Pidilite Industries Limited (PIDILITIND) Q1 FY23 Earnings Concall Transcript

Pidilite Industries Limited (NSE: PIDILITIND) Q1 FY23 Earnings Concall dated Aug. 11, 2022

Corporate Participants:

Sandeep Batra — Chief Financial Officer

Bharat Puri — Managing Director

Analysts:

Avi Mehta — Macquarie Group — Analyst

Abneesh Roy — Edelweiss Broking Limited — Analyst

Trilok Agarwal — Dymon Asia Capital — Analyst

Krishnan Sambamoorthy — Motilal Oswal Financial Services Ltd — Analyst

Percy Panthaki — IIFL Securities — Analyst

Sheela Rathi — Morgan Stanley — Analyst

Ritesh Shah — Investec India — Analyst

Rishi Mody — Marcellus Investment Managers — Analyst

Rajesh Gajra — Informist Media Pvt Ltd — Analyst

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Divij Muthappa — Ankhonia Advisors — Analyst

Unidentified Participant — — Analyst

Arun Baid — ICICI Securities Limited — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Pidilite Industries Limited Q1 FY ’23 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Arun Baid from ICICI Securities. Thank you, and over to you.

Arun Baid — ICICI Securities Limited — Analyst

On behalf of ICICI Securities, I welcome you all to the Q1 FY ’23 Post-Results Con Call. From the management side, we have Mr. Bharat Puri, Managing Director; Mr. Anshu Vats, Deputy Managing Director; and Mr. Sandeep Batra, CFO.

Now, I hand over the call to Mr. Batra for opening remarks, post which the floor will be open for Q&A. Over to you, sir.

Sandeep Batra — Chief Financial Officer

Thank you and good afternoon and a warm welcome to all those who have joined the call. I take great pleasure in sharing my opening comments on the first quarter results, which were approved by the Board at its meeting yesterday.

First of all, delighted to share that on a consolidated basis, the company crossed the milestone of INR3,000 crores in revenues for the first time. This represented an over 60% growth over the same period last year, a combination of higher volumes and measured price increases. Consumer & Bazaar growth was across all geographies and categories of adhesives, construction chemicals, and DIY portfolio. B2B growth was also strong across all verticals. While input costs remained elevated, sequential EBITDA margins remained constant on account of calibrated pricing, higher volumes, and effective cost management actions.

Now, I’ll share a summary of the financial performance for the quarter ended June 2022. On a consolidated basis, net sales were INR3,091 crores, a growth of 60.3% over the same period last year. Consumer & Bazaar segment grew by 63.9%, with B2B segment growing at 49.8%. As mentioned earlier, gross margins remained impacted on account of steep escalation in input costs. Material costs as a percentage to net sales for the quarter were higher by 736 basis points over same period last year and 180 basis points higher over the immediately preceding quarter. EBITDA for the quarter was INR529 crores, a growth of 52.3% over the same period last year. Profit before tax and exceptional items was at INR473 crores and increased by 63.3% over same period last year.

I’ll quickly touch upon the stand-alone financial performance where net sales at INR2,778 crores were higher by 62.5% over the same period last year with sales volume and mix growing by 44.3%. Consumer & Bazaar sales were higher by 66.6% with an underlying volume and mix growth of 49.2%. The B2B segment grew by 50.5% with an underlying volume and mix growth of 28.9%.

The prices of our key raw material vinyl acetate monomer, VAM, have continued to increase during the quarter. Q1 consumption rates were $2,230 per metric ton versus $1,608 per metric ton in the same period last year. EBITDA before non-operating income for the current quarter is at INR487 crores, higher by 53% over same period last year. Profit before tax and exceptional items at INR443 crores grew by 58.8% over the same period last year.

I’ll quickly now touch upon the performance of our subsidiaries. Starting with the overseas and international subsidiaries, which maintained positive growth momentum and reported high-digit — high double-digit constant currency revenue growth largely due to judicious pricing actions. Subsidiaries in Asia reported higher sales and EBITDA, whilst the Africa subsidiaries continued the growth momentum. The subsidiaries in Americas reported higher sales but EBITDA was under pressure due to higher input costs.

The domestic subsidiaries registered good sales growth. However, the EBITDA margins of the B2B subsidiaries in India, they remain under pressure due to higher input costs. While the near-term remains challenging, we remain cautiously optimistic on the medium-term given the recent softening of input prices led by lower oil prices, good monsoon, and a continued good demand conditions in the housing and home improvement sector. Our focus continues to be to deliver broad-based profitable volume growth.

With this, I come to the end of my opening remarks. Open the floor for questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] We take the first question from the line of Mr. Avi Mehta from Macquarie. Please go ahead, sir.

Avi Mehta — Macquarie Group — Analyst

Hi, sir. Can you — am I audible?

Bharat Puri — Managing Director

Yes, you’re audible.

Avi Mehta — Macquarie Group — Analyst

Yeah. Hi, sir. Sir, I just wanted to understand the comment on your near term challenging situation because it seems you’ve indicated that demand is positive. Clearly, from the performance, input costs are also moderating. So would love to hear why you have shared a challenging situation for the near term.

Bharat Puri — Managing Director

Sure. Really why we’re saying the near term is challenging is because of two reasons. Reason number one is that quarter one of the year is when we have seen the highest input costs, which means that all of the inputs bought in quarter one, a large part of the inputs will be consumed in quarter two, and therefore, quarter two from a near-term perspective is challenging, because from a margin perspective, it would remain challenged, the highest raw material cost and we believe we will see will be in this quarter. That’s one reason.

The second reason is largely given that on a year-over-year basis, all building materials have seen substantial inflation. We are seeing some amount of slowdown stroke moderation of growth in the rural stroke small towns and until the effects of a good monsoon, money going into the hands of the consumer in rural and semi-urban happens, which will probably happen only in the second half, the near-term will remain challenging. That’s the comment of the near-term remains challenging. Does that answer your question?

Avi Mehta — Macquarie Group — Analyst

Yeah, it’s clear. Perfectly clear. So just on the follow-up essentially — was essentially on the margin. Is the understanding correct that the price hikes also will start to flow through a lot more in 2Q, and hence from a margin perspective, logically, gross margin should slowly start to improve as we go forward or would you expect 2Q to kind of see — what I was trying to get to is, it does seem like 1Q is probably the bottom on — in terms of gross margins, but would love to…

Bharat Puri — Managing Director

See, I don’t think there will be a substantial difference between first quarter and second quarter because we have taken some pricing in the first quarter. But as I said, the highest impact of raw materials on material cost as a percentage of sale, if we were to look at constant prices, would be the highest in Q2 and not Q1. Having said that, let’s see how the product mix works out and how consumption works out, but I would not — it’s not going to be significantly better or significantly worse. It will probably be in the same range.

Avi Mehta — Macquarie Group — Analyst

Okay, sir. Got it. And, sir, second bit I wanted to kind of just understand on the — in the last call, you had indicated a focus on innovation that you would be trying to start to build in. So is there any update in terms of the initiatives that you had planned in terms of distribution and new product launches?

Bharat Puri — Managing Director

See, first, I’ll tackle distribution. Yes, on distribution, we have continued our strong investment, especially in the smaller towns and rural India. As we speak, we now have more than 7,500 Pidilite Ki Duniyas in rural stores in villages, which have a population of between 5,000 and 10,000. We’ve now added another 17,000 villages to our direct coverage in the course of the last six months and these are normally villages with the population of between 5,000 and 8,000.

Overall, from a — therefore, Pidilite reach perspective, from our investment in route to market, especially in small towns and rural areas, we continue the march. As far as innovation is concerned, each of our divisions are, for example, our waterproofing division is — has had innovation. In terms of product, you would have seen advertised in the first quarter called Roofseal Classic, which is a coating, which is for roofs. Similarly, each of the divisions now has an innovation program. Each of these would be significant innovations, which obviously over the next 18 to 36 months will start contributing substantially to revenue.

Avi Mehta — Macquarie Group — Analyst

Got it, sir. Got it, sir. That’s all from my side. I’ll come back in the queue for the remaining questions, sir. Thank you.

Bharat Puri — Managing Director

Sure. Thanks.

Operator

Thank you, sir. We take the next question from the line of Mr. Abneesh Roy from Edelweiss. Please go ahead.

Abneesh Roy — Edelweiss Broking Limited — Analyst

Yeah. Thanks, and congrats on very good performance. My first question is on the business, which suffered a lot in the last two, two and a half years. So on the arts and craft, you have mentioned the business has doubled because schools are now back. So want to understand here two things. How is the margin profile here? Have you managed to take the price hike here also, almost 25% towards the inflation impact? And second, have you gained market share because such a tough time to your competitors, so ideally you would have gained market share here?

Bharat Puri — Managing Director

So specific to art materials. Firstly, good to hear from you, Abneesh. This time your record has been broken. Normally, you’re always the fellow with the first question. This time you’ve been beaten to second place. But always good to hear from you. Really, as far as art materials is concerned, as you know, a lot of the margins in art material are linked to price points. INR10, INR50, INR20, and therefore, you tend to be a little more conservative. So again our pricing here, while at the gross level would be 75% of inflation, in some cases, it may only be 60% because you want to maintain the sanctity of the price point.

Having said that, have we gained market share? I think the answer is yes. If you look — we look at our growth rates, what has happened is there is consolidation happening and from a distribution and reach perspective, the larger players clearly are gaining at the expense of smaller players.

Abneesh Roy — Edelweiss Broking Limited — Analyst

Sure. Thanks, that’s helpful. My second question is on the observation you had made in the Q4 call that in the global shortage in raw material, there were two issues. One was the force majeure clause of the many plants which are there and there was cartelization. I understand the global recession fears, which is driving down most of the other commodity, but on these two aspects, what is the update? On the closure of plants and cartelization?

Bharat Puri — Managing Director

See, there are still one or two plants, but obviously, you got keep plants closed indefinitely. So we are definitely seeing an easing. When we look at — I suspect, your next question is going to be on VAM rate, so I will answer it straight away. If you look at VAM, we are finding that VAM is moderating and the spot rates are now gone below $2,000. In fact, they range anywhere between $1,600 and $1,800 a ton. So clearly, both from a force majeure point of view — and I think the overall demand situation is such that it’s not possible for even — these are all short-term phenomena which happened for three to six months.

Now, barring any unforeseen circumstances, Abneesh, unless we have — last time, in January, we were confident that rates would come down in Russia-Ukraine happened. As long as we don’t have any geopolitical issues or some unforeseen areas that happen, we actually believe the second half of the year, you will see a moderation across input costs.

Abneesh Roy — Edelweiss Broking Limited — Analyst

Sure. My last question is on Araldite and the tiling submissions. On Araldite, if you could give us some update on the distribution and product extension if you have done in the last few quarters? And tiling solution, you had mentioned 15% penetration, and I think INR1,500 crore kind of size. Now, with the kind of growth you’re seeing across industries, lot of good demand in the real estate also. Where do you see this number for the industry in terms of penetration and size from a three to four years perspective?

Bharat Puri — Managing Director

See, there is no doubt about the fact that let me answer the tiling question first. As far as tiling adhesives is concerned, this is a fast-growing market because obviously a lot of companies are investing and consumers with the larger and the vitrified tiles, if you don’t use adhesive, you’re going to have issues, and people are realizing that. So it’s very difficult right now because there are a lot of unorganized and small players also in the market. Abneesh, it’s very difficult to estimate what pace the market is growing. But if I — and I won’t take one quarter, but if I take the last 12 months, I suspect the market is growing anywhere between 15% and 20%. We are obviously growing at rates far higher than that.

As far as Araldite is concerned, our march continues. We have now started introducing Araldite and small towns and rural in the first quarter of this year. In one of the regions we’ve done that, we’ve tested, we are moving forward. The good news is that Araldite continues on its growth path. We continue to register strong growths on Araldite and we still believe there is a large amount of sales in distribution still to be attained even before we go into innovations or marketing, etc., which you will see in the second half. You will also see Araldite being blessed with traditional Pidilite advertising, so wait and watch.

Abneesh Roy — Edelweiss Broking Limited — Analyst

Sure. That’s very helpful, sir. Thanks a lot.

Operator

Thank you. We’ll take the next question from the line of Mr. Trilok from Dymon Asia. Please go ahead, sir.

Trilok Agarwal — Dymon Asia Capital — Analyst

Yeah. Hi. Good evening, sir. Thanks for the opportunity. From — when we compare this performance along with the other sort of — we don’t have direct competitors across the building materials or building your associated company despite having strong brands. Are you sort of satisfied with the kind of two-year, three-year CAGR performance that you guys have delivered?

Bharat Puri — Managing Director

See, I first wanted to just clarify this because it just keeps getting asked. The thing with Pidilite is because we have no like-to-like, apples-to-apples comparison, you fellows keep comparing us with different building material fellows. Largely as far as we’re concerned, you keep comparing us with paint. While we are not an apple-to-apple comparison and this is especially for my friend Avi Mehta who always uses this comparison.

The fact of the matter is that 15% of our business is B2B, another 15% of our business is FMCG. So really 70% of our business is what I would traditionally call Bazaar and even in that, therefore, I would say pretty much half our business compared to paint, another 15% to 20% compares to FMCG, another 15% to 20% compares to both projects as well as traditional B2B.

Now, when I look at, therefore, our own internal standards over a large period of time, today, if I look at the end of the first quarter, and obviously, we’re not looking at one quarter growth. When I look over a three-year period, across both my B2C businesses and B2B businesses, we have healthy double-digit growths. We’ve got obviously access to all of the peers numbers and we continue to be in the top quartile. Please remember that we don’t add back. We actually equalize volumes for value. If we were to add back the volumes of say, tile, adhesives, etc., our volume growths would actually be 1.5 times what they are today but that frankly is not a fair comparison.

So at an overall level, are we satisfied? Yes. Could we — can we be happier? Definitely, we can be happier but I don’t tell my teams I am satisfied but on overall level, all our numbers and our indications show that we are in the top percentile or the top quartile performer and that keeps us happy.

Trilok Agarwal — Dymon Asia Capital — Analyst

But — fair enough. I mean I — we also understand that you guys are not like-to-like comparison but, yeah, from value perspective and volume growth, at least we — as per our understanding, you guys seem to be lagging. So that’s why I asked, are you guys satisfied with your performance.

And second is, all this, I mean in the historical sort of connotations, we obviously never intended to sort of venture into paints as a category but as per our checks, it suggest you guys seems to be sort of planning to do so. Could you just comment on that, please?

Bharat Puri — Managing Director

See, you must understand that Pidilite, we have an overlap with paints in a lot of areas. See, a large part of waterproofing is coatings. Now, a lot of times, paint companies take their exterior coatings and actually puts that under waterproofing. The roof coatings, which also a lot of times come under waterproofing. Similarly, we’ve traditionally because of our pigment business, we’ve had a tinting business. We’ve always had a rural DDL and distemper business which has existed for 20, 25 years.

So actually if you look at our total — and then our premium subsidiary ICA Pidilite is in premium wood finishes. So actually, if I add all of my paint businesses, we’re a significant player in paint though we’re not a consolidated paint major. As far as we’re concerned, our — therefore, I suspect your question is short hand saying, are we going to do another five plants, large scale paint entry? The answer is no. We’re happy with the way we are going. As — the Pidilite model is about creating disruption. Wherever we find, we can create markets, we can disrupt markets. That’s where we focus on. That’s where we put our resources and that’s what we continue.

Trilok Agarwal — Dymon Asia Capital — Analyst

No. Understanding of you getting directly into paints is not true as of now, correct?

Bharat Puri — Managing Director

See, as I told you, we are already in paints.

Trilok Agarwal — Dymon Asia Capital — Analyst

Sure, sir. Sure. Understood. Thank you very much.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] We’ll take the next question from the line of Mr. Krishnan from Motilal Oswal. Please go ahead, sir.

Krishnan Sambamoorthy — Motilal Oswal Financial Services Ltd — Analyst

Yeah. Hi, Bharat.

Bharat Puri — Managing Director

Hi, Krishnan.

Krishnan Sambamoorthy — Motilal Oswal Financial Services Ltd — Analyst

Yeah. Hi. Bharat, typically Pidilite has always operated at a certain premium varieties to the other brands and the other players in the market, and therefore, the guidance of 20% to 22% margins. And now, you’ve indicated that VAM costs have come down to about $1,650 to $1,800 per metric ton, right? Do you see scope for a sharp deflation, sharp reduction in prices, and possibly a sharper reduction in prices than the inflation in your own craft and product prices? Is that a likely possibility towards the second half of the year?

Bharat Puri — Managing Director

That’s a great question, Krishnan, but very difficult to predict. See, today is VUCA world where fortnight by fortnight things keep changing, very difficult to work out if nothing then unforeseen happens, so on, so forth, we do see VAM coming down to more palatable level, so on, so forth. But frankly, wait another three months when we actually see a trend because right now, it’s like — or two — a fortnight or a month of trends. Let’s wait another three months and then we should be far clearer on what second half margins will look like.

Krishnan Sambamoorthy — Motilal Oswal Financial Services Ltd — Analyst

Sure. Again, and just going in the same way, right? You had indicated in the last quarter that the unorganized and smaller players were more adversely affected, right, from a commodity cost perspective. Do you see a scope for competitive — competition increase in the second half of the year and beyond, or again, is it too early to say?

Bharat Puri — Managing Director

I — see, to my mind, whenever the material cost situation turns benign and I don’t know when it will, competition normally increases because a lot more people jump in. In these current times, when the situation is inflationary, most of these people have much longer credit periods, much — and they tend to buy spot from the market.

So will competition increase? Frankly, in our sectors, we are no strangers to competition. We keep getting newer competitors as well as the old ones. Frankly, we expect that to continue and we’re always — we work with the assumption that it will remain a very competitive space.

Krishnan Sambamoorthy — Motilal Oswal Financial Services Ltd — Analyst

Got it. Thanks, Bharat.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you. We take the next question from the line of Mr. Percy from IIFL. Please go ahead, sir.

Percy Panthaki — IIFL Securities — Analyst

Hi, sir. Just wanted to know what is the total price increase you have taken in the last five to six quarters on Fevicol as well as on our overall company on a weighted average basis.

Bharat Puri — Managing Director

Good to hear from you, Percy. It’s a very difficult question becuase, as I said, we’ve got so many product ranges, divisions. On a weighted basis, I would say our price increase is anywhere between 14% and 18% over a year’s period, and Fevicol would probably be at the high end of that.

Percy Panthaki — IIFL Securities — Analyst

Okay. So it’s not as if Fevicol is like 1.5 times or 1.7 times the…

Bharat Puri — Managing Director

No, no, no. We’ve always — you remember we’ve always said that we would be conservative, we would rather sacrifice short term margin for medium-term volume and that’s what we’ve been doing. So Fevicol is not 1.5 and 2 times or any such thing.

Percy Panthaki — IIFL Securities — Analyst

Right, right. And since VAM has come down, I’m assuming that there are no further price increases in the pipeline, right?

Bharat Puri — Managing Director

Absolutely. This trend on VAM continues which knock on wood, hopefully, it should, then obviously we would not need to raise any further prices.

Percy Panthaki — IIFL Securities — Analyst

Right. Secondly, I just wanted to understand some of the niche or rather smaller brands that you have, but on which you’re focusing for growth. So things like raw for WD-40, etc., etc. So if you take that as a portfolio, what is the growth of that portfolio as indexed to your overall company growth?

Bharat Puri — Managing Director

See, very — again, as I say it, every investors be it — we break our business into three buckets core, growth, and pioneer. Core is where we already have a market-leading position, our job is to grow the category. There we try and grow between 1.5 to 2 times GDP growth. In growth categories, where we are competing against non-consumption. Things like waterproofing, things like, for example, floors, joineries. etc., we try and grow at 2.5 times GDP. And third is pioneer categories where we want to achieve a certain minimum size. That minimum size normally is INR100 crores in three years. Those are the parameters in which we operate each of our categories and largely actually in the last 12 months, we’ve been exceeding these numbers.

Percy Panthaki — IIFL Securities — Analyst

Okay. So would you be able to give some idea on which are the brands, which are in your pioneer categories, but which have sort of not reach that INR100 crore mark?

Bharat Puri — Managing Director

Right now, for example, if I look at floor coating. We have a company called CIPY that largely currently operates in the industrial flooring space. We haven’t done much in the area of commercial flooring, so on, so forth, etc. Now, that is something that is a pioneer category. We have a whole category called epoxy grouts which we have a brand called Starlite, raw Starlite. Epoxy grouts is another category where we are the pioneer. So like this, remember, at any point of time at Pidilite, we will have anywhere between five and eight pioneer categories being tested in various places. So these are some of those.

Percy Panthaki — IIFL Securities — Analyst

Okay. And one last clarification. This ratio of GDP, which you’re talking about. Firstly, the GDP itself, you’re talking about the nominal GDP growth or the real GDP growth? And secondly, in terms of your growth, you are talking about volume growth or value growth in this equation?

Bharat Puri — Managing Director

Normally, we try and equate real GDP growth to volume growth and nominal GDP growth through value growth.

Percy Panthaki — IIFL Securities — Analyst

Okay, sir. Okay. That’s all from me. Thanks.

Bharat Puri — Managing Director

Welcome.

Operator

Thank you very much, sir. We’ll take the next question from the line of Sheela Rathi from Morgan Stanley. Please go ahead.

Sheela Rathi — Morgan Stanley — Analyst

Thank you for taking my questions. Hello, Mr. Puri. Sir, I had two questions. The first question was a follow-up to the questions asked by the previous participants was with respect to margins. Sir, you had said that we are seeing trends of VAM prices coming down. At the same time, you have said that we won’t be taking any further price hikes. So in order to — for us to go back to the pre-COVID level margins or the high margins of the past, do you think we are at a point where operating leverage will be the key driver of margins going ahead?

Bharat Puri — Managing Director

I think, firstly, good to hear from you, Sheela. I think that’s a great question. Right now, again, in this uncertain VUCA world, very difficult to say what will happen three, six months later, but it does appear from where we sit today that going forward, actually, frankly, we’ll decrease in — on input prices will actually become a greater contributor to margin growth than anything else, because we don’t know at what extent and where they will fall to and we hope that they do, otherwise, your question is right.

We don’t see greater pricing action taking place hopefully in the next 12 months, so therefore, whatever leverage you will get will be operating leverage. But in our belief, it will take six to nine months for the whole input prices situation to really settle and for it to find its real level, where we see that delays or this is the new normal. It’s then that we will be able to ascertain where we are and what we need to do.

Sheela Rathi — Morgan Stanley — Analyst

Understood. And a second question — my second question was with respect to your distribution strategy. You mentioned that you are really going into very small towns. If I heard it correctly, the population size is about 5,000 to 7,000 people. Is it just too small for a category like yours? I would believe that you would focus more on the core category to spread your wings in those smaller towns, but why is there a need to go in such small towns where often the opportunity is much higher in urban as well as Tier 3, Tier 4 cities?

Bharat Puri — Managing Director

Sure. That’s great a question. See, remember, it’s not either-or. We’re pushing hard in urban. If — for example, if you look at the last quarter, actually, the growth is led by metro and Tier 1, and even if I look at a three-year period, our metro and Tier 1 growth are very healthy. But our belief is that when I even equalize for income, Sheela, when I equalize small towns for income, we still believe because of a lack of knowledge and a lack of understanding. We are not achieving what we believe is the right penetration for our products there, which is why we are doing all of these initiatives that people who can afford our products, remember, in rural areas, whenever people have any form of prosperity, it goes either into construction or into gold, right? Now, construction is right up our sleeve, and therefore, if they do the right waterproofing at stage one, then we’ve got trained users right from the base of the pyramid.

The second thing of course is that any objects they have, remember, reuse is a much bigger thing in rural areas whether it is your agricultural pipes for which we have solvent cement, whether it is objects at home for which we have again a whole range of glues. Our belief is that, listen, we must keep investing in this market while we continue. Urban and Tier 1 is easier to focus on. By no means, are we taking our focus away from that but it’s and rather than either-or.

Sheela Rathi — Morgan Stanley — Analyst

Understood. If I may just ask a follow-up question, what would your mix be with respect to urban and rural currently, revenue mix?

Bharat Puri — Managing Director

See, very difficult to say because of the extent of wholesale but at a broad level, it will be two-thirds, one-third.

Sheela Rathi — Morgan Stanley — Analyst

All right. Thank you. That’s it from me.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] We’ll take the next question from the line of Mr. Ritesh from Investec. Please go ahead, sir.

Ritesh Shah — Investec India — Analyst

Yeah. Hi, sir. Thanks for the opportunity. Sir, my first question is in continuation to the — one of the prior participant. I’m just trying to put my head on basically diminishing marginal returns. You indicated focusing on more villages with lesser population. I’m just trying to understand how do you look at the size of the market, the investment, and what do you expect out of it? If one had to put it in numbers, how should one understand that?

Bharat Puri — Managing Director

That’s a great question, Ritesh. See, we have a whole system where we actually have divided the country into a whole set of sub-states based on economic prosperity and we obviously have surrogate measures of economic prosperity. Against that, we plot the penetration of our products in these sub-states, and then based on obviously a system on where we believe the greatest bang for our resources is we prioritize a set of sub-states.

So it’s a fairly evolved system. I won’t pick it up here, but obviously, your question is the right one. In a country as large as India and as widespread as India, how do you prioritize and make sure that you’re not pushing water uphill? We’ve got a fairly evolved system over time where we realize that listen, if a place has this kind of economic potential, this is what is our rightful share. And then based on where we are [Technical Issues] to prioritize and say listen, this is what we’ll take up in stage one, we’ll do something else in stage two, etc., etc.,

Like, for example, in places like Bihar, we are actually working with HUL, where we are using their Shakti platforms to actually take forward our products because we realized that it’s not viable for us to do the same. So like this, we keep putting various experiments in place. Our whole objective remains that make sure that the first mover and first user advantage remains that any consumer in the smallest of small towns starts with Pidilite and hopefully stays with Pidilite.

Ritesh Shah — Investec India — Analyst

Sir, can you detail the actual platform that you indicated? Sorry, I could not comprehend it.

Bharat Puri — Managing Director

HUL has this concept of Shakti, where they have these Shakti Ammas who go to the small towns and villages, etc. We’re trying to work with them in a partnership with them, where they sell not only HUL products but our products also in Bihar.

Ritesh Shah — Investec India — Analyst

Okay. Sir, just want to put the question, if I just flip it around, we have a basket of SKUs. How do you look to cross-sell the number of SKUs, that’s one? Or the other way to look at it is if you are targeting a village with a population of say, 5,000 to 10,000, is that — is there a metric that we look at it to target on a per capita basis to make sense to go into the hinderlands? So there are two questions. One is for capita and second is extent of ability on cross-selling SKUs.

Bharat Puri — Managing Director

See, the first one, frankly, the per capita one is the one that we use, but we don’t use a simple measure of per capita. We use what is called per capita economic potential and which — and how much of it are we actually accessing. We — as I said, we divide this into sub-states and those sub-states we assess the economic potential and see against the potential how much of that are we penetrating.

The — as far as cross-selling is concerned, actually in the smaller towns and rural areas, it is much more easier because the outlet tends to be the same. See, the guy in the small villages sells kirana year round, and then he sells various seasonal products and sells stuff with building materials, so therefore, accessing these outlets and cross-selling is not a problem.

Ritesh Shah — Investec India — Analyst

Okay. So would it be possible for you to quantify per capita economic potentials that we look at?

Bharat Puri — Managing Director

See, it’s again, as I said is different for different substrates. Maybe like in a different meeting, we can do that and take you through it but it’s fairly evolved and I would say we have a lot of intellectual property invested in there.

Ritesh Shah — Investec India — Analyst

Okay. Sure. Sir, my second question is you emphasized on disruption. It has always been disruption when it comes to Pidilite. You did elaborate that we are in paints in different forms already, but if we really had to be in paint. What would disruption mean over here to Pidilite?

Bharat Puri — Managing Director

See disruption would mean if I was to go back in time, if we were the first guys with tinting machines that would be disruption, right?

Ritesh Shah — Investec India — Analyst

Yeah. Right.

Bharat Puri — Managing Director

So thing that — I mean things that disrupt the market where you become a one or two player, where the others don’t have a chance of, in a sense, catching up with you. That is disruption to our mind. Or if you had some like medical products, so on, so forth. I’m just thinking aloud given my own background in paints. But anything that where you get aha either from the consumer or the user or the seller or all three of them.

Ritesh Shah — Investec India — Analyst

Okay. Okay. Sure, sir. This helps a lot. Thank you so much.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you very much. We’ll take the next question from the line of Mr. Rishi Mody from Marcellus Investment Manager. Please go ahead, sir.

Rishi Mody — Marcellus Investment Managers — Analyst

Hi, sir. So just wanted an update on understanding in the past three, four years, right, you’ve seen a lot of these paint players and a lot of hardware, building materials players coming into the white glue segment, which is your core category. So just wanted to understand has there been any market share loss to the likes of Asian, Berger, Astral, or are they taking the share from the unorganized sector?

Bharat Puri — Managing Director

That’s a great question. We will obviously be keeping a close watch on them. Frankly, the only player that has actually put some volumes, which are significant out there is Asian. Asian uncharacteristically so is actually operating at the bottom end of the market. Their current pricing is actually the equivalent of economy glues. They’re tending to gain a lot of share, therefore, from the unorganized, so small players. But if you look at our growth rates, and again, I’m not looking at growth rates only over this quarter. When I look over the last 12, 18, or 24 months, in our belief, we are actually gaining share. We’re not losing share in white glues by any stretch of imagination.

Rishi Mody — Marcellus Investment Managers — Analyst

Okay. And so on the waterproofing front as well. There’s a lot of aggression by the paint players. They’re trying to do something which will replace Fixit, so just wanted to understand like what kind of projects is Fixit getting used to and what kind of projects is Asian’s waterproofing getting used to and have we lost any market share out there to the likes of Asian, Berger?

Bharat Puri — Managing Director

See, again in waterproofing, there are — I’ve always said, there are two large segments, new construction and repair and renovation. Normally, the paint companies largely tend to play in repair and renovation, though some of them are now putting up project teams for new construction. In new construction, our competition tends to be the large multinationals like Sika or BASF or Fosroc.

In retail, which is the repair and renovation, it tends to be the paint companies. Again, with the entry of the paint companies, what has actually happened is this was a tremendously under-developed market. The market itself is growing at a much higher rate. When we look at our growth rates, we believe we are still growing faster than the market. There is also consolidation taking place. But in our belief, we haven’t lost market share at a gross level to any of the paint players. In fact, our growth rates remain very healthy.

Most of the paint companies, also remember, in water-proofing, still playing in the coating space. Products that painters can use rather than masons, etc., etc. Masons is a new user for them, which they are not familiar with. So even in repair and renovation, they tend to be more concentrated on coatings. If you see their offer, it is largely around coatings. But as I said, at an overall level, when I look at our waterproofing portfolio, we’re maintaining our momentum and in fact, actually, what’s happening because of all of this action is the category is growing and because we are the largest, we tend to get a larger share of the category.

Rishi Mody — Marcellus Investment Managers — Analyst

Okay. And so a lot of these paint players are also creating what they’ve been claiming to say that they are training people to become waterproofing specialists. So just wanted to get an idea on where we are on that front. Like because if the category is going to expand, its going to professionalize as well. Like we’ll have specialist applicators for this and masons, painters, there’ll be differentiation then. So just wanted to get your view on this this.

Bharat Puri — Managing Director

See, this is something that Pidilite has been doing for years. We have a skilled waterproofer’s program where we train people to become waterproofers. We certify them. Based on their level of skill, we then recommend their services. Frankly, all that the paint companies are doing is just following us. In fact, a lot of them have taken some of our people and they’re, therefore — actually, I mean it’s a great compliment to us because imitation is the best form of flattery. They’re all actually doing what Pidilite has been doing for many years.

Rishi Mody — Marcellus Investment Managers — Analyst

Okay. That’s encouraging to hear. Thank you, sir.

Bharat Puri — Managing Director

Thank you, Rishi.

Operator

Thank you, sir. [Operator Instructions] We’ll take the next question from the line of Mr. Rajesh from Informist. Please go ahead, sir.

Rajesh Gajra — Informist Media Pvt Ltd — Analyst

Yeah. Hello, sir. I just wanted — you mentioned about the input costs staying elevated because the materials that we sourced in the June quarter would also get consumed in the current quarter. So will it be possible for you to give us a sequential of what was the sequential rise in your cost of production in the June quarter and how much do you expect the rise to be in the September quarter, the sequencing?

Bharat Puri — Managing Director

Rajesh, my friend, if I put my team on it, it will take a lot of time because remember, we operate across 30 different verticals, each of whom has a different raw material cost. But [Technical Issues] if I can tell you, our VAM consumption would be between $2,200 and $2,400 a ton in the first quarter. In the second quarter, it will probably be between $2,300 and $2,500.

Rajesh Gajra — Informist Media Pvt Ltd — Analyst

Okay. Okay. That’s all. That was the only question. Thank you.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you, sir. We take the next question from the line of Mr. Amnish Aggarwal from Prabhudas Lilladher. Please go ahead, sir.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Yeah. Hi. So I have just one question on the demand. So if you look at this quarter, our volume growth has been pretty healthy both in Consumer & Bazaar as well as in the industrial side. Now, if I look at particularly say our top line growth trajectory, so first time around, we have now crossed the INR3,000 crores. Like last year 3Q, which is usually perceived to be the festival quarter, we were at INR2,800. So is this, you can see this kind of volume growth the uptick we have seen, is there some one-off kind of an element or we should consider it as a new base and then we tried to build upon this? And is there demand so strong that it will continue like this?

Bharat Puri — Managing Director

See, there’s — I — again, we’ll remain cautiously optimistic. To our mind, in this first quarter, there’s also been a certain element of pent-up demand and obviously, when you’re comparing basis, you are comparing versus two months of last year to three months of this year because of a one-month, COVID was closed.

Having said all of that, clearly, we are seeing some tailwinds in terms of good housing demand. We are seeing that post-COVID, consumers are investing a lot more in their homes, be it in repair, be it in renovation, be it and upgradation. We are seeing an upsurge in the whole real estate sector and clearly, you’re seeing organized real estate and commercial real estate see some upside.

On the other hand, that headwind is inflation, my friend. And we all know that any emerging market inflation is — will always moderate growth. Now, in — across building materials, if you were to build a home between last year and this year, I don’t have the exact numbers but I suspect your costs are up anywhere between 12% and 25%, and therefore, that does tend to impact volume growth. I think the next six months will show where does really the new normal come to. Our focus will be obviously therefore, unprofitable volume growth because if we are able to make sure that we’re getting volumes, it will be then we will have reached the next phase of growth.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay, sir. That is pretty useful. Just one thing incremental on this because we have been doing lot of innovations, new launches, so what could be the share of say, topline from the products, which we have launched in the last couple of years or last two, three years?

Bharat Puri — Managing Director

See, let me say that number is a confidential number, but it is a significant percentage of sales.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay. So is it good double digits?

Bharat Puri — Managing Director

No. If it was in double digits, my friend, then our growth should be something — It is in — as a percentage of growth, it will obviously be in double digits, but as a percentage of total, it will not be in double digits.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay, sir. Thanks a lot.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you very much. We’ll take the next question from the line of Mr. Divij Muthappa from Ankhonia Advisors. Please go ahead.

Divij Muthappa — Ankhonia Advisors — Analyst

Sir, good afternoon and thank you very much for taking my question. This might be a bit repetitive, but just to get a sense on Tier 2, 3, and 4 cities. You said repair and renovation being one aspect and construction of new infrastructure or homes being another. What do you expect to drive this in, say, the next one year, gain, like you mentioned given the inflation constraints on the consumer with elevated food prices and energy, etc.?

Bharat Puri — Managing Director

See in most Tier 2, 3, and 4 towns, new construction tends to drive growth, though repair and renovation’s in equal piece during festivals, etc. Wherever — whenever the crop earnings etc. come in, consumers will both repair, renovate, and then add a room or add a terracce, and so on, so forth. Based on the inflation, difficult to say what — where it will pan out, but I suspect the mix will not change. We’ll just have to see where the quantums are and it will really depend. To my mind, this good monsoon will take another three months to play out. In the second half of the year, hopefully, you will see a good impact of this monsoon also.

Divij Muthappa — Ankhonia Advisors — Analyst

Right, sir. Second question with regards to paint players, and I’m going to dial down specifically on Asian Paints, I think you’ve been well aware given your history with the company. They’ve sort of morphed their business now as opposed to traditional coatings and paint into decorators altogether, where they transform your house end to end be it from consulting to in-house products available. So does that pose an additional threat as far as repair and renovation and construction is concerned, considering that their distribution network is sizable as is Pidilite’s?

Bharat Puri — Managing Director

See to my mind, it all depends on the scale of their — currently they have an initiative, which is doing that, but frankly, it’s only restricted to large towns and that also to small parts of large towns. I mean for it to significantly impact the millions of customers who construct or repair and renovate every year involves a scale, which is very, very different. I would say the jury is out. As of now, from a distribution perspective, frankly, we believe actually we have a reach, which is far deeper than any of the paint companies.

Divij Muthappa — Ankhonia Advisors — Analyst

Thank you, sir. Last question with regards to your distribution itself. Considering you’ve got such a robust network, if you can give an overview hypothetically. Now that we’ve seen sort of an erratic monsoon and I am doubling down on Tier 2, 3, and 4 cities because that’s largely the narrative as to where growth is coming forth in the next three or four years in India. What you see with regards to monsoon because we’ve seen states like UP, Jharkhand, Gujarat, and Bihar not have the amount of rain that they would essentially expect this year around where we’re saying paddy sown per square foot having reduced by about 13%. Do you think that is a bit concerning or are you still optimistic for the year to come?

Bharat Puri — Managing Director

See, I think all the numbers you are giving us are right ones but, Divij, my simple answer to you would be let’s address this question at the end of the monsoon. It’s clear that the pattern of the monsoon over years has changed. We seem to have these sudden spurts rather than this constant monsoon. Let’s revisit around 15th of September and then we’ll know where prosperity is high, where it is — and where it hasn’t been good. Very difficult to say currently.

Divij Muthappa — Ankhonia Advisors — Analyst

Done, sir. Look forward to speaking to you then. Thank you.

Bharat Puri — Managing Director

Sure. Thanks.

Operator

Thank you very much. [Operator Instructions] We’ll take the next question from the line of Sanchit Narang from Paras Sales [Phonetic]. Please go ahead, sir.

Unidentified Participant — — Analyst

Hi, sir. Thanks for the opportunity. Hello?

Bharat Puri — Managing Director

Yes. Yes, Rachit.

Unidentified Participant — — Analyst

Yes. My first question is that in C&B business, what I’m seeing is that margin is dipping to like 2% from the past year basically.

Bharat Puri — Managing Director

Sorry, you are not very audible, my friend. Just repeat your question.

Unidentified Participant — — Analyst

Sir, I’m saying that in C&B business, we are seeing a 2% margin drop as we compare it to a year-on-year basis. And so when can we expect it to come back to the previous levels like it was for 24% previously?

Bharat Puri — Managing Director

See, as of now, as we’ve consistently said, we have purposely moderated margins in the interests of volumes. As raw material prices ease, as input prices ease, we will see it come back. We would rather prioritize volume. If you see the absolute profit, we are still growing very healthily. So we would still prioritize volume over percentage margins, but given the way raw materials are difficult to say, but I would suspect hopefully, our exit margins will be in our band of 20% to 24%.

Unidentified Participant — — Analyst

Okay. That’s helpful, sir. And the second thing, if you can guide us with the PAPL numbers in terms of revenue.

Bharat Puri — Managing Director

See, PAPL now got merged into Pidilite, but if you have last year’s numbers, I can tell you that our growth rates in PAPL are very similar to our growth rates at an overall level. So PAPL is growing very healthily.

Unidentified Participant — — Analyst

Okay. That’s helpful, sir. And that’s all from my side.

Bharat Puri — Managing Director

Thank you, Sanchit.

Operator

Thank you very much. We’ll take the next follow-up question from the line of Rishi Mody from Marcellus Investments Manager. Please go ahead, sir.

Rishi Mody — Marcellus Investment Managers — Analyst

Yeah. So just one broad question, right? So you’re seeing a lot of this trend of a modular furniture coming into the play for people who are renovating their home or they’re buying new homes. So just wanted to understand how you view this. Is it a positive, is it a negative because what we understand is there’s a lot of glue gets consumed in furniture and a bunch of it gets wasted, which is going to reduce once modular furniture comes into play. So I’m coming from that thought line. So if you could just give me more understanding of this phenomenon that is taking place in the furniture industry.

Bharat Puri — Managing Director

See, for long, we’ve been looking at the whole area of modular furniture. It’s actually — it’s not a new this thing. Modular furniture has now existed for a large period of time, like there are large number of joineries that have been set up. One of the reasons why we did our tie-up with Jowat who is Europe’s leader i a technology called hot melts, which actually go in these joineries is that we wanted the same market share in the joineries that we have in retail.

So having said that, what we are seeing, Rishi, is that while modular in a growth rate sense maybe higher, it is still 85-15 or 90-10 between customers making custom-made furniture, because this is the only country in the world where you can custom-make your furniture to your house, and it’s cheaper than ready-made furniture. And, therefore, while 10 years back, we all did this trend work and thought that it’s going to actually go up very substantially, frankly, the growth rates have not been at those levels at all.

Having said that, we’re obviously alive to it. We keep studying it. We have similar market shares in the joineries that we have at custom-made furniture.

Rishi Mody — Marcellus Investment Managers — Analyst

So like let’s say if I am to get an idea of how much value of adhesive gets used in a custom-made furniture versus a modular furniture, including your joineries have been in. If 10 rupees gets used our custom-made furniture, how much would be getting used in a modular furniture in totality?

Bharat Puri — Managing Director

In — frankly, in value, the number because the technology used this different. What joineries use a technology called hot melt adhesives, which actually melt under heat, which are — incidentally, we only — now, one or two other people may be still trying but we’re the only local manufacturers of hot melt. The rest is all imported. So on a per kg cost etc. or on a usage cost, there’s not a great difference.

Rishi Mody — Marcellus Investment Managers — Analyst

Okay. Okay. All right.

Bharat Puri — Managing Director

It’s only at the lower end of the market whereas the cheaper end of the market just as in custom-made furniture, you have economy glues, in joinery furniture, the cheap joineries may be using cheaper products.

Rishi Mody — Marcellus Investment Managers — Analyst

Okay. So like ideally if modular furniture picks up over the next decade or so, we should ideally benefit from it given the current scenario. Of course, there will be prices coming down in the future once more players enter but the high-value items go into modular furniture compared to the custom furniture?

Bharat Puri — Managing Director

It all depends on the quality of furniture, my friend. Just as in every market, there is furniture for rich India, middle India, and aspirant India, it’s the same here. So the qualities differ dramatically. Difficult to make one generalization.

Rishi Mody — Marcellus Investment Managers — Analyst

Okay. Okay. Got that. Thank you, sir.

Bharat Puri — Managing Director

Thank you.

Operator

Thank you very much. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to Mr. Arun Baid for closing comments. Thank you, and over to you, sir.

Arun Baid — ICICI Securities Limited — Analyst

On behalf of all the ICICI Securities, I thank the management of Pidilite for allowing us to host the call. I’ll hand over the call to the management for any closing remarks, post which we can close the call.

Bharat Puri — Managing Director

No. Thank you very much to all those who joined the call for their continued interest in tracking Pidilite and will connect with you after the second quarter. Have a good evening, gentlemen.

Operator

Thank you on behalf of ICICI Securities. [Operator Instructions]

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