Ladies, and gentlemen, good day, and welcome to the Pidilite Industries Limited Q2 FY 2023 Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there'll be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Krishnan Sambamoorthy. Thank you, and over to you, sir. Thanks, Mike. On behalf of Motilal Oswal Financial Services, I welcome you all to the 2Q and 1H FY 2023 results conference call of Pidilite. As always, it's a pleasure to host the management of Pidilite Industries. We have with us Mr. Bharat Puri, Managing Director. With us Mr. Sudhanshu Vats, Deputy Managing Director. Mr. Sandeep Batra, CFO, as well as Mr. Sunil Burde, Vice President Accounts. I now hand over the call to the management for opening comments. Right. Good afternoon, this is Sandeep Batra from the offices of Pidilite. I will begin with a summary of the financial performance for the quarter and half year ended 30th September. On a consolidated basis, net sales for the half year stood at INR 6,090 crores, a growth of 34.1%, which was aided by strong volume growth across categories and geographies. Our growth was broad-based across Consumer and Bazaar segment, which grew 35%, and the B2B segment, which grew by 33%. This growth was enabled by distribution expansion, innovation, a very responsive supply chain, and our ongoing digital initiatives. For the quarter, consolidated net sales was INR 3,000 crores, a growth of 14.8%. This quarter saw input costs at all-time high levels, with material cost as a percentage to net sales higher by 436 basis points over the same period last year and 74 basis points sequentially. Calibrated price increases as well as a sharp focus on operational efficiencies helped us to maintain EBITDA margins in line with the previous two quarters. Absolute EBITDA for the half year at INR 1,029 crores was up by 14.7% over the same period last year. EBITDA for the current quarter at INR 500 crores was lower by 9% over the same period last year. Now moving on to standalone financial performance. Net sales for the half year at INR 5,481 crores was 35% higher than same period last year, again led by 35.4% growth in Consumer and Bazaar and 33.7% growth in the B2B segment. For the quarter, net sales at INR 2,703 crores were higher by 15.1%. The consumption rates of our key raw material, VAM, have continued to increase during the quarter. Q2 VAM consumption rate was $2,491 per ton versus the previous quarter being $2,231 per ton. Our current rates at which we are ordering are ranging between $1,200-$1,400. EBITDA before non-operating income for the first half was 11.5% higher at INR 951 crore, and profit before tax and exceptional items for the half year at INR 876 crore was 14.2% higher. I'll also give a quick overview of the performance of our subsidiaries. Domestic subsidiaries maintained positive momentum, with the Consumer and Bazaar-oriented subsidiaries continuing to deliver industry-leading growth and margins, while the B2B subsidiaries reduced their losses significantly. International subsidiaries witnessed good sales growth, but EBITDA remained under pressure due to higher input costs. We remain cautiously optimistic on improving demand conditions aided by favorable monsoon and increase in construction activities, and with the decline in commodity costs, particularly VAM, profitability will improve sequentially. Our focus continues to be to deliver broad-based profitable volume growth. With this, open to any questions that the participants may have. Thank you, sir. We will now begin the question- and- answer session. Participants who wish to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies, and gentlemen, we'll wait for a moment while the question queue assembles. We have the first question from the line of Avi Mehta from Macquarie. Please go ahead. Hi, sir. am i audible? Yes, you are. Yes, you are. Yeah. Yeah. I'm sorry, I just missed the initial comments on the VAM. Could you kind of re-highlight that first? That was the first one. Sure. Do you want me to respond to that? So our, the consumption rate for VAM for the second quarter was $2,491 per ton, as opposed to $2,231 in the first quarter of this fiscal. Last year, same period, it was $2,071 per ton. And so- Current spot rates are ranging between INR 1,200-INR 1,400. Even just kind of taking this forward, given where the VAM situation is, it's, you know, more or less kind of back to pre-COVID levels or actually closer to that. Would you now argue for a more front-ended return to the earlier shared guidance of 20%-24% EBITDA margin in the second half? Would that be the right way to see this? See, I think there are two factors to be looked at. One is, w hile VAM is a very important and key raw material, it's maybe about 20%-25% of our raw material basket. There are other raw materials which have not yet come back to the kind of pre-COVID levels. Secondly, the currency has depreciated by more than 10%. Thirdly, we are carrying inventory both of raw material as well as finished goods. I think on a blended basis, certainly while we see margins improving, maybe in the fourth quarter, we should be able to report the EBITDA margins north of 20%. To give a very specific number at this stage would be difficult. Fair enough, sir. This is helpful. The second bit, sir, I just want to kind of, you know, better appreciate the demand situation. You know, you highlighted there being some tailwinds for demand as we go forward, given that construction activity has improved. You kind of shared some caution because there was weakness in this quarter. Would you know, in your best estimate, you know, do you see that we are now in the path of recovery to reaching back a double-digit level in volume growth? Or is this going to take some time more for us to kind of move back to that level? Any comments on that front would be very useful, sir. Good afternoon, Avi. I think that's the right question. See, my invitation to you is if you look at and pick out quarters, then it tends to distort the picture. If you look at the first half, and we also look at CAGRs, which I think probably is the best indicator, including over the pre-COVID period. You would find that for the first half, whether it is our value or volume growth, both will be in a CAGR basis in the mid-teens. Therefore, to my mind, as far as demand is concerned, while obviously the jury is out to see how does rural and semi-urban come back in the third and fourth quarters, there is sufficient evidence to show that there is a tailwind, especially in urban, including the class one, class two towns, both from a real estate, construction activity, and the consumer's overall attitude towards the home. If you were to ask me at an overall level, obviously our objective would be volume growth, profitable volume growth. The way it looks currently is while, you know, for example, I can tell you that the last year, the second and the third quarters were bumper quarters for two reasons. One was the first quarter was, you know, a quarter of a lot of closures and therefore there was a lot of pent-up demand in the second quarter. In the third quarter, there was substantial pricing that we had taken two large price increases because of the raw material situation and therefore dealer inventories have substantially gone up. Now, when you equalize this over the year, we are, you know, our objective remains double-digit volume growth, and we are fairly confident that for the year that's where you'll be. We've always trended and said, listen, core categories at 1x-1.5x GDP growth categories at 2x-5x GDP growth, and pioneer categories at INR 100 crore in three years. If you look at it, the last three-year period were actually fairly consistent on these parameters, in fact, beating them by some distance. Yes, sir. I mean, if I hear you correctly, because, you know, as you rightly said, quarter beats getting a little noisy. That's why I just wanted to kind of, you know, would you say because price hikes are also, as you rightly said, we started in the second half, so they're not yet in the base as we speak. Is the right lens to see as pricing starts to become normal, this pricing growth will move towards volume, or that's not the right way? That's what I was trying to articulate better. I think the right way to look at it is two things. One is definitely volume growth, because in any emerging market that is a greater indicator of greater usage as well as new customers. You know, we will also keep looking at because we've had these unnatural years where, you know, somewhere second quarter was impacted, somewhere third quarter. We're also looking at CAGRs over the pre-COVID period and seeing that, listen, overall equalizing for all of this, are we growing substantially or not? Fortunately for us, the answer is yes. Okay. Okay. Got it, sir. Sir, just a last bookkeeping request. Would it be possible to give us a sense on the volume growth for the quarter? It just helps us appreciate the three-year CAGR on volume a lot better. It's not- It will be about 1.2%-1.5% on Consumer and Bazaar. Overall, you can take it as pretty much on par. Point something it is. Okay. Similar as to our Consumer and Bazaar. Okay, sir. Overall. Yeah. Thank you very much. For the first half, it is about 21% volume growth. 21% on overall basis. Yeah. Thank you very much, sir. Thanks a lot. That's all from my side. Thank you. Thanks. Participants who wish to ask a question may press star and one on your touchtone telephone. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question from the line of Ritesh Shah from Investec. Please go ahead. Hi, sir. Thanks for the opportunity. Sir, my first question is, how do you reflect upon the recent amendment which has come to Section 194R under the Income Tax Act? Basically it reflects on the incentives like gifts and perquisites, which are given to the channel partners. How does it impact us or, how should we understand this particular variable for the company? I think that's a great question. It definitely impacts us because obviously our incentives. You know, for all leading companies with leader products, what you try and do is give dealers non-cash incentives so that, you know, there is not undercutting in the market. Now, we've obviously therefore evolved a set of policies by taking this into account. I mean, you know, it's something that we don't welcome, but it is something we have to live with, and we will live with it. You know what I mean? Yes. I think, you know, we are, from a compliance point of view, totally on top of it, in terms of, and not only how it impacts us, but also how it impacts our channel partners. We have from that point of view educated all the channel partners, the implications that this has on us, on our business with them and on their business. We have factored the impact of that in our business model going forward. Mr. Ritesh, is that all? Hello. Hello. I'm audible? Yes, now you are. Yeah, yeah. Sir, let me just rephrase the question. I'll just take a step back. If one has to understand how much is the money that we put on the table for the distributors, for the dealers and the influencers separately. If you can explain it from a margin standpoint or if you are selling something for INR 100, basically if there's a bridge available, taking into account the margins, for the different parts of the value chain. We have not reduced or adjusted the margins of the channel partners. Whatever is the impact we have, as I said, factored that in our business model going forward. The amount in any case is not very material. Okay. Sir, when we look at this particular variable from a marketplace standpoint, is it something that we will incur more expense so that the dealer gets the same quantum or basically we are telling the dealer that you will get less because we are adjusting for the tax collection? I think it is a combination. We are not, it's not a hard and fast rule. Depending upon the program that we are running, the kind of benefit that is being given, we have calibrated that accordingly. There is no hard and fast rule that either dealer will bear or we will bear. It's something that we have, as I said, first of all, it is not very material. Secondly, we have factored that in without in any way trying to compromise the relationship that we have with our channel partners. You know, I'm very happy to connect with you outside this call if you have any other specific questions on this topic. Sure. I'll connect with you separately on this. Sir, my second question is on price growth. You did indicate variables of rural and urban demand. Plus there will be some benefits on raw material prices actually softening going forward. So how should we look at incremental pricing trends for the two segments? If you can throw a color over here, that would be useful. See, as far as pricing is concerned, we don't see ourselves taking any more pricing. I think we're currently fully priced and therefore we see no further pricing actions from us either on a B2C or a B2B basis. In fact, in B2B in certain cases we will be looking at a reduction in prices. In B2C, we will start, you know, look at the rupee as well as the overall cost of raw materials and then take appropriate calls. We don't see any further pricing action in terms of increasing prices. Sure, sir. This is helpful. I'll join back with you. Thank you so much. Thank you. Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question from the line of Latika Chopra from JP Morgan. Please go ahead. Yeah. Hi. Thanks for the opportunity. Couple of questions. The first was, you know, if you could provide some flavor on, what is the contribution or exposure of your portfolio towards new constructions and, you know, what is the kind of momentum you're witnessing on that part of the business? Good to hear from you, Latika. See, it's a very difficult question, and I'll tell you why, because different divisions of ours have different exposures to new construction, there are some which are, you know, more correlated, like for example, the tile adhesive business and obviously waterproofing, especially new construction, tends to be larger users. Having said that, you know, the basic ground rule that we follow, but don't hold us to it, you know, to the last decimal point is, it's 2/3 and 1/3. 2/3 of our business tends to come out of renovation and repair, and 1/3 of our business tends to come out of new construction. Clearly, there is a certain tailwind as far as new construction is concerned across the board. It is visible both in an organized real estate sense as well as new constructions in, you know, Class 1 and Class 2 towns. Sure. Thanks for that. My second question was around, you know, innovation intensity. You know, you alluded to the fact that you're looking to, you know, pace it up, and probably every division will see, you know, one new launch every quarter, if I remember correctly. I wanted to understand, you know, what's been the progress in that aspect? You know, what are the kind of product introductions you are, you know, rolling out across your core categories and some of the new emerging categories? And what kind of, you know, revenue share some of these new products could eventually have in your view? Or what kind of a growth contribution can these, you know, products do to the overall, you know, Consumer and Bazaar in particular, you know, segment growth? That's a good question. In a steady state, you know, the objective we give our people is, hopefully 1/3 of our growth should come out of innovation, and 2/3 of our growth should have come out of growing the core. Now, we've got a whole set of products. Again, it is different for different divisions. A lot of them, for example, have been launched already in the last six months. You will see launches happening across the next six. As things normalize and as we're able to undertake a whole lot of field activity, and now we have enough flex in terms of being able to invest behind new products, you will see this at the intensity go up. You know, at Pidilite, we are clear that our four big drivers of growth remain, A, innovation, B, sales and distribution, C, digital, and the last being a resilient supply chain which yields better service and therefore growth. On all four, we have an ongoing, fairly aggressive program, which is to my mind, tracking on schedule. Okay. You know, Mr. Puri, you just alluded to the fact that for B2B segment, you know, you may take some price reductions, while for B2C one has to see, you know, how commodity trends behave. One part was, you know, what is the salience of B2B generally in your overall business mix? Second was, in the past cycles, you know, when commodities have seen deflation, how has your pricing strategy behaved for the core adhesives portfolio or waterproofing portfolio in the past? I I mean, is there actually a need to return back the full price increases that you have taken? Because this time these have been very significant. Or how would you think about that? See, I think, again, great question. If you look at the core adhesives portfolio from a B2C perspective, clearly we've always maintained that we thought that this raw material inflation was not permanent, it was temporary, and therefore we will only price at 75% of inflation. In our Bazaar and Consumer segments, we have, you know, we deliberately called out that we're gonna reduce our margins because we believe that, this is not something that is permanent. Fortunately, we've been proven right as prices have now come southwards. Now, as far as we're concerned, our overall principle, Latika, is that we believe in the core adhesives portfolio, our brands command a premium of about 15%. That's the kind of premium that we maintain from a pricing point of view. We believe any premium that we take more than that tends to affect our volume growth, and our mantra remains profitable volume growth. Therefore, that's the stance we will continue to follow as we go forward. As far as B2B is concerned, remember, in B2B, you raise prices also much faster and you reduce them because the customer is getting impacted straightaway. Given its size, B2B remains about 15% of our business. It's not a substantial impact. From a profitability point of view, we've already obviously worked that through our plans. Sure. That's very clear. Thank you so much, Mr. Puri, for answering my question. Most welcome. Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question on the line of Krishnan Sambamoorthy. Please go ahead. Yeah, Mike, I'm audible. Yes, we can hear you, Krishnan. Yeah. Hi, Bharat. My question is on the comeback of smaller regional unorganized players. I think various estimates have been at about 1/3 of the market. Now, given that they're seeing extremely sharp commodity cost deflation, and particularly on a sequential basis, do you see a risk that they are coming back, there could be even if the market situation improves, would you see slower growth as some of these players who were badly affected by RM price made their businesses unviable? Or given the shortage of VAM globally, were not even able to procure VAM, would that affect your growth in the time that these guys come back? Sure. Good to hear from you, Krishnan. See, listen, as far as the, there is no doubt about the fact that the smaller regional players will have greater access and, you know, lesser inventory, and therefore they will come back. Remember, a large part of their share has been taken by the bigger competitors who could be regional or even national, for example. We have tended to take far lesser share from them because these tend to operate at the price competitive end of the market, at the lower end of the market. Having said that, I think, yes, you will see greater competition, but I do also think that given the current trends, you will also see greater demand. Therefore, you know, you will come back to a situation of normalcy, I suspect, by the first quarter of next year. Sure. That's useful, Bharat. My second question is on, given that, Sandeep mentioned that there's been such a steep reduction in your purchasing costs, have you taken any price reductions, in the last month or so? We've taken price reductions only for B2B customers where it was necessary. We haven't taken in B2C areas because remember, A, we haven't priced to the full extent. B, remember the INR 1,200 price was at a rupee at 73-74 and not 81-82 as it is now. Therefore working that out if there is a need. As I said, remember our stance is very clear. We will work with a price premium of about 15%. If we find that that premium is going higher, we will reduce prices. Now, it may be via discounts or it may be via price increase, price list cuts. Sure. That's clear. Thanks, Bharat. Thank you. Participants who wish to ask a question may press star and one on your touch-tone telephone. We have the next question on the line of Shirish Pardeshi from Centrum. Please go ahead. Yeah. Hi, good evening, Bharat. Thanks for the opportunity. Yeah, just two questions. At this point of time, what is our weighted inflation which we are seeing? Because I heard in the previous commentary that there is some prices of raw material has not softened. In that context, just wanted to hear what is the current inflation and how the sequential inflation has moved. I'll give you the answer via an index. We have a raw material index that we track internally. If you take base year as 2019, 2020, that index had reached up to 193 in June, went up to 200 in September. Sequentially, quarter-over-quarter, there was an increase. We now see that index coming down to maybe 180 or something in the third quarter. Okay. Keep in mind that, you know, even versus same period like last year, in material margin we have a 500 basis points gap, right? Even if you take last year second quarter as the base. Thank you, Sandeep. That's helpful. Yeah. The second question I have, if you can share some context into the Consumer and Bazaar, the distribution expansion. I think I really liked this time there is some more information which has happened, but maybe your efforts on expanding the distribution, if you can give some color. Sure. See, we, you know, we've consistently maintained, Shirish, that one of our drivers of growth is sales and distribution. In our categories, even equalized for income, we believe there is a substantial opportunity in small town and rural India, which is why we set up a separate division called Emerging India, which over the last four years has made a tremendous amount of progress. Currently, for example, over the last two years, we have increased coverage in towns and villages below 10,000 by about 20,000. We now cover 24,000 such villages against about 13,000 or 14,000 a year. In 10,000-20,000, we are pretty much now covering the large part of the universe. Is it in 25,000-50,000. We have a whole set of initiatives around both reach, the availability and the quality of availability, and then, you know, obviously demand generation, teaching people how to use. You know, we have an initiative called Pidilite Ki Duniya, which is small rural stores in villages below 10,000. We are now slowly reaching about 7,000 such stores across rural India. On a consistent basis, we believe over the next not just 12 or 24 months, but possibly over the next three to five years, this will remain an avenue of growth for Pidilite. That's helpful, Bharat. Just one follow-up on here. When we track the paint companies, they are also making an effort. Now, I do understand the comments what you passed on last quarter call. But just more curious to understand if what is the distribution advantage to the paint companies versus Pidilite? See, I think very simply, if you look at the number of outlets that paint companies cover directly vis-a-vis us, our number is far, far larger, largely because of the range that we have, the kind of price points that we have. For example, we would be actually covering pretty much twice the number of outlets that the largest paint company covers on a direct basis. Okay, got it. Thank you, and all the best to you. Thank you so much. Thank you. We have the next question on the line with Ritesh Shah from Investec. Please go ahead. Hi, thanks for the follow-up. Sir, you gave a very interesting data point. You indicated, we try to maintain a 10% premium on the brand as it impacts our volumes. Did I hear it right, sir? Yes, 10%-15%. Sir, how should one better understand this number, if one has to look at it from a price elasticity of demand standpoint, and if you could bifurcate it between B2B, B2C, I think, that would be awesome? This is purely on B2C and not B2B. B2B tends to be different for different people. B2B has a very large number of segments, and therefore like, you know, for example, what you will do in textile emulsions is very different from what you will do in pigments, which is different from what you will do in joinery adhesives. Leave B2B aside for a moment. B2B is much more a price-value relationship. In B2C, really we look at our competitors who we believe are competing head-on against us, and we believe, you know, we always maintain a product advantage. One of Pidilite's philosophies has always been to offer a better product which is demonstrably better and can be demonstrated so to the consumer. Obviously, on that we overlay our brand-building activities both with the consumer as well as the user, and that gives us a premium of between 10% and 15% in the market. Sir, if one had to include the quantum of discounts over here, which we give to the value chain, how will this number change from 10%-15%? It's the net. I'm talking of net, post all discounts. I mean, every competitor of mine will be. You know, if you look at their price lists, they will price at the same rate as us, but they will be giving discounts 4x or 5x us. Okay. This is net of discounts, so that's great. Sir, what will be the number, similar number on the B2B side? It will be significantly lower, right, sir? How should we understand that? Has that number changed given the competitive intensity has increased in the several segments that we operate in? See, in B2B it's very difficult. As I told you, there are very distinct segments and technology plays a very large part. Like for example, if I give you an example of organized furniture, the large furniture makers, they use a technology called hot melt adhesives, right? We are one of the few people in India who make, you know, European quality because we have a collaboration with the leading Europeans. We are the only guys who make, everybody else imports it. Now, obviously, therefore, the margins there would be very healthy. It depends product to product and what's the price premium. As a company, one of our movements over the last, I would say five to 10 years, has been to consistently keep moving up the value chain and vacating the commodity end of the markets. Unlike a lot of, say, other companies in other sectors who have been going after volume for volumes, we don't do that. We actually. Our mantra is profitable volume growth, not just volume growth. Okay. Sir, sorry for a follow-up, sir. Can you highlight any particular segment that we have vacated over last, say, five years, seven years, specifically on the B2B side of things? See, we had a whole range of lower priced, for example, you know, products which were at the base level in, say for example, for furniture centers, for joineries, et cetera. Over time, either we've improved and, you know, priced those higher and had better products or we vacated those. We've got, I mean, you will see this both in B2C and B2B. Sure, sir. This is helpful. Thank you so much. Participants who wish to ask a question may press star and one on your touch-tone telephone. Participants who wish to ask a question may press star and one on your touch-tone telephone. Sir, I'll go then. Particularly with the growth that you have indicated in rural in towns with over 20,000 population as well as with between 10,000 and 20,000. Has the regional skew of your business changed, is that which particularly towards the northern and eastern part of the country? Actually, no. I mean, overall our growth has been fairly secular across all regions of the country. We haven't seen. I mean, there are, you know, at times you will find, for example, in one year or two years, but over a larger period of time, actually, you know, we follow a system where we correlate to ability to pay. There frankly, our penetration is fairly, I mean, our penetration and market shares don't change dramatically over, you know, the four regions of the country. Okay. As the waterproofing business becomes larger, would that regional skews remain similar to your Consumer and Bazaar segment? No, in the waterproofing segment, by definition, wherever there is more water, therefore higher rainfall, those markets tend to be bigger. As waterproofing gets much bigger, the coastal areas of the country, the areas where there is higher rainfall, will tend to play a larger role than the drier part of the country where, you know, the problem therefore of waterproofing is not such an. You don't need solutions that are very rigorous and expensive. Got it. My last question is on, as a book closing question, given the continued healthy demand prospects, what are your CapEx plans for both FY 2023 as well as FY 2024? See, as we've maintained over the years. You know, one of the first things we did during COVID, Krishnan, was we realized that supply chains will have to change dramatically. In the course of the last three years, we've actually completely rejigged our whole supply chain network. We now have 20 of our facilities across the country have been expanded substantially. These are brownfields. In addition, we put 11 new factories in place. You know, we now have more than 60 manufacturing locations across India, forgetting those abroad for a moment. We have plans, obviously, and, you know, we are clear that we are positioned for the next phase of growth. Whenever we find and we plan on a three-year basis, whenever we find even in three years later, based on our projections, we may be running short, we will always start looking at plans. We have, you know, you would see over the last three years, and you will see it over the next three, our CapEx tends to remain between 3%-5% of sales, but it remains a very active part of our growth plans going forward. Okay. Just a follow-up to that question. Are these 11 new plants that you indicated something similar to what the FMCG companies are doing, ITC and Lever, smaller and more nimbler plants closer to demand locations? Absolutely, yes. Okay. Thanks a lot. Thank you. We have no further questions. I would now like to hand it over to the management for closing comments. Thank you very much. Thank you to all the participants for your continued interest in Pidilite, and we'll connect again after the third quarter results. Thank you very much. Thank you very much, and have a good evening. Thank you. Thank you. Thank you. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.