Apollo Pipes Limited (531761) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Apollo Pipes Limited Q1 FY '22 Results Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jigar Kamdar from Systematix Institutional Equities. Thank you, and over to you, sir.

Thank you, Lizan. On behalf of Systematix Institutional Equities, I welcome all participants for Apollo Pipes Q1 FY '22 Earnings Con Call. The management of the Apollo Pipes will be represented by Mr. Sameer Gupta, Managing Director; and Mr. Ajay Kumar Jain, Chief Financial Officer. Now I hand over the call to Mr. Sameer Gupta for opening remarks. Over to you, sir.

Mr. Gupta, we are not able to hear you.

Sorry. Thank you. Good afternoon, everyone, and thank you for joining us on the Q1 FY '22 earnings call to discuss the operating and financial performance for the quarter. I trust you and your families are safe. I hope you all had the opportunity to go through our result presentation, which provides details of our operational and financial performance for the quarter Q1 FY '22. To begin with, I'm pleased to share with you that we have reported a linear performance during the quarter. Our sales volume decreased marginally by 2% to 10,402 metric tons due to country-wide pandemic and sluggish domestic demand. However, our cost optimization measures and improved contributions from the high-margin setting segment resulted in a better gross margin performance during the quarter. Furthermore, expansion of our product portfolio, improved reach in new geographies and addition of our new brownfield capacity assisted volume growth. Over the next few quarters, we anticipate this sales performance to strengthen led by improving demand improvement and [indiscernible] extension in markets and a sustainable uptick in utilization level. Moving on the operation front, we have successfully completed all our brownfield manufacturing extensions across facilities located at Dadri, Tumkur and Sikandrabad, though optimization of our greenfield facility at Raipur, which would have an installed capacity of 7,200 metric tons per annum is delayed due to impact of COVID -- second wave of COVID. However, we expect to commercialize this facility from next month, that is August 2021. So in all, with the addition of new capacities, we will be able to notably scale our volumes in the coming quarters. In addition, we are aiming optimally utilization of our -- utilizing our capacities over the next 2 years, which will also help to organize our sales volume going ahead. From a core basket standpoint, we continue to witness a positive traction in price of APL Apollo water storage tank. We have already doubled our capacity for water storage tanks at our Sikandrabad plant and also commissioned our production line in Tumkur to ensure that we can increase demand. We have identified a strong business segment for this. We have also identified strong business segment for us, which is bath fittings. This is highly segmented industry, which will give potential for Apollo to emerge as a leading brand. Margins are superior in this segment. We are confident that this product, along with our other value-added offerings like fittings, solvent cement and adhesives will enhance our reach and strengthen our sales going forward. To conclude, I would like to state that we are constantly working towards enhancing our presence across the existing and new potential geographies. Once we complete [ operationalization ] of our plants, we expect to address the untapped and high potential market of Eastern and Central India as well. Going forward, we expect to deliver on our performance in the quarters to come and further gain the momentum on the back of improved totality and extension in geographical areas and better brand acceptance. On that note, I would now like to invite Mr. Ajay Jain to run you through the key financial highlights for the Q1 '22 -- FY '22. Thank you.

Good afternoon, everyone. I will briefly cover the financial performance during the quarter of Q1 FY '22. The company delivered a linear operational and financial performance during the quarter due to constraints like country-wide pandemic restrictions and sluggish domestic demand. Sales volume for the quarter stood at 10,402 metric tons, decreased marginally by 2% Y-o-Y as against 10,633 metric tons, which was 80% of sales volume of Q4 FY '21. Revenue from operations for the quarter stood at INR 137.6 crores as against INR 92.5 crores in Q1 FY '21, higher by 49% Y-o-Y. On the profitability front, EBITDA for the quarter grew by 182% Y-o-Y, which stood at INR 17.4 crores as against INR 6.2 crores in Q1 FY '21. EBITDA margin, which stood at 12.7% in Q1 FY '22 as against 6.7% in Q1 FY '21, higher by 598 bps. Going forward, we anticipate EBITDA margins to normalize from quarter 2 onwards. Interest cost stood at INR 8.8 crores, up by 338 -- sorry. Interest cost stood at INR 1.1 crores in Q1 FY '22 as against INR 2.1 crores in Q1 FY '21, declined by 50% Y-o-Y. PAT for the quarter stood at INR 8.8 crores, up by 338% Y-o-Y when compared to INR 2 crores in Q1 FY '21. PAT margins for the quarter stood at 6.4% as compared to 2.2% in Q1 FY '21, higher by [ 420 ] bps. Last but not the least, I'm happy to share that our company is not leveraging our balance sheet for any extension project. I believe our cash flow to this going ahead will improve on demand and productivity. Moving forward, from Q2 FY '22, we are discontinuing quarterly volume disclosure ahead of quarterly results due to sensitivity of data. So with this, I would now request the auditor to open the forum for any questions or suggestions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Bhargav from Kotak Mutual Fund.

Yes. Congrats for this performance. My first question as far as on the volume breakup, is it possible if you share the volume breakup between agri and non-agri because our volume decline is just about 2%. Just wanted to know how has been the breakup between agri and non-agri?

Between agri and non-agri, the ratio is somewhere 55% will be the agri business, and 45% is the building products.

And is it possible to share the Y-o-Y volume growth for agri and non-agri?

Y-o-Y first quarter?

Yes, yes, for the quarter, yes.

Hi Bhargav, Anubhav here. So when we say that 45 building material in Q1 and 55 agri and infra, this is with the fact that Q1 is seasonally heavy for the agri side. Otherwise, this would have been like 50-50, what we closed FY '21 at, right? And in terms of value growth, the building material revenue has grown at 50% on Y-o-Y basis because the proportion was very low in Q1 of FY '21 because of lockdown and heavy sales from the agri and infra side in Q1 FY '21.

And how about the aggregate portfolio, has it declined in double digits?

No, even agri, we have seen double-digit growth in Q1.

So value growth, okay.

Value base, yes.

Yes. Secondly, is it possible to know what has been the operating cash flow and free cash flow generation in the first quarter? And how was it on a Y-o-Y basis?

So on a cash flow basis, we are still a net cash company. Our net cash stands similar to what was there on March 31, 2021, except that there is a slight increase in the working capital because of the lockdown restrictions what we witnessed in Q1. Otherwise, the operating cash flow to EBITDA, if we remove the increase in inventory, that remains same what we witnessed in FY '21.

On the branding side, how are we looking at spending in FY '22? I believe we've appointed a couple of new brand ambassadors. So how is the branding side likely to pan out?

So Bhargav, see, I mean, if you look at our ad spends so far, right, which are mainly focusing on below-the-line branding campaigns, right, we are spending anywhere around 1% to 2% of our turnover, okay, depending on like which campaign goes in any specific quarter. With our focus now turning on above-the-line aggressive campaigns with the appointment of Bollywood celebrity, et cetera, we should be looking to spend around 3% to 3.5% on our full year FY '22 revenue estimate, which we believe will give us a very strong and aggressive campaign to come up with.

And lastly, how is the plastic process business doing? I believe we are sort of now away from the gestation period, and now the business is looking like coming on stream. So is it possible to share the size of the business margins in this business whatever you can share?

So Bhargav, I mean, this is something that we are very excited about as we speak today, right? What we have seen is that this industry is highly segmented, okay? With the absence of large formal organized players, okay, where we think that we can fill a big gap, okay, which has been there in this industry with superior margins. So we have been adding new product range at our plants, right? Our focus -- our target was to generate like 5% of our turnover from this segment, which we believe can potentially be above 10% now, okay? So we also appointed Bollywood celebs specifically for this segment with enhanced packaging and revised brand campaign, so which is yielding very good results. And we are hopeful that this business could be a very big revenue lever for Apollo, and it will help us meet our target of INR 1,000 crore turnover on a sustainable basis.

This 10% of revenue target is by what period, FY '23 or FY '24?

I mean, if things go as per the plan, you might see us I think 10% of turnover in FY '23 itself.

Okay. And is it fair to get this higher-margin than the pipe business?

Yes, it has.

We'll move on to the next question. That is from the line of Shaleen Kumar from UBS.

So just -- first of all, just an observation. When I was going through the presentation, you have 1,500 SKUs, and you're talking about 2,500 SKUs. Why is your capacity -- while your expansion plan of capacity of 125,000 is already there. So like will you be able to launch these extra SKUs from your existing capacities? Or you need additional capacity for that?

Actually, marginal capacity additions will be there on account of such products, which we are adding up. Personally, we are working on the fitting side, which have high volumes, high margins. So the -- you can say value-added such products will be added, which are -- the molds will be ahead, which will be -- we can see run on the same machines, which are already there in the plant. So maximum investment will be there on the molds, which we are planning for increasing this SKU.

Right, sir. Sir, what kind of CapEx are you looking at for, let's say, next 3 years? So let's say you're targeting 20%, 25% growth. What are the CapEx you're looking at, let's say, the next 3 years?

We are targeting a CapEx of roughly around 20% to 25% of the EBITDA level per year over the next 2 years under unless and until we get a very good opportunity to diversify our business. Otherwise, we will be sticking on the same level of 20% to 25% as you can say regulatory investments on the SKUs or the normal machines.

So no major CapEx.

No major because we already have the capacity with us to announce our sales to INR 1,200 crores or INR 1,300 crores. So we don't actually need to reach the first target of INR 1,000 crores for -- and need to invest in the capacity for achieving this target. So whatever the target investments we make in the coming future, it will be adding up the targets for the coming years. So right now, we don't need actually any major expansion or major CapEx for the current target.

Right, sir. Right, right. Sir, what's the -- so I just made -- just a primitive question, like what is the sales breakup for us? Like if you see like in terms of the customer like proportion of B2C versus B2B customer segments?

We are maximum, you can say bank to -- B2C only. Our major focus is on the retail and the trade sales1 only. Our B2B is very low because we are not very much interested to contractor sales or other such sales because there is no such permanent -- you can see that stability is there. Any company can come and talk their prices and take over the business. So that is not our business model. So we are much more focused towards trade sales and the retail sales.

Right.

Just to add here that the medium through which we sell our products is 90% B2C. Okay? B2C, okay? Within that, there are 2 kinds of applications where our products go. One is agriculture and infrastructure. Second is building material, right? So today, 50% of our products go into building material space and 50% of our products go into agriculture and infrastructure space. But the medium to sell these products is 90% B2C.

Basically via distributors, right?

Via distributor network.

It is, yes. Right, right. Okay. Anubhav, in terms of the concentration or strength, are there like specific areas or gearing of the towns where we have strength of where we're targeting? Like we see that there are very much possible gaps in certain region of the country or maybe the town, like Tier 2 town, Tier 1 town? Obviously, irrigation would have been in rural areas, but building material and infrastructure.

So Shaleen, I mean, if you look at Apollo Pipes, today majority of revenue is coming from North region still, right, because we started expanding into pan-India markets from 2018 itself, okay? First plant we put up in West India, then we acquired -- when we acquired the Kisan molding plant in South India. Now we are just on the verge of starting our fourth plant in Raipur, which is Central India. So for Apollo Pipes, we have fairly good potential to expand our sales into these geographies because we are very new here. And with the focus more on distribution expansion and retail penetration, we are getting good response and which will be fueled with our ad spends, which will go up in FY '22 and our consistent or constant addition of product into our SKU portfolio. So this is giving us a good opportunity to keep on expanding and grow our sales. This is like rural or urban. I mean, in building materials, mainly you are selling our products in urban and semi-urban centers. Agri and infra is mainly semi-urban and rural area, right? We still think that there is maybe scope of new capacity in the -- to further expand in the West markets because Maharashtra is a very strong market for PVC, which we may evaluate at some point of time. But I think for us to grow within the closer markets near to our plant, so I think we -- our business plan of INR 1,000 crore turnover should be achieved by constant distribution network into areas near our plants.

We'll move on to the next question, got it from the line of Shrenik Bachhawat from JM Financial.

Sir, could you please help us understand what will be the sustainable gross margin level going forward?

The sustainable gross margin will be on the same line of 13% to 14% that we are targeting right now is because of the most focus on value-added product sales. So we are trying to maintain the same gross margin in coming -- in terms of coming quarters and years.

Sameer, this is EBITDA margin?

Yes, we are talking about the EBITDA margin right now.

And sir, gross margin [indiscernible]?

So talking about EBITDA margin, yes.

Yes. So I mean, we have been talking about EBITDA margins with the investors and analysts, okay? The reason is that it also takes our sales promotion and aspects into consideration. And just to answer on gross margin front, it's a clear function of constant increase of value-added production to our turnover, which is mainly driven by building material products such as CPVC, more fitting sales, solvents and adhesives, water storage tanks and plastic bathroom fittings. So gross margin should constantly move up. And at EBITDA level, the target which our business plan suggested, that 13% to 15% kind of EBITDA margin on a sustainable basis is possible.

And sir, our new greenfield plant in, Bangalore started operation -- operations?

You mean the Raipur plant?

Yes.

The Raipur plant is just on the verge of getting commenced. It's just that we are waiting for small and final approvals from the local authority, which should come over the next few days, and then we are ready to go.

The next question is from the line of Ankit from Bamboo Capital.

Yes. Anubhav, I missed the answer on the volume de-growth on the agri side, if you can repeat that?

No, there was no de-growth. There was double-digit growth.

I'm talking about volumes, volume, not value because the realizations have increased significantly.

Volume. So volume was flattish, okay, at 10,500 tons, okay. There was like marginal 2%. So let's assume that is flattish. The reason the volume was flattish in Q1 FY '22 was that in Q1 FY '21, there were heavy sales coming from the agri and infra side because the government had started spending heavily on the agriculture after the lockdown decisions were lifted, right? So that gave us good volume, right? And the revenue was around INR 950 million versus like in Q1 FY '22, our volume remains almost same. And our revenue, value-wise inched up to INR 1.3 billion, right? So this explains the -- this explains our -- this explains the shift of our sales from nonbuilding to building material. And this journey has been throughout in FY '21, right? Q2, Q3, Q4, Q1. And it has been consistently around 45% to 50% our building material volume, which was like 30% in Q1 last year.

Sure, sure, sure. And on the volume guidance part for this year, you are targeting 25% CAGR volume growth over the next few years. So how does this year look like, given we have seen de-growth in Q1? And any idea on -- or any feedback on how the Kharif sales in Q3 for the pipe season -- for the agri pipe season looks like?

So I guess, I mean, for us, our business plan, how we are looking at it as that we are targeting revenue, okay? And then volume is delivery of that, okay? So to achieve INR 1,000 crore turnover, what kind of product portfolio, what kind of sales mix we have to achieve, right? So that's how we are going about it. We think that today, the platform what we have created, okay, it has potential to give us 30%, 40% revenue growth in FY '22 and FY '23 consistently, right? And the volume growth could be high double-digit here, right? But the majority of value will come from the sale of value-added products, which are like better superior realization, which are better margin products.

That is one, but you would also realize that PVC prices have increased significantly, and that would also add a realization part even on simple PVC pipes. So volume growth for this year, do we expect we can -- in the next 3 quarters, if we don't see any significant hit because of third wave of COVID, you expect double-digit growth in volumes?

So like we clearly said that we are looking at high double-digit volume growth for next 2 years, right? And see, I mean, when we say that the revenue growth will be 30%, 40%, the EBITDA growth will also be same, right? If I'm considering the high realization on the back of high PVC prices, right, high PVC prices, then my EBITDA wouldn't grow at the same pace. So I'm saying 30% to 40% revenue growth, 30% to 40% EBITDA growth. That's how we're going to achieve INR 1,000 crores turnover over the next 2 years.

Sure. And on any inventory loss because of PVC prices coming down in the quarter?

Yes, there were some inventory loss, but that was not too much because we were trying to increase our sales on building products through which we were trying to mitigate the loss of -- and marginal loss of the inventory loss in this quarter. But again, going forward, the prices have rebounded, and we don't see any major inventory loss in coming days also.

Moreover, I think -- I mean, the other thing is like quarterly inventory plus/minus, what we believe is that today, we are capable of delivering 13% to 15% EBITDA margin on a sustainable basis, irrespective of fluctuation in the PVC prices, okay? So I mean PVC prices are going to be like plus/minus every quarter, every month, right? So what we do is that we work on minimum inventory levels so that we mitigate the risk of any fluctuation, which is coming from the PVC pricing. And second, focus on value-added products, where the gross margins are so high that 4%, 5% reduction addition in PVC prices won't impact our business model. So the point what we're trying to make here is that you look for -- you look upon us that we're going to deliver 13% to 15% EBITDA margin irrespective of how PVC prices would be.

Sure. And 2 broad questions on the strategy part, Anubhav. We have done exceptionally well over the past few years in diversifying from agri to almost 45%, 50% contribution from non-agri portfolio. And one thing we have been noticing is that all smaller regional players, including us, are trying to make it big on the building product side. And agriculture and not any bigger and even the smaller and midsized players in the industry are not focusing much on the agri side. And with the past 1, 1.5 years of COVID impact, do you see there is some vacuum being created on the agri side? And the tough competition that we are seeing on the agri might add on and the building product segment might become more competitive than agri side, agri PVC pipe industry over the next few years.

So, there are 2 things to it, okay? One is that, I mean, why we are focusing more on building material today than agri, not because like the building materials name looks fancy. It's about the margin. It's about the return on capital employed, what we generate from building material portfolio, right? Building materials margins are like almost like 2x of what you achieve in agri side, okay? So that's what is making us move towards the building material space, right? So that is one. Second, I mean, the competitors, the big competitors on unorganized sector, informal sector, I mean, not only in COVID wave 2. I mean, look at what's happening since 2016, which started right from demonetization, then GST shop, the [ NGFT ] crisis, then GDP economic slowdown, then corona wave 1, then corona wave 2. So there is space which is being vacated by smaller players, not only in agri, but also in building materials. Like in all of 30,000 crores of PVC industry category, right? And this is the reason that -- this is one of the reason that why we could achieve such a healthy growth rate over the last 3, 4 years, right? We have been -- we have doubled our turnover, almost double our turnover in the last 3 years, right? And now we are on a platform where we say that we could double our turnover from here in next 2 years, right? So I guess it's not a function of like agri versus non-agri. It is more function of where we can get leverage on our brand, where we can get superior margins where we can generate superior ROCE for our business.

No, I understand that part, Anubhav. But what I'm asking is, do you see the competitive intensity reducing on agri part and increasing on building material part? Because all -- even small and midsized players are looking at the fact that non-agri portfolio or the building product segment is -- has better economics, has better margins, ROCE and even it's not lumpy or it's not seasonal like agri. So do you think the better economics of building products segment might lead to this space crowding up and the margins and economics reducing?

Ankit, actually, let's answer to this. Actually, what is happening with the building product it is not so simple as we think like every agri business is. I think agri business, only we have to put [indiscernible] and food supply. And whereas in building products, you have to have a complete management of the fittings and all those, I was going to say, 1,500 SKUs, which we're talking about, 80% SKUs are from fittings only. So we need to manage all those things. For any unorganized player or small player, it is very difficult to manage the show with such high number of SKUs and maintain the inventories or deliver the goods in time or deliver the right good at right price. So we need to have complete management for this thing and which is not possible for any unorganized player where they say it's lot of trouble because of tax savings and because of -- uncompetent peoples with them and because of not good infrastructure with them. So that is actually the problem with them. And so these people or these type of unorganized industry. We'll continue to work in agri business only where the margins will always be in pressure. We cannot expect a high margin for this product because of very -- you can say that's a easy business of producing pipe and delivering it to the customer. Whereas in building products, you have to have a complete infrastructure. So that is the main difference between agriculture and non-agriculture. If any new company, which is to enter this product, then they have to have a complete infrastructure and complete setup so -- to deliver the goods to get the results. So by that, you can understand that the agri business will be, you can say, I can see low-margin growth in coming days also. And building products will be, you can say, a high-margin product because of that [indiscernible].

Sure. That was really helpful, sir. And just last question on our strategy for building plants with low installed capacity and geographically diversifying. We have seen some companies putting up big plants. And the companies like us, we establish a smaller plant and we establish a plant that -- smaller capacities and then ramp up or increase capacities over the next few years. So any views on this strategy and how is it different than not putting up big capacities at a single location and trying to achieve better economics of scale or -- from that particular location?

Okay. Yes, that is one idea. I agree to you that once we build up the sales in that area, then the putting up a big plant is, of course, that is more advisable. Other than that, wherever we are putting up the plant, the main focus is to produce wherever the low margin products are. They are like pipes we don't have good margins, and we need to deliver the goods to the customer to deliver other products. So with that view, we are putting up the plants to deliver low-margin items produced locally and producing the high-margin products at our main plant Dadri or Tumkur, where we are producing fittings and other value-added products to deliver all across India. And if we deliver these goods from the Dadri plant, the factory is very low because of the high-margin and high value products. The freight margin is almost 2% to 3% of the conceded total volume. And whereas if we produce it locally, the prices or the investment will be much higher as compared to this. So it is a much more advisable to produce it at a center location and distribute it to all the areas where we wish to sell at a common point at the plant via like Ahmedabad, or Tumkur or this Raipur. We are getting us our stock over there and distributing even small quantities from that plant in the nearby areas.

[Operator Instructions] The next question is from the line of Shalu Afisia from Anvisa Research.

Sir, my first question is I want to know the reason behind operational profit margin decline in quarter 1 financial year '22 as compared with quarter 4 financial year '21.

In the quarter 4 as compared to -- if you talk about the margin in quarter 4 and quarter 1, the quarter 4, we had, you can say, inventory gain in that quarter. That was actually helping us. Otherwise, our sustainable margin is 13% to 15% only, which we are targeting, and we are achieving on this. We are working on the same line.

So this [indiscernible] as per the industry norm, okay? This is nothing specific to Apollo Pipes. If you look at the numbers of any PVC company who would have reported, you will find a similar trend.

Okay, sir. And sir, can I know the current capacity utilization?

The current capacity, again, because we have high capacities available, so we are not able to utilize that. Moving forward, we would be using them. Currently, it is around 40%.

40%. And in the coming 2, 3 quarters, how we see it will go up?

So see, I mean, Q1, we did 10,500 tons of sales volume with our capacity of 118,000 tons, which is available. In Q2, the available capacity should be 125,000 tons as the Raipur plant would start. Last year, we did 48,000 -- 47,000, 48,000 tons of volume. In FY '22, we believe that high double-digit growth in volume is possible. So for the utilization level, rates will definitely go up. You can calculate with the numbers which we have given to you.

Okay. And sir, what is the debt level currently?

We are a net cash company with net cash of INR 100 million.

Okay. And these increase cost in interest, what is -- like what is there net?

I'm sorry. Please come again?

Interest cost.

Right.

Includes what like which item is coming...

So that's on a net level. We are a cash surplus company, but we have a gross debt. And then against that, we have fixed deposits in the bank, okay? So interest cost, what you see is from the gross debt. Against that, there is other income, which we receive interest on our FDs. So that was -- so it gets nullified. Both things get modified net-net. Net-net, we are a net cash company.

Okay, sir. And sir, can I know the current market share in India of our company?

Total industry size stands at around 30,000 crores, 35,000 crores, okay, on an annual basis. Last year, we did INR 520 crore of turnover. So you can calculate our market share.

Okay. And sir, can I know the individual capacities of the products?

Not really because...

like plumbing, pipes and fittings. Yes.

That's a bit of sensitive information. So we're not comfortable sharing this information.

The next question is from the line of Nikhil Gada from Abakkus Asset Manager.

Sir, my first question is -- so you mentioned about [ brandex ] being close to 3% to 3.5% of our sales in FY '22. Can you help me what this number was in FY '21?

FY '21, we were at 1.5% of turnover, so you can calculate.

And so when we are planning to increase this by another 2 percentage points. Do you still believe that this 13% to 15% EBITDA margin guidance that you've given for FY '22, that is achievable?

Yes. So all the additional incremental profits, which will come from the value addition. That will go into ad spend, right? So that's why we think that it is going to remain stable between 13% to 15%.

Okay. So just then in that case, can you help -- I guess our value-added products when we mentioned, so we include CPVC settings and maybe even plastic processor planning now. So what is that percentage share in terms of revenue in FY '21?

FY '21 was 50-50, okay? Q1 was 45 towards value-added because Q1 is [indiscernible] for agri.

I'm talking about the fittings and CPVC specifically.

Okay. So okay. So fittings and CPVC put together would be around 25% to 30%.

And how do we see this moving in the next couple of years?

So CPVC, we are growing at 30%, 40% on annualized basis. And fittings also, we are seeing very strong growth, similar growth rates. So this proportion should be like going -- inching up incrementally.

Okay. And sir, I don't want a specific number, but how much higher in percentage terms at least would the gross margins and these products be compared to our base product?

So I mean -- see, I mean, since we are talking on EBITDA level, so let me tell you on EBITDA level, the agri portfolio delivers margin less than 10%, okay? And the value-added building material portfolio delivers margin more than 15%.

Okay. And then secondly, regarding our raw material procurement, I guess, earlier, we were doing close to 80%, 90% imports. And since this entire COVID situation has happened, we are doing more domestic procurement, I'm assuming. So what would that percentage now be in terms of PVC, specifically?

For PVC, we are procuring all our raw materials for Tumkur, Raipur and Ahmedabad plant from local sources. Whereas from Dadri plant, it is around you can say 80% from imports, and 20% is from local sources. So somewhere around 30% and 70%, you can say that.

So 70% domestic and 30% is...

70% imports, and 30% is domestic.

Okay. So when we say that we have not faced many major inventory losses, what would be our raw material inventory generally, number of days?

It's less than 30 days, always.

It's less than 30 days. Okay.

The next question from the line of Karan from Asian Market Securities.

Congratulations for a good set of numbers. Just wanted to have some sense on the dealer inventory as on July end. I'm asking in the context because we've seen some price corrections from April till second week of July and suddenly we see...

Karan. Sir, your voice is breaking up. Can you use the handset mode while speaking?

Yes. Am I audible now?

Yes. Please go ahead.

Just wanted to have some sense on the dealer inventory as on July and I'm asking in the context because since April, we've seen some outward movement in the PVC prices. And suddenly from second week of July, we've seen some INR 1.5 to INR 2 high. So [indiscernible] reacting to the same?

Karan, your voice is actually breaking up.

Karan, I can't hear you. I'm sorry. Probably, you can go back in the queue, and you can disconnect and call again. Meanwhile, we can take other questions.

Yes, for now?

[indiscernible]

Sorry to interrupt, Karan, but we're not able to hear you, sir. Maybe the ... The next question is from the line of Madhav from Fidelity Investments.

I just want to understand like what is happening on the Nal Se Jal program, we've heard that traction has picked up across quite a few states. Are we seeing demand coming to organized players like ourselves as well? Or is it more restricted to some of the more unorganized players in the market?

Actually, the demand is coming up to the organized sector also, and we are also receiving good demand from this sector Nal Se Jal yojana. But of course, because it's a government supply, the unorganized sector is a bit strong. Because of that, we can see local presence over there. With the local authorities, we are able to cross very easily, whereas for us, we have to do through a channel. So that is a problem. Otherwise, we are getting good demand from this sector also. But our main focus is not worth testing. But on regular basis, our -- you can see the products -- because we have quality products, and we don't compromise on the quality front. So that is a bit of challenge for supplying to these government supplies. Otherwise, we are supplying regularly to this program, this new -- we are getting regular orders from them.

And then it is like very broad calculation like R&D, it seems like if all the demand -- I mean, given how much budget the government has increased for this program in this fiscal if that demand actually comes through the piping industry in India can expand by a good amount, like maybe 15% or -- which is a very large number. Do you think that kind of action is happening on the ground in the next 1, 2 years, the piping industry can expand by the quantity?

Yes, Madhav. Actually, the demand is floating in the market, the demands are there, but it basically depends on the funds or the fund allocation the department has with them so that the contractor can easily -- can supply the material to the departments. So that actually -- that trouble is there. Of course, the demand is there, and it is actually a very big number. But the fund problem is there. So people are not very considered aggressively supplying to this yojana because of that -- so that they don't get stuck with the payment program with these department.

So Madhav, I guess this is going like a typical government project, where the announcements are heavy, right? The CapEx plans, et cetera, are always aggressive and higher in number. And see, it's a big project, right? It's linked to like multiple states, some funds coming from central, some funds coming from state government, right? So a lot of government machinery has to get oiled here for the smooth functioning of this project. So I guess with the limited resources government could allocate, the project is going at a decent pace, not at the pace what PVC players would like to have, but as there is like constant flow of orders, and based on like everyone's capability to generate margin and collect receivables, collect cash right from the authorities, they are participating here. For us, I mean, it's a regular government project. We were never too much excited about it. Our -- because our main focus has always been towards credit sales, where we could sell our brand on our terms to our clients.

And how different broadly with the margins and the receivable cycle be for these kind of projects versus our case is?

So margins will be like single digit, okay? And the credit cycle would be like -- can go up to like 3 months also.

Okay. Understood. And just the other question from my side was I don't know if you've already addressed it, but in general, how is the demand condition right now? For the second wave, restrictions have gone down. Is demand like growing at a healthy pace again for us? Or is there still some challenges being faced?

Yes, of course, the demand is coming back in position, and we are getting good response from the market led by, I can say, we have seen marketing and good basket and good intensive broad reach also. So demand according to us, it is ramping up, and we are hoping that a bit of a slowdown in agriculture demand, maybe there because of the rains. Otherwise, regular demands of the building boards and other segments are there with us. And it's ramping up that. [indiscernible] position.

The next question is from the line of Dhruv from [indiscernible].

Congratulations on a good set of numbers. Sir, regarding the new [indiscernible], you were talking about high-value fittings products along with plastic bathroom products, correct?

Yes.

Yes. So what would be our strategy for this plastic bathroom segment? What is the market size currently? And how do you -- what are the target markets? If you could elaborate a bit, that would be great, sir.

Yes. Actually, this plastic bath fittings, they are mainly, you can see that sold in the Tier 2 and Tier 3 cities, where the people don't spend too much on the houses or you can say that for homes, their expenditure is very low. So we are targeting those size of cities only. And first of all, this -- the market is very much unfragmented. It is very much unorganized, very few organized players work in this segment. So a lot of demand scope is there -- if we talk about the market and the market potential. And if we talk about that product position, we are trying to position our product you can say along with the leading force in this product along the leading brands. So we are quite hopeful that we can increase our sales to at least 100 Cr in the, I can say, in next 2 or 2.5 years. We may ramp up our, you can say, product line or production to that level because the potential is there and the demand of the organized players versus there in the market. And lack of the organized player is giving us good opportunity to sell our product.

Okay. So this will be mainly for your current catchment areas of north state? Or will you look to add a few other markets in other parts of the country?

We are right now -- for bath fittings, we are targeting pan-India right now focusing towards the nearby area of Bangalore plant, along with that Eastern region and the Northern region.

The next question is from the line of Jaspreet Singh Arora from Equentis PMS.

Just some clarifications and some specific questions. So the 25% volume CAGR is over the next 3 years, while current year, we're targeting a high double digit. Is that what's been given?

So what we are saying is that we will achieve INR 1,000 crore turnover by FY '23, okay? So that makes 35%, 40% revenue CAGR. This will be supported by high double-digit volume growth.

High double digit. Okay. Okay. Fair enough. And that's the INR 1,000 crores, March '23, fiscal year March '23?

I mean, assuming there is no third wave, et cetera, I mean, in the nonpandemic period, if we get the platform, this is achievable.

Sure. Sure. And the second thing is related to the capacity. So we go up from 118,000 to 125,000 next month. The Dadri brownfield would add more, right? Is that correct? Or am I missing something?

No, no. So...

Debottlenecking, whatever is said. Yes.

Agri brownfield is like whatever has to happen, it has happened. Now, we are sitting at 118,000 tons, and 7,000 ton will get added next month from Raipur.

Okay. And that is where we stop. And -- but there's also something mentioned regarding exploring more brownfield debottlenecking expansion opportunities over the next few quarters. Can you elaborate on that?

So of course, yes. I mean, when we say that, I mean, the immediate target is INR 1,000 crore turnover, right? And then, I mean, as a company, we do believe in the industry space where we are, given the brand we would have built over the next 2 years, given the SKU portfolio addition, what would have happened over the next 2 years. So we do believe that 25%, 30% consistent revenue CAGR is possible. So for that, we will have to keep on doing some brownfield expansions, right? We'll have to keep on adding new products to our portfolio. So what we meant was that 25% -- 20%, 25% of our EBITDA we should be spending on such capacity additions. And apart from that, West region is one market where we think we could add another plant, which right now, we have in one in Gujarat. There could be something coming up in Maharashtra. That's what we believe.

Okay. Okay. So the volumes we've done last year was 47,000-plus and now quarterly of 10,000-plus. So what is -- based on the current capacity, maybe at whatever you want to take maybe 125,000 or 118,000, what is the maximum production possible in the fiscal year and in a particular quarter, whichever be the best quarter seasonally? Just trying to understand what's the best utilization is possible on a practical basis?

100,000 tons.

That's per -- on an annual basis.

On an annual basis on capacity of 125,000 tons.

Okay. And on -- in a particular quarter because there will be a lean, and there will be the best quarter?

Yes. So I think probably like Q4, which is good for both agri and building materials, so the skewness there could be like 25,000 to 30,000 tons.

25,000 to 30,000. So we could go as much as 100% in a particular quarter if the demand allows.

Yes.

Roughly speaking. Okay. Okay. Fair enough. I was just trying to understand what's the -- I mean, in 2 years' time, possibly, that could be the exit run rate, let's say, you're talking March '23, maybe the March quarter of that year could be something closer to that? Just trying to understand if...

I mean if environment remains safe for the business, definitely.

The next question is from the line of Ritesh Shah from Investec.

A couple of questions. First is, you did indicate your comments on Nal Se Jal. What we understand from the marketplace is the peer set is actually going for a different set of [indiscernible] to cater to this large but typically a low price segment. Sir, what are your thoughts over here? And do we have any -- are you looking to venture into this segment to better tap into Nal Se Jal as a team?

See, again, I mean, see, the government schemes, I don't know if you noticed like 4, 5 years ago, there was this LED bulb scheme from the agency called PEL, right? They were selling LED bulb for INR 40. And all the major brands, which are like spending in hundreds or crores on their -- like ad spends every year, they participated for those orders. And the margin, what they were making was 25 paisa for one LED bulb, right? So I guess, I mean, of course, everyone wants to venture out whatever comes from the government when it's new. Then people understand that what kind of margin return profile you are going to make. So I guess, I mean, same is here, right? So yes, there could be some opportunity for low price staff profit, et cetera. But again, I mean, when it's like on L1 ordering basis, right, it's very difficult to sustain the margin. I mean, we are talking about margins in our tap business, the tap fossil business of around 15%, 20% right, where we have appointed Bollywood celebrity. We have a separate planning strategy to penetrate deeper into the markets. Rural market is one category where our sister company, APL Apollo Tube, has done so well with the product called Apollo Chaukhat, right? It was a steel door frame which replaced wooden door frames. And today, we are selling 250,000 door frames every month, okay? So I mean, that's the power of your brand of the distribution of your trade channel, right? So I mean, as a company, we have decided to focus on that, right? Yes, if there is any opportunity, which is profitable, which is ROC accretive, definitely we'll go for that, right? We have our ears on the ground. So like in the earlier question, someone was asking that why are we not going into agri when there could be some space vacated. I mean, we are having our ears on the ground, right? So if there is any opportunity which arises, we'll definitely go for it, right? But yes, it has to be within our set benchmarks, right, margins, ROC and working capital.

Great. So if I could just take a step back and understand Nal Se Jal, you also indicated that the local companies are benefiting more. So if Apollo had to benefit or the larger organized sector had to benefit out of this, how should one look at it, so is it a no-go zone or is it -- we have a certain harden rate only then we will actually go and do a bidding for a particular stay or a particular order? So you indicated 15%-plus margins on the tap business, which is lucrative. So is it something like it has to be a minimum at a company blended out? How should one look at it?

Yes. So number one, it's not a no-go zone. Okay, we are already selling our products in these projects, okay? Now you talk about hurdle rate, hurdle rate, yes, I mean anything should be like at least high single-digit margin, okay, for us to even evaluate any opportunity. And second, it shouldn't impact my collection days. See, I mean, it's been a very strong learning curve for us where our receivable days started coming down from 60 to 30, 40, right? And today, we are very proud to tell you all the investors and analysts who are evaluating or who are looking at our stock that we are very proud to say that we are at a 30- to 40-day of stable cycle, right? And we just don't want to deteriorate that to buy out some sales, right, from a government project, right? So I mean hurdle rate, I mean, high single-digit margin, and my payment should be safe, right? I shouldn't be running around -- see, I'm a brand company. I'm a trading company. I'm a marketing company, right, with a very strong manufacturing setup. So my job -- the job for my salesmen is to sell products, not to like beg for receivable collections. I hope this clarifies what you...

Yes, yes, yes, it has. My second question is very basic. I just wanted to understand how do we account for the inventory. I think one of the statements that the management indicated that we do not expect inventory losses in Q2. Now looking at where the PVC resin prices were, it actually came down by, I think, from INR 130 to INR 118, INR 119, and there has been a small bump of INR 2, INR 2.5. So just wanted to understand, have we booked any inventory losses? If it has been booked, is it only on the resin part or it has also been booked on the finished goods? And what gives us comfort to say that we are not looking at inventory losses in Q2?

No, we never said that we're not looking at losses in Q2. See, I mean, see, we are in a business of buying PVC right, converting that into a product brand, right, with a lead time of 30 days. So we will always carry that basic risk. The question is that how are we going to minimize that risk, how we are going to mitigate the risk, okay? So first thing comes first is that you work on minimum low inventory levels, right? So that is one. Second is that you were able to revise your price list regularly, which is possible when you sell more and more value-added products, right? In commoditized products, the market acceptance is always weak. But in value-added products, the market acceptance is always high, right? So that's how you mitigate the risk. Now in Q1, of course, there would be some marginal losses we would have booked, difficult to quantify. And in Q2 also, whatever the pricing fluctuation we might foresee, right, accordingly, we will do that. But then what -- again, I'm saying, I mean, on record from our side is that whatever fluctuation might come up, right, on annualized full year basis, sustainable margin is 13% to 15%. In 1 of the quarters, lets's say, PVC prices come down by INR 20, INR 30 per kg. Then I mean one can imagine what kind of route is going to have on all the PVC players, not only -- not only Apollo Pipes, right? So I guess, I mean, our job here sitting is that how do we ensure that we work on the sustainable 13%, 15% EBITDA margin. Yes, in 1 or 2 quarters, there could be plus/minus here and there. But long-term margin is like how we are going ahead with our business plan.

However, I completely appreciate from a strategy standpoint what you're indicating. Now if I look at the inventory days on March-end basis, it was 55 days. Now just trying to understand how much would that be on June-end basis? And have we already done a markdown on finished goods as well or was it only done on the raw material or the resin inventory?

Yes, actually -- when we talk about the inventory at the closing of March. That inventory was actually we already anticipated the increase in the resin prices. And so because of that, we builded us our inventory in the first month of January only. We actually stopped all our purchases from next February. No bookings were made for the resin procurement plan from February onwards. So the loss on that account was a bit lower. We got lucky. We were selling very aggressively in -- back in March, where the long-term pressure was very minimum, and we were very aggressive in selling our products in that month. May, of course, were disturbed because of lockdown and the pandemic. Again, that was coming back to normal in the month of June. So you can see the impact was there in the sales because of the drops in the month of June, you can say that. But we try to minimize that loss because of the high prices in April. We try to maintain maximum -- gain maximum profit and minimize the loss of the same, we can say, in the same -- during the same quarter. So exactly this happened like this. And because of that thing, you can say that we minimize our loss. Secondly, the resin is -- it's not 100% of our sales. It is -- actually, you can see it takes a total percentage, it is roughly around 40% to 50% of our sales. The balance is fitting trade where the drop is not so high and the -- because the margin didn't drop too much over there, and the gross margin was there. Along with that -- along CPVC, there was no drop at all, SCP, there was no drop at all. To put together, it was [indiscernible] because of quarter and the slight dropbox there in the quarter, which you can witness also because of that price drop.

This is very encouraging. Last question, if I may. Sir, we have seen PVC prices -- or say, piping product sizes more in tandem with the resin prices. Now given the shift which has happened from unorganized to organized when the larger players are benefiting, I just wanted to understand, has the price increase, which has been taken on fittings, say, on a per kg basis, is it more than the price increases what we have seen typically on a UPVC pipe? I'm just trying to get some sense on the structural improvement in the margins, given the shift in the market structure that we are looking at.

Yes of course, the margin increased in the fitting segment. Further, as you see that we are continuously increasing our SKUs. So the baseline SKUs are already there with us and whatever the balance SKUs that we are building up in the last quarter and then the coming quarters. These have high volume, high margins and low volume. So the margins always improve with the sale of these goods. So they always, you can say, high margin or high, you can say, a EBITDA level in these fittings as compared to pipes where, of course, these players, of course, these players or the local players, they are trying to sell more quantity because of the dropping prices. The margins, of course, reduced. But we will be very less focused on those products because of the low margin, and we are not too much, you can say, optimistic about those products. So our total focus was on the building products. We were high sales and where the margins were not so much under pressure. Whereas, of course, in the report, the margins were under pressure. And you can see that the sales were a bit, you can say, a challenge because of the low margins. But we try to manage that thing, you can say, with the help of this fitting sales, high volume of fitting sales.

We'll take the next question from the line of Pratibh Agarwal from IDI Mutual Funds.

Am I audible?

Please go ahead.

Sir, just a very basic question regarding PVC prices. Like for the last few months, it was understood that as the situation normalizes, the prices may come back to normal. But as we saw that, that didn't happen. And now we have understanding that things may not go back to the last year's level. It may settle somewhere in between. So what I'm asking is on the context of the INR 1,000 crore sales target by FY '23. So we know that it is based on very high double-digit volume growth as well as improvement in realization on the basis of value-added products and building material products. But my basic question was, how do you see the swing in the basic PVC prices, which may swing the top line? EBITDA margin may sustain and every profitability may sustain, but the optical INR 1,000 crores, how can it swing with the -- if there is a drastic drop in PVC prices for whatever reason? And how do you see it -- how much down it can go based on the industry dynamics? So that was my one only question, sir.

So see, I mean, when we say INR 1,000 crores, the basic assumption is 100,000 tons of sales volume at selling price of INR 100 per kg, right? So I think this should answer your question. Like if there is any swing plus/minus, that's how it's going to impact us. Our business plan suggests 1,000 -- 100,000 ton sales volume at realization of INR 100 per kg.

Further regarding the PVC prices, if you talk about the PVC prices, they have not yet stabilized. The prices that was going downwards, that has now stopped, and it is now coming back to track. So you can see that the disruption in supplies is still there. So it is not very easy right now to source PVC. And the premium we may see in the coming days, again, back to the previous level before COVID 2 level, the pricing up to that level once again because of the shortage in the material and the supply problem is still continuing with the product.

Ladies and gentlemen, due to time constraints, that was our last question. I now hand the conference over to Mr. Jigar Kamdar for his closing comments.

Yes, thank you. 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 out to join us on this call. Thank you, and have a good day.

Thank you, participants and management of Apollo Pipes. Thank you.

Thank you. Ladies and gentlemen, on behalf of Systematix Institutional Equities, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.