Hindware Home Innovation Limited (HINDWAREAP) Earnings Call Transcript & Summary

Thank you, Rituja. On behalf of Antique Stock Broking, I would like to welcome all the participants on the call of Somany Home Innovations Limited Without further ado, I would like to hand over the call to Mr. Gavin Desa from CDR India. Over to you, Gavin.

Thank you, Manish. Good day, everyone, and a warm welcome to all of you participating in Somany Home Innovation Limited's Q3 and 9M FY '21 Earnings Call. We have with us today from the management, Mr. Rakesh Kaul, Whole Time Director and CEO; Mr. Sudhanshu Pokhriyal, COO of Bath Fittings, Brilloca Ltd.; Mr. Rajesh Pajnoo, President Pipes Business, Brilloca Ltd.; Mr. Sandeep Sikka, the Group CFO; and Mr. Naveen Malik, CFO. Before we begin, I would like to mention that some statements made in today's discussions may be forward-looking in nature. The actual results may vary as we are dependent on several external factors as well. A statement to this effect has been included in the results presentation sent to you earlier. We will start the call with opening remarks from the management, following which we will have an interactive Q&A session. I would now request Mr. Naveen Malik to open the call. Over to you, Naveen.

Thanks, Gavin. Good afternoon, everyone, and welcome to Somany Home Innovation Limited earnings call. I would like to take this opportunity to share a brief background of SHIL, before we take you through the company's quarter 3 financial performance. Pursuant to the composite scheme of arrangement approved by the honorable National Company Law Tribunal, Kolkata Bench vide court's order dated June 26, 2019, the marketing and distribution of consumer products and retail divisions of HSIL Limited were demerged from SHIL and vested into Somany Home Innovation Limited. Further, the marketing and distribution of building products of HSIL comprising of sanitaryware, bath fittings and faucets, plastic pipes and fittings segments was vested into Brilloca Ltd., a wholly owned subsidiary of SHIL. The company's equity shares were listed on National Stock Exchange and Bombay Stock Exchange on December 26, 2019. SHIL is home to the iconic brand Hindware which, as you all know, has a rich legacy of enriching the life of millions of households in India. Our versatile brand Hindware has demonstrated its versatility by its successful presence across our varied product lines, across businesses ranging from kitchens to bathrooms and living rooms. We are relentlessly focusing on expanding it further. Our robust infrastructure includes 3 distinct distribution channels, namely, consumer appliances, sanitaryware and faucets and hardware for plastic pipe and fittings. Our operations are supported by an expansive distribution reach with omnichannel presence extended across 35,000-plus touch points, 3,100-plus distribution partners and 700-plus modern retail outlets. Our business model and investments made during last 3 years are now yielding results, both in terms of top line as well as bottom line. We have achieved a sharp recovery in the just concluded quarter of this financial year, and we expect the growth and momentum to continue. I will spend the next few minutes to take you through our last quarter's figures. The 9 months data is not comparable due to impact of lockdown and COVID during Q1 and Q2 of current financial year. The respective business heads will share in-depth details of their businesses as we move forward on this call. The consolidated revenue from operations for the quarter amounted to INR 551 crore approximately, registering a growth of 24.1% year-on-year as compared to Q2 FY '21, the revenue growth was 29.7%. EBITDA. EBITDA came in at INR 60 crore, having grown by 73.6% as compared to quarter 3 FY '20 and 30.7% from quarter 2 FY '21. EBITDA margins expanded by 300 (sic) [ 309 ] bps from quarter 3 FY '20 to 10.8% for the quarter under review. The profit after tax. Tax for the quarter came in at INR 38 crore, growing by 305% (sic) [ 305.8% ] year-on-year and 93.5% quarter-on-quarter. Non-annualized EPS earnings per share for quarter 3 FY '21 stood at INR 5.21 per share, up by 30.7% -- up by 307% year-on-year compared to same quarter last year and 93.7% sequentially. Moving on to the segmental financial figures. The Consumer Appliances segment revenue came in at INR 156 crore. It registered a growth of 39.1% year-on-year and 37.4% quarter-on-quarter. EBIT for the segment came in at INR 16 crore, having grown by 375.3% year-on-year and 51.9% quarter-on-quarter. Now coming to Building products. Revenue for the Building Products segment stood at INR 377 crore. Growth recorded was 22.8% year-on-year and 29.4% quarter-on-quarter. EBIT for Building Products stood at INR 34 crore and has grown by 51.7% year-on-year and 26.3% quarter-on-quarter. Now coming to EVOK Retail business. Just to update, we have closed 8 physical stores of retail business by December 30, 2020 and we shifted focus to online sales and franchisee-based sales model with an aim to move retail business to cash earn model. Revenue for the Retail segment was INR 18 crore and is negative 28.3% year-on-year and negative 10% sequentially due to the reasons stated above. EBIT for the retail segment stood at INR 1 crore as compared to INR 3.2 crore EBIT loss in quarter 3 FY '20 and INR 2.8 crore EBIT loss in quarter 2 FY '21. We have laid the foundation for sustainable and profitable growth and are well positioned to continue our success story with support from our stakeholders, including dealers and distribution partners, bankers, suppliers, vendors, shareholders and teams who are working extensively to achieve growth and profitability. We are excited by the abundance of opportunities and a scope for the growth in these businesses. I would now like to hand over the call to Mr. Rakesh Kaul to take you through -- to take you all through the Consumer Appliances and Retail business. Thank you, and over to you.

Yes. Thank you, Mr. Malik. Good afternoon, and a warm welcome to everyone. I'll be sharing the overview of the Consumer Appliances in the Retail business. I joined the company in 2015 to build the Consumer Appliances business from the ground up. We started with an extremely small base of just INR 15 crores in 2015 with the kitchen appliances vertical under the business. The teams have worked exceptionally hard to deliver the planned growth as we see today. The business has always been a separate vertical even in the erstwhile HSIL Limited pre-demerger as the business dynamics and retail touch points are distinct that of the Building Products business, which is now part of Brilloca. To become the fastest-growing appliances company in India for the past couple of years, we made strategic investments into the distribution channel. We launched highly differentiated and innovative products, expanded our presence across off-line and online networks, digitized our supply chain after-sale service, marketing and, most critical of all, research and development. Our investment in our research and development has yielded us considerable results as they have consistently helped us to launch innovative products, which in turn have helped us to win new customers and retain the old customers as well. And also at the same time, achieve the sales growth we set out at the inception of the business. We have applied for 26 patents so far in just a short span of time, which underlines the recognition of our approach towards innovation. The consumer appliances portfolio as of now consists of brands such as Hindware Kitchen Ensemble, which houses kitchen chimneys popular name for kitchen cooker hoods, built-in hobs, cooktops, built-in ovens, built-in dishwashers, sinks, food waste disposals, basically all the large kitchen appliances, which constitute the category of large kitchen appliances. Next one, Hindware Atlantic, which includes water heaters and electrical heatings. Moonbow by Hindware is -- consists of purification products and Hindware Snowcrest, which includes air coolers and ceiling fans as well. Ceiling fans, tower fans and pedestal fans as well. We also recently entered into a strategic partnership with Formenti & Giovenzana, a highly reputable Italian company, to distribute a wide variety of high-quality modern furniture and modular kitchen fittings under the brand FGV Powered by Hindware. We also have a technical collaboration with Groupe Atlantic, a very prominent European company for our range of water heaters and electrical heating. Today, we are among the top 2 players in the kitchen segment with an around 18% market share in the kitchen appliances in the kitchen chimney segment. However, in the e-commerce and digital space where we focus and grown significantly, Hindware Kitchen Appliances leads with an overall market share of around 40%. We are also amongst the top 5 and the top 5 players in the category of evaporative air cooling and amongst the top 6 player in the category of water heating segments. While our e-commerce platforms for both these above categories, we are amongst the top 2 in the desert air cooler segment and among the top 3 in the water heater segment. We have also the largest range of Internet of Things or the IoT products in the consumer appliances business in India. We have launched 6 products so far and are in the midst of launching some more. Faster digital adoption, increased penetration of Internet in day-to-day life and availability of smart and affordable devices, giving rise to the application of Internet of Things, where everything is connected or will be connected in India. We believe that the future is to have massification of technology from our Consumer Appliances business to launch more innovative products as we go ahead. We believe that the consumer should be empowered in order to build a bigger consumer base and our decisions to give power in the hands of the consumer has yielded us significant results. We believe consumers to be our trusted advisers. It means letting go of -- go a lot of things which we were close to learn. And we want our consumers to be our trusted advisers, which becomes the basis of bringing in new and innovative products into the market. Our last 2 to 3 years CAGR has been 32%. And based on the current market sentiments, we aim to achieve a CAGR of 20% to 30% in the medium to long run. Moving on to the retail segment. SHIL launched EVOK, an e-commerce chain offering a host of furniture and furnishing, home furnishing products to meet the demand for furniture and home decor in India. Currently, EVOK has 2 company-owned and 20 franchisee stores across the country. We realized our fixed costs like store rentals, et cetera were hampering our growth in the last financial. And in the last financial year, we took a strategic decision to shut 8 out of the 10 retail-owned showrooms, and we wanted to be leaner in our go-to-market approach through the franchisee route and the e-commerce route. This has helped us become EBIT positive in the quarter 3 as compared to the quarter 3 of FY '19, '20 where we were losing money. However, our strong online footprint to our e-commerce website, which is our own brand dotcom, which is EVOK.in, and our presence on major third-party platforms like Amazon, Flipkart and Tata CliQ, is helping us to grow and enhance our visibility and customer connect. Our journey has just started now, and we are very excited to see the future unfold. At this stage, I would now like to hand the call over to Mr. Sudhanshu Pokhriyal, to give you the overview and take off through the performance of our sanitaryware and faucets business. Over to you, Sudhanshu.

Thank you, Mr. Kaul. Good afternoon, ladies and gentlemen. I'll give you a brief overview of HSIL's sanitaryware and faucets business, and take you through the quarterly business for the same. I understand you will have many questions relating to our sanitaryware and faucets business which we will address after Mr. Pajnoo's brief. Today, Brilloca is one of the leading players in sanitaryware and faucets segment in India with 5 brands spread across wide pricing spectrum from luxury and super premium to mass segments. Our brand in this space are Queo, Alchymi, Hindware Italian Collection, Hindware and Benelave. I would also like to briefly talk about the segment evolution for the past 3 to 4 years. Sanitaryware and faucets business has seen extreme competitive pressure with the entry of many new players. In addition to this, the impact of COVID on our segment has actually been greater because of the end user our business caters to. Most innovation -- renovation and construction activity was kept on hold during this time. On the back of the improving environment in the last few months, we have seen an uptick in the growth in Q3. And as the situation normalizes, we expect the recovery to be fast. We are in the process of transforming the business to gain market share and track healthy double-digit growth. Further, in line with our focus on profitable growth, we have rationalized our product portfolio and made it market-facing with greater emphasis on increasing our direct connect with [ end ] customers. Currently, we have more than 2,000 direct retailers selling sanitaryware and faucets products, and we want to expand our distribution reach even further. Towards achieving the same, we have identified region and cities in the country where we are relatively weak as compared to competition and have in place aggressive plans to increase our distribution and dealer base in these locations. We have further increased our emphasis on customer service and focus on enhancing satisfaction on distribution -- distributors and dealers. Over the years, we had lost ground among some of our channel partners, and now we have reestablished our presence in many of them. We're also focusing on creating customer demand and our latest ad campaign, Thoughtful is Beautiful identifies the white space of the segment and communicates how innovative performance-led product solutions that offer convenience to customers -- consumers is where the true beauty lies. The ad campaign and our recent innovative design-led products, such as sensor faucets, touch free and tankless sanitaryware, we're addressing certain customer needs that we identified based on customer insights and market research, which we have undertaken. We've also increased our focus on internal digitization, through which we want to bring this transformation live. This includes the introduction of the distribution management system, dealer management portals, warehouse management and sales force automation, amongst others. So this is an exciting phase for us as we are gearing the organization for market-leading growth. I would like to now invite Mr. Rajesh Pajnoo, to take you through the Plastic Pipes and Fittings business.

Thank you, Sudhanshu. Good afternoon, everyone. Thank you for joining us today. We are very enthusiastic about the prospects of our Plastic Pipes and Fittings business. I joined HSIL in 2015 to start this business from the conceptual stage, and it has been an exciting journey. We commenced commercial production in that company in August 2018. And in the span of first 8 months, we achieved a revenue of INR 130 crores. While the manufacture of CPVC, UPVC and SWR continues to be done by HSIL, we at SHIL [ brought it to ] market and sell these products under the brand Truflo by Hindware. In the first complete cycle in commercial -- first commercial year, that is last year FY '19/, '20, we achieved a sale of INR 250 crores till lockdown. And in the current year so far, a sale has been achieved in the first 3 quarters to the tune of INR 250 crores till 31st of December. Our products are extremely well accepted in the market, owing to their quality and strong brand [ recall ] and our strong relationship with the influencer community. Our entire range of CPVC products, that's for hot and cold water application. This entire range received NSF certification from U.S., which is a prominent certification for portable water application in the world. Backed by a strong demand for our products and feedback we garnered from our channel partners, we successfully launched 2 new products this year also. That is column pipes for borewell applications, which is under patent and overhead water storage tanks. These tanks are of premium quality and are durable and safety oriented. Both our new products have been well received in the market. We actively engage with the influencer community to build a strong network of channel partners who share our vision. We have initiated numerous marketing activities, including participation in exhibition, sales partner engagements, plumber meets and several outdoor campaigns, which have helped us to amplify our visibility and maximize impact exposure. Last year, we had a plumber [ network ] of 1 lakh plumbers. We believe the addressable market size will keep expanding, understanding needs and leveraging technology to develop products to deliver on our customers' needs is how we will continue to grow. With what I would like to -- with this, I would like to conclude the opening remarks and request the moderator to open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Pritesh Chheda from Lucky Investment Managers.

Yes. Sir, congratulations for a good set of numbers. Sir, I was looking at your P&L, and it seems to suggest that we tend to operate at about 35% gross margin. And then there is another 11%, 12%, which is a direct cost head. So the contribution margin in the business is about, let's say, about 22%, 23%. Employee head is the -- another larger head where the operating leverage can flow in. So just wanted to understand that in your initial commentary when you are indicating kitchen -- the appliances business to grow at 20%, 30% and let's say, the build ware products also to grow at a faster rate. This employee expense line should behave in what way when you scale up from, let's say, INR 1,600 crore revenue last year to a higher revenue over the next couple of years?

So this is a very important question and very rightful question. First point, I'll just take you back one step and just try to communicate here. Our company, which is SHIL, along with the subsidiaries, is a very unique company in India today, wherein we operate 3 go-to-market channels separately, and these are separate verticals. One vertical, which deals with the consumer appliances. Second is the building materials, or the building products, we call. And third is a new channel, which, again, which has been developed over the last 2 years, which is the hardware channel. When we do this verticalization, all these teams are separate. And on this call today, we have CEOs of all the respective teams. Definitely, it adds value, adds cost to the bottom line in terms of the employee cost. But that is our strategy that each of these verticals should be built independently over a period of time. And the success of our story over the last 3, 4 years, we have been reiterating over this -- you see our calls what we have done over 3, 4 years, even on a pre-demerger basis. So this verticalization has actually an impact on the overall growth of the company. And the major part of that growth comes from the employees itself. So your question is right. Now answering your questions. We feel that as the businesses grow, the overall employee cost in medium to long run should come down by around 10% to 15% on an overall basis, based on the existing cost structures. Because employee cost is always the semi-fixed cost or a semi-variable cost. And the businesses as they are growing, we feel that employee cost in medium term, maybe in next 2 years, we should be able to bring down by around 10% to 20%.

For the current quarter, which is at about 10 percentage, if you scale up your revenue to about INR 2,000 crores, INR 2,100 crores, is that the EBITDA margin number that we should be looking forward, considering the operating leverage? And will all your incremental business come at 35% gross margin?

So basically, all our businesses are not at 35% gross margins. So there are different businesses. [Technical Difficulty] All our businesses have different gross margin structure like consumer products, the gross margins are different from what we do in sanitaryware and in faucets and in pipes. But you have taken a consolidated figure of an overall 35%. And definitely, when the overall business growth, a part of the gross margin expansion should also happen because this is -- right now, we are working on a contract manufacturing model. And as the volumes build up, definitely, some part of the synergy of the increased volumes, it gets built into the overall cost impact. So we feel that in next 2, 3 years as the volume expands, with the type of growth which we are envisaging, we should be able to unlock an additional 2% to 3% gross margin -- incremental gross margin [ in there ].

My second question is, sir, on one on the depreciation and one on the debt side. So we being largely a distributor, I could understand why we have such a large depreciation number of INR 45 crores last year and let's say, about INR 30 crores in the first 9 months. And second, incrementally, and as of now, how do you see the debt movement happening in the companies? What it is today? And how do you see the debt figures panning out?

So answering your question on depreciation, depreciation has 2 elements to the business. [Technical Difficulty]

Mr. Chheda, please mute your line when the management is answering your question.

Done, ma'am. Done.

Yes. So answering your question on depreciation first, definitely, the depreciation cost is there. So when we do consumer-facing businesses, especially on the consumer side and also on our sanitaryware and faucets side, which is the building materials, the focus is on the premiumization of the product. And when we do a premiumization of the product, we do a lot of investments at our dealer end in building up their shops and creating our own branded display areas. As a matter of policy, we do an accelerated depreciation for this, which is spread over 3 to 5 years, depending on what type of model we do. And also, there are various elements of investments which we do in terms of creation of molds. Like when we go for a contract manufacturing, especially on the consumer side, most of the toolings which we do that we own, so that the overall -- the aesthetic impact or the design impact is not shared by the contract manufacturer with anybody else. So that leads to a depreciation charge. And these are all -- we don't depreciate it over 10 years, like most of the retail shops, which we do. They get depreciated over 3 to 5 years. And that is also we [ plough ] back. If the dealer is not able to perform, we [ plough ] back the money from him. Also, one element of depreciation is -- this year is high, is that we are having retail stores. And as a part of the Hindware, the rental income -- the rental expenses now get set between depreciation and interest. So in quarter 1 and quarter 2, by the time the stores got closed, the depreciation is charged to -- on account of expenses. And since 8 stores have already been closed this financial year. So next year, you make a slight decrease in depreciation on account of the store rental. What was the second question on the -- on the debt side, on a consolidated basis, in the first 9 months on a year-on-year basis, we have been able to pull down the overall debt of -- on a controlled basis by around 70 -- INR 75 crores to INR 80 crores. The overall debt level today is at INR 118 crores -- is around -- around INR 189 crores on an overall debt basis, the consolidated debt. And primarily, it's the working capital debt. And very few quantum of long-term debt that primarily goes towards the molds expenses.

So you have 3 distinct businesses with 3 distinct distribution lines needed for that business. How is the organization structure shaped up? It's fairly unique to have 3 businesses house or 3 distributions set up house under one company. So if you could just give a short knowledge there.

So this is a very good question. In fact, many guys have asked this question in the past. Today, the whole management team is here, and each of the CEOs of each of the businesses has empowered CEOs, and they take their own decisions. And in terms of the overall -- the control mechanism and the organization as such, the question which focuses on. We have these verticals. And the whole synergy, which we have built. In the Hindware brand, if you see 10 years back was servicing maybe INR 4,000 crore market. We have built up -- we included faucets, which was another INR 9,000. Then we build up pipes and addressable market size today is INR 11,000 crore. And another INR 15,000 to INR 20,000 is an addressable market size on the consumer. So today from a INR 4,000 crore market brand, which was addressing of INR 4,000 crore market, today, it's almost servicing INR 40,000-plus crore market size. And it's not only just a small market share, we have communicated historically also. The consumer business was a small business, 5 years. We are #2 player in kitchen chimney, hood and hob in the market. Pipes is a very aggressive company, which we are doing. We have disclosed what sort of turnover we are doing. We did in this quarter itself 170 -- how much is -- yes, INR 117 crores of sale in this quarter itself. So the potential or what we call as the real unleashing of a brand value we are demonstrating in the market today. Historically, many people have discussed with us whether we should have invested into these ventures. But today, we are demonstrating the success of our consumer business which -- in 4 years of investments which we did, I think on an overall basis, we invested around maximum of INR 60 crores of EBITDA in the last 3, 4 years. And now we have a business, which we feel in the next 5 years, maybe doing INR 1,500 crores-plus business on an overall basis on the consumer side. And similarly, in next 5 years, we see pipes doing more than a similar size, INR 1,200 crores to INR 1,400 crores on the pipe side also. So we have created a substantial value. Not only that, the Hindware brand, 10 years back, which was primarily a bathroom brand, has not only moved out from bathroom, it has gone to kitchen, it has gone to the drawing rooms. It is -- now has its presence across the houses. And it is not only present across the houses, it is taken as a premium trusted brand with the consumers, and they are ready to pay a price and a premium for that.

The next question is from the line of Pranav Mehta from Equirus Securities.

And congratulations on a very good set of numbers. Sir, I just wanted to understand on your bathware segment. So how did the sanitaryware and faucets, both the segments performed during the 9 months? And if you can share some numbers for FY '20 as well separately. Because you have shared it for pipes, but I just wanted to understand on this sanitaryware and faucetware segments?

Yes. I think Mr. Sudhanshu briefly spoke about this on the performance of our sanitaryware and faucets business, over the last 2 years, market had got it bit crowded and we had a few processing issues, which we were trying to build in the last 2 [ years ]. Now we [Technical Difficulty] most of the points which we are trying to touch with we are in a process of growth last quarter. Just one minute. So we did around INR 252 crore of sales for the quarter for building products other than pipes. And when we see the last year, 9 months figures are not the direct figures as well. Those are not direct figures. [Technical Difficulty] over the previous year figures. But on a 9-month basis, we did around INR 538 crores on the sanitaryware, faucets vertical other than ex pipes. As far as pipes is concerned, we had done INR 117 crores sales on the pipes for the quarter and around INR 250 crores for the first 9 months.

Sure, sir. And sir, have you taken any price hike in either of the sanitaryware or faucetware product portfolio?

Yes. So we've seen unprecedented input price increase in the corporate, especially, and we have actually. In the quarter 3 period, we've actually taken a 1% price hike in the sanitaryware business. However, we have planned a 5% to 12% price hike in the faucets business in the Q4. So in the -- by the end of February, in last week of February, these prices would be effective in the market. And this is to take care of an unprecedented increase in especially brass prices and also prices in plastics and [ other materials ]. So that -- so these benefits will accrue to us starting from March.

Okay, sir. And sir, on your -- on foray into this tile segment, neom tiles. So anything on that side? So are you gaining traction? Or are you mostly focusing on exports? How are things moving in that direction?

So the primary focus of our tile business is on the premiumization of the tiles, mostly it is the GVT tile. And we are doing an addressable market size of around INR 10,000 crores. The focus here is we don't want to focus on the mass side of the tiles. Our whole strategy is built around adding value to the product. So we work along very closely with the European guys in terms of the design. And design is us. And based on that design, we'll go for a contract manufacturing. So initial responses have been very good. We started this business somewhere in January last year, in December, January last year, but immediately got hit by the COVID. But we have seen good traction. We are not disclosing separate figures right now as a part of this conversation because the figure is not that big right now. But as we move ahead, I think once it attains a critical mass, we'll definitely disclose the figures.

Sure, sir. And sir, one last question from my side. So any new product segments you are looking to move into this consumer product division?

Rakesh.

Yes. So we being the fastest in the industry to have launched 7 categories within just a span of 4 years. So any category which we add on in future, the basis of adding any category is an extensive consumer research, where we see the long-term demand plan, long-term demand of that category. And also, as a brand and as a business, what is the differentiated approach we could bring into that category. And the other objective is very clear that if we have to enter into a category, we have to be sure that we become among the top 3 players in that category within 5 years of its launch. And another factor which governs our approach to being in the new category is to attain an ROC of between 15% to 22%, which is the basis of that category. So we take these decisions based on all this extensive research which we conduct. And from time to time, we will take an appropriate decision on the same and keep our investors informed.

Sure, sir. And sir, one question regarding this pipe. So how many dealer distributors do you have currently for the Pipes segment?

Yes. See, we started with the -- when we started, we started with 110 dealer distributors. This is a distributor model business. And currently, we are linked to more than 260 distributors across the country.

The next question is from the line of [ Rahul Garg from Shikha Family Office ].

My question is more on demand size. Is it like a pent-up demand? Or we see it sustained for medium term, like 2 to 3-year period? And geographical-wise, if you can give the numbers, like, is it like more on rural sides we are looking at the demand?

So we feel that the demand which is coming up, initially, we thought in Q2 was a pent-up demand, but now we've seen a full recovery happening in India now. And it's not only our sector, it is across various sectors when we try to monitor. Pent-up demand can happen actually in fast-moving consumer goods, like when people tend to store some material and in the consumption have increased. Our product is more linked to the end use. And definitely, what has happened as a part of the overall growth scenario, which has happened in the COVID period is, people have been more exposed to various consumer products, and they have understood the benefits of the consumer products. And based on the value-added consumer products which are available in the market, people are seeing that how they can make their life easy. But we feel that the scope inside the kitchen and inside the home space is very extensive. One thing COVID has left with everybody is work from home. Each and every organization has considered or is considering as a part of the processes, how much percentage of their staff should work from home so that they can optimize their cost and be more cost efficient. And we feel that the demand structure is further going to increase. This is an initial trend, which we are feeling here. And especially as the real estate sectors in certain pockets are also building up, we feel the demand from those sectors is going to increase. In pipes, we feel that a lot of replacement is happening on the GI Pipe side. So each of the segment, we feel that there is a substantial leeway for further growth, both for the industry as well as for ourselves. Our internal plan and our internal targets based on the current market condition is that each of the business should outperform the industry by 1.5 to 2.0x the industry growth.

Got it. So how does it work for us? Like, for example, if growth kicks in and growth demand goes in hyper mode, how we are going to serve it? Is it like out from the outsourcing perspective? If you could put some color like the product mix or how we give the heads up to the outsourced vendors? How does we manage that demand scenario from the market to the outsourcer?

So if you see over the last many years, we have excelled ourselves in terms of developing and outsourcing -- outsourcing and contracting model. Based on the feasible market scenarios over the next 2 to 3 years, we worked very closely with our vendors, both we understand what are their capacities, what are their capacity utilizations, what sort of product design innovation we are working on. Also, there is a pipeline of new inventories which is there. So we feel that we can service this growth on a medium-term range to long-term range in the contract manufacturing. And now contract manufacturing is also a very viable structure in India. And this also brings some benefit. The guy who was actually doing a contract manufacturing is primarily focused on bringing a quality product at a right price and the right cost. And that helps us in terms of building up the -- our business. But definitely, over a period of time, after reaching a critical mass in respective businesses, the company may evaluate in terms of looking at in-house manufacturing. But the whole logic of doing this, building an efficient capital model, wherein our focus would be that if we put up manufacturing, our return ratios should further enhance over a period of time. Although in a short run, they can put some pressure on capital employed in terms of building of the assets, but they should unleash the value in terms of higher ROCs with in-house manufacturing.

Got it. And do you work with co-design, like we also design or we get the help from vendor? For example, in the [ frame ] it is showing that capability to co-design and showcase it's product to the clients, how does it work -- designing works?

So we design our products ourselves. We have a very in-house design setup in our organization at SHIL. And we have -- and we work closely with our design agencies, some of the them in-house and some of them outsourced. And once we get to the stage -- and again, design is all inspired by the consumer needs, actually. So once we do an extensive research, see the needs and gaps, and then we create an innovation around that hidden gap through our innovative design. Then we work closely with our tooling guy to get the more done for that. These are all done under very standard NDA agreements where there is no disclosure of the design as such. And then once the mold is ready, we parallelly work with our contract manufacturer to work on the products and manufacture it exclusively for us. So that's how we go about it. So we -- most of the times, if you see in the consumer appliances business, we are working on our own models, our own design as such.

Got it. Got it. And how do we measure innovation in our organization on -- for example, IKEA does this outsourcing from the design perspective. Do we have taken some such initiative in the organization?

Yes, we, from time to time do a lot of consumer research and extensive research on the basis of what will be the future needs of the consumers. And if -- in my opening remarks, as I said, we have registered around 26 patents in a matter of just 3.5 years points to the significance of innovation in our organization. A simple example I can give you is an example, we have a water purifier called Achelous Premium iPRO, which is an autofill function with a jug, which means you can just keep the jug there and it will fill it to a level. And you can -- you don't have to wait there for a minute for the jug to get filled. And you can take out the jug and put it in the refrigerator. So we've seen the smaller needs of the consumers and we have amplified them through our use of technology to make the consumer's life simpler. So at various stages of our product development and thought process, we take this fact into consideration that, how do we make the lives of our consumers simpler and easier through the means of technology. I hope that answers your question.

The next question is from the line of Uttkarsh Sogani from Moneybee.

Congratulations on a good set of numbers. So my first question is on our revenue target going ahead. So I see the revenues -- sir, the revenue contribution of the building products segment coming down and the consumer segment going up. So what is the long-term target for this?

So we have given this guidance. We don't give guidance on a quarter-to-quarter basis. But on a medium to long-term range, if we see on the consumer side for last 2 years, our CAGR is around 32%. And guidance to market is that we should be able to build up 20% to 25% growth on a medium to long-term basis. As far as the Building Products businesses there, there we have sanitaryware, faucets, industry is growing at around 7% to 9% on this. And again, we have said that on a medium to long-term basis, based on the current market conditions, we should be able to beat the market by 1.5x to 2x the industry growth. As far as price is concerned, it's a new business. We have just completed -- we're just completing second full year of business. And the target is in the next 5 years, we build more than INR 1,000 crore business of Pipes itself.

Okay. And sir, the facility that you get our production outsourced from, are they exclusive to us? Or they manufacture with someone else as well?

So as far as the sourcing of our building products is concerned, that is primarily, exclusively from HSIL. But we do a lot of traded things in terms of the procurement of faucets and the sanitaryware from third parties, both imported and outsourced. But as far as the consumer business is concerned, most -- we don't have a dedicated guy there. Most of the vendors, they are focused contract manufacturers. They are doing manufacturing for various brands. But the design element in consumer actually is primarily we own, so that we have exclusivity in the market.

And sir, how much of that would come from China, the imports?

So our overall imports from China, as far as the consumer product, was less than 20%. But as we move ahead, we see that we are building up resources, the vendor resources within India to even shift those to the Indian base.

Okay. And just last question on the ad expenses. So what is the target ad expense? And whether we share anything with HSIL for our branding purposes?

No, you have to understand here now the entire Hindware brand is all a part of the vertical SHIL, which is Somany Home Innovation Limited. SHIL from the perspective of building products is pure-play focused manufacturer on an OEM basis. So on a broader side, on -- again, we have started various campaigns in the market, both on the consumer side as well as the building material side and a lot of BTL happening on the price side also. But on the medium range, again, we feel that we will keep investing around 4%, 4.5% of our businesses into communicating newer products to our consumers and maintain the growth in the business.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Yes. Now regarding margin, you spoke about in the next 2 to 3 years, incremental gross margin of about 2% to 3% likely and plus the kind of growth that we are seeing. So we are sure we are going to get operating leverage advantage as well. So just wanted to understand something on the EBITDA margin trajectory or the EBITDA margin outlook that we might be having over next maybe 2 to 3 years, that would be quite helpful.

So this has to go business by businesses. Like consumer product, there is a huge potential. We still feel that it's a very nascent business, which we started 5 years back, 2 to 3 years was an investment phase. Around 2 years back, we became EBITDA positive, and now we are PBT positive on -- and PBT positive at a good number on the consumer side. So we feel that consumer businesses in 2 to 3 years' time, we should be able to build up a model wherein our EBITDA margins are ranging between 14% to 17%. And in terms of the building material, also in a similar range. This is based on our contract outsourcing model. But as we build synergies into the business model, we feel there's a great upside as far as the margin expansion is concerned from here for the newer businesses.

Fair enough. So 14% to 17% is the kind of potential that you kind of highlighted in 2 of the major businesses that we're currently having, and the new business will have -- can have a much higher potential, right? So is that fair?

So I'm giving overall guidance because the various businesses are at various stages of their growth. So basically, on sanitaryware and faucets, we were around 16% on our post-demerger basis. So that can expand by another 2%, 3%. But on expansion, the margin expansion on the consumer side and the pipes side will be substantial.