BirlaNu Limited (BIRLANU) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the HIL Limited conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mit Shah from CDR India. Thank you, and over to you, Mr. Shah.

Thank you, Michelle. Good afternoon, everyone, and welcome to the call hosted by HIL Limited's management to discuss the recent acquisition of Topline. Joining us will be Mr. Akshat Seth, Managing Director and CEO of the company; and Mr. Ajay Kapadia, Chief Financial Officer. The call will commence with remarks from Mr. Akshat Seth covering the key highlights of the acquisition, following which we will open the forum for a Q&A session. I request you to limit your questions to the development specifically. Before we begin, please note, certain statements made on today's call could be forward-looking in nature, and details in this regard are available on the invite shared with you earlier. Thank you. I'd like to invite Mr. Akshat Seth to make his views.

Thank you, Mit, and thank you, everyone, for joining in today. I know it was at a short notice, but it's an important and a happy development at our side. We thought we should break away from the cycle of those quarterly result-driven conversations and start sharing some developments, which will have a bearing not just for the here and now, but for the long-term prospects of HIL and our various business segments. So thank you again for joining us. So I'm happy to share that we have signed an agreement with Crestia Polytech for the acquisition of Topline. It's a popular brand in pipes and fittings in Eastern India along with Crestia's 4 other group companies. The total deal consideration is INR 265 crores, that's the enterprise value on a debt-free, cash-free basis. The total estimated turnover of the group of companies that we are acquiring is about INR 330 crores in FY '24 with an adjusted -- with an estimated adjusted EBITDA in the range of about 9% to 10%. We would also like to highlight that this acquisition will be PAT accretive. The acquisition is a significant step for us at HIL and in our commitment to further accelerate the fast-growing pipes and fittings business. In my calls with you, my recent results call with you, we have been speaking about how pipes and fittings will be a key growth lever for us in the years to come. And this step is in that direction. This particular acquisition and company comes with a complementary portfolio of products, technologies and market footprint and will help us to significantly scale HIL's production capacity to 3x the current and will double -- straightaway double our revenue in this category. So this acquisition perfectly aligns with the ambition and is part of a well-thought-out growth strategy for pipes and fittings. The combined synergies of the 2 organizations will broaden our product portfolio. Our product offerings and SKUs will double from where we stood before this acquisition, manufacturing capacity and market reach. Overall, our ambition is to be at least 5x our current size in this category over the next 3 years. The acquisition also offers immense growth potential. As I said, it not only doubles our revenue, but also enhances our production capacity threefold, which means there is more headroom for growth, especially in the strategically important Eastern region. We also gained access to Topline significant channel presence across 15 states. East, of course, is a stronghold for them. The company has built over the last few years, significant government-oriented business, I'll talk about it in a second. Let me first talk about the product synergies that we get. So this acquisition will enable our entry into large segments such as HDPE, high-density polyethylene, MDPE and water tanks. These are segments where we were not present in the past. These are large segments in the market and we now have a meaningful play in those. As I said, we will double our SKU offerings. It also creates access to patented technologies in water tank and electrofusion fittings, which will position us amongst a handful of players in the country with access to that technology. It also enhances our presence in government projects. You would recall, so far, we have not played in the government segment. Topline, on the other hand, is specified and approved to supply the products in 12 states through various government departments, including the Jal Jeevan Mission, the natural gas grid and PM Ujjwala scheme. This means if we step back, that we will now be able to play in segments like agriculture, telecom and natural gas where either our presence was small or not at all in the past. For this transaction, we'll be paying INR 125 crores. So as I said, the total enterprise value is INR 265 crores, of which INR 125 crores is equity, the rest is debt. So for this transaction, we'll be paying INR 125 crores to existing shareholders for purchase of 100% of equity shares and additionally infused INR 35 crores, so an aggregate of INR 160 crores to repay unsecured loans. The rest of the INR 105 crores, INR 110 crores will be the bank loans that we will bring over in the entities that we are assuming control of. This INR 160 crores of infusion at HIL's level will be funded through a combination of internal accruals and borrowings, and we expect that this acquisition and all its related formalities will close in the next 4 to 6 weeks' time. Those were the highlights of this deal and why we feel excited about it. Let me pause here and open it up for questions. Thank you so much.

[Operator Instructions] The first question is from the line of Praveen Sahay from PL India.

Congratulations on this acquisition. The first question is, sir, in this acquisition, there are 5 entities. And is there any intercompany transactions as well? Because if I look at the revenue for each and every company, it's not -- the consolidated revenue is not equal to that. So is that intercompany transactions also there?

There are some. Let me invite my colleague, Ajay, who's the CFO, to answer that question.

So out of 5 entities, the manufacturing is done in 4 entities, whereas 1 entity is mainly bundling the products and then supplying to the customers. So 1 is a trading company and the 4 are mostly manufacturing companies.

Okay. Okay. Which one is the trading company?

Topline Industries is the trading company.

Okay. Okay. Got it, sir. And the second question is, sir, on the numbers only because in the press, that's one of the acquisition retail document. If I look at the numbers mentioned in the first -- the serial number, that is a INR 265-odd crore as of 31st December '23. So is that a calendar year '23 that number is INR 265-odd crore? Because if I look at the -- down in the same document, for calendar year '23, I can see consolidated number is around INR 221 crore for a total number.

So Praveen, this INR 265 crores is basically 9 months unaudited numbers. INR 221 crore is year FY '23 full year audited numbers.

Okay. Calendar year '23 is INR 221 crores, 9 months FY...

No, no. Praveen, financial year '23, that is April '22 to March '23 number is INR 221 crores, which is audited number. From April '23 to December '23, unaudited number is INR 265 crores, this is 9 months.

Okay, okay. Got it, sir. Got it. And about the business, if I look at these companies are manufacturing the HDPE, PVC piping, tank, containers, fittings, everything. So can you give some more color, is like the large portion of the business is coming from where? Like it's more on the SGP or PVC piping? How the business is actually placed in? And secondly is where we are actually that these companies are selling? It's more on the project Jal Jeevan Mission projects or in the retail as well?

Sure. So broadly speaking, the HDPE, MDPE portfolio is to the tune of about 60% to 65% for them. The tank business accounts for about 15% of their revenue. The PVC -- so UPVC, CPVC accounts for another 20% of the portfolio. If you look at a split by the type of channel, the government channels account for about 40% to 45%; the B2C retail channel accounts for the remaining 50% to 55%.

Okay. That's helpful, sir. And also, if you can give color on the geographical mix. So largely in the eastern geography, they are positioned themselves or sales is happening from outside as well?

They are selling products through the trade channel in 15 states, have a very good distributor-dealer network in these states. The center of gravity of their sales are in the eastern part. So Bihar, Jharkhand, West Bengal and neighboring states is, of course their stronghold. Eastern UP also.

Okay, okay. And also if you give some color on -- because already you had given the EBITDA margin of 9% to 10%, how has been the trajectory? Is it a steady state margin for the company? Or is that something to look at improved or something like that?

So as far as the stand-alone operations pre-acquisition are concerned, they have been consistently on that trajectory. We expect as the merger happens and synergies start kicking in, both there will be benefits on the P&L of both our Birla HIL brands of pipes and also on Topline.

We'll take the next question from the line of Krisha Kansara from Molecule Ventures PMS.

Sir, my first question is on the capacity. So post this acquisition, what would be our consolidated capacity in the pipe segment?

We will cross the 100,000 mark, so we will be closer to 110,000, 115,000 metric tons per annum, which from where we stand today is nearly 3x as large. But the other interesting bit about the capacity pieces, you are aware that so far, we at Birla HIL had capacities in North, at our Faridabad plant; in West, at our Golan plant outside Surat; and in South, outside Hyderabad in Thimmapur. East was a missing element. With this acquisition, that gap gets closed. Our ability to serve the fast-growing markets of East and Northeast grows manifold with this acquisition. So it's not just the number and the capacity that we have, but now sort of closing all the gaps in the manufacturing footprint as well. What I'll also highlight is, apart from what the current stated capacity is, there is a fair headroom for growing this capacity at the existing facilities as well.

Okay. And sir, 1 question regarding this only. So how are we planning to position this Topline brand along with our own brand? So if you can just throw some light on that part.

So over the next -- of course, Topline will now become a brand within the HIL portfolio. We've managed a house of brands for a really long time across our various product categories. Within pipes, we've been selling our pipes under Birla HIL. Topline will be an additional brand in this portfolio. For the short run of the next 2 to 3 years, we will keep this as a separate brand, grow it to its full potential. Of course, the brand will be endorsed by the Birla HIL association. But it will retain its unique identity. And the rationale for that is that the brand is fairly well known in the Eastern markets. There is a good recall. There is a good channel connect and there is a good customer connect. We want to take it to its full potential over the next 2, 3 years, and that headroom for growth is fairly significant in our assessment.

Okay. Okay. And sir, 1 last question. So you had given a sales guidance of close to INR 1,600 crores for this segment by FY '26 or '27. So I have 2 questions regarding this. So was this guidance given considering this acquisition, is number one? And number two is, do we plan to opt for inorganic growth in this segment even going forward?

So the guidance is the goalpost that we are aiming. In fact, what we are sharing and we have shared in the run-up is that, that guidance will only go north of the number that you are talking about. These are ways of getting to that ambition. These deals are not -- you can't be sure of them until they are completed in all respects. So I would keep the 2 conversations separate. If your question is, are we still on track for that INR 1,600 crores and beyond? The answer is yes, and with greater conviction. Will this help in that journey? 100%, it will. Will it accelerate that journey? 100%, it will. Will we be on the lookout for more such smart acquisitions? Absolutely. So our march towards what we think is a rightful size in the market will come from a combination of a lot of work on the organic side, but also sensible inorganic moves like this one and like the ones we have done in the past.

[Operator Instructions] The next question is from the line of Kush Gangar from Care PMS.

So what would be the capacity utilization for this plant? And what is capacity utilization at HIL stand-alone capacity?

Sorry. First of all, my apologies, I missed your name. .

Kush Gangar.

So the capacity utilization at -- our current capacities are in the range of about 70%. So this is the Birla HIL operations. At the acquired entity, these are in the range of about 40% to 50%.

Okay. And acquisition seems to be quite reasonable in terms of price to sales considering 9% to 10% EBITDA margin. What was the reason for the existing promoters to sell out?

I think it's a question which is best answered by the existing sellers than us. So you are aware that in a business like this, there are sort of tiers as you move from one tier of growth to another, there are -- there is a significant demand of capital for investments in capacity, for investments in working capital, for investments in channel. The founders have built a solid platform, which has a runway up to what we believe at least INR 1,000 crores. But the investments that are needed, somewhere a company like HIL in partnership with this brand can actually make it on a more accelerated track. So that is what -- that's at least our hypothesis, but the exact answer, I think the sellers can give you.

So the existing promoters would continue with us or...

No. So they would not. It's a 100% acquisition. So the operating team and the management team will continue, but the promoters will transition out.

Sure. And you mentioned you want to take this business to 5x of the current size. That would be -- current size will be around INR 300 crores for our pipes business?

Our pipes business, we are in the zone this year, we should be in the zone of INR 350 crores to INR 400 crores without this acquisition. With this acquisition, we'll already be INR 700 crores plus. Like our existing fees, at least 5x is the aspiration. I think Krisha had also asked some number on what the goalpost is as we are going along, somewhere we are also being ambitious on that goalpost.

And in terms of margin synergies, if you can help us a bit detail and our aspirational target margins at a higher revenue figure. What can be the margins at that level? And some synergy details.

See, for the combined entity, I can talk because soon, there will be no advantage in talking about the stand-alone entities. For the combined entity, as I have shared in the previous calls as well. For this segment, we are aiming to be in the teens, so double-digit, 12% to 14% is the first milestone like operating margins that we need to hit. There will be a journey and a path to it because we also anticipate in the short term, there will be investments for us to scale up. So for us, the path will be first scale up and then the margins will also start showing up because you know in this business, scale has a significant impact on the margin structure as well. But in the short run, also, this particular acquisition gives us some great synergies. First and foremost, the scale, as I said, doubles up. That advantage will show up. Second, today, for Birla HIL, nearly 20%, 25% of our sales are happening in East India. They were being served from our plants in North and in South. Immediately, with this footprint coming in, there will be advantages on the logistic cost. There will be advantages on sourcing the raw material. There will be advantages on the people front, given the team and the synergies there. So we expect that impact to be start becoming visible in the short run itself. But overall, for this segment, the real picture will take a couple of years to emerge because in the short run, we will be investing heavily to grow scale, grow counter share, grow market share. Our first milestone in that time period will be the numbers that I shared in the zone of 12% to 14% at an operating margin level.

[Operator Instructions] The next question is from the line of Achal Lohade from JM Financial.

Sir, quick question with respect to Eastern market. What is the size of this market according to you, how it is growing? And, b, we have seen a lot of new capacities being set up by the leading players, so how do we look at the competitive intensity, particularly for the Eastern market?

So overall, see, these numbers will be up for debate in our market -- overall market size of about INR 40,000 crores, as far as -- INR 40,000 crores, INR 45,000 crores as far as pipes and fittings is concerned. We understand that the whole East and Northeast cluster will easily be 25% to 30% of that. The overall all India market in the last few years and is expected to grow at about 9% to 10%. East will be an outperformer as far as that growth rate is concerned. So I would expect low double digits there. So 12% to 13% type of growth is what is expected. And the interesting bit is, in East, it's not just -- there is a fair amount of government-related activity that is also driving investments in this. So it's both a combination of B2C projects happening and the residential demand. And that is why this market is interesting. There are also other things. If you look at -- I mean, in recent quarters, you would have seen there is renewed interest as far as East market is concerned. There are bigger cousins who are setting up capacities or have announced capacities. Why we feel excited about this is, somewhere it helps us leapfrog an organic development of a platform of this size is time consuming. So somewhere it allows us to be ahead of the curve as far as addressing the East market is concerned.

Understood. This East and Northeast, you mentioned, did I hear the number 25%, 30%?

Of an aggregate overall India market, these are broad estimates.

Okay. Okay. The second question I had with respect to -- are there many more such players who are in that INR 200 crores, INR 300 crore revenue bracket, which could come up as potential targets? Or you think that's very rare? It's more of large players now?

See, Achal, as we look at these potential partners, acquisitions, mergers, the filter for us is less on size, but more on what this portfolio brings to us and how good the strategic fit is. So when we scout for these opportunities, the net is cast wider. We look at -- we will look at something which could be INR 100 crores to much in excess of the INR 350 crores that we are talking about. So -- but the important thing is how does it fit into our portfolio and what's the value at which we are able to acquire. So I'll focus more on that than on the specific current size of these assets.

Fair point. I was just curious to know from your perspective, are there players? I mean one is, obviously, whether it fits the bill, the requirements what you have, but in terms of the availability, are there many more such players around? Or this is far less, very...

Not many. I think if you look at -- so if from an industry structure point of view, sub INR 150 crores or -- sub INR 150 crores, you will have quite a few players, subscale and so on. But as you start going north of that, it starts becoming a rarefied field. As we are now hitting closer to the INR 1,000 crores mark, you will have a handful of players in that zone. So it is the options in that price -- in that size will become fewer.

Understood. And just one quick clarification with respect to the competitive scenario, particularly in the Eastern market. Have you seen intensity going up off late or things are as they were and probably that will intensify over the next couple of years as those capacities come up?

So where we stand today, it is possibly the competitive intensity is on the lessor side; however, it is intensifying. And if I fast forward to the next 3- to 4-year picture, you will expect fairly heated competition in this geography. The way we are seeing this opportunity, I'm sure everyone else have their analysts working on it. And that raises their interest about that market. So my expectation is that competitive intensity will increase from current levels, but standing where we are, maybe there is a window for the next 2, 3 years, where it is relatively better compared to other regions.

The next question is from the line of Khush Gosrani from InCred.

Sir, could you give us what is the mix between agri pipes and non-agri pipes in the Topline and even for HIL?

So at -- at HIL, this will comprise today, you are aware, we are very heavily focused on CPVC and that's been one salient feature of our portfolio. We are amongst the very few players who have consistently been 40% plus. And as a result, agri has been -- we have been very less indexed on that. It's about 10% or so of our portfolio that agri will comprise. In Topline's portfolio, it's a number -- allow us to come back on that. It's not a number that I recall immediately.

Okay. Sure. And sir, overall, what is the mix between pipes and fitting at Topline?

Overall from a -- so the fittings bit will be at this moment about 20%, in that range, 20%, 25%. What is interesting, and I have to highlight this is the technology this company has on electrofusion fittings. I'm sure as observers of this industry, there have been some recent acquisitions and valuations for the electrofusion part of the portfolio. This acquisition gives us a unique capability to play in that segment. It's a niche segment. It's a very -- there are only a handful of players playing in that. It's a better margin product. So far, it has -- the investments in that capability were recent as far as Topline is concerned. And we expect to grow that part of the portfolio fairly aggressively. So it's a USP of the portfolio that we've acquired, and I wanted to highlight that.

Sir. And sir, if I look at the press release that you have given, there is some confusion on my part. The total revenue, if I look at, Crestia, Topline, Aditya, Sainath and Aditya Industries is coming to somewhere around INR 600 crores. So what is the structure over there at the -- when we have acquired?

Ajay, do you want to answer that?

Yes. So Achal -- sorry, Khush, there is an intercompany sales happen because some of the companies are into manufacturing of pipes, some are into fittings. So they bundle all the products and then supply to the customers. So these 9 months for this year, that is from April 2023 to December 2023, the revenue is INR 265 crores.

Okay. Okay. Got it, sir. Got it. And just last question on the margin side. So you highlighted 12% to 14%. Is that right, both the synergy?

For which one?

Both combined, for HIL and...

No, no. We are saying at the moment, the acquired entity is in the zone of 9% to 10%. As we mature in this business and as we grow scale in this business, that is the first milestone that we are aiming at.

Okay. So what would be the HIL margins right now?

So this year, we have done in the region of 7% plus. And to your question on agri in the current portfolio, they are about 20% in agri.

We'll take the next question from the line of Nikhil Gada from Abakkus AMC.

Congratulations for -- sir, so just firstly, so with this capacity, which is 80-odd thousand and we may be around 30,000 plus. What is the maximum revenue that with this combined capacity we can achieve? Or is it that INR 1,600 crore number you are saying is sort of achievable with the capacity that we have announced?

No. So for us to achieve INR 1,600 crores odd, if I'm talking about the 5x, which is roughly in the INR 2,000 crores, north of INR 2,000 crores, we will, of course, need to invest more in capacity. The current capacity in the acquired assets can take it to the INR 1,000 crore mark stand-alone for that. Our current capacity can take us to about INR 500 crores to INR 600 crores.

I think, INR 1,600 crores combined is possible with the capacity that we have now?

There are nuances to it. There will be some organic investment that will be required and that will happen. What this does is the need for organic investment just immediately is pushed out. So if we had not acquired it and we were pressing only on the organic lever, we would have had to invest earlier. This gives us a little more flexibility in that planning.

Understood. And sir, just in terms of this brand Topline and as you mentioned, it's predominantly towards the government part of the business. Is it possible or is there something of a strategy where you want only restrict Topline to just the government part and focus on build Birla brand in PVC, CPVC and all the other areas purely because you being a stronger player in the Eastern part?

So one small correction. I don't think they are predominantly government oriented. As I said, the 40% of their portfolio is through these government projects, which, by the way, are fairly -- one, they are chunky. So there is a predictability that you get, and they are also at good margins. The whole brand play and how we will sort of use both the brands and the portfolio, I would request a little more time for that to play out in the market. You can imagine this is slightly competitive and sensitive information. So let it play out in the next few months.

Okay. But it's fair to say that the focus would be at least on the retail front or on the PVC, CPVC side to push Birla more with the capacity that we have in place, right?

See, I think there are 2 or 3 aspects to the question that you are asking. We at HIL, as we look to grow our pipes and fittings business, we recognize and acknowledge that we need to play in as wider market as possible because otherwise, the addressable market remains narrow and the ability to grow there will be range bound. So to that extent, if we were not playing in the government segment, which accounts for anywhere in the zone of 30% of total market, then that's a new segment we have opened up through this. Similarly, there will be a few more segments from a product point of view. For instance, HDPE, MDPE, we didn't have a presence. It opens up new addressable markets for us. So first is that strategy of increasing the addressable market. Second is then how do we grow the share in this wider addressable market that we are going after. That will require investments in brand, actually require investment in product and innovation. And more importantly, will also require investments in building a channel, which is performing at an exceptional level. So all of those things will happen. There is the -- what I'm distinguishing is the aspect of increasing the addressable market and then second aspect of increasing the share in that addressable market. There was a third aspect to your question, which is how will the brand, et cetera, play? See, there is a way in which -- while I will not answer this question, but I will lay out the facts as it stands before us today. There is a way in which the Birla HIL brand has been created. As I have shared in our previous calls, apart from a huge amount of trust that the Birla brand brings with it, it is heavily focused on the premium end of the market where we are selling more of CPVC. We are focusing on higher realization. I had shared with you at about INR 160, INR 162 a kg, we would be amongst the top quartile of realizations in the industry. So there is a certain way that brand has been positioned and pitched in the market. There is a slightly different way in which the Topline brand has been built and developed over the last few years. We will want to marry the 2 and get benefit of or try and get the best of both worlds.

Understood. Sir, and just one last question. If you can share some balance sheet details as well in terms of what is the gross block and the working capital currently in the acquired company? And you mentioned that INR 100 crore odd, so this is a bank loan, which is already there, right, in the company? Or this is something they are going to raise?

Nikhil, the gross block is in the range of INR 150 crores, INR 155 crores. And the working capital requirement is -- working capital right now in the business is in the range of INR 25 crores.

Okay. And just for the INR 100 crores, I didn't get it clearly. So INR 260 crores, INR 160 crores is going to be for the equity and unsecured loans, and the remaining INR 100 crores would be for?

INR 110 crores, we are taking over their existing debts.

The next question is from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, I wanted to understand, has the business been PAT positive for the past 3 years?

So Madhur, they are PAT positive in the year FY '21, '22. FY '23 because of sharp fall in resin prices, they have shut down the operations -- PVC operations, particularly for 6 months of the year. So they were PAT negative in last financial year.

Okay. Sir, my like understanding from this was, the government business is very -- working capital -- like it puts strain on your working capital because we have seen in the industry player like Jain Irrigation, where they suffered significant losses from the government business. So I wanted to understand how are you planning to tackle this problem for the government part of the business?

Is the question on losses or is the question on working capital?

So the losses were -- so mainly, it's regarding the working capital as well as losses in the government business of some of the industry peers? So I wanted to get your sense on that perspective.

See -- and I'm talking on the evidence of this company, let me not broaden it. They have had a balanced portfolio, whereas 40% of government, they have returned profits consistently. So there is no concern around this segment being unprofitable, point number one. Point number two, yes, it requires working capital investment. A lot of times to bid for these projects to meet a certain balance sheet strength, you need certain credentials to win. And that is where we believe that with us being in the mix, our ability to build for larger projects, our ability to win larger projects through Topline will grow significantly. So somewhere there is latent potential that is sitting there. With their balance sheet, their ability to borrow, they could only bid a certain size. Having said that, they are approved and specified in those states and in those projects, but there were certain limitations, which with us coming in, there will be almost an immediate alleviation around that and offers us some interesting growth opportunity.

We'll take the next question from the line of Bharat Seth from Quest Investments.

Congratulation on this acquisition. I understand that, now with this, we will become a pan-India player. Is that fair understanding?

We are already a pan-India player. As I said, we are serving all the markets. And as I said, East is already accounting for 20% to 25% of our sales. So as far as go-to-market, our distributor partners and channel partners are concerned, we already have a pan-India footprint. What we did not have was manufacturing in East, which this acquisition helps us close that gap.

With this acquisition, what will be our market share in the East India? And what was the -- how these -- when we were distributing -- only distributing, so how this existing entity that we acquired was competing against us? And what was their market share at that point of time? And now, of course, their EBITDA margin, as you say, is a little lower than the -- our company. So what is the road map to grow that margin?

So small correction, they are at par, slightly better compared to us as far as the operating margin is concerned, so they are no worse than us. As far as market share in the sector are concerned, I think the numbers are in front of you. At an all-India level, we are small. I think there is no denying that fact. We would request you to judge us on how our market share will look like in 3 years' time. And that is the whole story that is playing out. We want to grow to a level that the market share first is respectable. And second, starts at least aiming for double digit.

Sir, you said also this acquired entity, Crestia has an electrofusion fitting capability, which is really USP. So how much that product is really contributing where the margin is also high? And how do we really want to play out on that product pan-India?

So that's one of the exciting parts of the story. A lot of that electrofusion-oriented capability and capacity was built in the last few months, they have started hitting the market. So if you ask me the revenue contribution, this year is small, very small, but it is growing month after month. We believe we can grow that business alone to about INR 75 crores to INR 100 crores in the short run. The margins in that part of the segment are usually double of what we see in the traditional pipes and fittings as the overall category. So it offers a great growth potential and a profitable growth potential. Of course, work has to be done to realize that potential. There are players like Bentlay, et cetera, and there are transactions that have happened recently. So those are exciting stories that are playing out specifically only on electrofusion fittings.

And that is applicable -- so that fitting is in which kind of, I mean, work that? I mean, if you can -- because we are unknown to all this what you are talking electrofusion fitting. So if you can give a little more color, its application.

These are fittings that specifically go on the HDPE side. They are technical in nature. So -- but largely go in the HDPE part of the application.

Okay. Fair. And how much big is the market for that? And who else are there in this business?

So globally, and these guys have some presence in India as well. Georg Fischer is the market leader. Then I mentioned this company called Bentlay, which would be at the lower end of that spectrum, does about INR 120 crores, INR 125 crores of sales. So there are maybe a handful of players that play in that segment. There are a lot of people who may be trading and branding their own -- branding outsourced product, but core manufacturing and capability is only with a handful of players.

The next question is from the line of Nikhil Upadhyay from SiMPL.

Congrats on the acquisition. Yes. Just 2 questions. And I think this question was asked earlier also. But if you have to understand, see, they have a big -- almost 40% from the government business. So if you have to understand their brand saliency in the Eastern market, at the retail level, can you share something on like what is their market share in the Eastern market? And secondly, during the call, we also discussed that there are many sub INR 150 crore kind of players. And if you look at their sales ex of government, it's still around INR 160 crores, INR 170 crores. So are they a large retail player in a way? Or is there -- or there are multiple larger players? And then something on the retail side and their market share?

So market share, again, if you do the math in terms of what is the market size and their own sort of revenue, they will be in low single digits. Retail. But that said, they are a relevant player, at least in the Eastern market. So if you look at the states of Bihar, Jharkhand, West Bengal, Eastern UP, they have a good brand recall and they have a good channel presence. As I said, about 50% of their revenue comes through that, but market share, as I said, would be at all India or even at an Eastern region level would be in the low single digits.

Okay. And at the retail level, if we compare our realization with their realization, what would be the kind of price difference?

See, it's not comparable because their portfolio is different. Remember, I mentioned a lot of it is HDPE. A lot of it is water tank. So it's not really the right comparison.

Okay. Okay. And lastly, on synergy. So one thing which I understand, with this manufacturing, you released your capacities for North, West and South probably by 20%, 25%. But other than that, what kind of synergies can actually play out? Like I'm unable to understand like broad pointers, other than this capacity release, what kind of synergies are we thinking can play out here? Because distribution cost -- because this is more of a regional business with your capacities in there and your brand presence in there. So at manufacturing level, I don't know how the synergies will play out for us? If you can just spend some time or help us understand?

I think let me take it one by one. First, at a Topline level. I mentioned one area that they are playing. So first synergy is, what are the new product segments that it allows us access and allows them access. You, as a follower of this industry, a lot of -- one metric that everyone follows is, how many SKUs does a company have to offer to the market. And that immediately doubles up for us. That is a significant point of synergy. New products like HDPE, MDPE for us, the depth of PVC, CPVC offering on our side is, again, a synergistic play. Then on the channels, elements like government, as I laid out, the fact that it now comes under the HIL and the CK Birla portfolio, our ability to play at a larger canvas goes up, our ability to win larger projects goes up. So there is a direct synergy there. Then the depth that they have in Eastern market from a retail presence point of view is, again, a complement to our existing portfolio. We have been strong in North and West. East is something that we've grown in recent years and quarters. It immediately gives us a stronger foothold there. Again, a point of synergy. Then there will be synergies on the cost side. It comes from freight, as you can appreciate. Even today, 20% to 25% of my sales happen in East, but I'm servicing it through my plants in South or in North, that gets addressed. There is potential benefit on the sourcing side. When you are sourcing the same raw material at a much larger scale, there are benefits that you derive out of it. So there is procurement cost advantage. Teams come together. And at a while shop floor and operating level, there is exchange of best practices, there is exchange of efficiency and effectiveness metrics, which allow us to be better versions of ourselves on both sides. I'm sure we will also have some learnings from them. So that's, again, a benefit that will start flowing. And possibly also on the headcount side. So there will be the usual suspects when it comes -- when 2 entities of similar sizes are coming together on the cost side that those benefits should start flowing. Does that clarify what you were looking for, Nikhil?

Yes. To some extent. See, what I was trying to understand is that on the product SKU side, I agree that the basket increases. But now if you bid something or manufacturing something in East and sell it in West, the reverse freight costs will again come into play for us. So because largest cost was the freight cost, which impacts the industry and on...

You will have to allow us -- see, the way it will happen at the moment. Let me give an easy example, okay? We are not -- today, all the tank manufacturing is happening in Patna only. Now with the technology that we acquired and with the capability we acquired, it is easy for us to also augment tank capacity in our existing plants in North, South and West and we can start serving local markets from there. So the idea, and this is something that is a work that we'll have to do at our end, the idea is not that we keep moving things from Patna to the rest of the country and so on. But with this asset, our ability to optimize that goes up many folds.

Okay. Okay. And lastly, even though our realizations are higher, our margins have been lower. So -- and this being a more government-driven, like 40% government driven business, which means the spending getting a bit lower. So if we understand for a stand-alone HIL [Technical Difficulty] marketing spend, where would our margin profile be? Because you've mentioned this point multiple times on call that we're investing to build up, but can you give some sense that ex of this marketing spend or pre-marketing spend, where are our margin profiles?

Nikhil, slightly bad line. I could not quite understand the question and the relation you are trying to derive between marketing spend and margin.

So what I was trying to understand is that you said our EBITDA margins on HIL stand-alone pipes business was around 6% to 7% this year.

7%.

Yes. And we've also mentioned in our previous calls, we are having marketing to build the brand in the pipes side. So if we have to understand our premarketing margins, where that would be currently? Like are they close to 9%, 10% or...

Correct. So at this moment, you can easily assume that what you are calling marketing, I will call it, business build spend will easily be in the -- to the tune of 250 to 300 basis points, that is where we stand today, that is likely to be the scale of investments over the next couple of years as well.

The next question is from the line of Chirag from White Pine Investments.

Congratulations for a good acquisition. Just first, very basic clarification I want. You said working capital is INR 25 crores of this entity, right? I'm more interested in receivables and inventory. And any risk of any provisions that could come across given its 60% also B2C for them? That is the first question. So have you done a due diligence on that side or how...

Yes, Chirag. We have done due diligence on that side, and we are only taking over receivables up to 90 days or inventories, which are good in condition.

Okay. So that has been sorted out. Okay, yes. Okay. So that is one. Second is, just to understand -- so we HIL brand or the Topline brand, who are the actual competitors? Are these smaller players are your main competitors? If you can just throw some light, both for Topline brand today, who are your key -- I know everybody is a competitor in that sense, right from the biggies, like Astrals and Supremes to the smaller size, but from your perspective, from today as well as some 2, 3 years out, who are genuinely your competitors or from whom you are looking to win the business or gain market share?

See, it's an interesting and a difficult question, but maybe I'll take the liberty of saying who are the people who inspire us. And to that extent, they are the people that we track, follow -- would want to emulate and would eventually want to beat. These will be the top 4, 5 players in the industry, starting from an Astral, right up to a Prince. There are good stories that they have charted out over the last couple of decades. For us as a younger brand and as a challenger brand, those are the goalposts to keep in mind. Otherwise, you are right, every micro market has a different dynamic and the brands at play are different even for different product segments, there are differences that come into play. But when we look at what is the kind of model and scale that we would want to emulate, then these larger big brothers are the inspiration to follow.

So -- and the second question was, while we talk a lot about margins, what is the thought process on return on capital employed or ROCE if I can use? Because industry, again, if you look at the player -- listed players, the ROCE profiling is all over the world. There are people who are in single digit to mid-teens, and there are people who are consistently upwards of 25%, 30%. For a business like ours, how are you looking at return on capital for this combined entity? And have you given a thought or it's still work in progress?

I think the thought is the following. And this is, Chirag, I think we've been interacting for the last 1 year and for everyone else on this call, the first and foremost objective is to build scale. So while there are conversations and rightly so around margins and return on capital and so on, we believe the path to profitability comes through scale and, hence, the single-minded #1 focus is to win on counters, grow market share, grow the revenue profile. Having said that, the margins that I spoke about will lead us to return on capital and at a minimum level, the threshold that we have even from a group, et cetera, perspective is to be nearer the 15% to 20% mark. Anything less than that over this period will not be in the direction that we are setting for ourselves. But there is -- again, I'm highlighting because we will keep interacting and we'll keep meeting hopefully, every second month.

No, fair point. My question was because 15% margin is a very high threshold. And I was worried would you be compromising growth for that? 15% margin is a reasonably high threshold...

I'm saying 15%, we'll get to that level. Will we be there tomorrow? The answer is probably no.

Okay. But would it be fair to assume as an aspirational objective, INR 1,600 crores when you achieve that revenue of INR 1,600 crore to INR 2,000 crore revenue, is where you would like to settle at that number? Is that the right way to look at it? Until that time, it could be fluid?

Sorry, would you say that again, Chirag?

Your revenue aspiration of INR 1,600 crores to INR 2,000 crores kind of number that you indicated, is the point where you are looking at this 15% kind of margin? Until that time, it can stay fluid and focus will be on the revenue?

I think the way I would answer that is, yes, a lot of these things -- all of these things should start looking in the right zone when we start hitting the INR 2,000 crore number. But most of them should start looking in the right zone north of INR 1,500 crores.

Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thanks. Thanks, Michelle. Thank you, everyone, for joining in. It's been a pleasure interacting with all of you over this call. Again, appreciate all of you joining at a short notice and joining us on what we feel is an important milestone for us at HIL. As I shared about a year ago, when I took over this role, one of the big things, actually 2 things I spoke about: one was we will be pushing hard on the growth agenda. News like this should give all of you the confidence and conviction that we are staying true to that commitment. The second thing we said was we will grow the non-roofing, non-cementitious part of the business. With this acquisition, that part of the business will now become almost 25% of our portfolio and will start -- will inch towards the INR 1,000 crore mark. Both are significant milestones. So thank you for joining us for this important news. Please keep being interested in HIL, keep following us, keep sharing your inputs and thoughts. If there are any further questions or you would like to know more about this transaction or HIL in general, please reach out to our Investor Relations desk. Thank you so much, and good afternoon, everyone.

Thank you very much, sir. Thank you, members of the management. Ladies and gentlemen, on behalf of HIL Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.