Apollo Pipes Limited (531761) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Apollo Pipes Limited Hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pranav Mehta from Equirus Securities. Thank you, and over to you, sir.

Thanks, Rutuja. Good afternoon, everyone. And on behalf of Equirus Securities, I welcome you to the call with the management of Apollo Pipes Limited. Management is being represented by Mr. Sameer Gupta, Managing Director; Mr. Ajay Jain, CFO; and Mr. Anubhav Gupta, Group Chief Strategy Officer. Without wasting further time, I'll hand it over the call to Mr. Sameer Gupta for his opening remarks. Over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on our Q2 and H1 FY '22 earnings call to discuss the operating and financial performance for the quarter. First of all, wish you and your family a very happy Diwali in advance. I hope you all had the opportunity to go through our results presentation, which provides details of our operational and financial performance for the second quarter and half year ended on September 30, '21. To begin with, I'm pleased to share with you that we have reported a robust performance during the quarter with our sales volume growing by 18% Y-o-Y to 14,518 metric tons. Volume growth was driven by a healthy contribution from the cPVC, HDPE pipe and value-added product segment of Fittings. Furthermore, expansion of product portfolio improved reach in newer geographies and addition of new brownfield capacity assisted volume growth. Over the next few quarters, we anticipate the sales performance trend to strengthen led by an improving demand environment, expansion in addressable markets and a sustained uptick in utilization levels. Moving on to the operational front. We have successfully completed all our brownfield expansions across facilities located at Dadri, Tumkur and Sikandarabad as well as happy to announce that our Greenwood facility at Raipur is now operationalized with an installed capacity of 7,200 metric tons per annum. So in all, with the addition of new capacities, we are able to scale up our total capacity to 1,25,200 metric tons per annum. In addition, we are aiming towards optimally utilizing our capacities over the next 2 years which will also help augment sales volume going ahead. From a product basket standpoint, we continue to witness a positive traction in queries of our Apollo Life portal Storage Tanks. Earlier in the previous quarter, we had doubled our capacity for this product at our plant in Sikandarabad and had also commissioned a production line in Tumkur and Raipur, to ensure that we can meet our increased demand. We remain confident that this product along with our other value-added offerings like fittings, solvents, bath fittings, adhesives and tap Faucets 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 all across existing and new high potential geographies. Post operationalization of our Raipur plant, we expect to address the untapped and high potential market of Central and Eastern India as well. Going forward, we expect to deliver a robust performance in the quarters to come and further gain momentum on the back of improved profitability, strategic expansion in geographical areas, key geographical areas and better brand acceptance. Further, on this festive season of Diwali, we are happy to announce to -- and happy to announce a bonus of 2 shares on 1 -- each share face value of INR 10. Now I would like to invite Mr. Ajay Jain to run you through the key financial highlights for the quarter and half year ended on 2021. Thank you.

Yes. Good afternoon, everyone. I will briefly cover the financial performance during the quarter and half year ended September 30, 2021. The company delivered a strong operational and financial performance during the quarter, driven by an uptick in demand and consumption in key domestic markets. Revenue from operations for the quarter stood at INR 208.2 crores as against INR 123.3 crores in Q2 FY '21, higher by 69%. In H1 FY '22, half year revenue from operations stood at INR 345.8 crores as against INR 215.8 crores, up by 60%. Sales volume for the quarter stood at 14,518 metric tons, growing by 18% as against 12,268 metric tons. Sales volume for H1 FY '22 stood at 24,920 metric tons as against 22,901 metric tons, up by 9%. On the profitability front, EBITDA for the quarter grew by 67% Y-o-Y, which stood at INR 26 crores as against INR 15.5 crores in Q2 FY '21. EBITDA margins, which stood at 12% in Q2 FY '22 remained almost flat Y-o-Y, lower by just 13 bps. EBITDA for H1 FY '22 stood at INR 43.4 crores as against INR 21.7 crores, growing by 100% Y-o-Y. Margins for the half year ended September 30, 2021, stood at 12.5% where compared to 10.1% in the corresponding period last year, higher by 248 bps. Going forward, we also anticipate EBITDA margins to remain high. During the quarter, we witnessed a sharp increase in depreciation during the quarter, which was partially offset by a reduction in financial costs. Depreciation costs stood at INR 6.2 crores in Q2 FY '22 as against INR 4.1 crores in Q2 FY '21, growing by 53%. Net profit for the quarter stood at INR 14.1 crores, up by 48% Y-o-Y when compared to INR 9.5 crores in Q2 FY '21. Net profit for H1 FY '22 grew by 98% stood at INR 22.8 crores as against INR 11.5 crores in H1 FY '21. Net margins during the period stood at 6.6% as compared to 5.3% in FY '21, higher by 127 bps. On the balance sheet front, our net cash position stood healthy around INR 6.5 crores. However, our endeavor remains on maintaining our overall working capital cycle at stable levels. With this, I would now request the moderator 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 [ Ankit from Bamboo Capital ].

Sir, if you can tell us which segments saw growth during the quarter? And then how is Q3 shaping up in terms of -- in the various segment demands from various sectors?

Right. Yes. So segment-wise, there are like 2 broad categories. One is building materials and second is agriculture. So building material continues to gain momentum with higher growth. Today, it is contributing around 50% to our overall turnover and agri is around another 50%. 2 years ago, this was like 35% building material and 65% agriculture. And 2 years from now, we will have building material contributing 65% and agriculture, 35%. So this is a -- this was a strategy on which we started working on in 2018 when we started expanding our product portfolio, and we went on PAN India. So within Building Material, of course, products like fittings and cPVC and water storage tanks and bathroom fittings, these segments are giving superior growth than the overall pipe sales. And all our capacity expansion over the last 2 years has been with this strategy that this portfolio has to grow much faster than the overall sales. And we continue to expect very strong momentum over the next 12 to 24 months, given that we are also starting our ad campaign next month, and this will help us gain mind share in the customers' mind. And this will boost our overall sales for the building material product category.

And sir, how has been the growth in both these segments during the quarter? Like what -- as per what you are saying, the growth in the Building Product segment is much more than agriculture, is it so?

So building material for Q2 has grown at 50% Y-o-Y.

Great. Okay. Okay. So agriculture has broadly remained segment or de-grown in terms of volume?

Yes, agriculture, basically, what's happening is because of the increase in PVC prices because this is -- there is like one segment in the agri space, where the customer, they switch to secondary grade pipes, okay? So all the branded players, all the organized players, they start losing out sales somewhat. And that's what's happening with us also. But then again, those are very opportunistic sales, which take place in the industry. And once this situation would normalize again, again, the branded players start getting the market share in the agri space. So other than that, overall, we are satisfied the way things are going.

Okay. But on the -- on such a sharp rise in PVC prices, so is it that the Building Material segment has been able to absorb such sharp prices while agriculture hasn't been able to, is it so?

So that's how the whole industry works, okay, not only to Apollo Pipes, that's how the whole industry works.

Yes.

But specific Apollo Pipes, we are happy to share that all the price revision, what we have taken place in the building material space has been absorbed completely, and that's why we've been able to protect our margins, as you can see in the quarter.

Okay. And how is the out -- what is the outlook for the current quarter and has been the demand in both the -- in building material and agriculture in the month of October till date?

So normally, for building material, third quarter is good because of the festive season, the household owners, they want to finish renovation work, et cetera. And in Q4, the real estate developers, they want to finish their projects so they hand over the units. Normally, second half is good for building material anyways, and we are seeing the same momentum like how it has been historically.

Okay. Okay. And just one clarification, the 50% number that you gave, that is the volume growth on the building material side?

No, that is the value growth.

Value growth. Okay. Okay. And how much is the volume growth in building materials and agriculture, if you can give us the broad numbers?

Yes. So volume growth in the billing material category will be upward of 30%, and overall value growth is 50%. Now just don't think that this value growth is because of the increase in selling price. It is also because of our like value-added products within the building material space are catching up, like, for example, cPVC and fittings, overall fittings and water storage tanks so these are high value-added products anyways. So because contribution from them is increasing, that's why we are seeing higher value growth than the volume growth.

Sure. And what about HD segment?

Sorry to interrupt you, sir, may I request you to please rejoin the queue, we have participants waiting for their turn.

So it's just a continuation of this. How has been the volume growth in agri segment, sir?

So agri is more or less flattish.

The next question is from the line of [ Abhinav Mehta from GK Capital ].

So sir, you mentioned that next month, we will starting our ad campaign. So what was the ad spend?

So [ Abhinav ], [ Abhinav ] right?

Yes.

Yes. So [ Abhinav ] I mean, if you see over the last 2, 3 years, we have been spending around 2% of our sales value on the branding expense, okay? Now this year, for FY '22, if you see, we will end up spending 2% only given that all the initial expenses to produce the accident and pay to the brand ambassador, et cetera, all that will be accounted for. So we may end up spending 2%, 2.25% of our overall sales for FY '22. FY '23, we will ramp it up to further 3% given -- because we'll have to run the campaign for like full year. So we expect to spend around 3% of our overall sales next year. So -- but this will not hurt our EBITDA margin. We will take this up 100 bps additional from our gross margin expansion.

Okay, sir. And sir, what was the contribution of value-added products right now?

So value added -- so building material is all value-added 50%, right? Within agri also, some of the segments are value-added. So 60%, 70% of our sales today is value-add.

So supposing that PVC prices do come back to their original level of around INR 100-odd levels. So whether our realizations will also fall in a similar way or there will lesser fall in our realization because of [ majority crops ]?

So it's not 1:1, right? Definitely, because of our high value-added portfolio, the revision in our NSR will be -- should be lower than the revision in the net PVC prices.

Okay, sir. And sir, the last final question. So what does the trend for the PVC prices look like?

The trend right now is the PVC prices are quite high. So the trend will be upward for the next few months, but I don't think that it will remain high for very too long time. But of course, once the things stabilizes a part of the -- as far as shipping lines are concerned or supply constraints are there, once those fields [ sludges ], then they will start coming down. But in the near future, I don't see any correction in the PVC prices.

Okay. So majorly it is because of logistic constraints, which have emerged through this...

Supply constraint is also there. Yes, of course. Both the things are playing role in this.

The next question is from the line of Bhargav Buddhadev from Kotak.

Congrats on a very good performance. My first question is what would be the capacity utilization across all our manufacturing plants broadly?

Bhargav, can you please repeat the question?

Yes, I was asking what is the capacity utilization across our manufacturing plants, business manufacturing plant broadly?

Right. So today, we are at 50% utilization. Given that, I mean, in Q2, we did 14,500 ton kind of volume. So this gives us 50,000, 60,000 ton of quarterly -- of yearly run rate on a capacity of 125,000 ton. So we are hitting around 40%, 50% utilization levels.

Yes. But our Dadri plant would be operating at much higher utilization, right?

Dadri is almost hitting 60%.

Okay. Okay. So the reason why I was asking is that if capacity utilization possibly in South West and the upcoming Raipur plant is much lower. Then would it be fair to say that the EBITDA margin difference at the plant level for North India and non -- North India plants would be significant as of now?

Yes, definitely, Bhargav, if you see our blended margin is 13%, 14%. So you could assume that North plant would be contributing above 15%, and the other plant would be contributing below 15%. So that's how we are making blending -- blended 13%, 14%.

Okay. And given that we don't have any major CapEx going forward. Fair to say that in the next 2.5 to 3 years as we reach maximum utilization levels, our other units will also start contributing to around 15-odd-percent EBITDA margin with capacity utilization ramping up?

Yes, definitely Bhargav and those were the initial IRRs and ROCs on which we went ahead with our CapEx plans for West, East and South, okay? So definitely, as the utilization levels ramp up in South and West and East, Raipur just started, right? South, it's been like 1 year, we got the position of the plant and West, of course, is doing well. So yes, in next few quarters, you will see that as the utilization levels ramp up, the margins will also improve.

And on the cPVC portfolio, would it be fair to say that the contribution of cPVC across manufacturing plants could be similar or it's much higher in North India our acceptance in the cPVC side?

Yes, it is same.

[Foreign Language], it is broadly same across plants?

Yes. Again, this goes with our broader strategy that value-added products should be kept in a similar range across the plants so that when we enter in the market, we go with the complete product range.

And my last question is if you look at your realization of frontline companies, the discount is broadly 20-odd-percent. But if you look at EBITDA per kg, the difference is almost of 50%. So I mean, obviously, with operating leverage, we will be closing down this gap. But do you think this 20% discount also has a room to sort of close as you ramp up our value-added stock?

So Bhargav, there are like 3, 4 factors why this discrepancy you see in numbers, okay? So one is -- the number one is the product mix, okay? All the 2, 3 top players whom you are comparing us with, they will have very high proportion from cPVC and fittings, right? For us, this segment is very small today because we started this 2, 3 years ago. Now it is ramping very fast. In 2, 3 years, yes, we will cover up most of it, okay? Number two is, of course, that -- I mean, we offer extra sweetener to the distributors versus the established players, right? So that is there. And third is, utilization levels, yes, I mean, we are today at 45%, 50% utilization levels versus all these players are at 60%, 65%. So that also gets their better EBITDA per ton. So I guess in 2, 3 years down the line, our target is that we should be able to cover up a lot of it, right? And that's why we are confident that in 2, 3 years down the line, we will have EBITDA margin of 16%, 17% on a sustainable basis.

The next question is from the line of Rajesh Ravi from HDFC Securities. The next question is from the line of Rajesh Ravi from HDFC Securities.

Hello?

Yes, hello. Yes, you are audible sir.

Okay. Sir, my question pertains to the gross margin impact, it rising PVC resin prices. So in this quarter, first of all, was there an inventory gain, which was booked?

So Rajesh, this quarter, I mean, there was hardly any inventory gain or loss, okay? It was nil on neutralized basis because initially, the prices had come off, okay? And then they started going up. And maximum revision was taken place in the second half of the quarter, right? So it may have some spillover impact in the Q3, but not in Q2. Also, we work on a very thin inventory levels, Rajesh, okay? So any like 5%, 10% increase or decrease in the PVC prices will not hurt or boost our EBITDA significantly, right? And this is the strategy which we want to follow on the sustainable basis to work on the -- on very, very low inventory levels for the raw material.

Okay. And anything you have -- in terms of the cost pass-through capability, are you seeing any pressure because raw material prices have surged up significantly? And do you see any impact on demand with soaring prices in your cost pass-through capabilities? I mean the margin of INR 18 a kg this quarter, do you see some risk to this because the cost pass-through may not happen in full?

So Rajesh, let me address. This is a fair question, but let me address in a broader base that given you look at the any building material product today. Not only PVC pipe, you take cement, you take steel, you take paints, you take tiles, every industry is facing with raw material push cost revisions, right? And all the producers, brands, manufacturers, they are trying to pass it through the channel to protect their own margins. And we talk to a lot of channel partners, a lot of other brands in the other building materials segment. So -- and also the contractors and the real estate developers and the household owners, the end customer who is using all these building material products. So today, no one has any choice but to buy the products at the higher prices today, right? So contractors are negotiating their contracts, developers are renegotiating their contracts with their subcontractors, et cetera. So it's all that is happening, right? Whenever there is such a sharp increase, it takes time for the end user to absorb these costs, but then there is no choice for them, right? Specific to PVC industry, I mean all the peers you would see that they are constantly talking to pass it on to their end consumers. So is what that we have done. I mean you won't believe the PVC industry would have revised the pricing list by at least 4, 5x last quarter, minimum 4, 5x, right? So this does suggest that, I mean, we are seeing a passing it on to our distribution channel, and then they pass it on to their retailers and ultimately, the end consumer. It does impact the demand somewhat because, like I said, so many revisions in such a short span of time, it does take time for people to absorb. But that's what we are seeing everywhere. So we are not like overly concerned today. We don't know if prices keep on going up, then it's difficult to say because we haven't seen such a situation in the past. I mean this is one of its kind, first of its kind situation what we are into. But as of now, our whole focus is to strengthen our brand, to strengthen our reach, to strengthen our product portfolio and to strengthen our serviceability, right? So even if at all the market has to contract in future, although we don't anticipate that, but we should present a very strong offering, so which will protect us from any downturn if there is any.

Okay. Two more -- one follow-up on that. How much price hike has been done in this quarter so far in month of October?

It's been like -- I mean, the PVC prices have gone up by 20%, 25%, and a similar price hike has been taken by all the industry players.

Okay. So any ballpark numbers that for much pass-through has happened in terms of percentage and when those hikes were will implemented?

Same, same, same -- no, same 20%, 25%.

Okay. So all of the increases which has happened has been passed on?

Yes, yes. So far, it has been the case.

Sure. And lastly, on the capacities, now you're 125,000 tons with the Raipur expansion coming onboard. What's next in terms of are there any further debottlenecking capacities which are being planned?

So yes, of course, Rajesh, I mean, our endeavor has been to keep on expanding our capacities into value-added category, right? So I mean, last year, we spent INR 60 crores as CapEx, of course, that was towards Raipur plant and Dadri brownfield expansion. This year, so far, we have spent INR 25 crores in the first half, okay? So this time, the proceeds have been towards adding the new molds, new designs, okay, new lines within the existing plants. This should consume 15%, 20% of our EBITDA on a sustainable basis going forward. And like I was discussing with Bhargav before your question, that Dadri plant, North plant, we are hitting 60% utilization levels, 55%, 60% utilization levels. So something there, we will have to see because North is a very fast -- super fast-growing market for us. We are a very strong brand here. We don't want to lose our momentum. And then in future, West is another geography where we are planning greenfield because Maharashtra and Goa built APL Apollo brand is very strong, and we want to leverage on that and create a strong presence in the Western market.

And sir, how much would cPVC and bath fittings would be part of your total volumes and our revenues?

Today, it is 16%, 17% of the total value.

16%, 17% bath fitting as well as the cPVC mix, you're talking?

Yes. Put together, they are at 16%, 17% of the total value.

Okay. And tanks would be some sizable revenue now or?

For tanks, we started 2, 3 quarters ago, Rajesh, it is ramping up quite fast. Now we have capacity across 4 geographies, right? And today, it will be contributing around 3% to 4%.

3% to 4% additional than the 16%?

Yes.

The next question is from the line of Amit Zade from Antique Stock Broking.

Congrats on good set of numbers in such challenging times. Hope I'm audible, sir?

Yes, yes. Please, go on.

So we have guided of reaching volumes of 100,000 tons by FY '23 or INR 1,000 crores of top line by the same time. Maybe we could reach that number ahead in terms of revenue. But in terms of volume, sir, are we sticking on that kind of a volume run rate or guidance of 100,000 volumes by FY '23?

Yes. So what INR 1,000 crore mix was around like 80,000, 85,000 ton of volume and 120,000 ton of selling price, right? So that gave us the INR 1,000 crore number. Now of course, that the selling price is much higher. So our capacity also is capable of producing more than INR 1,000 crores, right? So that is one. Second, this INR 1,000 crore also is not only because of -- like today, we got INR 208 crores kind of revenue number. That is not only because of increase in the PVC prices, okay? Our -- I mean our value-added product portfolio has performed better than even our expectations. The way we could ramp up our cPVC volumes, the way -- I mean I'm happy to say that, I mean, CPC volume should double in next 1 to 2 years' time, right? So today it is contributing 6%, 7% -- today it is contributing 10% to our overall sales. It should be contributing 20% over the next like 4, 5 quarters. Then water storage tanks that new segment we got into last year, it is ramping up very well. Then the Bathroom fittings, PVC faucets and taps, that also segment is growing very, very fast, right? So what I'm trying to say is that just don't look this INR 1,000 crore number if we are able to achieve, say, if we are able to do INR 250 crores in Q4. So just don't think that it is only due to PVC prices, it is also because of the better-than-expected performance from our value-added products.

Right definitely, sir, I mean, looking at the value addition on per kg basis of INR 18 per kg, almost incremental INR 5, INR 7 on a Y-o-Y basis that itself speak for the good performance. So on a sustainable basis, where should -- now that cPVC should -- the kind of growth you are witnessing in cPVC, bath fittings and tank. So on per kg value addition, where should we look at this number moving at in the near future?

So I guess a better way to monitor here would be on the percentage margin basis, okay? Because -- so today, like we did like 13% kind of EBITDA margin, okay? On sustainable basis, we are very confident that 14% to 15% irrespective of upward or downward revision in PVC prices, we should be doing 14% to 15% margin. And as we move forward from INR 1,000 crores -- beyond INR 1,000 crores as our utilization levels go up, we got further -- we get further into value-added products. 16%, 17% is very much achievable in 3, 4 years' time. And that's how, I mean, you will see year-on-year improvement of 1,500 bps.

Got it, sir, got it. So why I was asking on per kg basis because in such a volatile market with PVC sharp increase or decrease so then quite optically, that number may be not corrected, but it's okay. I get your point. And another question on one of our statement made in the press release where we have stated that some of the government projects like global infrastructure, agriculture space are driving volumes. So what are the kind of execution or spending have you seen on ground from the various government initiatives?

Yes. So that segment surprisingly did well in first half, okay, normally, HDPE pipes, which we sell towards education projects for the government, normally, they contribute like single digit in our sales mix. But this time around, it was better, okay? So not only in agriculture, I mean, like I said, we talk to a lot of participants in the infrastructure. There is very good spending, which is happening from the government. All the projects which were announced initially, there is good money allocation, which is going for these projects and these orders are coming in the market. And very cautiously, we are going for these orders, right? Because we are a very margin-focused and working-capital-focused company. So we just don't want to block our capital just to sell products to the -- for the government projects, either we sell to distributors or where we think that there is like very zero minimal risk for the receivables, only then we go for such projects. And I mean -- and in some of the cases, we have got even like 100% advance only then we go ahead and sell the products. So I mean, whenever we see such opportunities where our receivables are safe, our collections are safe. We will -- we have the capacity. We have the product. We have all the approvals with the authorities. We are happy to go and sell our product, but not at the expense of our working capital.

Understood, sir. Sir, just one last question, if I may. So we have -- we are a dealer network of almost 600 dealers pan-India. And so how much of these -- now that our geographical expansion is almost complete with presence in all the 4 geographies. So how should this number pan out? I mean, excluding North India, how has the penetration happened in last -- or let's say, 6 months or 10 months to support the kind of volume that would come out of north capacities?

Right. So out of the 600, still bulk of this, like 60%, 70% is from the North India, right? So we see a lot of scope to penetrate deeper into non northern markets, which would be South and West of course. And now with Raipur plant starting, Central and East also, we will have to penetrate deeper. And we have all the market activity, which is taking place already, right? So new distributor, new dealer addition should be like 10% to 15% year-on-year for the next 2, 3 years. And only then we will be able to say that, yes, now we are present pan India.

So what is the number for the first half, is it still at 600?

I mean in terms of new addition?

Yes.

So this time, I mean, first half, of course, because of COVID, et cetera, and heavy rains because of travel restriction, the dealer addition has been very minimal. But in second half, I mean, our target is to finish or to take this number up to 630, 640 by March 2022.

Got it, sir. Just one bookkeeping question sir, CapEx guidance for FY '22 would be? You already spent INR 25 crores. And for the full year, that number would be?

I guess INR 35 -- around INR 35 crores. I mean based on -- so no greenfield coming here, right, all the expansion is towards buying more molds and buying more lines for the value-added products as of now.

[Operator Instructions] The next question is from the line of [ Aarav Kapur ], an Individual Investor.

Just have a couple of questions. One was what volumes do we see in the second half of the year [indiscernible] guidance [indiscernible] if I get that right, it will be great to know that. The second was given some of the other competitive -- competitors are coming into building material or faucets specifically how do you foresee the competitive intensity going forward? And one last question on the working capital days, I think you'd guide it to get it to below 50. How is the progress on that?

Right. So coming to the third question first on the working capital. See, I mean, we are flat March versus September, okay, around 60 days. Yes, we had guided for 50 days kind of management, which today also is our target. If you look at our debtors and inventory, we are doing a very good job there, okay? So there is no deterioration in debtor or inventory days. It is just that because of the PVC market is so heated up. So we just have to like kind of pay advance to our suppliers so that the material is available. Once this market normalizes, of course, this is because of all the global supply chain disruption, which is taking place. Once this gets normalized over the next 1, 2 quarters, you will see that our creditor days will increase, and we will be going below 50 days of working capital. But if you look at debtor inventory, there is no deterioration, right? So this is one. Second, on the bathroom fittings side, right? So today, if you see this market is highly fragmented, okay? There is no large organized player who is present pan-India selling these products, okay? Right now, the market perception for these products is that these products normally a household owner would use only for his balcony or terrace kind of places where he would install a plastic or PVC faucet or tap. But what we are trying to do is that we're trying to create the market, which for this product, which can go inside the kitchen, which can go inside the bathroom also, right? So with that kind of esthetics, we have worked on that kind of marketing, that kind of packaging, that kind of product positioning what we are trying to do here. And so far, such efforts have already started to pay off. Okay. So this is a very new market segment where the household owner will use this product for his bathroom or kitchen, okay? So today, you don't see many plastic products into bathroom or into kitchen. So we think there is a very clean slate for Apollo, okay? We entered this industry, and we have already created our name. We have a very strong product line. Our sales -- we have created a totally new sales team, which is working to push this product. So we see very good scope of this product. And we think that this product segment alone can be a very significant contributor to our overall sales over the next 2 to 3 years. And...

The last question was on the volume side for the second half, how do you foresee...

The second half normally is very good for building material like we mentioned earlier also, Q3 is good for construction anyway because a lot of household owners, they want to finish renovation during Diwali time. So good demand from there. And Q4 is good when all the large real estate projects try to get finished in Q4.

Yes. Apart from this, in Q2 -- sorry, in Q3 and Q4, we also witnessed a strong demand for agriculture products because Q1 was affected because of COVID and loss of activities for agriculture, you can see that boardings and all this were deferred. And again, the high prices have again definitely the same, but they cannot wait too long. So that demand has to come back to -- we anticipate a good demand for agriculture products also in Q3 and Q4. So overall, the volumes should be good in the second half of the year.

And if I just may squeeze in a last question. I think you've mentioned that you're importing most of the PVC, right? 70% to 65% has been the imports of PVC. Do you foresee any shift in that? Or you expect it will continue to remain? And does it have any impact on rate, cost and others, if you were to shift from more import to domestic sourcing?

Of course, in the year -- starting of the year, we shifted our purchase policy to around -- from 10% to 30% for the domestic market to purchase PVC resin from. But right now, there is no such you can say, time available for us to again shift the pricing -- sorry, purchase policy to further increase the domestic share. So right now, we are working on 30% from domestic players. Apart from this 70% still, it is from imports only. Of course, there is a challenge right now for procuring PVC resin because of the shortage coming -- going all across the country for this product. So we don't want to disturb that supply chain right now. So in the coming days, once the things stabilizes, we will again shift towards the domestic players to purchase resin and decrease the import share.

The next question is from the line of Abhishek Vora from Ambit Asset Management.

First question would be on the branding spend, while we are leveraging APL Apollo brand. Is there any licensing agreement that we can mention of if there's a fixed percentage of revenue that is hooked to that we can know of?

Abhishek, actually, the brand is totally owned by Apollo Pipes only. It is actually divided into 2 segments, the steel segment and the plastic segment, where we own the brand of the plastic segment, the steel pipe segment is owned by APL Apollo tubes. And there is no such cross-holding of this brand between the 2 companies. So it is totally owned by Apollo Pipes so we don't need to pay any royalty on any such expense for the brand to them.

Understood. So the 2% to 3% spends on sales are purely with regards to the ad spend, right, nothing on this part?

Total ad spend, it includes all the activities, whether it is APL or the BTL activities include all the things. Many activities we do on the ground like the plumber meets or the dealer meets all the roadshows of the product. So this -- the cost includes all those activities apart from that PVC and that other holdings that we are planning.

Understood. My second question was on the working capital. I think you mentioned that the inventory was flat. But are we planning to increase the inventory or see some good cost in anticipation of higher raw material prices, are we anticipating and trying to purchase more in advance?

No, we try to hold raw materials on the basis of the booking of our orders. We don't try to play too much on the raw material's front. So these are very much on the stable side only, slightly up and down maybe there because of that investment -- price hike or the drop. Otherwise, we just try to hold the inventories as far as the quantum of orders that we have in hand.

Right. Because what we are hearing is normally the companies are trying to maintain more levels of inventory so that, they make the product available in situations of short supply. That's what I just wanted to get your sense on.

No, of course, the supply constraints are there thus are this concerned of PVC and they are further other raw materials also like chemicals and other things, they all are in short supply. So the constraints are there, and we try to build up the inventory for this thing. But right now, the opportunity is not there with us to build up any sort of inventory, whether it is finished goods or the raw material because of the continuous price hike for the last few months, the stock is not holding up. Yes. It's totally sold and getting sold. So we are totally working on that, you can say on hand-to-hand basis. We are not holding any inventories right now.

Understood. Got it. Lastly, on the sales mix, what percentage would be from the infra segment and some plumbing segment, if you can bifurcate of the building material mix as well.

We don't sell to the government directly. So majority of the sales is coming from the building product sales only. In that, if we talk about the infra's product sales or the building product sales, it's one of the same. The -- if you talk about the pipeline business that the government buys for pipeline, that is hardly around 6% to 8% of our total volume. Otherwise, majority is from that, you can say that building products only.

Okay. And any mix on the project basis?

Yes, of course, that is what that project sales has got because we don't supply them directly because of the payment constraints, we supply to the channel only. So that is around 6% to 8% of the total sales for infrastructure products. As far as the building products are concerned, we are not concerned with that outstanding of the projects with the dealers. We just get them the orders and the dealer supplies at their own risk. So we are not even say, in that channel to manage the whole payment cycle of them. So we are much more concerned towards the procuring of orders from the builders or that you can say that infrastructure projects where the dealer supply at their own risk.

The next question is from the line of Alisha Mahawla from Envision Capital.

While most of my questions...

I'm so sorry to interrupt you but we cannot hear you ma'am. Can I speak a little louder?

Am I audible now?

Yes, please go ahead.

Sure. While most of my questions have been answered. I just -- a little bit more clarity on -- while I understand that a lot of our capacity has come on stream now, and hence, we are targeting almost a 50% volume growth for '23 based on the current quarterly run rate that we are witnessing. What is giving us the confidence to increase our utilization so quickly in '23 and '24, while I understand we've expanded ourselves geographically, but also our distribution network right now is on relative basis, slightly lower, if I may say so. So just wanted to understand what is giving us this...

No, Alisha, what we said was that the current utilization is 50%. Okay. Next year, it will move towards 60%, 65%.

Okay. Okay.

Okay. Currently, in Q2, if you see and the existing run rate, that's around 50%. And next year, it will move towards 60%, 65%.

Okay. So the current expansion that you've done, we're expecting can be used by '24 or '25?

Yes. In terms of volume, yes. So what we believe is that on 125,000 ton capacity, we could do around 80,000, 85,000 ton of sales volume.

Got it. And just one more clarity. You were mentioning earlier that cPVC and bath fittings and tanks, which is currently small together would be about 20-odd percent of our volume. And in earlier comments you said that our value-added portfolio is currently 50%. What would be the balance?

So rest will be -- so value added, what we said was that the building material is 50%, okay, and 50% is agri. Within Agri also, there is some segment which is value-added. So overall value-added will be 60%, 65%. Okay? This is one. Second, in value-added, so we have a building material PVC pipes. We have building material fittings. We have cPVC, we have cPVC fittings. We have water-storage tanks, and we have Bathroom Fittings and solvents as well.

Okay. Got it. Okay. And any comment on -- while we've done strong volume growth of 9% in H1, how the industry has done?

So I guess industry also, I mean if you see -- I mean, the unorganized players have been losing market share, okay, for long time. And this is the case even today, given the raw material scenario has become such a -- in such a way that it is going up on weekly basis and then the supply also gets disrupted. So it gives a good opportunity for the branded players to take market share away from the unorganized. So overall industry, I mean, may not have grown at the same pace.

Yes, let me. Actually, the industry as far as the industry is concerned, we don't see a robust growth in terms of volume -- in terms of industry because of the supply constraint, first of all, to COVID restrictions in the first quarter was there, so it was badly affected by the unorganized sector. And further, because of the high prices, the overall -- the working capital constraint is also going on with them. So put together, the industry growth, I don't see it to be too much rather it should be in minus because of that raw material shortage is also there. None of the player is able to run the plant at full capacity because of the supply disruptions. So overall, it is affecting, of course, the volume. But overall, if you can say, organization is managing the show properly by having good supply chain and good, you can say that all the activities it within the plant is working well, then they can manage that, you can say, good growth. But again, because just 1 or 2 companies have shown the results when all the companies shows the result then only we will be able to ascertain that what exactly the industry is showing growth or what de-growth is there.

Understood. And just one last question, if I may. How -- what is the frequency of price reset considering that though like you mentioned earlier also that currently, the raw material prices are slightly volatile. So what is the frequency of pricing reset we take? Is this monthly or something else?

No. Actually, the price hikes that are going right now in the industry, it is quite unusual. Normally, the price hike is one or twice in a month in -- if we talk about before COVID period. But after COVID, the price is quite volatile. And you can say because of the supply disruptions, they are not, you can say, stable at all for the past few months. They were going down in the first -- before the first quarter and during the first quarter, it was going down. And then Q2 onwards, it was going up again, the supply chain was totally disturbed because of that shipping line and the total material availability within the -- with other players across the world. So it is right now very much, you can say, disturbed. But going forward, we see that the prices should be, you can say, because it is already a total -- to very high prices. So we don't see too much price hike in this case. So it should be stable in the coming you can say, quarters.

The next question is from the line of Karan from AMSEC.

Am I audible?

Go ahead, Karan.

Yes. Sir, last year, we had witnessed a 14% to 15% decline in the overall plastic piping industry, given the fact that PVC prices have further firmed up. So is it correct to assume a similar decline or we can see a steeper decline for the entire FY year '22?

Now, Karan, what are you referring to decline in what?

Total industry.

Industry, volume.

Yes, yes.

So last year was also a reason because of COVID lockdown, which was very stringent, right? So that's why the industry saw the negative volumes, okay? But this year, given -- I mean, the April, May month of lockdown were not like very harsh like last year. So -- and given the construction activity has picked up quite significantly. So I don't think volumes should decline at the industry level for this year.

Right. Right. But the organized players will benefit in more rate?

Yes. I mean given the supply chain disruption, what we are seeing in the PVC, the stronger players are bound to have advantage here. I mean...

Right, right. And one more thing from my end is, sir, how is the current channel inventory as of now because prices are still not expected to correct. So are -- so inventory level is healthy or they are still sitting at a low inventory argument that prices may correct?

Yes, Karan. Earlier, they were trying to build up inventories in the pipe side. But for the past few, you can say, weeks that the prices are almost reaching the all-time high. So they are a bit cautious, and they are holding -- they are not trying to hold any stocks and they are trying to sell as fast as the goods possible. But still the price hike is continuing. So they are in a mixed state of mind, whether to hold the material or not. So they are just buying the material at the old prices and trying to sell off at the new prices. That is what's happening, and they don't try to write now hold inventories too much.

The next question is from the line of Shrenik Bachhawat from JM Financial.

Sir, I would like to understand that as CVC prices are continuously rising. Do you see any threat to the upcoming agri season?

Of course, with the high prices, the agri market is very much price conscious and it is totally affected because of the high prices. They try to defer their demand. But for the last few quarters, they are adapting their demand because of the high prices and prices are not going to go down in the next at least couple of months. So they may have to buy at the current prices or they may shift their demand to the next quarter or one more thing happened that they may buy sub-standard products. Then in that way, the all the organized may be supplying to them, and we may have a hit in that terms. But overall, affect is definitely there in terms of agriculture products for agriculture pipes, mainly because of the high prices. But because of low EBITDA margins and the low you can say, overall margin of these products, we are not very much you can say disheartened for the very much high prices because it is across all the companies in the industry.

Okay. So as we speak on the unorganized sector. Sir, could you please throw some light on how are they able to procure the PVC resins and whether they have some -- many peers have shutdown their production? Or like how is the supply from the unorganized side, sir?

It's normally the unorganized sector, they normally buy from the open market, which is already at a continuous premium of around 10% to 15% from the restricted price of Reliance or other sources. So they have to buy at those prices, but they match the cost by selling some substandard goods. So in that way, they try to manage the prices. And again, they gave unconventional credits, and they again go for, you can say, supplies as per you can say, buyer specifications, which organized players cannot. So that benefit is there. But again, the price hike that they have to keep, price premium they have to keep. So it's a mixed bag. But of course, they are, you can say, seriously challenged because of the high prices and the restrictions of the government and the working capital restrictions are also there. So put together, that challenge is there with unorganized player also.

And sorry, if I'm repeating the question, but could you throw some light on how is the PVC procurement mix currently for us? And what is the target? Like what is the desirable CVC procurement mix within domestic and imports?

Yes, we are roughly right now buying from the local sources around 30% and 70% is from the imports. We are -- for this current year only, we are following the same can say same term in which we will be buying in the -- for the next 2 quarters also from 70% for imports and 30% from the local sources. From next year, we will try to shift more towards the domestic sources for our suppliers.

Sure, sir. And just one last question. On the lead regulations by the government, so are we complying on all those regulations or we need to make some changes to comply with the lead regulation?

Yes. Of course, we are complying with those regulations already and we were -- most of our products were lead free already. Some of the agriculture pipes were non lead free because of all the industry was going like that only. But we, again, since the beginning of this month, we shifted our total product to non-lead base only, and we are supplying as per the government norms. There is no such big you can say, challenge was there for us because we were already in that share of business for our old building boards, they were lead free.

The next question is from the line of Dhiral Shah from PhillipCapital.

My question is again pertaining to the price hike. So whatever price hike we have taken, is it equally on the agriculture side also?

Yes, of course, the price hike is the evenly distributed across all the products.

Okay. And sir, the similar price have we seen in the cPVC resin, which you have seen in the PVC resin also?

cPVC resin is yet to see a price hike. But in the next few months or couple -- you can say next couple of months, we can see, you can say, a steep price hike in cPVC resin also.

The next question is from the line of Abhishek Vora from Ambit Asset Management.

I had a question on tanks business. If you can just throw some light on what margins are we clocking at tanks business? Though I know we are at a nascent stage, but if you can give that what guidance on the margin of tank business and their asset turnover as well will be helpful.

Yes. So Abhishek, the value-added products contribute 15% to 20% -- 15% to 25%, okay, I mean they generate that kind of margin at EBITDA level. So water tank business also comes under this category, and it is also giving us a 15% to 20% kind of EBITDA margin.

Okay. And growth run rate expected would be much above the normalized that you have guided, right? Because it's at a -- the weigh will be low?

Sorry, Abhishek, your voice is not very clear.

I was asking the growth expected here in this business will be much above what you have guided for the overall company as a whole, right?

Yes, yes, definitely. So like we said that we started this product only 2, 3 quarters ago, right? So the momentum is building up, and we have capacities for this product across plants now, right? And we are going to have a dedicated ad campaign running for water storage tanks also. So that will add -- that will give us a larger platform to boost the momentum here. And yes, I mean, our target is to take it to like 5% of our overall business by next year.

Got it. And what could be the normalized asset turnover out of the tanks?

It's around 4 to 5x.

Ladies and gentlemen, due to time constraints, that was the last question for today. I would now like to hand the conference over to Mr. Sameer Gupta for closing comments.

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

Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.