments where we are market leader, but our market share will not be as high as they are in consumer and products. As far as price premium goes, in some of the consumer and baja products like adhesives, we have good premium over the second or third player. In industrial specialty chemical, the price premium would not be there in many of the products and would be much smaller in some of the other product categories. So again, there is no one answer because we operate in so many different products and market segments. Right. Okay, sir. Okay, thank you. Thank you. The next question is from the line of Shruti Duman from NBS Brokerage. Please go ahead. Hello. Good afternoon. My most of the questions are answered. Just two questions. Regarding the rupee devaluation and rising oil prices, how much is how much is your portfolio hedged? How much percentage? Yeah. So so on the trade front, we are while we are a net importer, we have we also have exports, which means we have a natural hedge for most of our import exposures. Having said that, all open exposures, we do take covers from time to time, which means by and large, we don't have more than a million dollars of open exposure at any point in time. So we have a very robust policy of taking covers actively, and we are more or less fully hedged. Okay. And according to the presentation, the losses for the perilite MEA chemicals have reduced, and sales also grew by 7.7% due to higher capital capacity utilization. So may I know what is the current of your capacity utilization and by when can we see the profits coming in the future? So again again, we had mentioned a couple of quarters back that the focus in some of these geographies where we have been negative on EBITDA has been in terms of looking at base and means of improving margins, optimizing costs as well as looking at better use of available capacity. So this is something which is very much on track. And it is in this context that you are seeing some reduction in losses in some of these geographies. Okay. But can I get in percentage terms like Currently, our capacity utilization of the manufacturing plant in Middle East is still low? So it is low. And we are still in process of developing an appropriate strategy for that market. So that's work in progress. So I do not have any definitive answer when this subsidiary will breakeven because we are yet to develop an appropriate strategy for that market. Current capacity utilization is fairly low. Okay. And in Q2, you took some price hike. So did you see some demand affected in Consumer Bazaar and Industrial Products due to the price hike? And what do you think about the Q3 demand? No. We have not seen any impact in the demand because of increase in price. There has been significant increase in input cost. And as in past, we are generally able to pass on the price increases. So we have not seen any impact on the demand as such. Okay, okay. Thank you. Thank you. The next question is from the line of Deepan Mehta from Alixir. Sir, household consumption pattern in India are changing, and some sectors are seeing premiumization. Because the hand affordable housing is doing well and then there is this whole rent versus buy trend which is taking place and now we have IKEA and Pepperfry doing exceptionally well. So there are many trends taking place which may impact the company positively and negatively over the medium to long term. Can you discuss our two, three specific trends which come to your mind, can impact the company positively or negatively, sir? So give us a slightly longer term view as to what the sustainable growth rate of the company could be. See, we are generally bullish about potential of our products in India. We believe that there is a good runway for most of our product categories in India. In India, still the penetration and consumption of many of our products is low. And hence, there is a lot of potential ahead. If you really look at construction or homes in India in terms of interior decor, still there is many, many more consumers who are getting into consumption cycle. As the prosperity improves, many more people spend more money on interior decor and that should generally help the consumption of our products. There could be some positive trend, some negative trend, but overall, we believe that there is still a very good runway ahead for good continued good growth. There are certain categories like construction chemicals where penetration is still very, very low. And hence, there is a much, much greater potential of increasing the consumption and usage of our product. And hence, the growth potential is even better in waterproofing or construction chemical type of products. So generally speaking, our view is that in many of our product category, there is a very good opportunity to improve the penetration and the consumption of our products. So we see good growth scenario. There could be some factors which could have some negative impact, but overall, as a combination of positive and negative factor, we believe there is a good runway ahead. Thank you and all the best, sir. Thank you. Thank you very much. Anyone else who wishes to ask a question at this time may press star and one on the touch tone telephone. There are no further questions, I'd like to hand the conference back to the management for closing comments. So I'd like to thank everyone for coming on the call. Thank you. Thank you. Thank you very much. On behalf of Ambit Capital, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.