Ladies and gentlemen, good day and welcome to Prince Pipes and Fittings Limited Q2 fiscal year 2024 earnings conference call hosted by Equirus Securities . 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 call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Pranav Mehta from Equirus Securities . Thank you and over to you, sir.
Yeah. Thanks, Sima. Good morning, everyone. On behalf of Equirus Securities , I welcome you to the call with management of Prince Pipes and Fittings Limited. Today the management is being represented by Mr. Parag Chheda, Joint Managing Director, Mr. Nihar Chheda, Vice President, Strategy, Mr. Anand Gupta, the Chief Financial Officer, and Mr. Kaustubh Gola, Head, Investor Relations. I will straightaway hand over the call to Mr. Parag Chheda for his opening remarks. Yes, sir. Over to you.
Thanks, Pranav. Good morning, and thank you for joining us for our quarter two and H1 fiscal year 2024 earnings call. The presentation and the press release have been issued to the stock exchanges and uploaded on our website. I hope everyone has been able to go through the same. Our performance this quarter has been good, driven by higher sales volume in the plumbing segment. Finished goods sales volume for the quarter increased by 8% year-on-year to 41,529 metric tons, and overall revenues grew by 3% year-on-year to INR 656 crore. The corrections in PVC prices in early October did lead to some de-stocking and deferment of volumes in September. But the prices have now stabilized with a slight uptick, leading to restocking and supporting volume growth during Quarter three.
Improving product mix, rigorous input cost control, efficient marketing strategy, and good volume growth have translated into margins rebounding to normalized levels in quarter two. I am glad to share that this was the maiden quarter of the bathware segment, and we have received a very encouraging response from dealers and end customers. Let me share some highlights of our Prince Bathware segment post its launch in June 2023. I am happy to share that our products have been well received in the market, gaining positive sales traction and encouraging feedback. We continue to build a robust distributor base in Northern and Western India with brand launches in Tier 2 and Tier 3 markets like Srinagar, Jaipur, and Varanasi. We plan to launch bathware in Eastern India by Quarter four, fiscal year 2024. We have also started participating at exhibitions and events which have drawn a very good response.
I am glad to share that we have already undertook our first project in Mumbai, where our products have already been installed for the first phase of the project. As our tanks business scales up, we will continue to leverage our multi-location manufacturing presence to scale this segment. In the next couple of months, we would set up manufacturing in Haridwar and Chennai, taking it to five of the seven in-house locations. With these efforts, we plan to establish a strong presence in all segments, including pipes and fittings, water tanks, and Prince Bathware. Just to give you an update on our Bihar facility, the implementation is going on as per our plan. The layout has been finalized, and the work will start post Diwali as we commence construction at our latest integrated manufacturing facility at Begusarai in Bihar.
As we grow, we are investing in building a strong frontline of our team in accounts, finance, and HR to implement progressive strategies to help us achieve our long-term vision. I take this opportunity to welcome Anand and Ajay as we work together towards fortifying our industry leadership position. Anand is a qualified CA with over 20 years of experience in finance, commercial planning, and efficient management of stakeholders, people, performance, risk, and opportunities. Prior to Prince, he was associated with ACP Limited for 14 years in different roles and responsibilities. In addition, I welcome Ajay Kumar, our new Chief Human Resources Officer, who brings comprehensive experience of 23+ years in developing and executing strategic human resource policies. He has extensive exposure to large corporates with multiple manufacturing units spread across geographies in India and overseas.
On an overall basis, several strategic efforts have been undertaken over the past few months, and we will bear the fruits from them as we progress ahead. Prince Pipes remains active, agile, and growth hungry to ramp up market expansion efforts. The long-term industry fundamentals remain strong. The real estate sector continues to remain buoyant, especially reporting good sales in the mid and premium category. In fact, realtors expect record sales this year and unsold inventory is at a decadal low, which augurs well for all building material consumption over the next two to three years. Property developers expect home sales to post a new high at more than 500,000 units in the top seven Indian cities this year, amid strong demand and big launches planned by many eminent large developers.
Several prominent launches for residential real estate are lined up for this festive season, as sales numbers are expected to touch unprecedented levels. We are closely monitoring every aspect of industry momentum and are excited about the untapped potential. With several steps in the right direction, as we focus on market penetration and expansion of pan-India footprint. We expect continued growth in the second half of the fiscal as we move ahead with an even greater commitment to transform and strengthen India's water infrastructure. Thank you for your time and mind share. I will now hand it over to Anand to take you through the key financial highlights.
Thank you Parag Bhai for the warm welcome, and good morning friends. I will be taking you through the quarterly highlights. In this quarter, revenues for the quarter improved by 3% year-on-year to INR 656 crore. Our finished goods volume grew by 8% year-on-year at 41,529 metric ton. We delivered a healthy operating performance with EBITDA at INR 94 crore for the quarter, resulting to margin of 14.3% for the quarter. A&P spend increased by 7% over the previous fiscal period and is at INR 15 crore. The finance cost reduced by around 50% due to improvement in cost of short-term borrowing. Let me highlight the exceptional item for the quarter and first half.
The legal matter between Prince Pipes, The Ruby Mills Limited and Mindset Estates Private Limited has been amicably resolved, and the corporate office situated at the Ruby, Dadar Mumbai has now been registered in the name of the company. Based on the valuation report, the property was revalued and there is a net gain of INR 17.93 crore towards the settlement, which is included in exceptional item for the quarter and first half. It is important to note that despite the exceptional gain, margin performance has been healthy. We continue to judicially expand our channel finance program. We have made steady progress since the recourse has shifted to distributors and have increased the credit limits of our channel partners from INR 105 crore in quarter one fiscal year 2024- INR 126 crore in second quarter of fiscal year 2024.
Commenting on the working capital for the quarter, our inventory is stable at 62 days, while our trade debt is at 59 days and debtor currently are at 63 days. We acknowledge that there is a large scope for improvement in the debtor days, and we are continuously working towards the same. With this, we would like to open the floor for questions. Thank you.
Thank you. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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 assembles. We take the first question from the line of Mr. Rahul Agarwal from Incred Capital. Please go ahead, sir.
Hi, good morning. Thanks for the opportunity and best wishes to Anand Gupta for his additional responsibility. I have first question on the PVC. You obviously mentioned that October has been stabilized. You had some recent hiccups. Any thoughts on the second half outlook, any known positive or negative surprises that could lead to volatility into PVC, either the pricing or the demand, please?
If I understand the question, you are trying to understand the demand outlook?
Yes, and any known positives or negatives which could lead to volatility in terms of performance.
I think, let me start from the raw material. On PVC, I think we are well poised as an industry. I think it is extremely low cost polymer today, and I think, at least for the next couple of quarters, we foresee a very low level of volatility, both upwards and downwards. I think PVC will be extremely range-bound, which is going to create an extremely growth-conducive environment because of affordability and also more certainty in pricing will always help the channel to avoid any heavy destocking or restocking. I think it is going to be a more growth-conducive environment with more certainty and better visibility of growth. As far as the end market is concerned, I think real estate is doing well, infrastructure is doing well.
There are positives on both sides, and from the medium to long-term perspective as well, we are confident and certain of the growth.
Got it. Secondly, one of the larger peers into pipes has acquired a facility which makes OPVC pipes. What I understand is the margins are decent and the demand looks sustainable over the next three to five years, given the drinking water problem in the country. Any thoughts on the product and your company's interest in doing this?
We have been evaluating this product. It's a capital-intensive line to be in. There is no application apart from infrastructure. It's purely going to be an infrastructure and an institutional sort of game, which traditionally we have stayed away from as an organization because of the credit cycles. But as the government's focus on infrastructure is improving, we have seen better credit cycles in the infrastructure and institutional business. We will keep exploring any new opportunities like OPVC. A couple of the new products that we have introduced within piping, like PP, low noise pipes, as well as polypropylene surface drainage products. I think we have seen very strong acceptance for these new technologies.
Of course, sales numbers do take time whenever you introduce such kind of technologies because we are the first mover in these kind of products where we have to generate demand, do the concept selling. But in this quarter itself, for both the products, we have already received our first project orders for PP low noise as well as for Hauraton, which has already been installed. Now with our modern plumbing vertical, we will always be on the lookout for these kinds of technologies, OPVC being one of them. But I would prefer to focus more on products that have acceptance in retail projects as well as infrastructure, rather than having products which are focused only on infrastructure and institutional.
Got it. Last one small question was, when do you expect to see Prince Bathware financials separately?
From December quarter.
Okay. Perfect. Wish you all a very happy festive season. I will come back in the new year. Thank you.
Thanks.
Thank you. Before we take the next question, a reminder to all the participants, if you wish to ask a question, you may press star and one on your touchtone telephone. We take the next question from the line of Devansh Nigotia from SIMPL. Please go ahead, sir.
Yeah, hi. Devansh Nigotia from SIMPL. Also, if you compare our volumes with the peers, it has been relatively tepid. Also, the base quarter was a weak quarter for us. Any thoughts if you can share why the volume performance has not been very robust?
Sure. Yeah. Thank you, Devansh. I think it's an important question to address, and we want to sort of answer this question with as much transparency as possible because regardless of whether the performance is good or bad, I would like to not shy away from the performance. Yes, I accept that the volume growth in this quarter and past couple of quarters has not been at par with industry. At Prince, we are used to industry-leading growth. What I can share is that there is no one or two peculiar reasons for this. We continue to be focused on distribution, adding new products, investing in branding, focus on entering into the project segment. So the fundamentals do not change, and we continue to focus on the fundamentals and our entire effort and mind share of the professional team as well as the family is on that.
I think, couple of places we feel that a segment like HDPE, we have maybe been laggards with investing in capacity. Those capacity investments have been made in the September quarter, which would start reflecting in the operational performance in terms of volumes from the March quarter, specifically for HDPE. There has been some corrective action that we have taken on pricing, where we felt that the largest player has been more aggressive in pricing in certain markets. So we have tried to close down those pricing gaps and certain more corrections that we have done in the past couple of months as well. So I'm confident from a medium to term perspective that we should be, if not industry leading, at least in line with peers in terms of volume growth.
In case of bathware segment, now that it has come in, what is the fixed cost which will be there in the P&L in terms of expected losses that you're expecting?
The cost running to Prince Bathware will be primarily on two aspects. One is the employee cost and the other, the branding cost, which we will be incurring in a P&L. These are the two costs which will sit in P&L.
Any expected loss contribution we are expecting this year, or let us say for this quarter, how much would have been the contribution?
Right now, you can see that around INR 3 crore- INR 4 crore is the branding cost in this quarter and around INR 1.5 crore is the employee cost that is sitting in the P&L, which you can factor for pipes and Prince Bathware separately.
Okay. And the revenues for Prince Bathware?
Revenues, like I said, for the earlier question, we will start reporting from December quarter because in September quarter we had just started our rollout. It is just the initial sales that have gone. I think in the next three months the focus will be on setting up distribution. From December quarter we would share the segmental revenues for Prince Bathware as well. We would be targeting INR 8 crore of sales for Prince Bathware in the December quarter.
Okay. Last question. How much is the contribution of infra pipes as a percentage of volume this quarter?
Kaustubh Gola will get in touch with you after the call to share the specifics. I will not have that on hand.
Okay. Thanks a lot.
Thank you. A reminder to all the participants, if you wish to ask a question, you may press star and one on your touchtone telephone. We take the next question from the line of Pritesh Chheda from Lucky Investments . Please go ahead, sir.
Yeah, hi there. I have a question slightly on the longer side. What is your opinion on these composite pipes, which is basically polymer aluminum polymer or polymer steel polymer, as an option, where polymer aluminum polymer has evolved and has done some business in India. Can they make CPVC eventually a redundant pipe eventually? Because it is quite unique that it is India where PVC-based piping solutions are prominent, but globally it is a different polymer and then there are these composite pipes.
Globally, if you think, there is one is composite, which is still not a very large market globally. You have PPR, which is globally even accepted, in which we are market leaders in India, and we are seeing an acceptance of PPR growing apart from its usual base. It is still very small. Developers today are looking for options outside of CPVC as well, as they are trying to upgrade their homes. I think average Indian consumer today, as disposable incomes increase, I think end user also is becoming more product conscious, more brand conscious for a product which is behind the wall. I do not think it is specifically about composite pipes or not. It is about what alternate or what next after CPVC, if that is the question.
I think CPVC will continue to have the lion's share of the market, even on a five-year to 10-year horizon, because of the ease of application as well as the cost structure. However, you will see certain niche polymers like PPR or composite pipes coming in, but I do not foresee it being more than 3%-5% of the overall CPVC market. We will invest in those kind of products because that helps us build a very strong brand identity and a first-mover advantage. The way we have done for PP low noise, where we are upgrading SWR drainage systems from PVC to PP. Similarly, we will upgrade water supply systems as well. But I do not foresee it to be a very large volume or top-line driver.
You mean to say that PPR plus composites will just be 5% of the market eventually?
Yeah.
Or individually 5%? 5% PPR, 5% composite.
No, I think put together around 5% is what I see.
Does your existing infrastructure and machinery, which makes the CPVC pipes can make the PPR pipe or you need a completely different manufacturing setup?
It is completely different.
You already have it.
It is a completely different setup. We have been in PPR for multiple decades now, so we have capacity. We process more than 400 tons or 500 tons every month of PPR. We have been in this industry as market leaders since a couple of decades now. So we dedicated capacity for pipes and fittings of PPR. We progress and as and when the demand supply permits us, we will be adding capacity as required.
Any specific comment on PSP, where when you put steel in between the two layers of polymer, the pricing also becomes competitive because steel is INR 50-INR 60 a kg versus polymer at INR 80-INR 100. So you get the strength of a steel and a life of a polymer which can compete straight away with CPVC. Any specific comments there, or it is too early to say?
As a product, it's in a nascent state, but as a market leader, it's very important for us to be ahead of the curve with these kind of technologies. As far as cost structure is concerned, I think with composite pipes, the cost structure becomes 2x- 3x per bathroom. The builder, the way he looks at piping cost is on a per bathroom basis. If you replace CPVC with composite, I think the cost per bathroom will not increase from a percentage point of view, but it will increase 2x- 3x . There is a market for it, but it's not going to become a commodity. Even in the long term, I see this as a niche, where more applications would be in bungalows, villas, maybe hotels, but your traditional high-rise buildings will continue to be in PVC and CPVC.
Okay. Thank you very much. Just one question I didn't get your answer. Why was your volume growth relatively lower than the industry for the last two, three quarters now?
Like I said, the fundamentals don't change. We continue to be aggressive on distribution, branding, entry into projects. There's no one or two particular reasons. We don't want to shy away from the numbers. Let the numbers speak for themselves that we have been lagging industry growth. There is no one or two reasons for it. But we are confident that we will be back to industry-leading growth or at least in line with peers. One of the corrective actions that we have taken is investing in capacity in HDPE, where we feel that we have been lagging. That will be reflecting in our volumes from the fourth quarter. Certain pricing actions as well that we have taken in the current quarter, which should help us realign our growth performance.
Pricing action means you are way off in terms of pricing vis-à-vis your peers in terms of premium or discount premium to peers. That's the thought or?
Yeah, we feel that in certain markets, as a premiumization drive that we undertook two or three years ago, in certain markets maybe we have over-premiumized. So we are correcting that to be aligned with our peers. I do not want to put this all down to pricing. I think pricing is just one aspect. But we need to be sharper and more aggressive with this, and I am confident that overall, apart from pricing, there is a lot of other factors apart from pricing that go into growth. This is not purely a commodity business. I am confident that in the next couple of quarters, our growth will come back to industry-leading growth.
Okay. Thank you very much, and all the best to you. Thank you.
Thank you.
Thank you. The next question is from the line of Hitarth Kapadia from Valuequest Investments. Please go ahead, sir.
Hi. Thanks for the opportunity. I have a couple of questions. My first question is, how has your CPVC performance been so far, and what percentage of volumes come from CPVC now?
We share a revenue breakup, not a volume breakup. CPVC would be around 20%-25% of revenue.
20%-25%. Okay.
Of revenue.
Okay, of revenue. What is the outlook on the working capital days as of now?
Right now, our debtors is at 63 days, and we are using channel finance as a lever as well as a trade policy we are reviewing wherever possible. We are trying to bring it down to around 50s in next two quarters, and then we see further downside is possible. By next year, we see that mid-40s should be the sustainable time period.
Mid-40s by next year. Okay. Any guidance on margins?
Just to clarify, mid-40s is the guidance for debtor days.
For debtor days. I got that.
Inventory and creditors will be a function of your procurement pattern. You are seeing right now creditors reduced because we are depending more on local times, which could be the trend for the next couple of months.
Local in terms of your resin?
Yeah.
Okay.
Local materials like Reliance Industries and DCW.
Okay. Is there any guidance on margin that you would like to give?
I think we will stick to 12%-14% on a long-term basis.
Okay. Thank you.
Thank you.
Thank you. A reminder to all the participants, just request to use your handsets while asking a question. We take the next question from the line of Akash Shah from UTI Mutual Fund. Please go ahead, sir.
Yeah. Hello. Hi. Am I audible?
Yes.
Yeah. Hi, thank you very much for the opportunity. So I had a few questions. One was on CPVC anti-dumping duty. So in fiscal year, in August or Hello?
Please go ahead.
Yeah. In August or September, the anti-dumping duty will get over. Any thoughts whether it will get renewed or it may not come up for renewal?
I think it is tough to comment on these kind of things where the government is the decision maker. There are two parts to it. As local capacities increase, definitely there is a better case for protecting the local capacities, the domestic manufacturers. We are seeing domestic manufacturers increase capacity, as well as our partner Lubrizol is putting up capacity in Gujarat. As the capacity locally increase, I think that builds an an even stronger case for anti-dumping duty. Having said that, the lower the cost of CPVC, the better the growth. We cannot really speculate on what will happen with the government, but if capacity is increasing, the case for duties will be even stronger.
Sure. Thank you. Just coming to agri, non-agri mix, if you can share what was the mix in this quarter, and how was the growth on a year-over-year basis?
I do not want to give too much on segmental growth because of competitive intensity. What I can say is Q2 is usually not very heavy on agri. The agri season is stronger in the March quarter as well as the June quarter. Typically, the September and December quarters are not as strong in agri because, as you know, agri is a seasonal business, versus plumbing and SWR, which is more of a perennial uniform business. Most of the growth has been driven by the building material segment in the September quarter.
Sure. Coming to industrial pipes, we had tie-up with Lubrizol. Hello?
Please go ahead.
Yeah, sorry. We had tie-up with Lubrizol, and we had launched pipes for industrial application using Corzan technology. Any thoughts, or anything that you can share on this front? How are we doing? Yeah.
Currently, this is a segment which excites us because of the lower competitive intensity, higher barriers to entry in terms of access to technology and investing capital for a specific niche purpose. Today we see ourselves as someone who replaces conventional products like MS and RCC. The way we have been able to create value in PVC, similarly, we want to do that with industrial CPVC as well. Currently, we are in the concept selling stage, so these kind of orders take an even higher gestation period than plumbing because a lot of concept selling has to be done. When you have to replace metal with plastic, in India, unfortunately, that mental perception is still very high.
I think next couple of quarters at least, we have to still invest into interacting with stakeholders, creating awareness about these kind of products, and then working on specifications, and then generating sales. It is a long process, but we enjoy that process because eventually then that gives us a very strong first-mover advantage and brand equity. We have seen that entire cycle play out with PVC, where the first couple of years, we were virtually working at very low capacity utilization. But we focused on concept selling, we focused on nurturing the market, and now PVC has become a very well-accepted product, and Prince today is recognized as a market leader in that space. Similarly, we are wanting to play out that process for industrial CPVC, and the important thing is that this will not end at industrial CPVC.
We will keep looking for newer opportunities, newer products. We are not in a hurry. Depth is more important than breadth. Whichever product we take, we will really give it a lot of mind share and time and efforts and investment in terms of people as well as branding, as well as capacities.
Sure. Sir, if you can share, what is the investment that we have done in this segment? Have we invested in capacity?
Yeah, we have invested INR 8-INR 10 crore.
Okay, sure. Over long-term, this segment would remain a niche or do you feel that this may contribute to a larger percentage of the top line?
Globally, this is very well accepted and has become more than just a niche, but these cycles take very long. It is not a question of two to three years, it is a question of five to seven years before this becomes more than just a niche. But at least in the next three to five years, we see a good level of concept selling that we can do.
Sure. Just last question, new applications of plastic pipes. Just wanted to check, how are we doing on, let us say, fire-related, I mean, the pipes which are fire retardant. Let us say any other new application that you would like to highlight with respect to plastic pipes? Yeah.
Specifically, we have entered into the low noise, drainage and sewage systems, with polypropylene, which is noise canceling, which also has better impact resistance compared to PVC. We have tied up with Ostendorf, which is now a global market leader for polypropylene drainage from Germany. Similarly for surface drainage, we have partnered with Hauraton for surface drainage products where we will replace RCC surface drainage to PP surface drainage. These products are also made of 100% recycled polypropylene. We are seeing today builders becoming more and more green conscious and looking out for these kind of products. With these kind of products, revenue is not the only metric that we need to see. We need to see the kind of brand equity that it helps us create.
A first-mover advantage, something unique that we are able to offer to the end users that our peers have not. In the long term, the gross margins are really exciting when we will start in-house manufacturing for both these products, the way we have started in-house manufacturing for industrial CPVC as well. In the long term, a lot of value can be created, especially at the gross margin level. This will somewhere help us become more competitive in our core products as well. That diversification within piping also helps us become more competitive in our core segments.
Sure. Thank you very much and all the best. Thank you.
Thanks.
Thank you. We take the next question from the line of Arun Baid from ICICI Securities. Please go ahead, sir.
Yeah. Hi, Nihar. You mentioned that going forward, we would at least be industry standard kind of growth. A lot of our peers are talking of at least 15% CAGR growth over the next two to three years. Are we trying to say that we will match that number, if not more?
I think we have to look forward. H1, of course, at least Q1 was majorly disrupted by ERP. Whatever I am talking about is from December quarter onwards, we need to be in line with peers. I want to be as transparent as possible and take this question head-on that, yes, the volume growth has not been in line with peers in the not only past quarter, but past couple of quarters. Certain corrective actions that we have taken, which we have shared in the earlier answers. Now the numbers need to talk rather than us guiding for any kind of growth. I think the actions have to speak louder than words. We are used to that internally as an organization in terms of having the highest growth in the industry.
Rather than us talking, I think the numbers need to do the hard talking, and we are confident that is going to happen.
Just one thing, last quarter, we had some issue with regards to fitting sales. Is that sorted out?
Yeah. That is normalized in the September quarter and that is reflected in our-
Numbers
Numbers, yes.
Thanks for this. Thanks.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your question to two per participant. Should you have a follow-up question, we request you to rejoin the question queue. The next question is from the line of Sneha Talreja from Edelweiss. Please go ahead.
Hi. Good morning, sir. Am I audible?
Yes.
Hi. Thanks for the opportunity and congrats on good margin improvement. Just starting with the first question, sir. While you have answered the market share loss related question, just wanted to understand where is this margin growth coming from?
Sneha, one is our pipe fitting normalized. Am I audible?
Yes, you are.
May I request you to go on mute? I think there is some. The question was on the margin performance. One is pipe fitting ratio is normalized from the first quarter onwards, which led to a normalization in margins. Second, there was the inventory gain, but which was not material. It was less than INR 5 crore of inventory gain. But mainly it is the normalization of pipe fitting ratio as well as the product mix in Q2 is always going to be higher from the building material segment. But overall, I will still stick to my guidance of 12%-14% operating margin is sustainable in the long run.
But given that now your volumes in Q3 and Q4 are going to be even better, don't you think with operating leverage coming in, this is really a conservative guidance?
Yeah, but like I also said earlier in the call that we have taken some pricing action as well in certain segments. Whether the operating leverage fully offsets that or partly offsets that is something to be seen. I would much rather have 12%-14% operating margin and growth which is leading in the industry. That is what.
Sorry to interrupt, Sneha. Are you on a headset, ma'am?
Yes, I am.
May I request you please switch to your handset?
Is this better?
Yes, please.
Yeah. Secondly, just wanted to understand from you, Sneha, where are we in terms of our HDPE at this point of time? What is the contribution from there, and what is the outlook like? Are you now focusing more on that particular segment, or you would still want to stay away given it is a low margin business, and higher working capital requirements as well?
One is, we will participate in HDPE only if the working capital is similar, because it does not make sense to stretch our balance sheet while we are tightening our balance sheet on the core portfolio. We do see the value in participating in HDPE. I do not mind if the margins are lower, but the credit cycle should be tight, which we are seeing as the government is increasing focus on infrastructure. I think these programs are more funded and well-capitalized. There are certain investments that we have made in HDPE. This has been one of the reasons that we have lagged industry growth. One of the reasons, not the only reason. That investment has been done in the September quarter, and this will start reflecting in the volume performance from the March quarter, specifically from HDPE.
Today, currently, we would be hardly anything in this particular scheme of things as a percentage of our overall volumes or revenue?
Yeah, it would be less than 3% in terms of volume.
With this new capacity coming up, what is the vision? Where does this go?
This should be closer to 7%-8%.
Understood. Lastly, in case you can just let us know what is the reason for working capital increase in this.
Sneha, you cut out. I think the question was on, am I audible?
Yes, sir.
I think the question was on the working capital increase. Majorly, the payables has reduced because sourcing has been more focused on domestic, where it works on advanced payment or a cash and carry payment, which has led to pressure on the payables. This may continue for the next couple of months. I think on the debtors side, Anand has already guided on our short-term and medium-term goals for debtors.
Sir, the line for the current question, Sn eha , is disconnected. We take the next question from the line of Achal Lohade from JM Financial. Please go ahead, sir.
Yeah. Good morning, team. Thank you for the opportunity. My question is, sorry, I joined the call a little late. If it is answered, if you could repeat once again. In terms of the capacities where we are, where competition is adding, do you see an issue with respect to the geographical capacity footprint creating a disadvantage and what kind of could that be with respect to the trade part of it?
Four years, we have added capacity in Jaitapur, which helps us cater to the North and West, and Telangana in 2021, which helps us cater to South and partly to the Southeast markets like Chhattisgarh and Odisha as well. We feel that the manufacturing footprint is actually our strength. And with our next greenfield project coming up in Bihar, which will cater to the entire Eastern market. With the kind of capacity addition we have done, not only in terms of numbers, but also in terms of the strategic location, I think we are well-positioned for the future. And we will be adding capacities aggressively in Bihar after the first phase as well. I can say on a long-term vision, five years from today, Bihar will be one of the largest manufacturing facilities for the organization. That's how we feel.
Basically, Nihar, if I understand correctly, there is no disadvantage you see with respect to our manufacturing locations vis-à-vis the competition. Have I understood right?
Correct.
Okay. The second question I had was with respect to the CPVC segment. We understand that the CPVC prices have kind of cooled off. Has that been the case with us as well? And with respect to secondly, the disadvantage of what we had in terms of the cost earlier, has that gone away completely or it's still there?
Achal, can you repeat your question? There was some disturbance.
Sorry to interrupt you, sir. Achal Lohade, sir, are you on a headset? If you are on a headset, I would request you switch to your handset, sir.
Yeah. Is it better, ma'am? Is it better?
Yes. Please go on.
Okay. The question is pertaining to CPVC segment. You know, A, we see that CPVC resin prices have come off in last few months. Is that the case with us for our source? And B, earlier we had some disadvantage with respect to the cost, CPVC sourcing cost. Has that normalized or is there a still gap between us and the peers in terms of the sourcing cost?
Costs have come down. As PVC costs came down aggressively, CPVC was bound to come down because CPVC is a derivative of PVC at the end of the day. As a result of which you have seen some destocking in the channel for CPVC as well. To answer the second part of your question, no, I do not think there is a further disadvantage. The kind of premium that we are paying to Lubrizol is similar. Of course, the base changes, but the delta relative to the market continues to stay the same.
Thanks. I will come back in the queue for follow-up. Thank you.
Thank you.
Thank you, sir. The next question is from the line of Udit Gajiwala from YES Securities. Please go ahead, sir.
Yeah. Hi, sir. Major questions have been answered. Just on volume front, if you can give any specific number, what kind of growth are you looking for 2024, maybe this specific year and of course medium term, do you stick to that 14%-15% CAGR that you have already mentioned, but anything specifically for this year?
Yeah. I think, like I have said earlier on in the call, we do recognize and we want to be fully transparent and acknowledge that volume growth has not been where it should be relative to the peers. We are used to industry-leading growth. There have been certain corrective actions taken on pricing, as well as certain investments in HDPE. I want to stay away from sort of guidances at this point. I think the action should speak louder than words, and we are confident that growth will be there and it will be in line with the industry. Certain corrective actions have been taken, and we are hungry and we are confident, and we are putting up capacities aggressively with that belief.
Understood. And sir, lastly, on your EBITDA per kg or the margins like you guide. With the price corrective actions that you have mentioned, do you see that these margins could suppress for next, say, couple of quarters or one quarter or so? Because your resin prices have also come down sharply this quarter.
Yeah. I think rather than talking quarter on. See, quarter on quarter could always go up and down based raw material prices. But I will stick to long-term guidance of 12%-14%. I am confident, which includes the investments in Prince Bathware and the kind of corrective action we have taken in pricing. Hopefully, the operating leverage from the growth and the cost absorption should at least partially offset pricing action. It will take a couple of quarters. It will not happen overnight. But I will stick to long-term guidance of 12%-14%.
Sure. Lastly, on your bathware business, can you give any number in terms of what kind of dealers are you looking to end this fiscal at, and what are the plans for next two, three years? What number do you want to look at?
This has been just the first quarter of launch. Our focus right now is on distributors. I think number of distributors again is not as important. It's the same philosophy that we use for Prince Pipes. It's the markets that we are able to do and the quality distributors. You will have to give me at least one quarter before we quantify target number of dealers. Our target for December quarter for Prince Bathware is INR 8 crore of sales.
Understood. Thank you, and all the best.
Thank you.
Thank you, sir. The next question is from the line of Rajesh Ravi from HDFC Securities. Please go ahead, sir. Mr. Rajesh, the line is open.
Am I audible?
Yes, sir.
Sir, first question pertains to your capacity breakup, which you shared this quarter. There has been major changes in the capacities. Any specific reason your Athal fittings capacity number has been scaled down and similarly, there is a sharp increase in the Haridwar capacity. Could you explain what is changes? Even Tamil Nadu capacity has been down by 20%.
Ravi, the overall capacity right now is around 3.28.
Chennai has gone down because of we have not replaced the NPM machine over there because in the region we have Sangareddy. For that reason, the NP has gone down. We have not replaced. That is for Chennai. Haridwar has added some capacity. In net, there is only 5,000-6,000 KT which has been added in the quarter.
Okay. Mm-hmm.
Yeah. That is how the split is. But yes, you are right. In some of the plants, the capacity has increased, in some of the plants capacity has gone down.
Based on the requirement of the organization.
Okay. Second question pertains to CPVC. You mentioned that [inaudible] of your revenue is from CPVC.
Thank you.
Correct.
We take the next question from the line of Jenish Karia from Antique Stock Broking. Please go ahead.
Yes, thank you for the opportunity. My question is on the CapEx guiding. Last quarter, we guided for INR 100 crore CapEx for fiscal year 2024. In first half, I think we have already spent INR 85 crore. Is there any revision in CapEx guidance?
In the first half CapEx, there are two abnormal items which are not the regular ones, which needs to be excluded while reviewing the overall CapEx for the plants. One is the Ruby number, which needs to be excluded, and the other is the Bihar, which needs to be separately tracked. INR 78 crore is Bihar right now, which will scale up in coming quarters. That is how you have to exclude these two things for normalized spend on normal plant operations.
If you can please quantify these two exceptional spends and how should we look at the full year CapEx number?
Yeah. Right now we are at INR 50 for normal, which we have guided for INR 80-INR 100.
Okay. Bihar plant total CapEx will be over the next two years, 2024 and 2025?
It will be around INR 150 crore. Phase two is also lined up, which will come subsequent to phase one. We are just evaluating how to go forward with it. But right now INR 150 crore is something which we are going ahead with.
Understood. Sir, if you can give utilization on total level and Telangana facility.
Utilization at current level is around 50%, and Telangana would be around 40% of capacity utilization.
Okay. That's helpful. Thank you, Nihar.
Thank you.
Thank you, sir. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi. Thanks for the opportunity. A couple of questions. First, on your just wanted to have your thoughts on the retention policy from the top management. We had a few exodus at the top recently. Any learnings from that and any retention policy? That's the first question. Thank you.
Yeah. No, I think there is no specific retention policy as such which is over and above the regular policies. As we mentioned in the earlier remarks, Anand, who has been Deputy Chief Financial Officer with us for some time, now is upgraded to the Chief Financial Officer position. The new Chief Human Resources Officer also has joined. We believe now that with these changes in the leadership, we are better geared for the future for the kind of vision that we have to take the organization, not only in terms of market and growth, but also in terms of organizational identity. That is where we are.
Will we be looking for some ease of policy, anything on the retention side, or we will continue a status quo?
We already had an ease of policy in place a few years ago. As of now, that is the status quo.
Okay. My second question was more on the operational side. If you look at the realization per kg, what we see for Prince Pipes, it has the least reduction on a year-on-year basis at 4% versus the larger peers wherein the reduction is pretty sharp, which is at 8% and 10%. Just wanted to understand, we have done pretty well on the price decline as compared to the peers. Can you give some flavor on the product mix? Was it less government sales, less HDPE, or there was a contribution from Prince Bathware? How should we understand it?
I think bathware contribution, it is too early to put that in here. You are right. I think this is not majorly a function only of price. It is also a function of product mix. For us, Q2 is not very heavy in agri. Also, like I said, we have been laggards in the HDPE space which is a low realization product, which will eventually drag down the margins at the organizational level. Today, it is not a very relevant capacity. In terms of volumes, it is maybe only 3%-4%. This will scale up from March quarter. Also, there has been some pricing action that we have taken in the core segments of PVC, CPVC which should hopefully help us realign our volume growth.
Is it possible to give some color on the mix? Was CPVC higher or was fitting substantially higher on a year-on-year basis? Just trying to understand the operating metric.
Fittings normalized from quarter two onwards. In quarter one, we did have some challenges for the fitting dispatches, which impacted our product mix. In quarter two, our pipe fitting ratio normalized and overall building material also had a better contribution relative to irrigation.
Sure.
Just to my long-term margin guidance of 12%-14% on a long term is attainable on a long-term basis.
Sure. Just last question, I think the other Jaitapur family also uses the brand Prince. I understand they are coming up with sizable capacities and which is due for commissioning. Is the brand logo, are the rights with the company or how should we look at it in the marketplace? Because there could be some scope of confusion between the two logos. What's the roadmap to actually address this? That's all. Thank you so much.
Yeah. The logo is completely different, and it has been like that for many years, and that completely is with the company, with Prince Pipes. A differentiated logo and name. I think now that the gap is too big and that activity is very volatile. In certain quarters it's there, in certain quarters it's not there. So I think the gap has become too big and now the market appreciates the range, the quality, the newer product. So today, Prince Pipes has a very strong brand identity, it's a very different scenario than what it was five years ago.
Sure. This is helpful. Thank you so much. Wish you all the very best. Thank you.
Thank you. We'll take the next question from the line of Keshav Lahoti from HDFC Securities. Please go ahead, sir.
Hi. Thank you for the opportunity. In your goal, you spoke about you are taking some sort of price correction. Can you give some sense, is it all across market? Is it specific to some market? What sort of correction you have taken?
Some of the corrections we have taken, some we are about to take. This is in certain markets, not pan-India. Wherever we feel that we need to be more competitive, in certain markets, in certain categories, this pricing action has been taken.
Understood. At company level, the impact would be 1% or 2%?
I will stick to my long-term guidance of 12%-14% of operating margin on an annual basis is achievable. Of course, for the current year, it will be ex of Q1 because of the challenges in the first quarter. But even for the next couple of years, I think 12%-14% annual EBITDA margin are sustainable, including the pricing action, because with that there will also be volume growth and resultant operating leverage benefits, which could partially offset this at the EBITDA level.
Understood. You said that your domestic sourcing has increased. My understanding was earlier you were taking 40% from domestic. So whether that mix is going to change on permanent basis?
Yes. This happens annually, the annual contract that we have to do with Reliance Industries and Chemplast Sanmar. So at the beginning of this year, we had increased our domestic contracts on an annual basis. So that will be permanent. It was maybe not reflected in Q1 because we were not normalized as an organization, but that's reflected from Q2 because we have increased our volume offtake. As we grow and as the overall environment becomes more uncertain, I think it's always prudent for us to increase local and domestic offtake. So we will continue to import and will continue to be a sizable share. But given the way we are growing, I think we decided at the beginning of the financial year itself that we would be increasing our domestic volume. Even the local players were keen to work with us, seeing the way we are growing across geographies.
Okay. Is it the proper understanding now your raw material sourcing will be 50% domestic and 50% imported?
For pipes, for PVC pipes, yes.
Yeah. Okay. One last question. Each CapEx of INR 150 crore, how will that be split?
It will be, you can take INR 60 crore- INR 70 crore in this year, and the balance will be in fiscal year 2025.
Okay, got it. This year total CapEx will be INR 150 crore- INR 160 crore?
Including Bihar, yes.
INR 150 crore-INR 160 crore including this year CapEx, right?
Yes.
Okay. Got it. Thank you. That is it from my side.
Thank you, sir. A reminder to all the participants, if you wish to ask a question, you may press star and one on your touchtone telephone. The next question is from the line of Nikhil Agrawal from VT Capital. Please go ahead, sir.
Good afternoon, sir, and thank you for the opportunity. Sir, my question was on the Grasim plant that is coming up. Will they be supplying only to you and Ashirvad, or will they be supplying to other players as well, the CPVC compounds?
Historically, if you see Ashirvad has-- Lubrizol has always had two licensees. As long as we are growing and we are able to fulfill our volume offtake, which we are, I do not see the need. Historically, if you see, they have always maintained two licensees because opening up the market may end up diluting the FlowGuard brand. We believe that it will still be a two-licensee approach.
Okay. Won't that really put you on an advantage compared to the other players?
Absolutely. This was one of our incentive to sign with Lubrizol when they had approached us a few years ago. There have been some delays, unfortunately. We still believe that once the plant is operational, we will be on a strong footing because local capacity, local cost structure with the FlowGuard brand will put us in a dominant position, especially for CPVC.
All right. The plant is expected to commence from 2025, right? If I am not wrong.
Correct.
All right. And, sir, any reason why your employee benefit expenses have increased during the quarter?
It is a normal increment which has happened in the increment cycle. That is one. And the provisioning of directors' commission is also there, which was not there last year because of the subdued performance. That is the two reasons you will find the difference.
Okay. Do we expect this kind of employee expenses going forward as well or any reductions?
It is a normal increment cycle which has happened and affected in the cost of employees.
All right. Got it, sir. That's it from me. Thank you so much.
Thank you, sir. The next question is from the line of Akash Shah from UTI Mutual Fund. Please go ahead.
Yeah, hi. Thank you very much for the follow-up opportunity. I just had one question. After taking the pricing action, if you can share, how much will our products be at a premium or discount to industry leaders?
It will be at a parity to the industry leader.
Sure. It would be for both PVC and CPVC, right?
In CPVC, there would be a slight discount to the industry leader in CPVC. In PVC, it would be at a parity.
Sure. Okay. Thanks.
Thank you. Next question from the line of Mr. Rajesh Ravi from HDFC Securities. Please go ahead.
Yeah. Hi, sir. On this Lubrizol new plant coming up, you mentioned that you and Ashirvad would be selling almost all of the CPVC from that factory. If I look at your current volumes, it would be close to, just ballpark, 160,000 volumes in fiscal year 2023, assuming 10%-12% of that would be coming in from CPVC. So it is around 13,000 tons-16,000 tons of volumes. This plant would be how much? 110,000 tons something?
First phase is 48,000 tons.
48,000 tons. Are you saying that even if you get 30%-40% of that incremental volumes, you see your CPVC portfolio significantly increasing over the next few years?
Yeah, it has to. It has to grow aggressively.
Mm-hmm. Okay. Do you see any risk with the CPVC, your Lubrizol capacity, made money capacity, and DCW all venturing into CPVC manufacturing domestically, and these two players supplying to even many other smaller players. This CPVC, the high margins the CPVC market is enjoying, that may come under pressure?
No, I think it is great news that there is local capacity coming in.
That will lead to growth of CPVC because we are today 95% dependent on import.
Correct
CPVC industry, that is not sustainable. If the CPVC industry has to grow the way PVC did over the past three, four decades, CPVC needs to have local capacity. Only then will CPVC become affordable, and only then CPVC will grow. Unless there is growth, there is no point of having very high margins. CPVC is a very different industry. It is much more brand conscious at the front end, where top four of us are controlling 70%, 80% of the market. I do not see that changing substantially, while having local capacity will really open up the acceptability of CPVC and growth of CPVC. I see this as a major positive.
Correct. You don't see that the margins, which is 2x currently of normal PVC margins, with more supply coming in of the CPVC market growing at a faster pace, you don't see a risk to the margin profile coming off significantly?
Yeah, what I'm trying to say is it will be more than offset by the growth. The growth will more than offset that.
Okay
Which is why we should see this as a net positive.
Correct. At industry level, this will be overall strong volume with slightly lower margin, but overall, the margin should narrow compared to where they are currently. Is my understanding correct?
Over the long term.
Over the long term, obviously, next three to four years.
Yeah.
Okay. Great, sir. That's all from my end. Thank you.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.
Yep. Thank you, everyone, for joining the call.