Ladies and gentlemen, good day, and welcome to Pidilite Industries Earnings Conference Call, hosted by Prabhudas Lilladher Private Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing *, then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amnish Aggarwal from Prabhudas Lilladher. Thank you, and over to you, sir.
Yeah. Hi, everyone. So on behalf of Prabhudas Lilladher, I welcome you all to the conference call of Pidilite Industries. Today, we are joined by Mr. Bharat Puri, who is the Managing Director of the company; Mr. Sudhanshu Vats, who is Deputy Managing Director; Mr. Sandeep Batra, who is the Executive Director of Finance and CFO; and Mr. Sunil Burde, who is the Senior Vice President, Finance and Accounts. So without you can say spending further time, I will hand over the details to the management to take us through the proceedings.
All right. Thank you, thank you, Amnish, and good afternoon, to all on the call. I take great pleasure in sharing with you a brief commentary on the results for the second quarter, which were approved by the board at its meeting yesterday. Our standalone revenue growth for the quarter was driven by robust underlying volume growth of 8.2%. This growth was broad-based, with the domestic consumer and bazaar segment delivering underlying volume growth of 8% and a four-year CAGR of 14%. And the domestic B2B business growing by a UVG of 20%, which translates into a four-year CAGR of 11%. The growth in rural markets continued to be higher than urban markets. Input prices continued to moderate, and suitable price adjustments were done.
Standalone gross margin percentage in this quarter expanded both sequentially as well as year-on-year. For the quarter, it grew by 230 basis points over the first quarter of this year and by 1,095 basis points over same period last year. VAM consumption in the quarter was around $1,000 a ton, as compared to $2,500 in the previous year. A significant amount of this is translated into the margin expansion. We continue to remain aggressive in investing behind our brands, with spend on A&SP being 2x of the same period last year.
Despite passing on some of the benefit of these lower input costs to customers, as well as increased A&SP spends, the standalone EBITDA margins have improved by 600 basis points over same period last year and by 50 basis points over the first quarter and stand at 23.2%. Our domestic subsidiaries continue to deliver robust sales growth, driven by the C&B businesses, and EBITDA margins improved sequentially as well as year-on-year. Our international subsidiaries, with excluding, Pidilite USA, which is in the process of... the business is in the process of being wound down, reported modest sales growth despite uncertain global economic conditions, inflation, as well as currency devaluation challenges in these countries. EBITDA registered a robust growth, and EBITDA margins improved both sequentially and year-on-year and are now kind of in the double digits.
The working capital situation continued to remain healthy, resulting in conversion of most of the profits into cash. As an organization, we remain focused on building a resilient supply chain and investing behind upgradation and setting up of new manufacturing units. In the last quarter, we commissioned 4 new plants, which, together with 4 that were commissioned in the prior quarter, takes us to 8 new plants in this financial year. We continue to increase our distribution touchpoints across India in both urban and rural geographies, along with effective use of digital tools. Very recently, in October, we've commissioned a regional distribution center in Hyderabad for strengthening our supply chain ecosystem. We continue to remain optimistic in the near term, with tailwinds coming from the extended festive season, increase in construction activity, as well as the government's focus on CapEx.
Though input prices are currently stable, we remain watchful of the current geopolitical situation and its impact on input prices, as well as global demand. These were my opening comments. I'm very happy to deep dive into questions that the audience would have. Over to you, Amnish.
Thank you so much, sir.
Yeah.
Yes, sir, Amnish, please go ahead.
Yeah. Now I hand over to moderator to start the Q&A.
Thank you so much! We will now begin the question and answer session. Anyone who wishes to ask a question may press * and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press * and two. Participants are requested to use handsets while asking your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Thanks. I have two questions. First is on the domestic consumer business volume growth of 8% YOY and 14% four-year CAGR. Now, a lot of your demand comes from discretionary segments like furniture, apparel, footwear, et cetera, which is currently seeing a slowdown. So if you could tell us the good volume growth you have reported, where this is coming from, and you have also diversified your business significantly over the last four years. So when you see that 14% CAGR, if you could give us, over a four year, how has the mix changed over a four year? Whatever details you can give.
Always good to hear from you, Abneesh. Good to see you back. To answer your question, see, as far as the... First, let's stay with this quarter, and then we'll go to the four-year picture. As far as this quarter is concerned, really, you know, when you're talking of things like footwear, textiles, et cetera, we are finding a clear trend that wherever people are based, their demand is based on overseas demand, that still remains challenged. Domestic industry and domestic demand is quite solid. A large part of this demand comes under our B2B section. So as far as B2C is concerned, actually, our growth is pretty secular across the divisions, and, you know, therefore, across categories and geography. For us, rural and semi-urban is growing faster than urban. And you know, and, you know, you're pretty much a Pidilite expert.
You know that over the last three to four years, we've invested substantially behind rural and semi-urban, and that is giving us a lot of dividends as we go forward. I mean, I can talk about the initiatives in detail if you want me to. On the four-year picture, if you look at the product mix, you know, you remember we talked about core growth and pioneer. About five years back, core to growth in pioneer was 75, 25. This has slowly and steadily now pretty much become 65, 35, and the way we are growing, it will soon become, by the end of the year, probably 60, 40. So a lot of the growth categories are really delivering. I mean, you know, if I was to give you an example, for example, of Araldite.
The Araldite has grown at a consistent rate of over 20% by volume ever since its acquisition. Now, clearly for us, therefore, that's become a substantial category. If you look at tile adhesives, we started from behind the starting line about 5-6 years back. We now have 10 plants. That itself tells you where the business has gone. So therefore, our growth businesses and pioneer businesses continue to deliver. The good thing, however, in this is, our core, our core businesses are still growing ahead of GDP. So it's not that, you know, you've got these new businesses leading the growth. Even if you look at this year or you look at the 4-year period, take a, you know, our action, where we call it, still double-digit growth.
Thanks, Bharat. That's useful. My second and last question is on the lending business. So 2-3 key questions there. One is, why acquire a promoter group company, and why was this a zero-debt company? And why promoter started this and nothing much happened, it seems. And why you acquired? Why not do it from scratch? That was first question. Second is, INR 50 crore per year, INR 100 crore two year, seems too small. So is this a pilot project, and if it is successful, it could be much bigger? You are such a large company with INR 3,000 crore EBITDA, so INR 100 crore two years seems too small to have a big business impact. So if you could tell us, what is... Is this pilot or is this the final amount?
And third is, no consumer company seems to be doing this. You are known to be out of the box, but why not do third party? What is the big benefit by doing it in-house? I understand data access. I understand premiumization. A lot of that could have been done by third party also. So if you could cover all these points.
Great, Arnab, sorry, Abneesh, we've been asked these questions a fair amount. See, first and foremost, let me. I'll answer the smaller part of the question just for simple ease of doing business. Since we had this old NBFC already in the promoter group, we felt the easiest way to, you know, without losing any time, move this forward, was to do this. I mean, this is not, has been inactive for a long period of time. You're absolutely right. You know, Pidilite's basic strategy always is to pilot, understand, learn, recalibrate, move on. This is exactly going to be the strategy for this NBFC. Now, based on the response we get via the pilot, the pilot, it will be piloted actually only one geography. It will not be piloted across the country or any such thing.
Once we've got our learnings from the pilot, all options are on the table. We intend following an asset-light model, so we will be co-partnering with a lot of other fellows as far as assets are concerned. Why we want to do this ourselves? Very simply is, A, we believe one of our strongest assets is the information base. You know, I mean, this whole Pidilite ecosystem, be it a carpenter, be it a mason, be it a tile layer, be it a plumbing contractor... and of course, the whole list of dealers across six or seven different routes to market, you know, from things as diverse as stationery to sanitary, to pipes, to obviously plywood, hardware, paint, and various other sectors. We want, you know, we are the only people who have a history of each of these parties.
We know their credit history, we know their buying capacity, we know exactly, you know, in a sense, what they are capable of doing, and therefore, we wanted to keep this in-house. This does not mean that in the future we can't have partnerships, but as of now, as a start, as a pilot, we would rather do it ourselves. But remember, just to make sure that management does not get distracted, management bandwidth does not get distracted, this is a separate team, completely different from the Pidilite team, and once we announce the team, you will see it's a very heavyweight team.
Sure. One, one follow-up, and that's the last question. So essentially, you have said that, this is- this has been a long-standing requirement and demand of the industry. So any other part of the world, any consumer company, not necessarily in your categories, does it do it? And second is, where do they get currently credit from, and how important is credit, for the ecosystem in terms of, doing this? Because they also get credit, right? Contractors also do get paid.
No, the contractors will get credit from the people they buy from. These could be dealers, they, et cetera. Dealers get credit from companies like us. We also give credit. But what tends to happen, Abhi, especially with the contractor universe, you know, you have these all credit by definition is lumpy. So suddenly you have a requirement for a short period of time, et cetera, and that impacts their business. In fact, just anecdotally, I was with a set of contractors in Gurgaon last week, and what they were saying is now when they have a sudden rush, you know, because of real estate going up, et cetera, they are struggling because the labor wants money every evening, but their builders are paying them only in, like, three and six months.
They know the money is going nowhere, and therefore, like, you know, infinitely, I must tell you, very welcoming of this and said, "Can we start tomorrow?" So really, the issue is... and remember, we're not looking at big-ticket items, we're not looking at large capital spends, et cetera. These are all small-ticket spends for a ecosystem that we are fully in control and know a lot about.
Thanks, sir. That's all from my side. Thank you.
Thank you, Abhi.
Thank you very much. Ladies and gentlemen, if you wish to ask a question, please press star and one on your touchtone telephone. The next question is from the line of Arnab Mitra from Goldman Sachs. Please go ahead, sir.
Yeah, hi, thanks for the opportunity. Again, my first question was on the lending business itself. So I think there are two concerns essentially I wanted to, like you to address. One is that, you know, this is an area where you don't have expertise, which is lending, and it's one of those businesses which can be very cyclical. You can have good years, and you can have very bad years. So how does one get comfort around your ability to do this business in the first place? Second, of course, is what the previous person asked is that, you know, is it that you think lending itself in this segment is a good business, or there is some rub-off effect you expect on your overall business if this becomes successful?
And the third is that, you know, again, lending is a business where it can take in a lot of capital in the long run. So are you, do you have some number in mind that, you know, our investment, even in the medium term, won't cross a certain value or certain percentage of your capital employed?
Great questions, Arnab! Always good to hear from you. See, again, to go in the reverse order, first, let's take off the NBFC questions. As far as the team is concerned, you will see that the team that we put in place for running this NBFC, you will see is an extremely experienced, and I would submit blue chip team. Just wait until you hear the details, and you'll be clear that we're obviously, we are clear that we don't have the expertise, and this is not- we're not going to second Pidilite executives to run this. This is a completely new team, and I would submit a very competent team. The rest of you know, again, now, from a capital and our exposure, as I said, post the pilot, we will decide what's the best way forward for this.
We are clear that this is not a core business for us. You know, there will definitely be some amount of rub-off because obviously this ecosystem, which already knows us, if we are able to make their lives easier and help them expand their businesses, then there is a rub-off, not only via the connect, via loyalty, but also via the kind of products, the premiumization, I mean, the linkages with the company. But really, from the opportunity point of view, we want to test our assumptions via the pilot, then be clear. This is again, an area where we, you know, once we are clear, this is the scope, this is what we want to go. Maybe at this time next year, we'll come back to you with a firmer plan on where this has to go.
We don't see ourselves employing a large amount of capital on this. We're going to limit the amount of capital that Pidilite puts here and take it forward from there.
Okay, thanks. Thanks for that clarification, Bharat. My second question was on, you know, the growth in the growth and the pioneering businesses. So, one of the key initiatives has been the expansion of PKD stores, where I think you're now at around 10,000 from what you mentioned last time. Now, my question was, you know, in these villages, there are some 10,000, is there any demand for outside core products or this initiative on distribution into rural is more about Fevicol, the woodworking adhesive business itself? Or is there actually demand even for, let's say, waterproofing, tile adhesives in villages, and these small areas where one would ideally expect, you know, those to be in very, very infancy in these kind of categories?
See, Arnab, now I was telling you, we are rapidly expanding the Pidilite Ki Duniya network. We're now actually at 12,000, and we are pretty much adding between 1,000-1,500 every quarter. As far as demand is concerned, a lot of times we may start with the core products, but actually, what we are one of the reasons, Arnab, why for us, rural and semi-urban continues to drive growth at a much higher rate than urban, is actually the innovation, as well as the new products getting, you know, used here.
So whether it's waterproofing, base waterproofing, whether it's something like Araldite, surprisingly, tile adhesives, we are actually finding that in each of these rural areas, these are completely new products, and in most cases, we are the first company to reach these places, and actually the first fellows to directly deal with the fellows. So on a consistent basis, we are seeing demand not only from the core products, but also from these categories.
Okay, understood. And one just like-
The example I can give you is Araldite. When we took over Araldite, it virtually had no rural sales. It's now slowly and steadily building a strong rural presence for itself.
Got it. Got it. And one last question on the quarter itself. So, this price, the gap of 4%-5% between volume growth and value growth in the consumer and Bazaar domestic business, is this given that you may have taken some price corrections, is this likely to continue into the second half, till, you know, those price for calendar price, this 4%-5% gap? And the other related question was, you know, your volume growth, while 8.5%, 8% is a good number, it has slightly slowed down from the 12 you had last quarter. Is there a little bit of an impact of the festive timing here?
So again, good question. See, firstly, as far as the slowdown, the growth is concerned, really this quarter actually, if you see, was very challenging from a physical environment point of view. You know, you had this extremely wet July. We had massive disruptions for 10, 10, 15 days, especially in the north. I mean, one of our own warehouses was out of action for 7 days because it was like, you know, I did... We thought it was in a safe area. It was almost as if it's in the middle of a lake.
So, we had a fair amount of disruption and, you know, therefore, if I look at the overall growth within the disruptions, it's we don't find any great difference between quarter one and quarter two, while obviously there is a difference in the number, but steadily it is moving forward. There's no. It's not that some categories have slowed down, some are slower. We are not so festive-oriented and so seasonal. There is some amount of seasonality for us. Also, the quarter, quarter three tends to be a big quarter. So having said that, therefore, as far as we're concerned, we're fairly optimistic about, you know, as long as the geopolitical situation doesn't get out of hand from an oil price point of view, I think the next two quarters should also, you know, in a sense, mirror the first half. Right?
His question was, will the volume-
Yes, as far as the volume, value gap is concerned, I think it'll take about six months to bridge. We are clear that, you know, offer value to the consumer, and if we are getting the benefit of input prices, we must do that in the form of price adjustments to our customers and therefore the final consumer. You know, at the last therefore, in my view, it will take another two quarters before it actually evens out.
Okay, thanks. Thanks so much for your answers. All the best.
Thank you.
Thank you. The next question is from the line of Jay Doshi from Kotak. Please go ahead.
Yeah. Hi, thanks for the opportunity. First, you know, bookkeeping question: What is the difference between domestic consumer and Bazaar and standalone consumer and Bazaar? And last quarter, I think, you know, standalone had a volume UVG of 8%, and I think domestic at 12%, and this quarter, both are very similar. So just want to understand the volatility, you know, what's, what is the difference there? And again, on a four-year basis, when we look at the numbers that, you know, we have captured historically reported, maybe some of the quarters you reported standalone or only volume, so that four-year CAGR comes to about 11%.
So, a request, if you could, you know, in the next quarter in a presentation, if you can have a time series data of the past few quarters, either domestic or standalone, something that is consistent UVG. And, yes, so that's the first question in terms of, what is the difference, and then I'll touch.
Yeah. So the difference is basically the exports that we do from India of consumer and Bazaar products. They get exported to many geographies, Middle East, Africa, and such like, and exports both of B2B and of consumer and Bazaar have been challenged for the last few quarters. We did see a small recovery in this quarter. So exports also were in the positive. Of consumer and Bazaar products were also in the positive territory. So the difference between domestic consumer and Bazaar is, A, the exports that we do, and at a consolidated level, the consumer and Bazaar would also include sales of ICA Pidilite and a couple of the other units that we have outside Pidilite, which serve the domestic consumer and Bazaar segment.
But your point is well noted, Jay, that in the next quarter, we will share the historical data, so that the definitions and the numbers are comparable.
Thank you. Second is, what is the cumulative price cut that you have sort of taken so far at a portfolio level, over the last 6 months or maybe 9 months from the peak pricing?
Just one second. It is a very difficult question because, you know, remember pricing across, say, for example, woodworking adhesives is very different across the waterproofing range, is different, consumer products. Sorry. So weighted average is different, but at a gross level, it would be about close to about 3%. Yeah.
Understood. And, will there be further price reductions or price cuts? I heard your response to Arnab's earlier question, but I'm assuming the, you know, that has more to do with the base, effect. But are you going to further cut prices or you think at the, based on the commodity prices right now, this, the, this level is a right level to be?
Based on the commodity prices, this seems appropriate, but if, you know, we again get some windfalls, so on and so forth, we don't... We are clear that, you know, our focus will remain on underlying volume growth. Keep pushing the volumes, we know that we will recover the values as time goes by. So if there is some further reduction in input prices, we see some other, some more opportunities, we will do that, because finally we must offer value to the consumer at the right margin.
Sure. And final one, you know, I read the press release, you know, about the doubling of A&SP spend, so that kind of explains the high, you know, increase in other expenses to a large extent. But employee costs are up about 20%, both at a standalone and a consolidated level. So just want to know, are these investments in the decorative paints initiatives, or are these investments in the rural penetration, you know, that you earlier talked about? Because employee costs had come off as a percentage of sales during COVID, and but it seems to have gone up to a pre-pandemic level, so.
See, this is basically three things, Jay. One is clearly we are investing for the future. I mean, just to give you a perspective, we put up in the last 18 months, 12 new plants, right? It will take time before they reach capacity, and they are obviously manned at a certain level. So therefore, A, it is investments in the future. B, it is definite investment in new categories. You know, as categories grow, the growth in pioneer categories grow. By definition, pioneer categories are front-loaded in terms of people investment, and the re-return comes back a little later, and therefore, that's the second thing. The third is, last year, please remember that inflation was also high, and therefore, the, you know, overall increases across industry have been high.
Since value growths are not high, the number is, you know, in a sense reflecting, but it was. It's nothing out of the ordinary.
Understood. Thank you so much. That's it from my end.
Thank you so much.
The next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question is just again, you know, clarifying on this, volume value gap. Do you expect this to moderate as we progress through second half of the fiscal? Is that the fair understanding?
Hi, Latika, Sandeep here. So I think, you know, we took our just to give you some data points, I think our last price increase last year was in the second quarter. So after second quarter, we did not take any price increase. The first reduction that we did in pricing was around the end of March. So to that extent, yes, whatever has been the price adjustment in the second quarter, kind of would remain for the rest of the year. And the second quarter price adjustment, while for the first half it was 3% reduction, for the second quarter was 5%. And that in, in that certainly will continue for the next couple of quarters.
But as things stand on the input cost front, we are not looking at any additional price adjustments, as of now.
Sure. And can you mention, I think, the VAM consumption price is $1,000, if I'm not mistaken. And does that imply that, you know, there's a very good gross margin progression that we are witnessing now? So this should continue to improve through remaining part of the year. So we probably, you know, you're already at 22% margins in this quarter. I understand the range is 20%-24%, but hopefully we should be on the higher side of this, you know, unless you see firming up of raw material prices in a significant manner.
So good to hear from you, Latika. We're already actually seeing some amount of firming up as far as VAM is concerned. It has started to go up a little. We're comfortable right now from the extent of the increase, because you would, you know, expect it to remain in a range, and it's within our range. Therefore, from a margin point of view, we will stick to 20%-24%. Let's see how it actually pans out. We will continue to invest behind the volume growth, you know, rather than worry about the margin going higher.
Sure. The last bit was, you know, any comments or any updates you would want to share on your, you know, paints, port-
... Sure. Again, you know, Latika, you know this as well as I do, all big companies, when we do something new, everything is a great success for the first 3-4 months. So give us, you know, as we said, we, this is a pilot, which we will take 6 months to come back on. Give us till, you know, the first quarter of the calendar year, you know, then it will be clear where we are, how our repurchase rates, so on, so forth. Right now, we're, so as to say, still in what I would say, launch or little post-launch stage, so there's a lot of excitement in the field. But I would wait to declare success maybe for the 6, maybe 4 months later.
Sure, Bharat, thank you so much and all the best.
Thank you, Latika.
Thank you so much. Ladies and gentlemen, if you do have any questions, you can please press * and one on your touchtone telephone. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, congrats on a good set of numbers. My first question is on this Pidilite Ki Duniya, this 10-12,000 outlets that you have, how much do they contribute to your turnover?
See, let's just say to our rural turnover, these are, what I would say, a good investment. I won't like to go into the numbers of exact numbers, so on, so forth, but obviously they're at 12,000, and they're slowly and steadily moving up. This is an initiative that is working for us.
Are these purely Pidilite products, or this is like a branded store where Pidilite is more visible, but there might also be some other company products also in them?
No, it's definitely a branded Pidilite store, which may have different... You remember, as you go to these villages, the shop tends to keep everything from, you know, Hawaii chappals to Fevicol. So they will have a lot of other products, but a lot of times our experience, Percy, is that in the home improvement category, they may have other products, but we are normally probably one of the few companies that reaches directly.
Right. Right. And what exactly is the sort of channel here? Are these people who run the stores, I'm sure they are the village entrepreneurs, and then you supply them directly from the depot. Is that how it works?
We supply them via a distributor network, and what we do is, we normally have a 2-member team, which is a demand generation cum servicing team, and which helps the village entrepreneur also learn and develop demand for the product so that it gives them regular rotation.
Understood. Understood.
General team.
Understood. And, in your experience, do most of these 10-12,000 stores sort of make a decent ROI for the entrepreneur? Or do you have to sort of give an additional support to him over and above the normal terms of trade for him to make an ROI?
See, in India, all the entrepreneurs are smart at making the ROI. We don't give additional incentives, so on. We may spend more in terms of training, so on, so, but we don't give extra margins and so on. Automatically, they find their own level, and they will reach a certain rotation. And remember, these guys, again, stock a vast variety of products, so therefore, you know, it depends on what's the variety of products the person has.
Right. And last question on this Pidilite Ki Duniya is that, on an average, what would be the pop strata of these towns or villages in which these 10-12,000 outlets are there?
Basically, between 5,000 and 10,000.
Okay, okay. Second question, again, I know, this was asked by the previous participant, but on paints, just wanted to know, which are the states in which you are running the pilot, currently?
AP, Telangana and Odisha.
And, to the-
Telangana and Odisha, only in towns with a population of below 50,000.
Okay. Okay. To the extent you feel comfortable, can you tell me what is your sort of take on the paints initiative, in the sense that, what are you going to do in order to sort of differentiate yourself or win in the market? Is it going to be mainly a small town array? Is it going to be mainly in the low-end business? Even within the low-end, I'm sure a lot of the top players still have a fairly wide range, even in the low-end. So really, what's here for a consumer or a contractor to choose Pidilite's products over some of the more established names?
You know, Percy, what I would request is, give us three months, and we'll give you all the answers. Right now, we're quietly, as like the proverbial duck, we are paddling under the water. Let's keep paddling for some time before we give you the answers.
Sure, sure. Makes sense. Okay, sir. That's all from me. Thanks, and all the best.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Hi, thanks for the opportunity. So you spoke about rural or non-urban doing very well for us relatively, but there's no consensus if we pick up from other players this time and then consumer companies on rural growth. So just wanted to know, is it an outcome of... You also spoke about the distribution initiatives that we had taken in the last 24 months. Do you think it is largely an outcome of that, or the rural demand itself was very relatively better for the industry at large?
... See, I think, you know, what we have to distinguish in our case is, as far as Pidilite is concerned, we don't have any items or very few items of mass consumption. So in our case, we have to first create the demand, educate the user, and, you know, this is a process we've been at for 3-4 years. Our products also, from a perspective of usage, tend to be middle class and above, lower middle class and above, is how I would put it. So I would say it's a mix of both things. It is also innovation across the newer categories that we've put into rural areas. We've done specific work on innovation in rural and semi-urban.
And also, as far as construction is concerned, and you know, you would see this even via cement sales, so on, even accounting for the boom in infrastructure, we're not finding demand as much, you know, while it could be better, and we would all want it to be better, it's not depressed as far as our sector is concerned.
Got it. And you also spoke about Araldite doing very well in rural. So I was just wondering, before we took Araldite to rural markets, were they not using this product at all or any substitute product, or were they using anything from our own portfolio of Fevicol, and now they have moved to Araldite?
See, a lot of them didn't realize that a lot of stuff, you know, when you want to create an unbreakable bond, there is a solution available. Okay, so they were actually, a lot of times, you were competing against non-usage, right? You just assume that, you know, there is not a solution possible. Also, in some of the markets like Gujarat, UP, Madhya Pradesh, companies like Astral were stronger in the rural network, and Araldite being a Huntsman product, was not there. So I suspect there's also some element of market share gain.
Got it. Got it. So second question is on competitive intensity in waterproofing. So all paint players are kind of have made foray in last two years, and they all are kind of sharing initially, they are sharing very good traction there on, on the respective earnings calls. So I just wanted to understand from you as a, as an industry leader, how are you seeing competitive landscape shaping up? And is there any pressure point building in terms of pricing or, or, shelf space more?
See, as far as waterproofing is concerned, you're absolutely right that every single paint company has moved into this space. The cement companies are also moving into the space. But what we are finding is, given the large, you know what, coastal market that exists, because where people were not using waterproofing, the market has started growing at a faster pace. Plus, a lot of these people tend to be, you know, to be fair, if I was to say, listen, as far as waterproofing is concerned, of the paint companies, I think at best two of them are making any substantial headway. And that is also largely in the repainting and renovation segment, not in the new construction segment.
When I look at my growth rates, whether it be in this quarter, this first half or the last four years, for us, you know, waterproofing continues to be a strong driver of growth. Now, the market is also growing, but I don't believe in any way we are losing share. So, you know, in a sense, it's helping the market grow faster. Our, obviously, emphasis, therefore, keeps on, A, building our brand, C, making sure that we innovate more than the others, and B, that our route to market also keeps expanding rapidly. Remember, there is also a substantial route to market, which is non-paint in waterproofing.
Got it. And the last one, if I may. So we have a new tail of pilot projects. I won't call it long tail yet, but tail of pilot projects like paints and, and now lending business, which are very execution-heavy business. So for example, lending, we call it lending, but it is more of a collection business, so you need a lot of feet on street. And paints also, it's a supply chain-heavy. So, we don't have dearth of financial capital for sure because of very good cash flow. But how are we going about the managerial or execution capital, which we need on the ground to, to kind of see some scale in all these businesses?
See, one is, remember, as I told you, remember, in... First, let me separate the two businesses. The lending business is going to be a standalone business, not drawing upon any Pidilite resources in a substantial fashion, in any way of Pidilite people, so on and so forth, et cetera. Right?
Mm-hmm.
So and therefore, based on its requirement, we will look at it, study from the pilot, come back and tell you, fellows, in 6-9 months in the pilot, how it's worked, and therefore, whether the business model needs tweaking and how it is going to go forward. As far as paint is concerned, remember, we are already in the channel. As I told you, one of the reasons why we got into paint was that we were already servicing these dealers, and they were saying, "Listen, to just complete the range, we have to go to another company. Why don't you come to us?" So actually, for us, paint is not manpower accretive. I mean, in all of these towns, we already had people. Remember, in the small towns, why have we gone into the smaller towns first? You know, this is normally counterintuitive.
Every other company goes to the large cities first. We've gone to the smaller towns first because they're already servicing the outlet. We already have a relationship with the outlet, and therefore, we are building from there onwards. And therefore, for us, you know, the accretive manpower will only be around education and demand generation, not around servicing the trade.
Got it, sir. That's all from my side, and Diwali greetings to the team. Thank you.
Same to you. Thank you so much.
Ladies and gentlemen, please press * and one on your touchtone telephone if you wish to ask a question. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. A couple of questions. First question is very simple. When we look at incentives, or basically rewards for carpenters or influencers, what is the typical tenure? Is it less than 12 months, or does it extend for over 2 years, 3 years?
See, what happens, Ritesh, is, it depends on the size of the carpentry contractor, but a lot of fellows like to bank points for a large period of time, so they can get a more substantial gift. I mean, somebody wants a motorcycle, somebody wants... At times, fellows want something. So it's not fixed, but the relationship is a long-term relationship.
Would it be possible for you to quantify, sir, what percentage of the rewards is less than 12 months? So 60% is usually 12 months, 40% over the next 2 years. The reason why I ask this is I just wanted to understand on the accounting side, when we report the revenue number, is it net of incentives or that is something there's a bucket which sits in the working capital, and as it stands to realize, it gets adjusted on the top line? Because it will have implication on both working capital as well as margins.
So it has no, no implication on working capital. We recognize these, and they get netted off from sales. So our sales number is net of whatever contractor reward program we would have run. Typically, the life, these are all today digital. Nobody puts any physical tokens. And generally, the token or the QR code or whatever has a life of about three years.
Okay. But we will recognize as, say, if I'm a carpenter, if I get something, if I buy something big, immediately, the company will recognize it, and that's the net revenue that we look at. Is that the right way to understand it?
Yeah, yeah. We follow the appropriate revenue matching concept, yeah.
Okay, that's, that's helpful.
Yeah, yeah. I mean, our accounts are reviewed by reputed auditors, so rest assured that we will follow accounting policies which are acceptable to the auditors, right?
Yep, yep, yep, yep. So the reason to ask that question is there are a few other listed companies which do not do so. So obviously, we looked at, you are of world standard, so I just wanted to check that. Sir, my second question is on Araldite. You did indicate around 12% volume cadence since acquisition. You also indicated there could be some market share gain. So is it possible to give some numbers? I think at the time of the acquisition, you had given epoxy sizing at around INR 1,200-1,500 crore, and I think Araldite at that point in time was around INR 400 crore. So can you give some numbers over here? Have we recouped INR 2,100 crore? I think that is the amount which has, which was paid.
How does it look at this?
What I can tell you very safely, Ritesh, is two things. One is, prior to the acquisition of Araldite, when Huntsman owned the brand, their average growth rate of the brand was, in volume sales, 6%-8%. Ever since we have acquired the brand on volume, we have grown the brand in excess of 20%. The second thing, which, you know, again, to answer your question, therefore, when we had, you know, done the acquisition and made an acquisition case, we are beating the acquisition case by a large amount, by a lot, large measure, and therefore, you know, it is something that is, has worked very well for us.
Sure. And, sir, would it be possible for you to quantify the market share gain that you indicated?
You know, it's very difficult because we did not know the size of the rural markets that we have gone into. I, you know, I would say we've, you know, if you look at, for example, in this business, pretty much we have one big and a few small competitors, the big competitor being Astral Poly, and you can see that their adhesives has been fairly stunted ever since Araldite has come. So I suspect there is an impact there, but we have also helped in expanding the market substantially in small towns and rural.
Sure. That is helpful. So just I had two follow-ups. So would it be possible for you to qualify PVA as a segment? What percentage of it stacks in retail versus joinery, and how the trends have been recently, and how do you see this going forward?
See, you know, this is a question that keeps getting asked. The fascinating thing in India is, while joineries are growing faster than the retail business, they offer very so, you know, I, ten years back, we did a study, and we, we were under the assumption that, you know, at that point of time, the market was 90% on-site and 10% off-site, which is in joineries. This will, you know, the assumption then, which a set of consultants made, was 70-30. Frankly, ten years later, it is still 85-15. So it's... I mean, while joinery is growing, I mean, remember, in large parts of India, minus the metros, people still prefer to get the furniture handmade at home.
Yeah, right. And, sir, for us, how would the mix be like? Will it reflect more of industry benchmarks, or is it something more on the retail side, I'll presume?
No, actually, the good thing is we are leaders in joinery, and we are leaders in retail in both. So in our case, we make sure that in both cases, we lead.
Sure. And sir, lastly, would it be possible for you to provide some color on waterproofing? What have been the trends like, market sizing, where we are, if possible, any numbers, that would be really useful, sir.
See, it's very difficult, Ritesh, to put market sizing, because every paint company keeps adding all exterior paints to waterproofing and adding a lot of paint to waterproofing coatings. Some of it is used for waterproofing, some of it used painting, and there's a, you know, space in the middle which could be common between the two. So it's very difficult to estimate the size of the waterproofing market. Given our estimates, what we are seeing, we would say, for example, that the market is definitely growing in double digits. The market is growing anywhere between, I would say, 10% to even 12, 13% by volume, is our estimate currently. It is growing at all three levels. It's growing largely at the institutional level because, you know, as more organized buildings, factories, large commercial complexes, hotels are coming up, that's a large segment.
It's growing substantially in individual housing, which is new construction, and it's also growing in repair and renovation. In each of the three, competitors tend to be different. In the large institutional space, the competitors are mainly the multinationals, the Sika and Fosroc. In the new construction space, a lot of times we will compete with the cement companies or the similar Fosrocs of the world. In the repair and renovation, the competition would be with the paint companies. Now, so therefore it's difficult to ascertain across. I would say that over a 3-4-year period, the market has grown substantially. And the fastest part of the market probably is right now, the new construction.
Right. So, sir, if I had to put it the other way around, how would we gauge our success in waterproofing? Like, are we beating the market growth rates by a significant margin? What's the benchmark that you use to gauge?
Our benchmark is simply we must grow faster than the market across all three segments.
Okay. Thank you so much. I wish you all the very best. Thank you again.
Thank you. All the best to you, too.
Thank you. The next question is from the line of Sachi Trivedi from Trident Capital Investment. Please go ahead.
Hi. Thanks for taking my question. What is my question is that for the last four quarters, we have been growing top line in single digits, and I understand, you know, you've been taking pricing cuts. The prior four quarters, you know, we were growing double digits, and, you know, that was more because we were taking price increases. I guess going forward, in, I mean, what should we expect in terms of, you know, top-line growth? And can we go back to steady double-digit numbers that are based on volume growth rather than the pricing ups and downs that we have seen in the past couple of years?
See, Sachi, I think that's a great question. If you look at our four-year CAGR, you would see on a revenue basis, it is double digits, and on a volume basis, it is close to double digits. Now, you'll have these ups and downs because of this extreme volatility that we've had in raw material prices. We saw VAM touch $2,500 a ton, and it's now, you know, $950 a ton. So really, we, if this, but if I, you know, equalize over a four-year period, we clearly believe that, again, both from a revenue and a volume perspective, our objective is grow volumes double digits, hopefully premiumize, improve mix a little bit, and therefore also grow value at a little above the volume. That would be our steady state if life was, you know, a lot more even.
That's what we would be aiming for. So right now, for example, our focus is to get from our current volume growth to double-digit volume growth. We believe in the next 3-6 months, the value will start coming back, and we will be well positioned because, again, we would have, you know, added another few hundred thousand tons to our volume.
Got it. Actually, I, I'm glad you pointed out the four-year numbers, because the four-year numbers, you know, whether I look at Q2 versus the four-year prior Q2 or H1 versus the four-year prior H1, and those numbers are like on a 15% CAGR. We do, I think, believe, you know, that we can grow 1.5x to 2x kind of, you know, of GDP. And these numbers are, even on a nominal GDP, seem shy of that. So how should we think about, you know, the growth correlation with the GDP of the overall economy?
I would definitely say that there would be 1.5 times volume of real GDP. And when we track us, actually, we've done this thing around over the last 10 years. Almost on a consistent basis, we have beaten the 1.5 times real GDP on volume. Value, you know, we've had so many ups and downs, whether it be the GST, before that, demonetization, then we had the COVID issue, then Russia, Ukraine. So, you know, the best thing is to do is see it over a longer period of time. I would submit that the whole home improvement sector, still from a volume and possibly revenue, we would be in the top quartile, and maintaining profitability at very healthy levels.
Okay. Okay. In one of your comments, you mentioned that where you are seeing sort of pick up or growth is in the new construction kind of a space. Now, I think, again, you know, going back a few years, I mean, you said that if both the new construction and the renovation, if both of those engines fire, you know, then you kind of look at very strong volume and value gains from there. And what would it take to... Like, what is holding back the renovation? Because I thought, like, new construction is a harder one, right? And renovation is the regular one that keeps growing.
See, I think your guess is as good as mine, but we know this famous rural slowdown. I mean, it has post-COVID, there has been a bit of a K-shaped recovery. And I suspect for more, you know, for life to be good for all of us, it has some key, it has to become a hockey stick.
Yes. Yeah. But you don't—I mean, you mentioned in the call that your target segment is the lower to upper, sort of, you know, lower middle class and above. So you are in the better part of the cave, isn't it?
Without doubt, without doubt, which is why, if you notice, vis-a-vis all my, you know, I also head CII's FMCG committee, and, you know, it's when I'm speaking to them, for them, like, 8% volume is a massive movement forward, because most people are struggling between zero and three or four, largely because of, again, this, you know, items of mass consumption suffering. And it, it's not that demand for the rest has been buoyant across large parts of the country. But I would say, if I was to take a step back, Sachi, what is our goal?
It is double digit volume growth and hopefully with a certain amount of premiumization, better mix, innovation, more at the top end, improving value to a larger and, you know, inflation hopefully will come back stably to around 3%-4%.
Got it. Okay, thank you very much for taking my question.
Thank you.
Thank you so much. The last question is from the line of Jay Doshi from Kotak. Please go ahead.
Yeah, hi. Thanks for the follow-up opportunity. Bharat, you mentioned about, you know, the new construction field is growing the fastest. So, you know, what is your reading of, you know, we are seeing a real estate upcycle, and normally in such times, you tend to benefit. What is your reading of what is the benefit that you're seeing in the business? Does it come with a lag, so you expect more, sort of, traction in some of your businesses that are, you know, linked to new construction going forward? Or, you know, right now, you are—the numbers that you are reporting already captures that. And finally, as, you know, as per my understanding, there are three legs.
One is the urban real estate, you know, residential real estate, one is commercial, and the third is independent housing units in small towns. So, you know, what's the growth or traction or activity you're seeing in each of these segments? So broader overview of, you know, this.
Sure. See, what we are seeing is clearly organized real estate. See, frankly, individual housing in the towns has not suffered a large amount except during COVID. That has been one segment that has held up well. It's residential real estate in the 10 lakh plus towns, especially the organized real estate. We tend to see, Jay, an impact which happens between, I would say 2-4 years, depending on the project completion, is when, you know, because a large part of our products, with the exception of new construction waterproofing, all come into substantial play when the flats are at a finishing level. So if now you see a lot of new announcements, you will see our demand start peaking, you know, 18-24 months, depending on the construction cycle.
So given the current situation, where fortunately also there, there were a lot of unfinished or unsold flats that are getting sold, you're beginning to see the up. But hopefully, if this, you know, you, this new announcements and therefore new starts continue, you will see good movement forward. Really, the area we are also very hopeful about is the commercial real estate and factories, because if manufacturing 2.0 or China plus one, whatever you call it, if that was to come, that again becomes a substantial driver of growth because a large part of these buildings all use sophisticated products, and therefore we find the benefit. I mean, you know, I'll just to give you an example, Samsung built this big factory in Noida, Kia built this big factory in Andhra Pradesh. All of these are waterproofed by us.
I mean, you know, if you have the second manufacturing boom, then again, that tends to benefit. But let's wait and see.
That's very helpful. Just one last, final thing. Do you have a playbook to penetrate into renovation, repair, part of waterproof roofing, the painters-led route to market? Do you have a playbook there, or it's still sort of,
Yes, absolutely, we have a playbook. In fact, we have a substantial presence there. Remember that in that area also we have a playbook, we have a set of products, we have, again, a whole set—we have a dealer network across the country. So yes, we obviously play there. As, as I said, that's an area where the competition is paint companies, whereas in new construction it tends to be others, in commercial real estate, it tends to be a third lot, but we play across all three.
Understood. Thank you so much, and Diwali wishes to everyone.
Thank you. All the best to you, too.
Thank you.
Thank you so much. As there are no further questions from the participants, I would now hand the conference over to the management for the closing comments.
Thank you very much. I have no closing comments, other than wishing all the participants and their families all the best for the Diwali and the festive season. Stay safe, and we'll connect again in the new year or after the third quarter numbers.
Thank you, everybody, and wishing all of you, your families, a very happy Diwali. Hopefully, have a restful break, and see you in the end of the third quarter.
Thank you very much. On behalf of Prabhudas Lilladher Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.