Apollo Pipes Ltd (APOLLOPIPE) Q2 FY23 Earnings Concall Transcript

Apollo Pipes Ltd (NSE:APOLLOPIPE) Q2 2023 Earnings Conference Call dated Nov. 14, 2022

Corporate Participants:

Sameer Gupta — Managing Director

Ajay Kumar Jain — Chief Financial Officer

Anubhav Gupta — Chief Strategy Officer

Analysts:

Udit Gajiwala — YES SECURITIES — Analyst

Aman Agarwal — Equitas Capital — Analyst

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Jenish Karia — Antique Stock Broking Limited — Analyst

Behzad Kalantary — Stallion Asset — Analyst

Dushyant Mishra — SageOne — Analyst

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Vijay Chouhan — Right Horizons — Analyst

Dhananjai Bagrodia — ASK Group — Analyst

Presentation:

Operator

Good day ladies and gentleman and welcome to the Q2 FY23 Earnings Conference Call of Apollo Pipes Limited, hosted by YES 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. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Udit Gajiwala from YES SECURITIES. Thank you and over to you, sir.

Udit Gajiwala — YES SECURITIES — Analyst

Yeah. Thank you, Michelle. Good afternoon, everyone. On behalf of YES SECURITIES, I welcome you all on the Q2 FY23 earnings conference call of Apollo Pipes Limited. From the management side we have with us today Mr. Sameer Gupta, Managing Director; Mr. Ajay Kumar Jain, the Chief Financial Officer and Mr. Anubhav Gupta, Group Chief Strategy Officer.

We start the call with a brief opening remarks from the management side and then open the floor for Q&A session. Thank you and over to you, sir.

Sameer Gupta — Managing Director

Thank you. Good afternoon, everyone. And thank you for joining us on our Q2 FY23 earnings call to discuss the operating and financial performance. I am sure you all had the opportunity to go through our results presentation, which provides details of our operational and financial performance for the second quarter ended September 30, 2022. As you all know, the PVC industry is witnessing the carnage. The resin prices collapsed 25% in Q2 and 12% in Q3 till date. This is after the fact that the prices crashed almost 35% from their peak till 30th June 2022. We have not seen such situation in our history. What it did was that it created a panic in the industry. The traders and distributors went into marketing stocking mode to prevent stock losses. In such circumstances, we were working on three-point strategy, prevent a pool of buyers from inventory writedowns to the extent possible; second, boost volume to continue market share gain; and third, to increase share of value-added products to boost margins. Only silver lining was the underlying demand, which has been strong enough for us to report 15,465 metric tons second highest quarterly volume number ever.

The current PVC pipe levels are way below pre-COVID levels given the fact that dollar has appreciated by 15% in last two years. This suggests that correction may be [Indecipherable] soon from here on. This should instill confidence in our channel partners, which will lift volumes in coming quarters.

Another data point I want to share is that in seven months so far, we have maintained sales volume run rate of 5000 metric tons per month. It suggests that 20% YoY growth for the current fiscal year. So I would like to appreciate the efforts put by the team Apollo for achieving such growth in the worst of the times. We continued to hold minimum inventory levels to avoid stock losses. At the same time we have to improve our share of value-added products such as HDPE, CPVC pipes and fittings, bath fittings, etc. We are continuing with our capex program. As planned earlier, we spent INR37 crores in quarter one and INR8 crores in quarter two to meet our full year capex guidance of INR60 crores [Phonetic]. I would like to remind that every — remind everyone that this ongoing capex is majorly for a greenfield plant which is 100% dedicated towards value-added products. We expect the new production to start in FY ’24 which will help us to meet our revenue targets of 25% CAGR.

To conclude, I would like to state that these are most of times out industry has ever seen. The moment there is some respite in PVC pricing the channel will see massive restocking which will lift our sales to significantly higher levels with sharp recovery in profitability. Till then we are holding our foot through market share gains that is growing at an exponential rate.

Now I would like to invite Mr. Ajay Jain to run you through the key financial highlights for this quarter ending June 30, 2022. Thank you.

Ajay Kumar Jain — Chief Financial Officer

Good afternoon, everyone. I will briefly cover the financial performance during the quarter and half year ended September 30, 2022. The Company delivered a strong operational performance during the quarter. However, financials got impacted due to lower realization and higher input costs. Sales volume for the quarter stood at 15,465 metric tons, reporting a growth of 7% as against 14,518 metric tons in Q2 FY22. Sales volume for H1 FY23 stood at 29,871 metric tons as against 24,920 metric tons, up by 20%.

Volume from operations for the quarter stood at INR207.0 crores as against INR208.02 crores in the Q2 FY22 lower by 1% YoY. In H1 FY23, half year revenue from operations stood at INR425.9 crores as against INR345.8 [Phonetic] crores, up by 23%.

On the profitability front, EBITDA for the quarter declined to INR2.5 crores versus INR26 crores in Q2 FY22. EBITDA for H1 FY22-23 stood at INR22.5 crores as against INR43.4 crores, lower by 48% YoY. Margins for the half year ended September 30, 2022 stood at 5.3% where compared to 12.5% in the corresponding period last year, lower by 726 BPs.

Going forward, we anticipate EBITDA margins to be stabilized. During the quarter, we witnessed a sharp increase in rising raw material costs. Deposition costs stood at INR7 crores in Q2 FY23 as against INR6.2 crores in Q2 FY22. Financial cost was higher by INR1.5 crores during Q2. The Company booked a net loss of INR4.8 crores for the quarter compared to a profit of INR14.1 crores.

In Q2 FY22 net profit for H1 FY23 stood at INR4 crores as against INR22.8 crores in H1 FY22. Net margins during the period stood at 0.9% as compared to 6.6% in FY22, lower by 565 BPs.

On the balance sheet front, our net debt position stood at INR45.6 crores and our annual capacity increased by 6,000 tons to one 1,31,200 metric tons during this period. Capex during the period was largely funded from internal cash flows. On the working capital front, our continuous endeavor improved our overall working capital cycle to 66 days in H1 FY23 against 73 days in H1 FY22.

With this I would now request the moderator to open the forum for any questions or suggestions that you may have. Thank you.

Questions and Answers:

Operator

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Aman Agarwal from Equitas Capital. Please go ahead.

Aman Agarwal — Equitas Capital — Analyst

Yeah. Thank you for the opportunity. Sir, two questions from our side. Firstly, [Indecipherable] on the magnitude of inventory losses that would have existed for the quarter?

Anubhav Gupta — Chief Strategy Officer

Hi, Aman. Good afternoon. This is Anubhav here.

Aman Agarwal — Equitas Capital — Analyst

Yeah. Hi, Anubhav.

Anubhav Gupta — Chief Strategy Officer

See I mean, if you look at — if you look at our quarterly revenue, which was around INR210 crores on a manufacturing level, we did make EBITA spreads of like 12% to 13%, okay. And of course, because of falling prices, because of destocking the channel, we had to push materials on some extra discount, etc. we gave to our channel partners, right. So let’s say we did 10% EBITDA margin at operating level and what we reported is 1.5%, 2%. Right? So that balance will be inventory right down. So this could be the tune of like INR15 crores to INR20 crores and that should be what it is.

Aman Agarwal — Equitas Capital — Analyst

Okay. And that would also include the incentive impact that we have passed on to the dealers as well, right?

Anubhav Gupta — Chief Strategy Officer

I mean some discounts, some discounts, right. When dealers are not ready to stock material right then you have to push your material, right, and some discount, some sweeteners, go into their kitty. So like we were working on a normalized EBITDA level of say 12%, 13%. Then some extra discounts, which brought down our operating EBITDA to 10% and rest is inventory write-down.

Aman Agarwal — Equitas Capital — Analyst

Got it. Got it. And secondly, just like to know about consumer sentiment shaping up, especially for the agri side of demand since we are [Indecipherable] approaching the good demand season for the agri segment. So how is the sentiments shaping up for that segment?

Sameer Gupta — Managing Director

So, agri demand has been strong for two reasons. One that monsoon has been on expected lines in India this year, right, so that has kept degree demand up. Second as prices are falling right, so this makes price more affordable for farmers, right, for people-related in the agricultural sector and this has been good factor for organized players who are dealing into high grade PVC pipes. So yes demand from agri is there, but glad to share that demand from the building material side has also been strong, right. I mean in first half, our volumes are up 20% YoY, right. Even in Q2 we could grow our volume by 6%, 7%. The reason, one is of course, I mean, agree, but right now 50% of our sales are coming from building materials. So that segment is also doing well. And we are confident that this portfolio from building material will keep on growing and that’s the main factor for our market share gains, Aman.

Aman Agarwal — Equitas Capital — Analyst

Sure. And just last question if I may. If you can elaborate on the kind of mix of value-added products in our revenue for 2Q.

Sameer Gupta — Managing Director

So till last year it was around 45% agri and 55% building materials. Right now we are operating at 50%-50% mix right. So building material is all value-added and then from agri, 10%, 15% of HDPE pipes is value-added right. So value-added should be around 60% and commoditized should be like 40%.

Aman Agarwal — Equitas Capital — Analyst

So thanks a lot. That will be from my side. If I have any follow-up questions, I’ll come in queue. Thank you.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Avadhooot Joshi from Newberry Capitals. Please go ahead.

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Hi. Good afternoon. Thanks for the opportunity. Two questions. First about PVC resins, how much we are importing currently? How much percentage-wise of total?

Sameer Gupta — Managing Director

It is roughly around 70% of our total consumption of PVC we are taking to imports.

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Okay. So, is that fair to assume that inventory losses may continue in the Q3 also?

Sameer Gupta — Managing Director

Yeah, of course, some part because in Q3 also as I told in my opening remarks that there has already been a drop of around 12% in date and of course — and in the next few days, we also expect some more drops. But I think that this should be considered the bottom — near to bottom prices that we are witnessing and once the prices take a U-turn, then there should be some corrections in the prices. So, we are not — because we are in the middle of that Q3. So, we are not exactly sure that what exactly will happen in the coming days, but we are you optimistic regarding the prices that it should be near to bottom or bottom out and we should witness a sharp growth in the coming days.

Ajay Kumar Jain — Chief Financial Officer

So, just to add to this that in Q2 the drop in PVC prices was around INR30,000 per ton. So far in Q3 we have witnessed INR10,000 per ton drop right. If the drop sustains at this level, then the inventory losses will be much lower than what we saw in Q2.

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Okay. But the import material we would be maintaining inventory or the given orders in the three months or something like that.

Sameer Gupta — Managing Director

Yeah, of course, we have reduced the imports seeing the volatility in the market and the drop in the international market, we have reduced the import cycle and we are right now trying to cater the demand to local purchases because material is plenty and available in the local market. So going forward, we will be actually maintaining, you can say, maintaining the normal level of imports in coming days. But right now of course, we are on the lower level.

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Understood. And second question about a CPVC, whether we have gained market share in the CPVC in the recent quarters?

Sameer Gupta — Managing Director

Yeah. Of course.

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Yeah, of course, [Indecipherable].

Sameer Gupta — Managing Director

So CPVC has been growing at 70%, 80% for us. Last year the growth was in same range. This year so far in first half, we have grown at 70%, 80%. So assuming that industry is not growing at the same pace, definitely we are seeing market share gains for Apollo.

Avadhooot Joshi — Newberry Capitals Pvt. Ltd. — Analyst

Understood. That’s heartening to hear. Thank you so much. That’s it from my side.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Jenish Karia from Antique Stock Broking Limited. Please go ahead.

Jenish Karia — Antique Stock Broking Limited — Analyst

Thank you for the opportunity. If you can just broadly help us with the estimated market share currently that Apollo [Indecipherable] going forward?

Sameer Gupta — Managing Director

So,

Right now — can you put yourself on mute please? Right. So, if you look at our market share, right, we are at a run rate of INR800 crores to INR1000 crores of annual revenue run rate, right, on a market size of say INR30,000 crores on reduced PVC prices. So, this gives us share of around 2%, 2.5% right. That’s what where we are today. And given our revenue growth target of 25% CAGR till FY25, we expect this market share to take it to 3.5%, 4%.

Jenish Karia — Antique Stock Broking Limited — Analyst

Great. That’s helpful, sir. Sir 25% CAGR is on revenue terms. If you can just [Indecipherable] volume guidance?

Sameer Gupta — Managing Director

So what we say is that 20% volume CAGR and 20% to 25% volume CAGR and rest will be the realization increase or I would say realization improvement on account of our growing value-added product portfolio. I mean, we don’t know where the PVC prices will be, right. So when we say 25% revenue CAGR, it’s the volume mix plus NSR improvement on account of our value-added products.

Jenish Karia — Antique Stock Broking Limited — Analyst

Understood, sir. Sir, next, sorry, I missed it in the opening remarks. 6,000 metric tons of capacity is added. So, what — is it in the value add category and which location have we added that 6,000 metric ton? And secondly, going forward the INR60 crores capex that we are guiding, so what capacities would be added in terms of metric tons and in what segments, if you can help?

Sameer Gupta — Managing Director

So, this 6,000 ton which came up as new capacity that’s majorly value add in the existing plants, right, but the majority of the INR60 crore capex, what we talked about that is for the new upcoming greenfield plant in North India which we are putting up 100% value added products. Okay. So, yeah. And what was the second question?

Jenish Karia — Antique Stock Broking Limited — Analyst

Sir, what was the total capacity after this new plant greenfield comes up and what will be the future capex, that is after this capex is over?

Sameer Gupta — Managing Director

Right. So as at March 31, right, we were at 125,000 tons as capacity. Now in first half, we have added around 6,000 tons. So right now we are at 131,000 tons. And this new plan which we’re talking about that will be incremental 15,000 tons, okay. So we should be around like 145,000 tons, 150,000 ton capacity after this new plant.

Jenish Karia — Antique Stock Broking Limited — Analyst

And post that any capex plan or we’ll figure it out at a later date?

Sameer Gupta — Managing Director

I guess we may want to put one plant in West India, right, after we are done with this. So we want to penetrate deeper into western markets. That’s where we are getting very good traction, right. And there will be some minor brownfield expansions which will keep on going on right. So I guess for the time being, our whole focus is to come up with this new plant, right where we have committed around INR100 crore plus capex and it’s going to contribute majorly into our FY25 revenue vision, right. So right now the focus is on completion of this plant.

Jenish Karia — Antique Stock Broking Limited — Analyst

Great, sir. Just one last question if you can help us with how is your distribution network shaping up for the rest of India? I know we have a good presence in north. But for the rest of India, how is the distribution network expanding and that will be all from by end?

Sameer Gupta — Managing Director

Right. So distribution expansion is taking place as we speak, right? The main clients who are our direct channel partners, they are at around 600 in number today. But that’s growing, right. At the same time we are also helping our channel partners to penetrate deeper with their retailers, okay. So the retail touch points are also increasing at the same time, okay. So we still see a lot of scope to improve our distribution network in East India, in South India in West India. North, we can say that we are fully there given that we have very high market share in north India. But same model we want to replicate in the rest of India. So, I guess there is a lot of work to do. And in the next few quarters — coming quarters, you will see a lot of new store addition in terms of like, counter addition in our network.

Jenish Karia — Antique Stock Broking Limited — Analyst

Great, sir. Thank you so much and all the best.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Behzad from Stallion Asset Management. Please go ahead.

Behzad Kalantary — Stallion Asset — Analyst

Yeah. Hi. Thank you so much for the opportunity. My question is regarding the distributors, which you have. So you have 600 distributors across India. Can I know what percent of distributors sell the value added as well as the commoditized or everyone sells everything at the end of the day?

Sameer Gupta — Managing Director

So see, I mean, majority of our distributors will sell all the products at their counters, okay, and that’s the right to win for Apollo in last two, three years. When we go to our distributor and we sell all kind of products, okay. That’s where they see value being added from our side and that’s why they are sticking to us, okay. So it is better to go to any distributor, reach out to him and sell or offer him the full SKU range, right. That’s how the stickiness will be there. Otherwise, if we do single product with single distributor, then my right to win goes away.

Behzad Kalantary — Stallion Asset — Analyst

Got it. Okay. My second question is just a follow-up on that. So is your entry in the door basically the commoditized product and then they come ask for the value-added product or you guys go with all the products at the end of the day? I just wanted to understand their psychology.

Sameer Gupta — Managing Director

See, I mean, if you look at the history of the company, right, when we started this business in 2015, ’16, that time we were doing majorly agri based products, okay. So that you can say was commoditized. But over the years, six, seven years, we have built our portfolio today equal to any top PVC pipe company in India, right. The full SQ range, whether you take pipes, you take fittings, you take CPVC, you take water tanks, you take bath fittings, you take solvents, you take HDPE pipes, okay. So I guess the main right to win for us has been the ever-expanding SQ range, what we are doing, right.

And that’s what our distributors also like about us that as a brand — as a tier two brand versus like the top brands which are there in the market, okay, we have been able to offer the complete SQ range, and we have been able to match the servicing levels also with our peers, right. So I think — I mean, we are happy with the current model where we go and take the full range to our distributors. And we want them to buy the complete range because in some products I will make x margin and in some product I’ll make x plus 2 margin, right. That’s how I kind of — because we also have this metric of one is revenue per distributor, second, also earnings per distributor, right. So earnings per distributor will go up if I sell more of value-added products, right.

Behzad Kalantary — Stallion Asset — Analyst

Right. Right. Got it. Okay. There is one last question. Sir, you said you want to penetrate more in the south-western and eastern regions compared to the north. Can I just know the problems from the distributors and why are not able to penetrate or not get that incremental market share which you’re targeting and how you’re able to address those problems?

Sameer Gupta — Managing Director

No, no. Okay. The first thing is that it’s not that we are not focusing on north. In north we already have a high market share of 8% to 10%.

Behzad Kalantary — Stallion Asset — Analyst

Right.

Sameer Gupta — Managing Director

Okay. So now we have the other markets to grow.

Behzad Kalantary — Stallion Asset — Analyst

Right.

Sameer Gupta — Managing Director

And the other markets have been new for us, right. Our competitors have been present in other markets for last 10,15 years, but we put up our plants only in last two, three years. Okay. South we started just after Corona, right which is like two years from today. East we started last year. So again, we are ramping up. West we had put up the plant which is now ramping up. So it’s not that we are not able to penetrate. It’s that we are new to this market and we are taking some time — it will take some time for us to penetrate into this market. So far the response has been good. All our plants when we put up the initial IRRs, ROCs what we have expected, we are achieving those desired ROCs from the new plants, okay. So it’s just that it will take some time. The market has been fluctuating. A lot of things have happened in last two, three years when we got this new capacity online. So once things are normalized, I’m sure our efforts will give more returns in terms of penetration — people penetration.

Behzad Kalantary — Stallion Asset — Analyst

Fair enough. Okay, thank you guys. All the best to you. Thank you so much.

Operator

Thank you. We have the next question from the line of Dushyant Mishra from SageOne. Please go ahead.

Dushyant Mishra — SageOne — Analyst

Hi. Good afternoon, everybody. I just had a couple of questions on the distribution side again. So we said about 600 channel partners. Could you elaborate on what percentage of those would have been gained because of our [Indecipherable] common Apollo brand?

Sameer Gupta — Managing Director

No, Dushyant, I’m sorry you will have to repeat your question.

Operator

Mr. Dushyant, I would request you to please kindly use your handset.

Dushyant Mishra — SageOne — Analyst

Okay. Is this any better?

Operator

Yes, please proceed.

Dushyant Mishra — SageOne — Analyst

Okay, great. I was just asking the percentage of our distributors who would be overlapping with our — Apollo brand. So kind of want to know what, hardly 5%?

Sameer Gupta — Managing Director

Yes.

Dushyant Mishra — SageOne — Analyst

Okay, got it. So, when you talk about this right to win because of the Apollo brand, what exactly are we talking about if there’s such little overlap?

Sameer Gupta — Managing Director

See, I mean, ultimately, it’s a building materials segment, okay. So, today, any Indian who is buying — who is buying, who is renovating a home or buying a new home or doing some work at his home, right, so he would know Apollo, because — APL Apollo, because in steel tubes and structural steel tubes, we are the biggest brand. So, number one pull comes from the — number one pull comes from the end customer, right. And then see today the distributor say I’m going to a new market in South India. I would talk — I will try to interact with the top PVC pipe traders, right, who may be doing some brand ABC. But of course, they would have heard of Apollo, right. And when they come to know that APL Apollo is also having this vast SQ range in PVC pipes, right, the brand is anyway is established right.

So, there is some respect, there is some reputation what we are getting when we are going to interact with him. So then the general discussion starts like the pricing, the servicing, our capacity, our brand spans, what we’re going to do with our band over the next few years, right. So all these discussions take place and we come to the conclusion, yes, I mean, he’s happy to — whether he’s happy to push Apollo or not, okay. And that’s how we have made the channel partners in last two, three years when we started expanding beyond North India, right. And we are pretty satisfied — we are pretty happy with the way how our sales team has been able to expand the distribution network, because in last three four years, we have grown at the fastest pace in terms of volume in the PVC industry and our targets also for next three years are most aggressive in the PVC pipes.

Dushyant Mishra — SageOne — Analyst

And one more question on this side. What is our given dealer margin right now?

Sameer Gupta — Managing Director

Dealers margin, I mean normally they would take like 3% to 4% to 5% right based on like what kind of product they are selling. So this also explains the other question like whether there is like one distributor for one product. Like I had explained that we have some products where we make x margin in, some products, we make x plus 2. So same goes with our distributors, our channel partners, right. So blended they would end up making 3%, 4% but the range starts from like 1% and it goes up to 6%, 7%.

Dushyant Mishra — SageOne — Analyst

Understood. Got it. And if you could talk about your CPVC as well. What’s the overall contribution of just the CPVC products?

Sameer Gupta — Managing Director

Right now it’s like just below 20%.

Dushyant Mishra — SageOne — Analyst

Just below 20%, okay. And what is our CPVC sourcing? Are we exclusive with somebody or we just buy from the market on a spot basis?

Sameer Gupta — Managing Director

So right now our requirement is small compared to our large peers, right. So we don’t have to go exclusive as of now. So we are sourcing from Japan and France. And we have been quite okay with the supply so far.

Dushyant Mishra — SageOne — Analyst

Got it. That helps. Thanks so much. That’s all for me.

Operator

Thank you. Bhargav Buddhadev from Kotak Mutual Fund. Please go ahead.

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

Yeah, good afternoon team and thank you for the opportunity. My first question is on inventory. So if we look at September 22, the inventory looks a tad bit higher at about INR167 crores versus INR132 crores in March and about INR80 crores in September ’21. So any particular reason for the high inventory?

Sameer Gupta — Managing Director

So Bhargav if you see in terms of days, okay, in terms of days, we are at around 65 days, okay. Now, if you look at the industry average also, that’s also in the same range between 60 to 70. And this is because we are expanding our SQ range, right. We have to improve our serviceability with our channel partners with our clients. So I guess as on average 60, 70 days, so you will see our inventory also being at similar levels of 60, 70. Although we try to become more efficient in terms of the raw material supply, but of course, because of this volatility in the pricing, we have not been able to do that. So I guess — I mean, there is still room to still some room to improve this inventory to say 60 days from 65, 66 what we are seeing on as on September 30. But on the finished good inventory, I guess this is something what we have to maintain as we have to match the serviceability of our competitor brands.

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

No, sir. Is it that we were expecting higher volumes and hence inventory?

Sameer Gupta — Managing Director

Of course, Bhargav. I mean, not only us, anyone in the industry would have expected better volume growth in second quarter, right? We were at 6.5% volume growth on YoY basis for 2Q, but our expectation was at least 15%, 20%.

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

Okay. So bulk of this is finished goods inventory, right?

Sameer Gupta — Managing Director

That is right. But we’ll still improve it from here towards the raw material side.

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

Okay. Okay. Secondly, has the channel restocking started at the industry level now that each and every company seems to be of the view that PVC prices have bottomed out and has the intensity of offering incentives at the industry level started getting reduced or is it the same?

Ajay Kumar Jain — Chief Financial Officer

Bhargav Ji actually — industry is not actually convinced regarding the prices to be bottomed out because every month or every week, we are witnessing a drop in the prices even in the international market not because of our raw material, but because of other raw materials or other products that is actually giving you can say — giving a dent to the PVC prices. So right now that convincing is not there in the industry. So industry is waiting and maybe in the near future in the next few weeks or next month we will witness that the industry has started destocking but right now it is not so. So, once it starts or once we feel that the Reliance is going to increase some price or the market gets at a premium of the Reliance price or the import price then you will see a sharp increase in the intensity of stocking level.

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

Okay. And lastly, is it possible to quantify how has been the YoY growth in CPVC and bathroom fittings?

Sameer Gupta — Managing Director

I mentioned no, 70%, 80% CPVC and sub 50% in bath fittings in terms of value.

Bhargav Buddhadev — Kotak Asset Management Co. Limited — Analyst

Okay. Sorry I missed it. Thank you and all the very best.

Operator

Thank you. We have the next question from the line of Deepak Lalwani from Unifi Capital. Please go ahead.

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Hi, sir. Thank you for the opportunity. My first question is that after guidance of about INR1,000 crores for FY23, any change in those numbers after the subdued prices and the volume uptick?

Sameer Gupta — Managing Director

I guess there could be little, not much, one from the fact that — I mean the PVC prices are down right. But then also we thought that we will be able to match INR1,000 crores with our improving value-added products. And also when we gave guidance of INR1,000 crores, we had not considered PVC prices at INR170 a KG, okay, which were at like all-time high towards the end of FY22. So we had already taken the normalized PVC prices while giving guidance of INR1,000 crores. So, I guess there shouldn’t be much of deviation from this number, except the fact that in 2Q of course the volume growth was a little low than expected. But I guess in second half, if PVC prices become stable and they go — and they start going up, even by a few percentage points, there could be like good restocking, which can take place and we will make up for like, what we lost in second quarter. So, I guess — I mean, we have done around INR450 crores already, right? And 4Q is strong quarter anyways, right? So I guess we should be here and there around INR1,000 crores.

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Right. Got it. And just from a value-added segment from what I reccon in the last quarter, it was about 35%, but it has substantially increased to 65% in this quarter. So, any rational behind that?

Sameer Gupta — Managing Director

So value added products last quarter also — I mean, see — I mean what the mix we gave is the mix between the equity portfolio and building material portfolio. So that’s like 50-50, right. And out of this the value-added product what we count is the PVC pipe is going to building materials, plus the CPVC pipes plus the PVC fittings plus the bath fitting plus the water tanks. So this portfolio also is around — has been around this proportion, 55%. The same was last quarter also.

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Okay. And on that lens if you can help me with EBITDA we make, EBITDA we make on the value added versus the commodity assuming that the prices are normalized.

Sameer Gupta — Managing Director

So on normalized level, if you see I mean, our EBITA per ton is INR17 a KG right. So value-added product will be anywhere about INR20,000 to INR25,000 a ton and commodity will be below INR12,000 to INR15,000 a ton.

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Okay. Okay. Got it. And on the new capacity, which we’re putting up, when should it start commercializing?

Sameer Gupta — Managing Director

I guess — I mean, we are planning to complete this over the next six to eight months. And if everything goes well in terms of like, there is no disruption due to COVID etc, I mean, we can have the first production starting as soon as like towards the end of Q2 FY24.

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Okay. Got it. And lastly on the distribution expansion, we were on track to grow that number from 600 to 800. So, any changes on that, any aggressive steps have been taken after calling that out?

Sameer Gupta — Managing Director

Yeah, so, I guess — I mean in last six, seven months the addition has been low, because the market sentiments have been so bad right. So today is not a time to go and ask for a new distributorship with any new client because right now the sentiments are too weak, right. So I guess like I said, I mean, once the prices become stable and the sentiments are back in the industry, we will try to make up for all the losses whether it was in terms of volume loss or distribution expansion loss. This is all recoverable, right. I mean the idea is to hit new distributors to approach new distributors when at least — I mean, they are not afraid of any kind of losses which they are booking with their existing business, right. So I guess last two, three months have been slow, but this situation will not remain forever right.

Deepak Lalwani — Unifi Capital Pvt Ltd. — Analyst

Yeah. Sure. Got it, sir.

Operator

Thank you. We have the next question from the line of Vijay Chouhan [Phonetic] from Right Horizons. Please go ahead.

Vijay Chouhan — Right Horizons — Analyst

Yeah. So,

The first question is basically on the EBITDA per KG side. So as you highlighted the different like value-add what is the normal margin of 17%, 20%, 25% value added price. So what is the like the blended EBITDA per KG that we make in normalized cases once the price volatility is gone in terms of PVC?

Sameer Gupta — Managing Director

That’s like INR16,000 to INR17,000 per ton.

Vijay Chouhan — Right Horizons — Analyst

Right, right, right. And let’s say in the next two to three years, so our value-added products share, so how much ideally we are targeting internally and you mentioned around 65%. So how much we are targeting?

Sameer Gupta — Managing Director

So, we think there is a good chance to take it beyond INR18,000 a ton.

Vijay Chouhan — Right Horizons — Analyst

Right. In terms of percentage of revenue value added product share?

Sameer Gupta — Managing Director

It should be — okay, so then the mix will be at least 70-30.

Vijay Chouhan — Right Horizons — Analyst

70-30, that’s fine. That’s fine. And lastly on the brand building side, so are we taking like what is the strategy that we are deploying to like — we have some discount what is the industry leaders? So, what is your long-term strategy that that we are deploying?

Sameer Gupta — Managing Director

For branding?

Vijay Chouhan — Right Horizons — Analyst

Yeah, branding and marketing particularly.

Sameer Gupta — Managing Director

Right. So, branding — I mean, last two, three years, we had focused on leveraging the APL Apollo parent brand, okay. Second, we were very strong in the below the line promotional activities, whether when we were trying to establish communication with the influencers, what numbers in our case and at the retailer counter front, the hardware shops. Okay. So that exercise, we were like, very, very aggressive. Of course, in first six months because of low profitability so we have pulled out some of those activities. But just before this carnage started, we had come up with a strong campaign with Tiger Shroff, where we tried to communicate with our end customer, the end user of our pipes, right. So that activity started on good note, and then we are following up with our social media branding platform. So I guess the brand spends continue to be around like 1% to 2% of our top line that will — with this kind of budget we are happy with what we have in hand for next two, three quarters.

Vijay Chouhan — Right Horizons — Analyst

Yeah. That’s helpful. Thank you very much.

Operator

Thank you. We have the next question from the line of Dhananjai Bagrodia from ASK Investment Managers. Please go ahead. Mr. Bagrodia kindly proceed with your question.

Dhananjai Bagrodia — ASK Group — Analyst

Hi, sir. Can you hear me now?

Operator

Yes, please proceed.

Dhananjai Bagrodia — ASK Group — Analyst

Yeah. Sorry. I might have missed this earlier, but, sir, on average how much cheaper are we compared to let’s say, some of the larger players in terms of pricing? That’s the first question.

Sameer Gupta — Managing Director

So I guess, on the overall portfolio, the range will be 2% to 5%.

Dhananjai Bagrodia — ASK Group — Analyst

Oh, okay. Okay. So that way, we’re not even playing the pricing game too much in that sense, because 2% to 5% is not — so then how do we see our volume growth going ahead, because let’s say another — let’s say another large player, which has been losing distributors is that something we’re targeting because even at the distributor end there are only so many companies products he can keep?

Sameer Gupta — Managing Director

I guess — see, I mean, our growth has been the highest in last four or five years okay. And it has not come at the cost of any established top brand, okay. Where we have focused is the unorganized part of the industry which still forms a very major part which is like 40% right. And with all the events, which took place in last four or five years starting from demonetization, then GST implementation the NBFC crisis, then macro slowdown, then COVID wave one, COVID wave two, then this PVC supply chain disruption, prices moving from INR70 per kg to INR180 per kg then crashing back below INR70 per kg, right. So all these events have made business situation very hard for the smaller unorganized players, and even smaller, organized players, okay. So this is where we have attacked to gain market share, and we still see good opportunity over the next two, three years, when we say that our volume CAGR target is 25%.

Dhananjai Bagrodia — ASK Group — Analyst

Sure. And sir just to consider that, how much would be a distributor target for that, let’s say, over the next few years to get this volume CAGR like are we targeting in terms of number of distributor expansion in the sense or are we just penetrating the same distributors more?

Sameer Gupta — Managing Director

I guess see — I mean, like I said, like I explained, there is a lot of room to improve or to expand the distribution coverage in North, west, east or sorry south, west, east, right. So right now we are at 600. We’ll take it to 700 levels in next two, three years. At the same time, rather than increasing the number of distributors, we’re also focusing on expansion of number of retail touch points, okay. That’s also important because the band we will — we will make our brand strong, not with the number of distributors, but with the number of retail touch points.

Dhananjai Bagrodia — ASK Group — Analyst

Okay.

Sameer Gupta — Managing Director

So I guess the question should be like from current INR25,000 retail touch points what will this number be in next two, three years. So, I can say that this number will be at least INR40,000, INR45,000 number.

Dhananjai Bagrodia — ASK Group — Analyst

Okay. Sure. And, sir, what would be your capex guidance for the next few years?

Sameer Gupta — Managing Director

So this year the guidance is INR60 crores, right, and we did spend around INR45 crores so far. So, second half should be a bit low, although we want to finish — complete that plant as soon as possible. So I guess I’m in INR30 crores, INR40 crores is what we should be spending every year. This will be towards like some brownfield expansion some D bottlenecking. If we can increase the capacity, some value addition within the existing plants and this new greenfield. So INR40 crores, INR50 crores is something what we want to spend every year. And if at all, I mean, we decide to go for new Greenfield, which we don’t see over the next 10, 15 months that will be over and above this.

Dhananjai Bagrodia — ASK Group — Analyst

Okay, fantastic, sir. Congratulations, again.

Operator

Thank you.

Dhananjai Bagrodia — ASK Group — Analyst

Thank you.

Operator

We have the next question that is a follow-up question from the line of Jenish Karia from Antique Stock Broking Limited. Please go ahead.

Jenish Karia — Antique Stock Broking Limited — Analyst

Thank you so much for the follow-ups. [Technical Issues]

Operator

Mr. Karia, there is a lot of disturbance from your line which is coming along with your voice. Please use your handset.

Jenish Karia — Antique Stock Broking Limited — Analyst

Is it better now?

Operator

Yes, please. Proceed.

Jenish Karia — Antique Stock Broking Limited — Analyst

I see that employee expenses and other expenses have gone up on a year-on-year basis and sequentially also. So any sensible thing that we’ll be looking at?

Sameer Gupta — Managing Director

Not much to our analysis, except that I mean some increments would have been there, but nothing much.

Jenish Karia — Antique Stock Broking Limited — Analyst

Okay, okay. And sir earlier you were guiding for EBITDA per KG of INR20 and above by FY25. So, are we still maintaining that guidance?

Sameer Gupta — Managing Director

So, like I said — I mean, right now, we are at INR17 a KG right on a normalized level. The target is to take it beyond INR18 and see where we land at INR19 or INR20. Right. But yes, there is a room to improve this to INR20 a KG given the top brand players are making such numbers.

Jenish Karia — Antique Stock Broking Limited — Analyst

Okay. Great. And just one last question if I may. So last quarter we entered in the PPR segment. So, anything incremental on that segment, that dedication?

Sameer Gupta — Managing Director

Sorry, your voice was breaking. Coming again, please.

Jenish Karia — Antique Stock Broking Limited — Analyst

Sir, last quarter we announced entry into a new product of PPR. So anything incremental on that that equals [Indecipherable]

Sameer Gupta — Managing Director

So PPR is a new segment where there is very little competition, right? It’s a niche market. We right now — I mean, we are at a run rate of say I mean, [Indecipherable] month kind of upgrade, right. But this can substantially go up because this product is more superior than the existing products, what are being sold in Indian market today? So I guess — I mean, and this is highly profitable product. So it just adds up to our SQ range, which our distributors love us for that. So I guess — I mean, this number has good scope to go up. But right now, the markets are pretty much like in Jammu and north India, where this market is more conducive. So we’ll have to make a lot of efforts to promote this product in the other markets. So that activity has started slowly, gradually we are focusing on this.

Jenish Karia — Antique Stock Broking Limited — Analyst

Okay. Yeah. Thanks that’s all from my end. Thank you so much.

Ajay Kumar Jain — Chief Financial Officer

[Indecipherable] And a question on employee costs. So I guess I guess like some marginal increase like I said, one is because of the average increments. Second, we are also expanding team in our sales and production as I mean — I mean the growth target what we have about 20%, 25%. So there is like some increase in the in the sales force and the production team as well.

Jenish Karia — Antique Stock Broking Limited — Analyst

Okay. Any amount of forex loss or something in a very expensive that has been accounted, since we bought a lot of PVC [Indecipherable]

Sameer Gupta — Managing Director

Nothing, nothing.

Jenish Karia — Antique Stock Broking Limited — Analyst

Okay, that’s all from my end. Thank you.

Operator

Thank you. We have the next question from the line of Aman Agarwal from Equitas. That’s a follow up question. Please proceed.

Aman Agarwal — Equitas Capital — Analyst

Yeah, thanks for the follow-up opportunity. Apologies if I sound repetitive, but I just wanted clarity with respect to our product mix. So, when we say we are currently at 70% of value added products, this includes the entire non entry portion and the PVC portion of the agri segment right?

Sameer Gupta — Managing Director

No, Aman, we said that 70% is our target for FY25. Right now, we are at 50%, 55%.

Aman Agarwal — Equitas Capital — Analyst

Okay. I think you said around 60%, 65% is our [Indecipherable] which you mentioned earlier, so I’m not wrong. [Indecipherable]

Sameer Gupta — Managing Director

See, I mean 50% is agri, 50% is building material right. Now there is a 15% HDP contribution, which is value added product in Agri. But then at the same time 5%, 10% is like commoditized UPVC piping building materials, right. So net net, what comes to the value-added product is 55%.

Aman Agarwal — Equitas Capital — Analyst

Okay, and when we say we want to raise this to 70%, we mean the 50% non-agri with what we want to raise 70% right?

Sameer Gupta — Managing Director

That is right. So that will go to 75%.

Aman Agarwal — Equitas Capital — Analyst

To 75%. Sure. And the second question, as a company we have in multiple times maintained our calm that we want to penetrate faster into the tier two and three markets. So my question is that now with the upcoming value-added products capacity, does this stand still maintained? Or will be will we be also looking at tier one cities to penetrate more for the value-added products?

Sameer Gupta — Managing Director

See these value added products are not because they’re expensive, okay. I mean, it is that they give us better market. That doesn’t mean that they’re expensive for the end user. For example, we talked about expanding sales in the bath fittings. Now a plastic tap or faucet is priced one-third of what you get a brass or stainless steel product. Okay, so for us it’s a value added because we are making 20 rupees per kg EBITDA, but for end user it is at one-third price of what he’s selling from — what he is buying from a tier one brand for available category. So I don’t think this is a correct — this is correct conclusion that the value-added products can only be sold in tier one cities, right. Water storage tank, for example, its value added for us. Now the demand for water storage tanks is more in tier two tier three towns.

Aman Agarwal — Equitas Capital — Analyst

Got it. Thanks. Thanks for the answer. Thank you.

Operator

Thank you. As that was the last question for today, I would now like to hand the conference over to the management for closing comments.

Sameer Gupta — Managing Director

Thank you all. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the Company, please feel free to contact our team. Thank you once again for taking the time to join us on this call.

Operator

[Operator Closing Remarks]

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