BirlaNu Limited (BIRLANU) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to HIL Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Siddharth Rangnekar of CDR India. Thank you, and over to you.

Thank you. Good afternoon, ladies and gentlemen, and welcome to HIL Limited's Quarter 2 and H1 FY '22 Results Conference Call. Today, we have with us Mr. Dhirup Roy Choudhary, Managing Director and CEO of the company; Mr. KR Veerappan, CFO; Mr. Ajay Kapadia, Vice President, Finance and Accounts. We will first have Mr. Dhirup Roy Choudhary making opening comments, and he will be followed by Mr. Veerappan, who will take you through the financial observations. Before we get into today's call, I would like to share that some of the statements that could be discussed on the call today could be forward-looking in nature, and details in this regard are available in the earnings presentation, which has been uploaded on the website and also shared with you. I shall now call upon Mr. Roy Choudhary to present his views. Over to you, Dhirup.

Thanks, Siddharth. Good afternoon, ladies and gentlemen. Welcome to Q2 and H1 FY '22 Earnings Conference Call of your company, HIL. I thank you for taking out the time and joining us today. I trust that you and your loved ones are healthy and doing well. As anticipated, Q2 FY '22 has been a tough quarter for HIL due to challenges emerging from a supply destruction, higher input costs and an off-season of our Roofing segment. The commitment and determination of our dedicated teams ensured that we were able to optimize the situation and maximize our performance, which mirrors the financials of this quarter. However, on a half yearly basis, HIL has posted a robust performance. Consolidated revenue for H1 FY '22 came in at INR 1,749 crores, registering a growth of 25% year-on-year. EBITDA grew to INR 241 crores, registering a growth of 17% year-on-year and EBITDA margin came in at 14%. PAT for the same period, stood at INR 126 crores, has witnessed a growth of 27% year-on-year. Moving to each business segments. In the Roofing segment, quarter 2 this year, was following an exceptional growth registered in quarter 1 FY '22 and also witnessed pent-up demand in compared to -- in comparative quarter last year. We observed selling price reduction in the market, coupled with discretionary costs coming back which collectively has impacted the profitability. However, our last leg connect to our influencers and customers have allowed us to command our price supremacy. We continue to bolster our leadership position in the market on the back of our high-quality products and our leadership in margins. Our Building Solutions segment has seen growth at a robust rate this quarter. As a result of the real estate coming back, the demand for these products have increased day by day. This is a very positive sign for the building materials industry, and we are well placed to meet this demand. That being said, we will continue to service the market in Tier 2 and Tier 3 cities as well, which we had started last year with the onset of COVID-19 pandemic. Our teams have been consistently interacting with various influencers, developers and construction companies and increasing the awareness regarding our offerings. We are facing short-term headwinds in availability and prices of key raw materials like cement, fly ash, burnt lime and coal, which will continue to impact the profitability in this segment. Building Solutions have reached peak utilization, and this is where our fresh capacity in each will assist. The Polymer Solution segment has seen a significant performance this quarter. This business has been growing month-on-month since last 2 years. Our strong brand value, product policies, influencer connect and increasing geographical reach continues to drive growth in this business. High price of PVC and CPVC resins in the market coupled by volatility issues are likely to have an impact on both revenue and profitability in the coming quarters. Our teams continue to develop more SKUs in a bid to ramp up business and increase our addressable market in the coming months. Last couple of years, including quarter 1 this year, has been good progress for Flooring Solutions. However, as intimated during our last call, the business is facing a huge scarcity of critical raw materials like HDF, MDF, owing to pent-up demand for furniture segments in Western countries, which is also resulting in continuous rise in price of HDF-MDF boards, chemicals and paper. Further, an increase in PVC price, higher sea freight and restriction of power consumption by the Chinese government has also impacted the availability and cost of multiple raw materials, which we import from China. To address the current situation, we have onboarded several new suppliers for HDF boards from Eastern Europe and Asian countries. We believe that nonavailability of raw material is temporary in nature and is expected to normalize by the end of December 2021. However, the price increase for various raw materials are expected to see a downturn only from middle of Q4 in a phased manner. While addressing the material availability and cost concerns on a daily basis, the sales team has done a phenomenal job in acquiring new customers across geographies, taking a price increase to the tune of 12% to 13% and moving towards non-HDF-MDF product offering for the maximum. This, together with the reduction in fixed cost, has somehow offset the material cost increase. Having said [ construction] plans for Parador are fully on track, and our long-term aspirations to grow Parador is then on course. While we hope and pray there is no third wave, but our learnings from the first 2 waves will help us adapt to and overcome any such challenges in the future. We continue to implement various systems that have proved their efficacy in the past 1.5 years. System like business intelligence, Industry 4.0, systematic mapping, zero-based cost model, et cetera. These, along with our fundamentally sound business strategy, ensures that your company remains agile and adaptive even in an unpredictable environment. In conclusion, I would like to say that our teams have been working tirelessly to overcome an imminent challenging phase, which, to many extent, is transient on the supply side, both in India and Europe, and we are very hopeful to mitigate this in the most professional way. Q2 FY '22 has been a tough quarter for HIL, especially in our flooring business, where we need another quarter before things settle down. We are confident that growth will continue to remain robust in long term. We will continue to launch and expand our new product portfolio, keeping in mind customer feedbacks. Innovation, research and development, agility and focus on profitable growth have been key ingredients to our strategy and will continue to introduce new SKUs and new products as we progress towards achieving our goals of making HIL, a $1 billion company with a robust balance sheet. Thank you very much for your patient hearing. I would now like to hand over the discussion to my CFO, Mr. Veerappan to take us through the financial performance of the quarter under review. Veerappan, over to you.

Thank you, Dhirup. Good afternoon, everyone, and thank you once again for joining us on HIL Limited's Q2 and H1 FY '22 Earnings Call today. I trust you and your families are safe. I will take you all through the financial and operating highlights of the business for the quarter and half year ended 30th September 2021. Continuous rigor of daily target achievements and collaborative efforts of our ONE HIL team resulted in ever highest revenue with a growth of 21% in Q2 in India despite severe challenges faced due to nonavailability and abnormal increase in key raw material prices. The Roofing Solutions business grew by 1% year-on-year to INR 189 crores for the quarter and by 25% year-on-year to INR 601 crores for H1. As Dhirup mentioned, the reduction in selling price during the quarter did put some pressure on margins. We continue to improve market share and remain leaders in the market in terms of margins, given the work our teams are putting to build on outreach and comps. The Building Solutions segment saw a very robust growth during the quarter, significantly boosted by the improving conditions in the real estate sector. Revenue grew to INR 96 crores in Q2, registering a growth of 32% year-on-year. On a half yearly basis, the revenue stood at INR 180 crores, having grown by 85% year-on-year. Capacity utilization across our plans have remained high and the upcoming Odisha plant will greatly help us service the increasing demand with relative ease from the next financial year. The Polymer Solutions segment witnessed a significant growth during the period under review. On a quarterly basis, revenue grew by 48% year-on-year to INR 136 crores. And for the first half FY '22, it came in at INR 244 crores, which is a growth of 74% year-on-year. Our strategy involving increasing brand awareness and widening geographic reach have played a major role in the growth of this segment, and we will continue to do the same to drive the growth further. Flooring Solutions segment recorded a revenue of INR 344 crores for Q2 FY '22, registering a degrowth of 3% year-on-year. And for H1 FY '22, the revenue came in at INR 723 crores having grown by 7% year-on-year. The slowdown in the growth was anticipated by us and communicated in our last call and was fully attributed to the shortage of available materials like HDF and MDF. This shortage is also impacting margins as prices for these materials have gone up significantly, coupled with increasing sea freight. We foresee this shortage to prove as a hurdle for a few more months. And after that, the Parador business will be back on its earlier trending growth trajectory. Coming to the consolidated financials, revenue for the company stood at INR 766 crores, registering a growth of 9% year-on-year for Q2 FY '22. On a half yearly basis, the revenue came in at INR 1,749 crores and registered a growth of 25% year-on-year. The company's consolidated PBT for Q2 is INR 36 crores and is in line with our expectations. The H1 FY '22 PBT stood at between INR 175 crores, growing 27% year-on-year and was significantly higher than the PBT for the first 6 months of the last financial year and also higher than the consolidated full year FY '20 PBT. PAT for H1 FY '22 grew by 27% year-on-year to INR 126 crores. HIL continues to maintain its focus on balance sheet health and strong cash flows. The overall debt came down to INR 307 crores after a debt payback of INR 102 during the first half FY '22. At the India level, HIL continues to be an interest-bearing net debt-free company since last quarter, despite various challenges on the [ material ] front. The total debt-to-equity ratio stood at 0.28 as on 30th September 2021 as compared to 0.41 as of 31 March 2021. The company's net worth stands at INR 1,104 crores and has grown by 23% year-on-year. H1 FY '22 proved to be a robust performance for HIL despite some pressures on import materials in terms of price and availability. But our teams are constantly working on ways around such issues and to minimize their impacts and we place great confidence in their abilities. We will continue driving this business towards a $1 billion dream and are confident of achieving all of our goals as one of India's premier organizations. With this, I would like to conclude my opening remarks. I request the moderator to open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Subham Agarwal from Aequitas India.

My first question is related to Flooring division. So as...

Sorry to interrupt you, Subham, but your voice is not that clear. If you can just maybe come a bit closer to the mic?

Hello? Is this clear?

Yes. Better. Please ago ahead.

Yes. So I was talking about the Flooring division. So sir, in your opening remarks, you did mention that you have already taken 12% to 14% increase in price. But if you see the gross margin or raw material cost to total turnover, it has increased by 8%. And this was probably not enough -- the increase in price is not enough to keep our gross margin Q-on-Q constant. So I just wanted to understand in the current scenario, where we have already taken such a high price hike, what's the current appetite of end customer? How they are reacting to this increase? And how do you think we will be able to take further price increase to offset our raw material price? Do you see any trend of down-trading in this product segment or any delay in their consumption?

Thank you, Shubham. I'm not sure I heard you very distinctly, but I could definitely grasp your question, and it's directed towards our Flooring business, Parador. Let me try and answer as much as I thought your question was and if I've left anything out, I would request you to fill it up, please. Before I answer your question, let me give a little more input on Parador. All of you are aware that Parador has been delivering consistent results since its acquisition almost 2.5 years back. In fact, last financial year was an exceptional year also for Parador. The way that we have been able to stimulate this company to be a part of HIL, I take pride in saying we are one. However, globally, there is a transient unexpected huge shortage of policy manufacturers for HDF and MDF boards. This is far more critical in Western Europe hugely contributable due to a sudden spark in demand after the second wave of COVID in the furniture industry. Suppliers of HDF-MDF having their own upward integration into furniture, flooring businesses have stopped supplying to external clients. This has created a huge shortage of raw materials for majority of flooring suppliers to our companies, including us. Parador has reached out to several manufacturers across the globe for supply of these critical raw materials and the process of trials and quality inspections are in their advanced stages. We hope to stabilize the supplies for these products by the end of quarter 3. However, owing to huge pricing increase taken by these suppliers globally, together with a peaking sea freight, the profitability pressure for Parador will continue till the end of this financial year. We have a fantastic connect with customers. Our brand is very strong. And over the last 7, 8 months, 10 months, our theme of taking Parador up to about EUR 350 million company in the next 4 to 5 years have taken a lot from the sales to acquire new clients. This was absolutely in place and had this transient issue not come through, Parador business would have been robust even this year. In fact, to give you a number, we have let go EUR 25 million orders this half of the year, which was in our platter just because we were unable to deliver as most of it needed HDF and MDF in their product. The model is very strong. The fabric is strong. I can assure you that. We have taken in 3 stages 12% to 13% price rise already with clients. This is going to be continued till we see any softening in the material price. We are setting ourselves alongside some suppliers of flooring who have their own HDF-MDFs. And that, I would say, is a disadvantage Parador has like many, many other flooring companies. Only about 10% or 15% of flooring companies would have their own HDF-MDF in their own company. So majority are facing this problem. We are tracking it. We are getting across the clients. We are getting the price rise. We will get more. And cost-cutting in Parador, very huge cost-cuttings are in place so that we are able to keep up the tally. Q2 has been quite disastrous, and I will not in saying that in the profitability of Parador. But I'm happy that we could scale with a good top line because we were able to ship some of the HDF-MDF products into more -- into resilient products, which do not need HDF-MDF and thereby cater to our clients. This effort will continue. I can tell you, during these times, a daily review with Parador far more improved impressions from HIL in a way we feel in India has penetrated. And I think this opportunity has helped us to be even better connected. And in many ways, the [ MISs ], the controls, the daily review, the aggression that HIL is now part of Parador. Give us the quarter 3, give us quarter 4 to stabilize the prices, you would see thereafter Parador will be on a different terrestrial altogether. Hope I answered your question.

Yes, sir. Fair enough. Sir, Slide 1 more question I had regarding flooring. So if you can tell me what sequentially was the volume drop with regards to nonavailability of raw material?

So the prices have gone up 12% to 13%, as I mentioned. So the revenue has an element of price there. Volume drop has nothing to do with entry of orders or customers. It has everything to do with how we have been able to service the customers. So just giving again a very strong notes here as a commitment from my side, the customer [Audio Gap] the demand, everything is absolutely fine with Parador. As soon as material -- first of all, was material availability, we have been able to sort that out to a great extent, I must say. The second is the huge price that stands on it. So that should take a little more time to soften. But I have an impression that maybe in quarter 4 this year, we would see some changes and the prices will start lowering down. Till such time, we will continue to see wherever opportunistically we can raise prices. For all new orders, we'll try and get more of non-HDF/MDF products. So those are the actions that we will continue to do.

Secondly, on the Building Solutions division, again, my question was very...

Sorry, I'm not able to hear you.

Hello? Hello?

Yes. Please, go ahead.

Yes. Can you hear me now?

Yes.

Yes. So on the Building Solutions division, given that we are working at optimum capacity, but our margin has again dropped because of raw material threshold, so I wanted to understand our ability to pass on the cost because in the last 1, 1.5 months, in fact, the raw material ratios have gone up. So how do you see the customer taking any increase in price that we have taken?

That's a very, very good question from your side, sir, and the point that I have with my team is this price pressure on bottom line because of materials, I guess, is being faced by everyone. And therefore, we have to do far more to get the NSRs up. And I think that's a consistent discussion that we keep doing, our sales teams are doing with the customers. Good thing is that HIL is able to cherry-pick a little bit because we have now penetrated into Tier 2, Tier 3 cities during the COVID. And you would see definitely an NSR rate upward movement as we go forward even more. So I'm not too worried about business solutions, though we have had a little weak profitable business, but the growths have been very good. We are back on track, and we'll be able to mitigate these challenges.

Next question is from the line of Shantanu Basu from SMIFS Limited.

So some -- I mean, some parts of my Parador query has been answered, but I still have something more to understand, basically. So there have been only a 3.5% degrowth, but there has been an EBIT loss. And if I put matters into context in Q1 FY '21, Parador revenue was INR 320 crores and EBIT was INR 20 crores. While in the current quarter, we have seen sales of INR 344 crore and loss of INR 7 crore. Now again, in FY '20, sales per quarter was generally less than the current quarter and profit was made at EBIT level. So just want to understand what's particularly wrong with the -- I mean, management of cost and I mean prices? Given the fact that you have taken 12% to 13% price hike, so what's particularly wrong? Because the historical results, even at lower revenue in the recent past has given higher EBIT or positive EBIT for that matter, positive and higher. So that is one. And what should we expect -- in this context, what should we expect in Q3 and Q4? Would there be EBIT loss in Q3 and Q4 as well for Parador? And the next question is, I mean, with respect to Roofing. So as you have stated that you have taken -- I mean you have reduced your prices. So post reduction of prices, have there been any market share gains? And -- I mean if you could just give me the volume growth, it's just a 1% growth. So I presume the volume growth would have been much higher as there has been a price degrowth. So if you could give me the volume growth, that would be helpful. And are there any cost pressures in that segment as well, in Roofing as well, as we see in all the other key segments?

Thank you, Shantanu. And you have your rights to be strong on Parador, and let me just take it on face value and try to answer them to you. There is absolutely nothing wrong with the management or our cost structures. Let me assure you that. In fact, there has been a lot of efforts in reducing the costs in Parador to sustain our [ price as a ] business. If whatever numbers we have said are all valid, and they are data and data speaks very well. Last year, Parador had an enjoyable year. And last year was not Parador. The Parador business was not at all hurt by COVID. Last year, in fact, Parador had a boost of a business because people were sitting at home. In Europe, they call it as a cocooning effect where they sit at home and they were doing a lot of investments to renovate their homes. So profits were good -- top line was good, everything was good in Parador last year. Now this year, we are back against that, and that cannot be a comparative, first of all. Q2 is always a weak quarter for Parador for years together. And Q3 also weak owing to Christmas and all the rest. Now having said that, the top line in Parador was the first detention that we didn't want to slide on, which means material availability, no matter at what cost, was the first impression that we wanted to do. Stay in touch with clients, don't lose sight of them, continue to give them what they want, so that we are not at all damaging all the hard work that we have done in developing your clients to expand Parador. So that was step number one. The cost structure on materials is something that has completely ruined the profitability. So once again, I -- and let me just harp on that. The entire profitability loss that you see in Parador has nothing to do with management structure, the way we handle Parador or anything. It is everything to do with the price at which HDF, MDF, chemicals, PVCs, sea freights, everything has gone north. Terrible. And in Europe, the best thing is, Shantanu, everything of these are well published. So there are websites where all of these indices are available and one can look into it. So it's much more explicit. We have gone through severe problems. You asked a question whether there'll be a loss next question? No. Next quarter, we will not be in loss. That's our efforts. We have gone through, I would say, the worst phase. Next quarter, we will -- we have been able to muster up more quantities of raw materials, so which means our company should run full and we should be able to get far more revenue in next quarter. And quarter 4, of course, we will be fully up as it seems today. Costs will remain a trigger, but in Parador, the more the revenue, we should be able to manage that. So I think next quarter will be far better on profitability than this quarter and quarter 4 will be even better than quarter 3. I would assume the lowest point of the bell curve has already been reached. That's about Parador for you. I can't give you exact numbers of how much quarter 3, quarter 4, we will raise because I don't have a crystal ball. That's my exact part. No one in the market is able to commit when HDF-MDF prices will start coming down. But we our deep connect with the clients, customers, suppliers and we are able to manage the situation to the best of our ability is all I can say. Coming to your next question on Roofing segment. I think Roofing segments have done exceptionally well. Yes, surprises by our competition or the market prices have slipped down in quarter 2 immensely because quarter 1 was HIL's quarter, where HIL took almost 25% -- 24% market share. We dominated quarter 1 in Roofing and a loss, which was very, very dramatically difficult to absorb by any of our competition. So they have tried whatever is under their roof to try and get market. Gone down on price, done literally wrong decisions, if I may say, from my lens. But we couldn't do that and we didn't do it, and we've never done it. So we have our market. We back our customers, we have the last connect. We have a brand. We get INR 15, INR 17 more than our competition per sheet in many places. We have continued that. We have slit our -- we have reduced our prices by about 2% to 3%, depending on the zone we are talking about, and that's about it. And we have got our market. Our market share, I would say, has gone up by about 200 basis points over last year in the first 6 months, and we should see anything between 22% and 23% market share in Roofing. Far, far higher than any of our next competition. So that's on Roofing for you.

The answers have been very helpful. I take this opportunity to wish you and the rest of the team a very happy Diwali.

Shantanu, very kind of view. And stay committed to this management, we will not let you down.

Next question is from the line of Dhananjay Mishra from Sunidhi Securities and Finance Limited.

Am I audible? First of all, I would like to congratulate on showing the resilient performance at least in terms of revenue. And I hope the input costs will subside in next 2 quarters and the price hike and other efficiency measures taken will improve the margin in Parador. Sir, just wanted to know, in terms of long run, is it making sense -- will it make sense to do some investment in terms of backward integration in Parador? Like we put something for MDF-HDF thing to produce for our own?

Dhananjayji, first of all, you made by day by congratulating the team because I didn't think quarter 2 really deserve that, but very kind of you. Coming to Parador and your specific question, for any factory that we want to set up for HDF-MDF, a minimum investment size will be about EUR 125 million to EUR 150 million. And the capacity output will be 3x that of what Parador would need. And I think that -- I was not and I'm still not very sure I want to get into a B2B model by getting into HDF-MDF manufacturing myself and then run depots to sell those products because I'll have a lot of excess capacity. That's one. I mean investment side will be very high. Second is this product was in for a very low margins, just a year back. And last 4 years, they've struggled. In fact, in Europe, if you map out many capacities have closed down in HDF-MDF just because the realizations were too low. This is just a transient part, I would say, because of COVID. This is just an element where it will get automatically corrected. I think we will be able to do strategic sourcing from many more suppliers of HDF-MDF and continue our efforts while the prices soften from quarter 4 onwards later part of quarter 4, is my guess. I don't think, sir, we need to invest in HDF-MDF. We should find a better business model is my view. But I'm happy to connect with you separately if you have a strong view on this.

Okay. And if you could provide the breakup in terms of geography, which -- how we did in Germany, Austria and other markets in terms of Parador this quarter?

So this time, we intentionally supplied maximum to Europe because we had created a good customer base for expansion of Parador, assuming nothing will go wrong in materials, but we were suddenly posed with this challenge. So we concentrated maximum in Europe, and the reason is because the realization then becomes best with less freights and all the rest of it. I think the numbers, therefore, would be far more Europe. I think about 70% to 80% would be sold within Europe, and the rest is outside, sir.

Okay, sir. And my second question would be in terms of -- in for Roofing business, what is the outlook in terms of availability of this fiber? And any cost that pressure we are facing in that segment?

I think today, I can tell you the comfort we are. So we are well poised in Roofing. The business is doing well. We have sustained our margins to a great extent. There are challenges of material always you know what the cement companies do, so I don't have to talk about it. But fiber, we are absolutely well poised. That doesn't seem to be a big concern in Roofing at all. We have been able to penetrate the market. We have been able to sustain our market shares to a great extent and take lots from our competition. Brand is doing well. Quality is doing great. So no concerns, sir.

Next question is from the line of Nikhil Gada from Abakkus AMC.

Congrats for showing a good set of numbers at least on the top line front. Sir, my first question is regarding Parador. And while you have mentioned that we have taken this 12%, 13% price hike, I wanted to know whether this entire price hike was taken in 2Q itself?

So I mentioned to you -- Nikhilji, first of all, thanks again for congratulating us. This was taken in 3 stages. So the price rise has -- the first price rise that we gave was 8%. I think this was at right at the beginning of the quarter, and then we had a 3% then and then another 2.5%, 3% depending on the client. So yes, the full of it hasn't matured in last quarter's revenue, if that's your question.

Understood, sir. Understood. And you mentioned that we have shifted to other products which are like non MDF-HDF and supplied flooring orders based on that. Can you highlight what kind of products are these? Are they similar to MDF-HDF and what is their availability source?

Yes. That's another tricky part. So we changed from -- we tried to change some of our orders of HDF-MDF-based products, which uses HDF-MDF as a central layer to the resilient flooring, which is like the PVC-based products. So they look exactly the same and the raw material for that comes from China. So that part we tried to do. But for instance, [ SPP ], we call it, then Modular ONE Hydron is another new -- brand-new product that we have already posted some of the engineered wood where we don't need HDF-MDF. So those are the products we have tried to supply more. There are 2 concerns there. One, the HDF-MDF products have better margins on a run rate basis. And therefore, the margins for these alternative products have not been as good. So that's some hits that we've taken on that on an equal basis. The second is PVC comes from China, and there, the new laws on power, and you have obviously read about it. Most companies are running 3 days a week and some who have a good connect with the government run 5 days a week. So some of our suppliers are big guys. So they run 5 days a week, but they had high set prices. And the killing part has been the shipping lines where the context is almost 8, 9x costs. So they are also posing us threats, but we will mitigate this.

Understood, sir. So the reason to ask this is that whether this was more of a makeshift arrangement or we were planning to at least move certain part of our product lines to alternate sourcing? So that was the reason I asked this. And just some of the domestic MDF manufacturers have highlighted during conversation that few of the European players or -- for MDF and HDF, they're sort of booked for 2 years in terms of the order book for MDF and HDF. And since you mentioned that we are moving sourcing from Europe to other parts, just wanted to highlight if we can give more details from where we are trying to source the MDF-HDF requirement?

So 2 years if they have locked their product deliveries, and I don't think they are the ones we can look at for alternators. We were primarily buying this from Western Europe, and we had very good sources in Western Europe. Sadly, 2 of our sources out of many were people who have an upward integration themselves in the company of supplying furnitures and flooring. So they completely switched off because they had enough demand within their own group. And that's the reason we have to look out. We are buying from Eastern Europe, which is one path that we have moved to. We have looked at China, and there is a good supplier in China, which we have to open up there. It's an in-line that is there. We are trying to use that if that's possible. Southeast Asia is another. So Malaysia has a very good supplier. We have the time stage of concluding with them. Vietnam is another. So there are quite a few options that we are looking at. We have looked at everyone. We've looked at the United States also. We looked at Indians also. A couple of them couldn't match our policies and some of them had a problem with the European approvals and one of them who could do everything, their prices were too high. So yes, we are looking at everything that's possible, Nikhil.

And sir, the freight cost over here would not have any impact or...

They have a huge impact, as you know, from India also so that always climbs onto the FOB price that we get. So all of that has to be considered, sir.

Understood, understood. And sir, just on the other part of the business, which is roofing, you already mentioned that we have been able to do quite well in terms of market share as well. But you had highlighted in earlier calls that we were going to finally get good quality fiber from Brazil and that would reduce our production cost. So any updates over there? Where are we in that industry?

It is helping us, sir. That's all I can say. How much, et cetera, I would not like to talk about.

But the integration has been done completely for...

Absolutely. We have a very focused supplier in Brazil. We have a preferential treatment from them. So that it's absolutely in place.

And it's flowing in our margins, right?

Yes. That is.

And sir, just lastly, if you could highlight the capacity utilization across all our segments, that would be really helpful.

So quarter 2 is always a weak quarter in Roofing. We had a mega, mega quarter 1. You may be aware that this was the best ever in the history. Quarter 2 is always weak. So I think last quarter, we were at 65% capacity utilization in Roofing. We were almost at 55% to 60% in the plumbing sector. And we were almost 90% in our Building Solutions sector. Parador was less. We were around 70% in Parador, and it could have been far more had the materials being available.

Next question is from the line of Nikhil from SIMPL.

I think the way the numbers have come out in a challenging environment, it's really appreciable. Sir, on -- based on the discussion we had till now on Parador, as I understand, like we've tried to save our sales and maintain our market share because during COVID, if I understand, we had gained significant market share because other people were not quite agile in the way we were. But considering that some of the suppliers were already having a forward integration. So have we seen market share lost -- significant market share loss? Or would it be in some percentage points market share loss in Parador? And on the pricing side, you mentioned that we've taken 10% to 12% price increase, but has the premium of Parador versus the other guys who are forward integrated, has gone up significantly or the price premium would have remained the same way. So they followed on the price increases?

Yes. Thank you very much. Both a very, very good questions. Let me try and answer. So countrywide, if you see market share mapping, I think we've done very well to secure that. We have gained market from a few additional connects, a few other additional customer acquisition which we have done. We have left out a bit of DIY in the process because DIY is more standard module that we sell and where the contribution is immensely low. So we've left out a bit of DIY specifically and strategically, but we have gained everywhere else. And that DIY, we will be able to gain back any time. So we have not lost anything on the sales side, on the customer side forever at all. That's answering that question of yours. And on your second question, well, we have raised the price, we have a premium, we get that, and this rises have always been a hard negotiation, but we have been able to convince it to the clients. Yes, some of the guys who have HDF-MDF in their family products are low-end quality products supplier. And therefore, we do not have a very steep competition against them. I would say they would have also raised it because their HDF-MDF price costs have gone up immensely. They would have also raised it, but it was not on a competitive levels.

Okay. Sure. Secondly, on the polymer business, see, what I'm trying to understand is, if we look at the growth, last year, we were doing around INR 90 crores of sales. And this year, we've done INR 136 crores of sales. And as I understand, PVC prices have gone up significantly. So of this 50% sales growth or even if we consider for the first half, almost a 50% sales growth, would it be like 25%, 30% would be volume-driven growth? Or can you give me a split of volume and price -- PVC-led price growth?

I think you're right, absolutely. The number you mentioned seems very logical about 25%, 30% would be the volume-driven growth and the rest would be boosted by the cost structure.

So sir, if we then -- if I look at sequentially from INR 108 crore to INR 136 crore and the EBIT remains in that INR 9 crore range. So have we done -- have we increased our market spending and promotions to gain volumes? Or is it like there was some inventory adjustment which has led to that -- the whole of the sales growth has not come into the EBIT -- has not flown into the EBIT improvement on a sequential basis?

I can see, actually, your questions are self-answering. And I must give credit to you, you are very well read on this. But let me try and coin it in my own words. So last year -- if you're comparing last year, there were obnoxious cost controls that we have taken. A lot of it, which had to come back. So we have not given raise in salaries to manpower. We have not started going from one place to the other. So that cost comes back. There are costs also on some branding that we are doing. If you ever go to Delhi or to Hyderabad, the autos would have a HIL pipes behind them. So those are some specific branding work that we have. Not big scale at all, but specific ones. So some of those costs have definitely come back, sir. And then there is the element of always inventories with the PVC prices continuously up and down, there are plus and minuses keeping going. So those are -- so there's -- it's not an apple-to-apple comparison. But let me give you a broad sense. The biggest push that I wish to do, and that's exactly what I have requested my team to do is to go on, excluding on sales. We are growing in pipes roughly about 50% in quarter 2. Quarter 1 will not be a right representation because last year, quarter 1 was very weak. So I'm not even going to that. But quarter 2 has been almost -- and we are on a drive scale for -- in excess of INR 300 crores this year on pipes alone. So I think that is our post, the more you're able to make, the better will be the profitability, engagement and everything. So that's our drive. You would see these profitabilities coming up, sir, in current coming quarters and years.

Yes, I appreciate it. And I think I'm not too much concerned on the profitability because this we've discussed multiple times, and you've mentioned that as sales come be will the profitability will improve. I'm just trying to understand if -- because if it's a marketing and promotion spend, it's more productive spend, which will improve the market share for us over a longer period. So that's just I'm trying to understand, is it inventory loss, which has hit the margin or is it more promotions, which we have increased, that's -- that was the whole idea.

Like the gain in quarter 3, last time, which was significant, we will -- 2 and 3, you will see that also haunting us as we go into quarter 3 results a quarter later. But let me tell you, there is -- the losses have come down immensely. It's all on quality, rejections. We are far more efficient on manufacturing. We have penetrated into newer sectors, so a lot more travels have happened, a lot more influencer activities have started with the plumbers and everybody, it's all costs, but those are very -- as you rightly said, they are investments and costs. So this particular business is -- we were struggling up to October 2019. I must say. Everything that I was saying was not happening. From October '19, when we changed the business or rather removed them and I took it upon myself that we should do something and the whole organization as ONE HIL has come together. Every month on month, we are growing in this business. And it's exciting to see we will be crossing INR 300 crore this year from a INR 200 crore last year. And as we cross INR 300 crore, we come into a very selective set of people and pipes. And I think the market share, our profitability will thereafter be quite a strong impact.

Sure. Last thing, which you can take up later also. On Fortune, Charminar Fortune, how is the progress since last 2 years now? Are you seeing traction building up? Or are we still in the process -- the proof-of-concept stage? Any thoughts there? Because we had good expectations from the product.

So we are finally -- I can make a [ something ] statement that we are out of the proof concept. We have tested the product enough. This rains have been merciless, in many ways. Sectors of the country, which has had torrential rain, taken away sheets, which were not our, thankfully. Fortune has sustained all of that, which means we are absolutely clear about the quality, technology and everything. Now we will be completely ramping up this product. If there is a concern, the concern is only on the cost of Fortune. We can't peg it around the adjective, and we don't want it. So we have to peg it with automated products and get the market scaled up. So Fortune is in far better hands and you would see progression quarter after quarter.

[Operator Instructions] Our next question is from the line of Anish Jobalia from Banyan Capital Advisors LLP.

I wanted to discuss broadly on -- your broad thoughts. So overall, how do you see the EBITDA margins recovering from Q2 onwards in H2? Like in the last year, we did close to 13% EBITDA margin. Do you think you can recover to those kind of levels in this year?

Anish, that's a very tough question, I must say. And part of it, I'm not able to talk about exact numbers. I can only tell you, Anish, that I think the worst is over in Q2. Q3 will also remain tough, but it's not going to be as bad as Q2 and Q4 will be far better. So we will considerably be improving here on. Last year was a bumper year for us. There were lots of cost cuts and everything. Let's see, we will keep passing this cost.

Okay. Sorry, I'm pushing, but in terms of achieving our $1 billion revenue goals by FY '25, I wanted to give any crucial developments in this quarter that you would like to highlight, which may have further crystallized your conviction to reach this milestone?

Thank you, Anish. Anish you should push me because this is your company, and you are all right to do so. We are here to make that happen. $1 billion dream is absolutely there. And this is no more of dream. This has now been positioned in plans. A lot of exciting bits has happened. One is we have got your approval and we are going ahead with the new factory for building materials in Eastern zone. So that's 1 step, a small, but very clear step that we will be taking on that. We are growing in pipes. We are increasing the -- our SKUs. We are increasing our product availability, getting into newer types of SKUs of pipes. And that is definitely going to reward us even going future. There's a lot of room for pipes to grow, and we will do everything to do that. Putty has been slow in H1, but because of COVID in quarter 1 and then incessant rain that happened in Q2, we have been slow in H1, but we have grown over last year. And now putty season is now and this month, I must say, it's looking very good. So putty will also be growing. Parador everything, every planning is in place to double Parador from where it is today in the next 5, 6 -- 4 to 5 years' time. And that's another part of the $1 billion story. We have just been crippled by, what I'll say, the transient problem, which will go through on raw material availability, but we'll be back once again. So I do not see anything that will keep us that from that story.

Next question is from the line of Alisha Mahawla from Envision Capital.

Sir, the first thing I'd like to understand is how is the pricing trend in the Roofing business now? Because you did mention that the Q2 did see -- you have some price cutting by competitors, that's still continuing?

Sadly, yes, Manishaji (sic) [ Alishaji ]. It's still continuing. And it will be prudent to say I would have assumed a lot more robust approach there, but you see 2 of our competitors are adding new plants. So I can't blame them if they want to take more markets to crystallize their own plans. The question is at what price, the question is at what profitability? But that's for them to handle. What pushes us, therefore, more is how do I not reduce price and still maintain by leadership and market positioning far more activities are going on digitally. ASN mapping, the PIN code mapping that we have done, not more drive into influencer segment, the last leg connect that they are doing as we meet them. I think all of that is -- whatever the others are doing, I would say, is helping us to even firm up our plants better and be in the market better Alisha. So I don't think we will be as exposed as they are.

Okay. Understood, sir. And the next question I have is, while we understand the challenges that you're facing in the flooring business and obviously, identified in detail the alternate suppliers that we're searching for, but will we be able to maintain last year's revenue or it's hard to say at this point in time, considering demand is there, but we are unable to supply?

So if your question is whether we will be able to reach last year's revenue that's the aim. So till now, we are very much on track for the last year's revenue in H1. And the aim is exactly that, that we don't want to let go the revenue. Profitability is another question.

And while you've highlighted that you've taken 12% to 13% price hike in H1 in phases, is it possible to quantify what is the incremental amount of price hike we've to take to neutralize the increase in costs that we've had to face?

That's not an easy question because Parador has lots of SKUs and each one has a differential model of cost and price, very difficult for me to answer. Ideally, if I had taken another 5%, maybe I would have been able to equate things. That's only ideally speaking. Again, it depends on what products and what orders I take from which horizon, we take, which geography was the freight element and everything else. There's a lot more -- there's a very strategic calculation tool that we use now with Parador so that we keep a fence on profitability at the time of picking the orders, Manisha (sic) [ Alisha ]. But our attempt is that while the prices are still not showing down, how can we raise -- other materials are not showing down, how can we raise further on NSR, those attempts are going on.

Understood. And just one last question. So once everything normalizes in the Flooring Solutions business, what do we feel would be a sustainable margin in that business?

Manisha (sic) [ Alisha ], we are absolutely committed as an organization. We picked up this company with 7% EBITDA margin. Sorry, I don't have the numbers with me. The 7% EBITDA margins, we had come to 11.5% EBITDA last year end. I had committed to you that 10% is what you should take on a normalized basis for Parador as we can grow the company, and I stick to that. We are going to be back, but give us a 1.5 quarters more.

Next question is from the line of Nikhil Agarwal from Tusk Investments.

Can you hear me?

Yes, we can, Nikhilji. Please, go ahead.

Yes. Sir, my question is how would the target of HIL trying to become a one-stop solution of building materials Parador? So how does the company plan to leverage the distribution network and use the outsourcing volumes for creating new products? Of course, we have launched a lot of products and we have transformed from becoming a roofing business to a building material business now. And how do we plan to expand capacity going forward or you be outsourcing volume? And what would be the working capital requirements? And do we plan to make it like a positive cash flow model going forward?

Could you start over, Nikhilji because I can't hear anything that you said, my apologies. The line is not good at all. Would you like to go slow and just come closer to wherever you're speaking from?

Sure, sure. Yes. So can you hear me now?

It's still breaking at times, but let's make a meaning of it. Please go ahead, but slowly, sir.

Sure. So my question is around the target of HIL trying to become a one-stop solution provider for building products, right? So like HIL was initially a roofing company and now you've expanded into multiple products in roofing -- apart from roofing business in building materials. So how does HIL plan to utilize the distribution network and use outsourcing models for creating new products, launching new products in the market and improve the working capital requirements?

Okay. It's very clear to me now. So yes, we are absolutely going to be one-stop building materials, $1 billion company, and that we are going to achieve. The whole team has signed off to it. And I do not see that as an issue at all. There will be these kind of problems. Some quarters -- last 4, 5 quarters have been very good from an HIL perspective the quarter has been a bit of a hurdle because of Parador. Next quarter also will be slightly changed because of Parador, but we will be back on with the plan. Our strength is the last net. Our strength is domestic retail across the country in India. And we are going to utilize every base of it. We will therefore come out with products that have a meaningful contribution in your distribution and connect with the clients. We have come out with -- for instance, you would have read it through that we have come out with plans, a lot of plans where we have a particular trial mode that we are doing. We have come out with some other products like [ Primary ] tile adhesives that also we are trying in very specific test markets to see how it works. All these products have a Birla brand to it. It's all on the Birla HIL brand. And I think none, if I may say, has a Birla connect elsewhere other than ours. So that's a good thing that we have. They are being sold through both our building materials -- sorry, we have the roofing as well as plumbing networks that we have. So there is a huge synergy, therefore. They are all being bought out mostly. So we are gathering speed in getting contracts done for our contract manufacturing at different locations and not travel beyond a particular kilometer, which are work freight. So we will have to have lots of them all of that. Therefore, working capital will be pretty less because we'll be mostly doing on an outsourcing model where we will be able to sign up with them with good terms of payment. CapEx will be minimal unless we really need something. So this will be a efficient model, but we'll have a very finite bid that we can do. If we want to go aggressive in any of the products, we'll have to look at a different model at a later date. But at the moment, we want to keep ourselves open. Test it through this route and then come out with what's the rational good model to take it to the next level.

Next question is from the line of Vipul Prasad from Magadh Capital.

I have some questions again on your expansion plan. So when you talk of USD 1 billion revenue in the next 4 to 5 years, what is the CapEx that you're targeting over the next 3, 4 years, let's say, and in the next 2 years?

Vipulji, I would say rather than looking at CapEx, let's look at what will be the borrowings and debt because it's a mix of CapEx model, CapEx and OpEx model that we would be doing. I cannot put my finger at the moment on how much will be an organic, how much of it has to be inorganic wherever there's a need. So I would say -- At the moment, in India, we are debt free. We have been able to clean up entire loans that we took for Parador, which was taken for 7 years in 2, 2.5 quarter year. The loans in Europe is absolutely not a bearing only because it's at 1%, 1.25%, 1.5%, and it's easily payable from the cash flow of Parador. So that's not going to be an issue at all. So therefore, we have now a room for any further investment that we want to do organically and inorganically. So we will continue to look at that favorably as per the business sectors.

Okay. Okay. And when you put these plans on the drawing board, do you would have some sort of a number when it comes to return ratios, let's say ROCE or ROE. So given it's in some kind of a range, let's say, last year, probably, your ROE was 25% and in fiscal '20, it was 15%. So what kind of numbers would you be looking at, assuming net sales realization do not change much?

So I think there are a few boxes we always seek for ourselves, and I'm not talking about an initial peaking time, but more on a stabilized time of our business. Any business that we want to go for, I don't think we want to go more than 1:1 debt equity in HIL at any stage. I'm not comfortable with that and that is also far-fetched. With an EBITDA terms, it should be double figures in a stabilized format for any new business that we look at because we don't want to tarnish the company's EBITDA at any stage. And ROCE, I think a sustainable 20% looks quite steady from So these are some of the boxes that will always see warning signals to us before we look at the investment.

Okay. And just 1 more question. You've been very clear about Parador's target about USD 350 million. So out of the total revenue that you are foreseeing about $1 billion, what percentage will come from Roofing and out of that, what percentage will come from [ asbestos ] roofing, roughly?

Okay. So okay, let me give you a few numbers, and I'm just thinking aloud while I speak, it's not on the paper. So Roofing will be about INR 1,500 crores to INR 1,600 crore. Building Solutions will be about INR 750 crore, INR 800 crore. Plumbing solutions will have a pipe of INR 1,000 crore and a [ putty ] of INR 600 crore. Parador will do about EUR 350 million. And we will have to look at new products, new verticals to fill up the rest to make it a INR 7,000 crore or whatever would be in the midterm.

Next question is from the line of [ Vishad Guthrie ] from [ Ongarah Capital ].

So sir, I was just evaluating the Flooring business, the Parador's numbers. I was trying to understand what kind of raw material price increase have we seen? Because like you mentioned, we've done about 12% to 13% price hike, despite which if we see on a Q-on-Q basis, our gross margins have decreased from 48% to about 40%, please correct me if I'm wrong. But what kind of raw material price increase have we seen on a Q-on-Q basis?

So these are different for different products. On an x-works basis, we have seen at least a 40% increase in our HDF-MDF prices in Parador. We've seen a 7 to 9x increase in for sea trade everything that we buy from a distance. We have seen the chemical prices shoot up by almost 100% to 200%, depending on what we are looking at. Some of the paper that we use for impregnation, those paper prices have also gone up. So it's a mix of everything. I think overall, about 8 million to 9 million has been the cost increase only on material costs in the first half year in Parador.

Okay. And you mentioned that we've done 12%, 13% price increase, and that was over a period of 5 different increases. So what percentage of that has already been captured in the Q2 prices? Because I understand not all of it has been captured and Q3 will be definitely better than Q2 is what we expect. So what kind of number has already been captured in Q2?

I don't have that number We can always get back to you. But I'll say we have taken it in 3 stages. So not all of it has fully rolled on to quarter 2. I would say about 60% to 70% has rolled down the rest is already happening as we speak. Second point is does it straightaway reflect that we'll have a very high profitable quarter 3? No. Because material costs haven't started coming down yet. And that's why that's a very volatile part. We will have to still see where really the hike is in where the -- where we reach the top most and then start coming down. I don't believe material costs will start coming down before Q4 level. So we will have to, therefore, look at even further price rises, if there's a need. So all of that are work in progress on the drawing board every day.

Ladies and gentlemen, we will take our last question for the day, which is from the line of Sagar Jethwani from Phillip Capital.

Sir, how many channel partners you have added in the segment? And how much addition we have seen over 1 last year? I think we have 2,500 distributors. Can you please share a breakup of that? It would be helpful. My second question is on the domestic revenue mix between large Tier 2 and Tier 3 towns? If you can share that, it would be helpful.

It's a difficult question for me to answer off the board, but in my reviews that was very clearly understood that we have done about 600, 700 new acquisitions of last leg connect in roofing and about half of that in plumbing in the last 2 quarters. So I think -- no, quarter 1 was far more. Quarter 1 was about 1,200 new counters that we have taken and quarter 2 was about 700 more. So, yes. Your question on Tier 2, Tier 3 versus Tier 1, that breakup, I don't have. But I think roughly about 30% of building materials is coming from Tier 2, Tier 3, sir.

I now hand the conference over to the management for closing comments. Over to you.

Thank you. It has been a pleasure interacting with all of you over this call. We thank you for taking time out and engaging with us today. We value your continued interest and support. I hope I've been able to give you a very transparent view on where your organization is and the challenges ahead. Let me once again reassure that every minute, every hour of our time goes towards protecting your interest as investors. And we will continue to deliver what we will do and more from your organization. Please reach out to us if you have any further questions. Until then, happy Diwali probably to all, and stay safe. Thank you very much.

Thank you very much, members of management. Ladies and gentlemen, on behalf of HIL Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.