Ladies and gentlemen, good day and welcome to the Pidilite Q3 FY18 Earnings Conference Call hosted by Motilal Oswal Securities. As a reminder, all participant lines will be in a listen-only mode. There will be an opportunity for you to ask questions as the presentation concludes. In case you need assistance during the conference call, please signal an operator by pressing star and zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Ponniah from Motilal Oswal Securities. Thank you. Over to you, sir.
Thanks, Aman. Good evening, everyone. On behalf of Motilal Oswal Securities, I welcome you all. We have with us Mr. Apurva Parekh, Executive Director, and Mr. P. Ganesh, CFO from the management. Without much ado, I will hand over the floor to Mr. P. Ganesh for his opening remarks. Thank you. Over to you, sir.
Thank you, Vishal. Good evening, everybody. I'll begin with a summary of the financial performance for the quarter ended December 2017 for the standalone business. On a comparable basis, net sales at INR 1,367 crore grew by 20.2% over the same quarter last year, with underlying volume and mix growth at 22%. This was driven by a 23% growth in sales volume and mix of consumer and bazaar products, and 18% growth in sales volume and mix of industrial products. EBITDA before non-operating income at INR 359 crore is higher by 28.9% over the same quarter last year. Profit after tax during the current quarter is at INR 239 crore and increased by 17% over the same quarter last year. Now I'll move over to a summary of the consolidated performance for the quarter.
On a comparable basis, net sales at INR 1,533 crore grew by 17.3% over the same quarter last year. This excludes the sales of Cyclo division of Pidilite USA, which was sold by Pidilite USA in June 2017. EBITDA before non-operating income stood at INR 372 crore for the quarter and grew by 28% over the same quarter last year. Profit after tax during the current quarter is at INR 239 crore and increased by 18% over the same quarter last year. In a steadily improving economic environment, we have delivered strong overall performance. This quarter saw robust broad-based volume and mix growth across our categories. While there are signs of commercial cost inflation, we remain committed to driving profitable volume growth. We can now open the floor for questions.
Thank you very much. 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 your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue settles. The first question is from the line of Avi Mehta from IIFL. Please go ahead.
Hi, sir. Congratulations on the great volume growth performance. My first question was on sales. Now, we've seen two quarters of very encouraging volume-led sales growth, if I may say. Last quarter you were a little hesitant in calling out the recovery. Would you now say that it kind of makes you increasingly confident that demand is recovering?
If you look at the performance, I think the second quarter sales growth was also partially due to low growth in the first quarter. Our sales had declined in the Q1 because of GST. Second quarter growth was partially aided by recovery from that. In quarter three of this year, we have a lower base of last year. Having said that, we see steady improvement in economic condition. Most of our product categories have performed well. We clearly do see improvement in economic scenario. However, we need to see for a couple of more quarters before we can make any statement like this.
Oh, the medium-term target is there, but you're still cautious is what I should kind of take away, sir?
We continue to be cautiously optimistic.
Okay. Sir, what was the reason then for the pick-up in this quarter? It was more a base effect, is what you're saying? Or was there another-
It's a mix of both. If you still look, last year, clearly because of demonetization, the base was fairly less, so lower base of last year did help us, without a doubt. However, we see improvements in economic situation. As Ganesh shared in his opening statement, we see steady improvement in economic condition, and that has also helped the growth. It's a combination of both.
Okay, sir. Sir, secondly was just a clarification on the subsidiary. You have said that there is an issue with the ICA growth rate because of some reclassification issue with the authorities. Could you please clarify what that means? Second, would the growth rate for Nina and Percept that we see headline, is that like to like net sales growth, or is it gross to net because of the reclassification and indirect taxes?
To answer the question on ICA Pidilite, in one of the products we had a classification issue in terms of under which chapter it should be classified, and because of that, what kind of GST should be paid. Because of that difference, for some days, we stopped our operation until we get adequate clarification on that. By that factor, we still have a dispute with the concerned authority, and we are contesting the stand that they have taken. However, in the meanwhile, the business has started. That has caused some disruption during the last fortnight of the quarter.
The business has started at our billed rate, or are you doing it?
No, currently we have to do under that rate, but under protest. That is what we have done. We will continue to contest and see where that goes.
Okay. Damir, sir, if you could just clarify on the whether it's like-to-like sales growth in subsidiaries.
It's on a like-to-like basis.
Net sales to net sales, right? Not gross and net because of the classification of indirect taxes.
Correct.
Okay, I'll come back in the Q&A question. Thank you very much.
Thank you. Next question is from the line of Gunjan Prithyani from J.P. Morgan. Please go ahead.
Thanks, sir, for taking my question. Just two questions. Firstly, would it be possible for you to give us a little bit more color on the growth? You clearly seem to be suggesting that the environment is improving, but if you can share more color, whether it is you're seeing it in the adhesive segment or you're seeing the construction chemical waterproofing segment picking up now. Any color. Secondly, if you could share the VAM prices and the trend that you're seeing in the current month.
Gunjan, on the first question, we have seen good growth across most product categories, adhesives and sealants and construction chemicals too. We have seen a fairly broad-based good growth across most of the product categories. As you always do, I won't be able to give you exact growth figures for each of the categories. I can tell you that most of our product categories have grown well during the quarter. As far as price of VAM goes, the price of VAM in the last quarter, the consumption rate was about $975, which in the second quarter was $920. From $920 in the quarter ending September, it increased to $975 in the third quarter. I would also like to add that because of some appreciation in the Indian rupee, it has partially mitigated the impact of this increase.
What is it currently? Is it in the same range or has it appreciated further?
I think it has slightly appreciated further from there. It is at around $1,000 level.
The supply shutdowns which you had mentioned in the September quarter, are those now stabilized? Are they back into operations for VAMs?
No, VAM, the supply situation has improved. The significant shutdown, which was linked to Houston and all, that situation has improved from there. The supply situation has clearly improved from there. At the same time, there has been a good appreciation in crude, and that has kept the prices high.
Okay. On the ad spends, if you can give a sense, because last quarter it was lower, right?
Yeah.
Ad spend and price hikes, which you've taken in this quarter.
Akash, what was the ad spend in the quarter? Just one second.
Yeah. Ad spend in the quarter was about INR 50 crores.
About INR 50 crores net.
This is about 3.6% of sales.
By this ad, he means advertising and sales promotion expense.
Sales promotion.
Okay.
It's about 3.6% of net sales. Typically, our normal range is between 3.5%-4% of net sales. It was unusually low in the second quarter. During this quarter, the spend has been normal between 3.5%-4%. On a full year basis, our aim is to have a spend in that range.
Okay, got it. Did you take any price hikes during the quarter?
We have taken price hikes in few products where there has been a significant increase in input cost. In some products, the raw material cost has been high. One example of that is the product which are solvent-based, rubber-based adhesives, where the cost of rubber has significantly increased. There have been some price increase in this product during the year.
The quantum of that would be?
The quantum of that would be, I think between 5%-10%.
Okay, got it. Thank you so much.
Thank you. The next question is from the line of Rohit Kadam from Credit Suisse. Please go ahead.
Hi, sir. Thanks for taking my question. Coming to gross margins, both crude and VAM are up sharply over the last six months. I'm looking at our gross margins, which are flat. How do we understand this? I don't see any major pricing involved because the volume growth is still ahead of the value growth. How do we then look at your margins, gross margins going ahead, given the current input cost inflation?
Sorry, can you just repeat the question? Sorry, I think we didn't hear properly.
No problem. Sir, I was saying on the gross margins, despite crude and VAM input inflation over the last six months or so, our gross margins are flat on a YOY basis for the first half of this year. How should we understand this? Because one would imagine that your RM cost as a percentage of sales should have inched up by now
Sure. There are a couple of factors. One factor is clearly sales mix. Our domestic consumer and Bazaar businesses have better gross margin than the rest of the business, and that business has done much better, as you can see from the segment accounts. Even within the segment accounts of consumer and Bazaar, our domestic business has done better. That is one factor. Second, there is a slight factor in terms of the actual gross margin do not get fully reflected because after the introduction of GST, there is a change in reporting compared to past. For example, in trading products earlier, the excise was built into the price and in the cost. While now because of GST, it is excluded from both cost and the selling price. There are some minor differences in reporting of certain products like that, which has also had some impact.
On a comparable basis, if you were to clean all that up, the gross margin may have deteriorated by around 1%. Yes, and partially, the rupee appreciation has mitigated some of the impact of increase in raw material and crude costs.
Okay, got it. That's helpful. Sir, one more question. As for on the waterproofing side, business which is sort of more linked to housing construction kind of demand. Any trends you want to call out there? Because even when you look at your Percept + Nina together, they have sort of this year grown at 20%+ as a margin expansion. Is the Dr. Fixit portfolio also showing some solid signs of turnaround?
As I answered earlier to question from Gunjan, our waterproofing business has had good growth rate in the third quarter. Overall, we see in construction segment that some of the new construction, especially in larger city, continues to be under some kind of stress. However, in India, the construction is very broad activity. A lot of construction in smaller towns is doing a little better. New construction in bigger town has some stress. However, overall situation appears to be improving, along with other improvement in economy. As for as Nina and Percept goes, both of them have a small base and some of the growth is also because of the initiatives that we have taken to improve our presence in the market. Nina and Percept's growth cannot be linked to the growth in that sector.
Got it, sir. Thank you. That's very helpful.
Thank you. The next question is from the line of Anshuman Rathi from Edelweiss Securities. Please go ahead.
Yeah, thank you for the opportunity. My question is related to the service portfolio, which is Dr. Fixit, Nina, Percept. Given that Pidilite is a market leader, what are the initiatives being taken to ensure that the usage increases both in the Tier 1 and Tier 2, Tier 3 cities? How do you see this whole market growing, say, in the next one to two years?
I will answer it separately for our waterproofing business and then for our servicing business. Our waterproofing business, the main focus is to increase the awareness of our products. The consumption of these products is through retail channel and happens across India. In bigger town also good consumption in smaller town. Our whole focus here is to educate contractor, educate applicator, educate homeowners, there is a greater consumption of waterproofing chemical in retail channel. We have also done a significant advertising campaign with Amitabh Bachchan over last year or so. That has also had a positive impact. We have taken several initiatives in terms of distribution, in terms of brand building, in terms of below the line activities. All these activities are towards increasing the sale of waterproofing products through the retail channel. This is the Dr. Fixit business.
As far as Nina and Percept goes, they are service companies, and they are largely currently targeting the large builder segment, as well as offices, some infrastructure projects. That is a very different dynamics. There, as I said earlier, there is still some stress in the large builder segment. However, we are making lot of effort to increase our share or presence in this market. We are doing a lot of business development activity, and we are trying to convert lot of users to our products and our services. That has helped in the growth of Nina and Percept.
Okay, sir. The second question is regarding the raw materials. We have seen Hello?
Yeah, go ahead, please.
Yeah. In the raw materials, sir, we had also seen some disruption because of these Chinese winter cuts. These will end in March. Do you expect the monomer supplies to improve and prices to cool off if, assuming crude does not move up further significantly?
We do not like to predict this thing. There are a lot of factors at play. There was a lot of difficulty because of the crisis in Houston. That situation is improving. A lot of factors are at play, including crude prices, including demand and supply scenarios. Sometimes shutdown can happen at a supplier. We would not like to predict what would happen to raw material prices. However, whenever we feel there is an increase in raw material prices, which is significant and over a longer period of time, we have been able to pass on these increases.
Okay. Thank you, sir, and all the best.
Thank you.
Thank you. Reminding our participants, anyone who wishes to ask a question at this time, you may please press star and one. The next question from the line of Kishore Kumar from Karvy Stock Broking. Please go ahead.
Thanks for giving this opportunity. Sir, I have a few questions. One is, I just want to know the volume growth of consumer and bazaar product, consolidated basis Y and Y, and industrial product.
Consumer and bazaar product, as we covered in our opening statement, there is a 23% growth in volume and mix of consumer and bazaar product, and 18% growth in volume and mix of industrial product for the quarter.
Is that on a consolidated basis?
This is on standalone basis. Our standalone is significant. This is on the standalone basis.
Okay. Second question related to industrial product only. In that, could you please substance on competitor like who and all are the major competitor on industrial products in India?
In industrial product, we have several product segments and several industry segments, there are different competitors in each. In our organic pigment business, we have competition from player like Sudarshan, Clariant, Meghmani and others. In our industrial adhesives, there are a different set of competition, including companies like Henkel. Our industrial resin business also has competition from many multinational as well as some small and medium-sized Indian companies. Our industrial business is composed of several different product segments and end-user segments, and each one of them has some larger or multinational type competitors and some medium and small competitors.
Okay. Actually, I have a two more question, if you allow, can I ask?
Go ahead.
Yeah. Actually, one is guidance on tax rates because we are seeing here in Q3, like in these three quarters, we have around 31%-33%. What is your guidance on tax rates? Second is there any CapEx plans for upcoming year?
Our nine-month tax rate is about 30?
About 32.
For the full year, we expect our tax rate to be in that range. As far as CapEx, yes, we have CapEx plan. We have a regular CapEx plan, both in terms of increasing our capacity, setting up new manufacturing plants. CapEx is a continuous process for a growing company. We have normal CapEx for every single year.
Okay. Interesting.
Thank you. The next question is from the line of Aditya Makaria from Motilal Oswal Asset Management. Please go ahead.
Yes, sir. You have multiple distribution channels for your various products. I was just wondering how much of your products are sold through the paint channel, if you were to treat that as a % of your overall sales.
In paint, there are 2 types of outlet. Pure paint outlets, where we will have very little sales, and then there is a paint hardware where we have reasonable amount of sales. Overall, at a company level, it's not a very significant figure.
Okay.
Thank you. The next question is from the line of Nathan Parsons from Ambit Capital. Please go ahead.
Sir, you mentioned in the earnings release that you acquired a small company also during, or approved on the 5th of January. Could you just help us understand where does this go? Does it go into consumer and bazaar? Is it like a new product altogether, or is it related to some existing products? If you could just explain us the business and selling mechanism.
It's a company called CIPY. Our acquisition, we are hopeful of completing by end of February, where we will have a 70% stake in that company. There are certain conditions precedent and other procedural matters which are going on right now, but we are hopeful to conclude the acquisition by end of February. Now, CIPY is a good, interesting, and innovative company. They have a good portfolio of products, including polyurethane, polyurea, epoxy. It is in a segment called floor coating.
Okay.
These floor coatings are used in industries like factories. They are used in hospital and healthcare kind of environment, and they also have application in buildings and malls and other places. These are basically coatings which are applied on the floor. It has several properties which are required in some of these kind of application which I just said earlier. They have very good product technology. Some of the technology, they are fairly good in Indian market. This is similar in a way to Nina and Percept type of a segment, where this is something where our consumers would be industrial units, healthcare facilities, and builders or the construction segment.
Would you say like a product sales or a service sales sort of a mechanism?
It would be product sales, some service. They also do some project on a apply, where they take up the whole application job, as well as they sell product to other applicators.
Okay. Any size indications like under 50 crores or under 100 crore rupees of top line?
It's around 100 crores. We have given that detail in the release that we gave at the time of acquisition. The top line is around 100 crores.
Okay. Can it go to 100%, or the 30% will remain with the existing promoters and they will be the existing management?
Currently, they will continue to be the existing managers. They will hold 30%. The managing director of that company, he will continue with us. He will ensure that we have good transition and we grow. He's a very capable person. He has started this company and brought it to this level. He will continue to be with us in different capacity.
Okay. The second question would be around the change in the entire logistics or market reach strategy, given the GST. Now with about six months, seven months behind and all this changes going on, any meaningful changes in the entire distribution network, if you could just take us through or key changes that have been made.
As far as our own network goes in terms of manufacturing and warehousing, we may make some changes, but the final plan is under development. Once we are ready with it, we will roll it out.
Okay.
Clearly, there would be some changes. We are about to formulate and we'll move forward with implementation.
Okay. Basically the internal changes, not the market changes in terms like the wholesalers or distributors or retail points, et cetera, all that is not going to be that much, internal changes are yet to come.
All that is part of process. For example, expanding our reach or increasing our distribution are important initiative, with or without GST, those are important things.
Okay. Sir, the last question would be in terms of the international businesses, where do you see the next six months or nine months out of a little bit more headwinds continuing or which businesses could improve? Give us some near-term outlook on the overseas performance.
In Middle East, in our international business, our focus is primarily on SAARC, which is Bangladesh and Sri Lanka. These are two very good businesses. Both have good market position in respective countries. We expect in medium to long term, our units in Bangladesh and Sri Lanka to perform well and to grow at good pace. In addition to that, our focus is also in Middle East and Africa. We need to get some of the things right, but these are important markets for us. The markets have some similarity to India, and we have now got several years of experience in this market. We also plan to continue to focus on that. We need to do some work. We need to get some things right. These are also good opportunities for us.
Okay. Sir, one of the key segments is the others, if you see the others EBITDA has turned from a loss of about INR 1 crore to about INR 6 crore this year. Is it operating to one of its best numbers right now or is it just a balancing figure there?
No, it's not very significant. It is some one-off sale. I think others, you should not give too much importance to.
Okay. I'll come back in the queue if there are no more questions and if I get a chance. Thank you.
Thank you. Members of conference line, anyone who wishes to ask a question at this time, you may please press star and one. Next question from the line of Kuldeep Gangwar from ASK Investments. Please go ahead.
Yes, sir. Thanks for taking my questions. A small one. Why the employee cost growth had been relatively lower? Any particular reason, like only 7% in standalone over there?
No particular reason. It could be due to some provision-related thing. No particular reason. I think you should not really look into too much into quarterly number for staff cost. The year-to-date number is more reflective.
Okay. In consolidated, other operating expenses, is it because of the divestment you had done or it had gone on beyond 8% or so?
Sorry, which number are you?
Could you repeat the question?
Other operating expenses in consol. Other expenses.
What is the question on that?
The growth had been 8% Y-Y, and these are within the standalone, it has been close to 20%.
We'll come back to you on that.
These expenses are not necessarily directly proportional to sales. If you look at growth for nine months, it's actually even lower. Even though the sales growth for the quarter has been significant, which is why you're seeing some amount of uptick here as well.
No, for nine months, if you see standalone is INR 640-INR 674, and for consolidated, it is INR 803 and INR 811. It is not significantly different.
It's basically a timing issue, you're saying.
It's a timing. It's not significant. If you look at the difference is INR 24 crore in standalone and some nine, INR 10 crore in consol. It's not a significant difference.
They're not directly proportional to sales.
Okay. Got it. Thanks a lot.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Hi, sir. Thanks for the opportunity. If I look at your last-
Mr. Tejas, may we request for you to use a handset, please, so we are able to hear you clearly.
Is this better?
Yeah. Thank you.
Yeah. Thank you. Hi, sir. If I look at your last four, five years number, there used to be a trend that we used to deliver best quarter in the first quarter, then it used to gradually accelerate. Somehow that has not happened this year so far. Is it because of all the disruptions that we had this year or because of all the changes and acquisitions that we have done and launches, the seasonality of the portfolio is coming down over a period of time?
No, it's absolutely because of GST. The first quarter this year could not have been largest because of GST. Due to the implementation of GST from first of July, in June, we had inventory correction with channel partner. We had decline in sale year-on-year during the first quarter. This is the reason this year our first quarter is not the largest quarter.
Okay. Even after all these launches and acquisitions that you have done, the first quarter bias will still remain in the numbers. Is that correct understanding?
It has nothing to do with launches or acquisitions. The first quarter buyer has nothing to do with that. Generally, in our case, the trade reduces their inventory towards the end of the year. We don't like to push stock or anything. There is some inventory correction, which happens towards March end, so that has some favorable impact in the first quarter. Also, for some of our businesses like waterproofing or some of the other products, just [inauble] , there is some amount of seasonality. The sale normally goes up.
Sure.
There is some favorable seasonality to some extent, not a very huge impact, but to some impact in the first quarter. Also there is a benefit of some channel inventory correction, which then comes back to normal level during the first quarter. These are the two factors.
Sure. Second, sir, if I go back to your commentary two, three quarters back, we clearly stated our first priority would be to revert back to 15% kind of growth trajectory, and if need be, we are willing to sacrifice margins for that. Just wanted to know our thought on the trade-off between growth and margins, how it stands today on that point.
Our thought continues to remain the same. It is important to us to achieve a good top-line growth while operating in a margin band which we are comfortable with. As I've shared earlier, both are from a gross margin or a net margin point of view, we like to operate within a band. Within that band, some correction can happen. Otherwise, the objective is to accelerate growth while remaining within a particular gross margin band that we are comfortable with. That thought still continues.
In that balance, would this quarter's margin be at the upper end of that band or
Yes, sir. This quarter margin is at a comfortable, I would not call it at the upper end of it, but the margin is comfortable. It is within that band towards the upper end.
Totally. Sir, lastly, if you can help us understand that I'm pretty sure that there are a lot of competing opportunities for the capital. In that scenario, why we went for the buyback. Just wanted to understand the rationale for the buyback.
There is no competing situation of capital for us. We as a company have good cash accrual, good cash flow, we generate significant cash, and we make sure that the proper cash request of each business is properly funded. Wherever we see that there is a good use of capital, those businesses do get the capital that they need. Our growth is not constrained by the need for capital. However, as a company, we are generating adequate cash, and once we generate enough cash, we have to consider giving it back to the shareholder as one of the options. The board deliberated on our cash position. The board felt that this is an amount which comfortably we can give back to the shareholder.
Sir, just for clarification, are promoters going to participate in this buyback?
Promoters do intend to participate in the buyback.
Thanks a lot, sir.
Thank you. A reminder to our participants, anyone who wishes to ask a question at this time, they may please press star then one. The next question is from the line of Avi Mehta from IIFL. Please go ahead.
Hi sir. Sir, just wanted to get a check on how the inventory levels in the channel have behaved, because you had said that the wholesale inventory level remains in the end of the second quarter, it kind of highlighted by the commodity pressure. Has it gone off? Is it back to the pre-GST levels?
We don't have an exact, whatever information I give you will be more based on a feel because we do not have the actual figure of the inventory that the wholesaler carries because they are independent entities. However, it has improved. In the first quarter after GST, the inventory level had significantly corrected and there is some improvement to those levels.
Okay. There has been some kind of pick up or improvement from that level. Okay.
Some improvement is there, yes.
Okay. Sir, secondly is, on the VAM pricing, you said that this quarter was about $975. I recollect that even the last quarter we had indicated a $1,000 kind of mark. Is this like a typical volatility that happens? We are seeing up and down movement. It's not a kind of structural movement upwards. Is that a fair understanding? At least last quarter that is how it was.
Last quarter, which is Q2, our average consumption rate was about $920 or so, which has moved up to about $975.
Sir, yeah. You had said, end of September was about $1,000. That's what you had said. I thought, that's why I was just trying to understand that range is where it kind of
Just one second. Ganesh will clarify.
I guess you are referring to the procurement price. What's the current prevailing price? Because what comes into our consumption is also the stock which you're holding.
Okay, fair enough. This is the procurement. Okay, that helps clarify it. Okay, sir. Thank you very much. That's all from my side.
Thank you. A reminder to our participants, anyone who wishes to ask a question at this time, they may please press star 1. The next question from the line of Anubhav Sahu from Moneycontrol. Please go ahead.
Hello, sir. Thanks for taking my question. I had a specific question regarding sourcing of vinyl acetate monomer. I want to understand the supply dynamics of it and how much China contribute to this market, and what are our tie-ups with these sourcing partners?
There are several manufacturers of vinyl acetate monomer in the world, we work with most of those suppliers. The suppliers are in China, Singapore, and even in Europe. We are in touch with most of the suppliers, the sourcing or the availability of VAM has never been an issue.
Right. What percentage would be imported? Is it 100%, or is a part of it is domestically procured as well?
All the VAM which comes into India is imported.
There is no VAM which is manufactured in India now.
Okay. What percentage globally, as far as the VAM market is concerned, how much China would be having a share?
I don't have that figure with me.
Okay. Regarding the tie-ups with the supply partners, so what kind of pricing arrangement do we have? Generally, is it a monthly reset which happens with the pricing thing, or how does it go?
There is no long-term contract for VAM prices. The VAM prices keep on fluctuating, and we don't have any long-term price contract because it can go either way.
We buy from them on a month-to-month basis, but we have deep relationship with all suppliers.
Okay.
Sourcing of VAM has not been a problem.
Okay. Thanks. Thanks a lot, sir. Thanks.
Thank you. Next question is from the line of Prasad Deshmukh from Bank of America. Please go ahead.
Hi, good evening. Two questions. Firstly, if the raw material prices keep going up, other than price increase, are there any offsetting cost initiatives that you guys are taking up where without taking pricing, this probably can be balanced?
Yes, as a company, we are taking a deeper look at cost. We have hired Accenture as a consultant. They are doing a project for the last six months or so. We are looking at all of our expenses in terms of manufacturing and related expenditure. There is always room to cut expenses to mitigate some of this cost. We are working towards it.
Are there any targets, in-house targets?
There are in-house targets, but I would not like to share it. We are focused on a particular target and trying to achieve that.
The source of the cost saving or it's like across the board?
In all areas. From the change in the design of some of the packaging material, to change in manufacturing process. It's a broad-based project.
Correct.
Accenture has deep experience in this. They are looking at all the cost factors and trying to identify savings.
Sure. Second question. In the adhesives market, are you seeing any signs of market consolidation? I mean, unorganized to organized?
I think it's too early to say like that. The players still exist. They are still operating in the market. I think it would be too early to talk about any consolidation.
Would they also have grown at a similar? Obviously, you may or may not know. Would they also, in your opinion, have grown at a similar?
I would not like to give opinion about what could have been the growth of other players in the market.
Okay. Thanks a lot.
Thank you. A reminder to our participants, anyone who wishes to ask a question at this time, may please press star and one. The next question is from the line of Mayank Bansal, as an individual investor. Please go ahead.
Hello, sir. My question is, what is the reason for weak overseas performance?
Your question is, what is the reason for weak overseas performance?
Yes, sir.
There are different factors in subsidiaries which underperform, and the details of that are on our website in our investor letter.
Okay.
That can give you a idea. There are different factors, like for example, in Brazil, the economic situation still continues to be weak. That has had some impact. In our Bangladesh and Sri Lanka subsidiary, while their top-line growth has been good, and we believe they are very good potential markets for future. We are investing in those markets. The SG&A cost has gone up and has had some impact on EBITDA.
Okay. Are we gaining market share in these markets or this is due to overall economic condition, this downturn is due to overall.
Our international market, we have to break up within that market. In Bangladesh and Sri Lanka, we are performing well. In Bangladesh and Sri Lanka, we have very good business, very good brands, and we are systematically growing in those markets. Quarter-to-quarter performance can sometime not be in line with that. However, these are the markets where we are making good progress with our brand, with our infrastructure, manufacturing, et cetera. In those markets, the situation is very different. In a market like Brazil, where economic condition has been uncertain. However, in Brazil, our focus has been to eliminate losses. If you see from last two years now, we are not incurring any losses in that market.
In the U.S., we had a business which had very high growth for two, three years, there the trend has changed of adult colouring market, hence there has been a sales correction. All markets are very different. I think our key focus in international market is in the SAARC region and the SAARC, Middle East, and Africa. In each of those markets, we are making some progress, and the results will follow.
Thank you, sir.
Thank you. Anyone who wishes to ask a question at this time, they may please press star and one. Reminder to participants, anyone who wishes to ask a question at this time, they may please press star and one. The next question is on the line of Nitin Bhasin from Ambit Capital. Please go ahead.
Sir, if you look at the last two quarters, especially this quarter, the kind of revenue growth that you've posted is roughly about 20%. If you look at the nine-month number, because you also said, once you look at little longer it's also 9%, 10%. Why is this quarter could be looking good because of last year and otherwise? Now when you speak to your marketing team, what sense are we getting? Are we going to be more easily closer to about 15%, 16% growth for the next year or so? We're saying that this 20% could actually be maintained for at least one more year before the base effect comes into play.
Nitin, we don't talk like that with our marketing. I cannot share any kind of guidance in terms of what do we see as growth rate in next quarter and all of that.
Sure.
As I said earlier, we do see steady improvement in economic scenario. However, we need to see couple of more quarters before we get a sense of what would be the new normal growth rates.
Okay. Sure. In terms of the product launches, is there any way to get a sense that new product launches in the last one year or two years, what sort of a proportion is that becoming now of your top line? Any sense on that? I know that you keep on launching new products, but any sense for all of us?
That percentage we do not share in general, but I'll give you a good qualitative idea. We had launched a couple of products in Fevicol division. One is called Hi-Per, which is a very new next generation kind of an adhesive which minimizes the formation of bubbles while doing woodworking. That product has had very good response and is contributing well to our business. There's another product called Fevicol Heatex, which is again an adhesive which sets very fast. That again, has had good response. That way, in all our businesses, we have one, two launches and some of them have had that good response.
Sir, Fevicol, these products are like extension of the existing brand of Fevicol. Application becomes even more specific and more technical. Something which altogether is new, like something I was reading about is that you have launched some roof insulation products or something of those lines. Any sense on such new insulation products?
That is also a product which is a part of construction chemical segment.
Okay.
In construction chemical segment, there are different products with different applications. It is one of our newer product, but that product will take time.
Okay.
Typically, in construction chemical, gestation period is very long because you have to change the habit of consumer.
Okay. Gives a perspective. Thank you.
Right.
Thank you. A reminder to our participants, anyone who wishes to ask a question at this time, they may please press star and one. The next question is on the line of Arun Baid from BOB Capital. Please go ahead.
Hello, sir. Historically, you had always been saying that the margins are very difficult to sustain. Now the tone which I think is that these margins are sustainable. Is my reading correct, sir?
I don't think I've said that our margins are sustainable. Yes, you are right, they have sustained despite us saying they may not sustain. We are at a higher margin band of what we have. Margin depends on number of factors, means EBITDA margin depends on number of factor, and the primary factor is the sales growth that we get. If there is a robust sales growth, then you are able to have a better EBITDA margin despite some erosion in gross margin. We still maintain that our gross margin and EBITDA margin are fairly high towards the upper end of what we have ever had. Hence some correction is possible. As we have shared earlier, our primary objective is to accelerate sales growth, but while operating within a certain gross margin and EBITDA margin band.
Okay, sir. If I ask the question in different way, assuming you're meeting the guidance of that 15% which you're looking at stays, then because you have the volume growth there, obviously for sure, then these margins are going to be broadly in this range?
First of all, that is not our guidance. 15% is what.
Yes, aspiration
We desire to achieve. It is not a guidance, so I want to clarify that.
Yes, sir.
That is what we always say, we aspire or we desire to get back to those kind of growth rates which we have achieved over a 10-year period. Number one. Second thing is, again, it's very, very difficult to predict or project our margins on a quarter-to-quarter kind of a basis. What we like to do is we want to, as I've said earlier, our aim is to accelerate our top line growth while operating in a comfortable EBITDA margin range that we as a company are comfortable. We've always had good margins. Our EBITDA margins are possibly better than most of our peers, and hence we want to continue to operate at a good EBITDA margin and accelerate sales growth. Our current EBITDA and gross margins are towards the higher end of our band.
Sorry if I missed that thing. What is the band? If you can give some broad indication.
We are more comfortable with an EBITDA margin of about 21%, 22%. Currently, we are at about 25%, correct?
Yes.
Correct.
25%.
We are currently at about 25%, 26%. 21%, 22%, 23% is the kind of range that we are more comfortable.
Okay. Thank you very much, sir. This was helpful.
Thank you. The next question is from the line of Kuldeep Gangwar from ASK Investment Managers. Please go ahead. Kuldeep, your line is unmuted for questions. Please go ahead. Kuldeep, your line is unmuted for questions. If you're muted, please unmute.
Consumer and bazaar product segment, at industry level, what would be the share of unorganized sales both in volume and value terms? Any estimate regarding that?
You're saying entire consumer and bazaar as a segment?
Overall market, what would be the unorganized players accounting for it over industry level?
If you look at the entire consumer, it is very difficult to predict. We don't have a fair or a good estimate on that. It could be in the region of say 30%, 35%, 40%. It's difficult to define what is unorganized. There are smaller players.
Okay
There are completely unorganized. It's difficult to estimate.
Just the smaller players and completely unorganized put together in value terms, you're saying 25%-30% or volume terms?
Could be. When you look at entire consumer and bazaar as a segment.
Both volume and value, you're saying close to that 20%?
It's difficult to say what volume and what value. It could be in the range of 30%-40% kind of range.
Okay.
If you count all small player and unorganized players.
Sure thing. Sir, second question is regarding your volume growth. What is the most important driver for your business? Whether it's increasing the distribution reach or increasing the number of products on a particular dealer level?
They both are not the main drivers. The main drivers cannot be just distribution and making our product available. No, that is not generally a growth driver. Growth driver has multiple elements in terms of how is the economy scenario, how is each end user segment of ours, how is the consumption in that, how is the overall macroeconomic scenario, how are our other factors related to our advertising, brand building, new product, innovation. Lot of those factors are more important than just distribution and making our products available on the shelf.
Okay, sure. Thank you.
Thank you. A reminder to our participants, anyone who wishes to ask a question at this time, you may please press star and one. Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to the management for closing comments. Thank you, and over to you.
Thank you everybody for participating in the call. Thank you, and have a good weekend.
Thank you very much. Ladies and gentlemen, on behalf of Motilal Oswal Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.