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

Ladies and gentlemen, good day, and welcome to the Q4 FY '20 Earnings Conference Call for Hindware Home Innovation Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nikhil Shetty from Nuvama group. Thank you, and over to you, sir.

Thank you, Michelle. Good day, everyone. On behalf of Nuvama Professional Client Group, I welcome you all to Q4 and full year FY '23 Earnings Conference Call of Hindware Home Innovation Limited. We take this opportunity to thank management of Hindware for giving us opportunity to host this -- host earnings conference call. From management, we have with us today Mr. Rajesh Pajnoo, CEO of Pipe Business; Mr. Sudhanshu Pokhriyal, CEO of Bath Business, Mr. Sandeep Sikka, Group CFO; and Mr. Naveen Malik, CFO Hindware Home Innovation Limited. I now hand over the call to Mr. Gavin Desa from CDR India for further proceedings. Thank you, and over to you, Gavin.

Thank you, Nikhil. Good day, everyone, and thank you for joining us on this call. I'd just like to add to Nikhil's statements by saying that any statements made during this call may be forward-looking in nature and are subject to risks and uncertainties the management or the company does not take any responsibility to revise these in the interim or make any changes. I'd now like to hand over to Mr. Naveen Malik to start by giving his opening remarks. Over to you, Naveen.

Good evening, ladies and gentlemen, and a very warm welcome to Hindware Home Innovation Limited Q4 and FY '21 earnings call. I hope you would have had the opportunity to go through our business presentation shared on stock exchange updates. I will reshare the call by taking you through our overall performance of the company along with an update on our consumer appliance business. After this, Sudhanshu will share an update on the bathware business. And Rajesh will take you through the plastic pipe and fitting business. Against a backdrop of a challenging macro environment, we delivered a resilient performance wrapping the year on a positive note. In FY '23, our consolidated top line grew by 25% and EBITDA margin improved from 8.9% to 9.8% year-on-year. For quarter 4 the consolidated revenue grew by 12% and EBITDA margin improved from 9.8% to 11.7% year-on-year. Our bathware business margins improved to 15.3% in quarter 4. For the plastic pipe and fitting, we reported double-digit margin of 10.8%. As discussed in earlier calls, we are working towards reducing the net working capital days and the progress can be seen in Q4 results where both net working capital days and net bank debt has been reduced from quarter 3 FY '23. The total bank debt as on quarter 4 stands at INR 712 crores. Coming to our consumer appliances business, revenue grew 16% to INR 501 crores in FY '23 with EBITDA of around INR 25 crores, and reported a top line of around INR 128 crores in quarter 4 FY '23 with EBITDA of around INR 4 crores. The performance was impacted by the challenging macro operating environment, such as elevated raw material prices and overall inflation. The Board of Directors proposed a dividend of 25% based on the equity share trade up value. We are confident about our performance and our ability to deliver sustainable value for all our shareholders. With that, I would like to call Mr. Sudhanshu Pokhriyal to take you through the bathware business. Over to Sudhanshu.

Thank you, Naveen. Good evening, and welcome, everybody. Once again, our bathware business has showcased exceptional growth, surpassing industry performance market dominance in FY'23 in Q4, we've achieved strong revenue growth of 29% year-on-year, respectively. This outstanding performance is a testament to the growing customer loyalty, which our products enjoy. As a part of our growth strategy, we focused on introducing innovative products to ensure we cater to the burgeoning needs of our consumers. To support our growth objectives, we worked on expanding our distribution network by adding new distributors, establishing new brand shops, expanding into Tier 4, Tier 5 towns, reinforcing brand recognition through integrated marketing campaign. I'm sure you've seen our new campaign, which was live during the IPL this year. We've also prioritized the development of our luxury brand Queo as we implemented a dynamic media and promotional campaign during the year backed by our influencer program that rewards the architects to influence consumer choices. We also have an influencer program for plumbers, which we believe is going to be a game changer for us. In FY '24, we intend to allocate our capital expenditures towards establishment of brand stores to drive market growth rate, as well as efficiency related investments to optimize our existing manufacturing capacities. These initiatives aim to improve the ASP of our products with improved margins. Our unwavering dedication to driving growth remains steadfast, and we possess unwavering confidence in sustaining this momentum going forward. With our diverse range of high-quality products bolstered by a strong brand presence and a proactive approach to expanding our market share, we are well positioned to drive profitable growth. With that, I would like to call Rajesh Pajnoo to take you through pipes and fittings business. Over to you, Rajesh.

Thank you, Sudhanshu. Good evening, everyone. Thank you for joining us. I'm happy to report that our plastic pipes and fittings brand TRUFLO maintained its position as the fastest-growing brand in its segment, receiving a 29% increase in revenue in FY '23, 7% year-on-year growth on quarter 4 and a sequential growth of 11%. The growth was primarily driven by a strong brand connect, increasing customer loyalty and the successful launch of a second manufacturing plant. I am also pleased to share that the pipe segment achieved its highest ever sales, both in terms of revenues and volumes for the year. We achieved these revenue numbers despite a steep fall in PVC prices, witnessed during the year. EBITDA stood at INR 24 crores in QY '23 -- Q4. INR 44 crores for the full financial year, translating to margins of 11% and 6%, respectively. Operating margins were supported both by improved volumes as well as stabilizing input prices. Our volume growth can be attributed to the remarkable performance of our CPVC products, which now account for over more than 45% of the total revenue, generated by our pipes business. Our commitment to expanding our distributor network remains unwavering. At present, we boast of an extensive network of more than 250 active super distributors in addition to approximately 25,000 retailers. In FY '23, we expanded our product reach by introducing new products, resulting in a total offering of more than 2,000 SKUs. We actively engaged with plumbers and plumbing consultants and organized multiple training sessions for our channel partners and influencers. We plan to sustain these efforts in the upcoming quarters as we strive to strengthen our presence in the category. During the period, we also forayed into PTMT Faucets and Accessories to provide customers with a one-stop solution for all their plumbing requirements. We also collaborated with all RWC, Reliance Worldwide Corporation to introduce and market multilayer composite pipes and push-to-connect fittings under the brand and TRUFLO SharkBite. To align with our strategic objectives, our expansion plans and curve us both brownfield and greenfield initiatives. The brownfield capacity expansion project at our Hyderabad plant commenced commercial production in January 2023, evaluating our capacity to 40,000 metric tonnes. Simultaneously, our greenfield project in Roorkee is progressing as scheduled, and we anticipate the commencement of operation at the new plant by mid of February FY '25. Our performance over the years gives us -- that we will surpass the sales target of INR 1,000 crores by the scheduled FY '25 guidance. That concludes the opening remarks, and I would like to ask the moderator to open the floor for question and answers session.

[Operator Instructions] We have the first question from the line of Pranav from Equirus Securities.

Congratulations on good set of numbers. Sir, I wanted to understand the mix between sanitary and faucets in your overall bathware segment. And also wanted to understand how much import dependence of Chinese products do we have as of now? That was my first question.

Yes. So our sanitaryware contributes to about 65% of our BD business and faucets is about the balance, which is there. And for us, within our sanitaryware business, we -- at an overall level, we are at about 16% to 18% contribution of Chinese imports, which has happened in the previous year. And we, as a strategy, have always indicated that we want to continue to reduce it, and we are working towards it, and we intend to bring it down as we go forward in the coming financial year.

And sir, my next question was on price hikes taken in bathware. So what was -- were there any price hike taken in 4Q? And what would be the quantum of price hike taken in FY '23 overall?

So we have not taken any price hike in Q4. We took the last price in Q3. In total, we took 2 price hikes, the one in Q1 and the other one, which was in Q3. Of the total level -- just give me a second, we took about a price increase of about 5% to 7% in Q1. And another price hike between average of 6% to 7% in Q3. The price hike was higher in sanitaryware and lower in faucets in Q3. So on a ballpark, you can say about 6% to 7% in Q3. But we have not taken another price hike in Q4. I hope that answers your question.

And sir, any plans of taking any price hike in, let's say, 1Q or first half FY '24?

I don't foresee any price hike at this point in time. And I mean, of course, we don't -- we can't really predict exactly what happens in future, for the foreseeable future, any price hike...

Sorry to interrupt sir, there is airy disturbance on the line. We have the next question from the line of Kaushal Shah from Dhanki Securities Private Limited.

Sir, my question was on the margin in both the segments, bathware and pipes, we have seen a very good improvement in both the segments and EBITDA margins. So I wanted your thoughts on the sustainability of these margins. What were the drivers for the sharp improvement in Q4? And how do you see the trajectory over the next, let's say, 4 to 6 quarters?

Yes. Basically, if you see like when you see on a sequential quarter, Q3 to Q4 and even Q2, there was one big hit in the initial quarters, in Q1, Q2, relating to sanitaryware, which was the increase in the gas price for us. The total impact of that, which impacted us profitability in Q1, Q2 was more than INR 10 crores -- INR 10 crores to around INR 14 crores at that particular time. So on one hand, even in the first 3 quarters, we had the increase in the input gas prices for sanitaryware, but on the other side, on the pipes business, there was a sudden drop in the PVC resin price. So as everybody knew, the PVC resin price peaked out to 160 and then dropped down to half. So if you see on an overall, we lost odd around INR 50 crores, INR 60 crores in this entire in. And Q4, we'll say it was a fairly normalized more of -- of course reactions happened in Q4, it was much more stable. Going forward, we feel that with the growth, which we are planning, we have given a guidance that we should grow by 18% to 20%, 21% of both the businesses, which we have. We should be able to unlock around 1% to 2% overall EBITDA margin in the next 12 to 18 months period.

And sir, on the working capital front, we have again seen a good improvement in both the segments. So some thoughts on that side. I believe the improvement in inventory could be because of the price drop. So how do you see that moving next, let's say...

So number of things. it is something we're doing internally, Sudhanshu spoke about it, one of them is the insourcing of the imported Chinese material into India -- to the Indian vendors. One is that because when we import from China due to the Chinese New Year, especially in Q3, Q4, we have to start -- we have to accumulate the inventory. So once we are fully successful on this, then the inventory should come down. Apart from this, we are looking at how other imbalance inventory can be rationalized, how we can renegotiate our trade terms with our vendors. So that overall net working capital cycle for the organization comes down. So internally, we have a target of around 10%, which we generally take 10% to 15% every year. If you recall, we had taken a similar target of 20% before we acquired the manufacturing entity, and we did it around more than 20%. But now I think with the manufacturing entity bought out last year, it created some disbalance in the entire planning. So we'll work on it. And I think we should be able to bring around 20% down in the next 18 months tenants. .

[Operator Instructions] The next question is from the line of Nikhil Gada from Abakkus AMC.

Congrats on the turnaround. Sir, first question is regarding the margins that you have seen, especially in sanitaryware and faucets. So you mentioned that there is no further price hike required. So are we trying to say that whatever inflation that we saw across the raw materials and everything, it is more or less factored in and we are at optimum gross margin levels?

So if you see like there was a price hike, there was input price increases, which happened during the first 2 quarters and starting from Q4 on the last financial year, especially on the gas. So we still have some inventory, which is linked to the -- which is produced linked to the higher gas prices, which we feel would get diluted in next 1 or 2 quarters. And since the prices have slightly come down, so we are not contemplating immediate price hikes in the very near future. But definitely, in this industry, there has been a continuous price hike on every year-on-year based on the normal inflationary rates. So we feel that until less there is a big fluctuation happening on the input prices not much there, but the margin release will keep happening because all the current inventory production, which is happening, is happening at the lower input prices.

And this is both for sanitaryware and faucet?

Yes.

Sir, my second question, specifically is to Sudhanshu. Just wanted to have your understanding while the industry is doing really well, which we can see across the numbers from all the players. We are also seeing a lot of new players coming and expanding. And you also alluded that we need to add more branch stores than all to maintain the visibility. Can you give some qualitative comments on how you see this industry and this increased competitive as to impact and where we are one of the leading brands?

Yes, Nikhil, we have seen in the last 1 year plans from many building material players, which are expanding into bathware business. We all know the names, so I'm not really getting it to them. But if you see in the last 12 months also, we've not seen any significant impact at this point in time. Though, as we now -- nearly for some of the players has been even been close to 2 years now. So they've not been able to make a significant impact. I'm not saying that they will not be, but I truly believe that this is a business which requires a lot of, I would say, lot of investment, lots to things to build this business, to build the confidence among plumbers, among dealers and to get the whole mix of products, right? It requires a bit more knowledge about your consumer, your influencer, your dealer, then perhaps what some of the people have. I mean at least shown in the last 24 months, we're asking my qualitative comment, I'm giving you my qualitative comment. Yes, so potentially, yes, they can come. It's -- and it sounds like very right, it can impact margins, it can impact market share for some of us. But very honestly, in the last 24 months, I have not really seen anybody getting it right at this point in time. So I hope that tells you exactly what the situation is. I'm not saying that they won't get it right in the next 12 months. But at this point in time, that is the situation.

And sir, one last question, if I may. Just on the faucets part. If we see for us as well as our nearest competitor, we have seen a tremendous growth. We are now close to around INR 550 crores, INR 600 crores, if my numbers are right in faucets. And the PR was also saying that they have seen a lot of market share capture from the smaller unorganized players. Is it the same with us or is it something which has worked differently for us in faucets that has helped us gained such beautiful growth?

So I think when you grow a market at 45%, 50%, that kind of range, 40%, 45%, then you don't gain only from the unorganized sector. I think you gained from even organized sector players. So in my view, I think we have gained market share from organized as well as unorganized sector. We perhaps would be one of the fastest-growing faucet companies in the previous -- last 2 years, in fact. And I think the gain is coming from across the segment. We've had a launch of one of our -- 1 of our new launches, which happened, which has been one of the largest sponsors in the history of Hindware, which has in 1 year, has done more than INR 125 crores and been the talk of the town. And we believe such launches have really helped us gain not just from an organized sector, but from organized sector players as well.

The next question is from the line of Praveen Sahay from Prabhudas Lilladher.

Congratulations on a good set of numbers. So first question is related to your bathware segment. If you can give me how much is the capacity in the sanitary and the faucet and how is the utilization as well as outsourcing contribution in both the segments?

Yes. So our capacity utilization has been very healthy for sanitaryware in the previous year, close to 90-plus percent, 91%, 92%. And however, the number for faucet has been lower for us at 45-odd percent. That's a conscious part of our strategy where we were developing some outside vendors and working on improving our efficiencies. So at the overall level, we have about 2/3 of our overall requirement, which is actually coming from in-source product. and an overall between sanitary and faucet. So what we believe is that we should basically be looking at improving our capacity utilization in the coming year. For faucets, and that will start happening from quarter 3 onwards, all the new products which are getting developed and getting developed within our plant announced. And with that capacity utilization for our faucet plan will also start improving as we go into the second half of the year. We are also, as I said in my -- as an answer to the previous question, we are also working on in-sourcing of a lot of Chinese products into India. As a part of that exercise, we are doing a bit of restructuring in our manufacturing product mix wherein some of our basic products are getting outsourced into domestic suppliers. While a lot of products which was being outsourced from China is basically getting insourced into our own manufacturing. So this may have a short-term impact in Q1 and Q2 for us because of this changeover which is happening within our sanitaryware manufacturing plant. But over the long term, say, about 12 to 24 months. I believe this is a core part of our strategy to increase our margins and Mr. Sikka has talked to you about more than 100 to 200 basis points improvement. So these are the changes which we are doing in our manufacturing, and we believe it can -- like I said, in-house utilization will also improve. And should definitely also have a role to play in our improvement of our margins as well.

So next question is related to the piping business. I can observe that on the Q-o-Q basis, your realization up by around 11%. So what's the reason behind that? It's only because of the price fluctuation or also you can give the contribution of the CPVC in the overall business?

There are 2 factors behind it. Quarter 4, there was hardly any -- we lost money in the first 3 quarters. There were a huge inventory losses. But in Q4, there was no inventory loss. And then also CPVC, we focused on CPVC. This was a strategic decision for Q4, and we have more growth in CPVC. So both the things put together and really the margin in CPVC.

Ladies and gentlemen, we have loss the line for Mr. Rajesh Pajnoo. Sir, can you please continue, Mr. Naveen Malik. I will reconnect him.

Yes, please, I think what Rajesh was trying to say is that the contribution of our CPVC as a percentage to sales has been continuously expanding and as a result of which the overall increase in the selling price is trying to -- you're seeing there.

So it's because of the contribution of CPVC increase and the realization improved because of that?

Yes. So in Q4, CPVC component was 52% of our sales as compared to Q3 of 42%.

The next question is from the line of Bharat from Moneybee Investment Advisors.

So my first question is what is the debt repayment schedule that you're looking ahead?

So basically, if you see we have 1 CapEx program, which is the expansion of our pipes division. And then Sudhanshu has spoken that we are doing some changes in the restructuring within our sanitaryware manufacturing, wherein the single pieces, we are trying -- or the larger pieces we are trying to shift inside the factory other than being imported. This will have long-term huge benefit. In the interim for 1 or 2 quarters because of the lower capacity utilization numbers may go a little bit up and down but it makes -- this is part of the fourth strategy, which we have. So we may be spending odd 100 crores, INR 100 crores, INR 125 crores this year. And we feel that with this, we should be able to repay odd 100 crores of debt in this financial year. And it can be higher also, if we are able to squeeze our working capital more than what we have planned.

So for FY '24, the CapEx, you put aside INR 100 crore, INR 125 crores and the debt that you'll try to repay is around INR 100 crores, am I right?

Yes. So overall planned CapEx is around INR 250 crores to INR 300 crores. But since the pipe plant will not come within this financial year. So a major chunk of that expense will be done next year. But majority of the sanitaryware spent, which is odd 30 crores, INR 40 crores in terms of making higher pieces will be done this year itself.

So in the pipe segment, the CPVC mix in quarter 4 is around 52%, as you said. So there has been a recovery in margins. But if I look at the peers, the margin is still on the lower side. So could you just tell me why is that?

Yes. I would like to answer -- see, the serious -- this we have been telling in quarter-on-quarter, but the margin cannot be compared with the competitors because we are only 3 -- this is our fourth year which we have completed in the market. And for your information, what we have done is we have taken a strategic decision that we need to grow fast. And what is visible from the results as of today now we have the fastest-growing PVC pipe industry. So what we do is we have just -- even just for you -- the information -- for your information, yesterday, we have done the [indiscernible] of our third plant. So it means that in 4 to 5 years' time, we'll be constructing 3 plants, and we'll be growing very fast. Ours CAGR is more than 40%. So for this, you need to have employees, you need to have employee expenses. So if you see -- if you compare as an apple-to-apple then you will see that the fixed cost and all costs which are there related to factories, we are at par with the competitors. But when it comes to an employee cost, we are there 4% to 5% higher than them, which in due course of time, it cannot come down exponentially, but definitely a percent a year. So I think down the line 3, 4 years will be a par with competitors. This is a conscious call.

Okay. Yes. So my last question is, so on the consumer appliance side. So when do you expect a recovery in margins?

So I think if you see and try to plot our earnings, both in terms of revenues as well as the earnings as compared to the rest of the players in the market. So in terms of the sales revenue, I think we have done fairly well. We have 16% sales growth, although on a very small base. But in this industry, a majority of the players, they had to do a bargain, majority of people who have done a good sales growth, they have a hit on the margins. And this is -- I'm talking about broad comparison of similar companies in India. The big chunk of here is that this industry has not been able to pass on because of the high level of fragmentation. So there is no leader and nobody has taken an initiative to increase, take a substantial price increases. So we feel that another 1 or 2 quarters, the pressure on this may continue. But we may continue with our sales growth because our initiative and our thought is capture the market first. Margins can always follow through. So we are working here also in terms of in-sourcing many materials from China to India so that we can reduce the cost as well as our investments into working capital. One or 2 vendors, we are already working for the last 1 year with them and a fair level of success. So not that bullish guidance today on this. We had given a guidance that one -- this was a guidance 2 years back. that we'll outbeat the market on sanitaryware and faucet, which we have demonstrated as compared to rest of the players in the market. We have also given guidance that by 2025, we should be INR 1,000 crores plus on pipes. I think based on the current market scenario, we should be able to do much faster. And I think the market should appreciate one very critical point. Last year was a year of disruption for pipes within a majority of them, they took a hit on the selling prices. So despite the degrowth in the selling price, we are able to maintain our growth on 20% to 25% plus. Consumer side, now we are giving guidance that we have initially given -- said that we'll do around INR 1,100 crore to INR 200 crores by 2025. So we feel that it may take another year or so to reach, by 2027, we should be INR 1,000 crores plus on the consumer side. This is based on the current market conditions. And as the market conditions improve, I think we should definitely be able to accelerate the growth pattern, our own pattern also.

The next question is from the line of Sandesh Barmecha from Haitong Securities.

Just one question from my end, sir. Sir, is that correct that our faucet revenue in bathware has gone up from 30% in FY '22 to 35% in FY '23?

What was the -- revenues?

Yes. Faucet revenue, sir?

What you're asking is what is our growth in faucet revenue?

Yes. So what I'm asking is, last time, you said the faucet share was around 30% in bathware and currently, there is 35%. So is the information right, sir?

You're saying contribution?

Yes, sir. The revenue contribution -- faucet revenue contribution.

Yes, it is around -- we spoke about it. It is ranging around INR 550 crores to INR 600 crores. I think he's talking about contribution in the total business, a percentage sale.

Bathware, so like faucet revenue in bathware, has it gone from 30% in FY '22 to 35% in FY '23?

Q4, it was around 37%. But on a yearly basis, it is still higher at 40% plus.

Okay. So would it imply that our faucet revenue has grown at almost 50% in FY '23?