Pidilite Industries Limited (PIDILITIND) Earnings Call Transcript & Summary

So thanks, Faizan. Good afternoon, everyone. And on behalf of Axis Capital, I welcome you all to the Pidilite Industries Q2 FY '21 Earnings Conference Call. We have with us the senior management of the company represented by Mr. Bharat Puri, Managing Director; Mr. Apurva Parekh, Executive Director; and Mr. Pradip Menon, CFO. So with this, I would just like to hand over the call to the management for opening remarks. Thanks, and over to you.

Good afternoon, everyone. Thank you, Anand. I'll begin with a summary of the business and financial performance for the quarter and half year ended 30th September 2020 for the stand-alone business. There has been sequential improvement in demand conditions during the quarter. Rural and semi-urban areas recorded double-digit growth. Performance in metros, while improving sequentially, have still to reach pre-COVID levels. Overall, Consumer and Bazaar segment returned to growth, reaching at pre-COVID levels in most geographies. Growth was healthy in construction chemicals and DIY products. B2B segment continued to face headwinds. However, it showed signs of recovery in the latter part of the quarter. The profitability for the quarter was aided by benign input costs and strong cost optimization measures. While we are seeing signs of input costs hardening, we remain cautiously optimistic on steadily improving demand recovery. Our plants are operating at a capacity utilization of approximately 90%, and operating efficiencies of our warehouses have been impacted on and off. On 3rd November 2020, the company has completed the acquisition of 100% stake in Huntsman Advanced Materials Solutions Private Limited, HAMSPL, for a cash consideration of approximately INR 2,100 crores, excluding customary working capital and other adjustments. HAMSPL manufactures and sells adhesives, sealants and other products under well-known brands such as Araldite, Araldite Karpenter and Araseal. Now moving to financial performance. Net sales grew by 3.7%, with underlying sales volume and mix growth of 3.6%. This was driven by growth of 7.4% in sales volume and mix of Consumer and Bazaar and a decline of 7.2% in sales volume and mix of business-to-business, B2B segment. Net sales for the half year ended stood at INR 2,388 crores and declined by 28% over the same period last year. Material cost as a percentage of net sales is lower by 283 basis points over same quarter last year and 200 basis points versus previous quarter. Due to availability constraints, our major raw material, vinyl acetate monomer, VAM, spot prices have moved up and are -- have already breached the $900 mark. Consumption cost for quarter 2 '21 of VAM is approximately USD 765 per tonne as compared to USD 901 in quarter 2 '20. Going forward, as I said earlier, we see this cost increasing. EBITDA before nonoperating income at INR 473 crore grew by 35% over the same quarter last year on account of lower input cost and advertising and sales spends. EBITDA for half year ended stood at INR 570 crore and declined by 26% over the same period last year. Profit before tax and exceptional items at INR 455 crore grew by 22% over the same quarter last year. PAT at INR 339 crore grew by 5% over the same quarter last year due to tax reversal in the prior year with reduction of corporate tax rate. On a like-to-like basis, PAT grew by 27%. Consolidated performance numbers. Net sales at INR 1,857 crores grew by 3% over the same quarter last year. EBITDA before operating income at INR 514 crore grew by 39% over the same quarter last year on account of lower input costs and lower advertising and sales promotion spends. About subsidiaries performance, international subsidiaries have reported double-digit constant currency growth during the quarter. Domestic subsidiaries continue to witness challenging business environment due to the pandemic. However, signs of revival are observed towards the latter part of the quarter. We are encouraged by the quarter 2 performance. However, we remain consciously optimistic on account of the risks associated with the ongoing pandemic. Our focus would be to continually drive volume growth via investment in our brands, in sales and distribution and in consumer-relevant innovation. That completes the statement from our side. And I would like to hand over to Anand and the organizing team for the questions.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Congrats, sir, on great numbers and the recent acquisition. So my first question is on Huntsman. So what are the thought process behind this? Huntsman is also into adhesives and sealants and you are obviously the dominant player there. So is it to get essentially lead over any other player entering, if someone else would have acquired, that is the main reason? Or it adds to your distribution or brand or product technology? So that is the first question.

Yes. So I'll obviously give it a response, and I'm sure Apurva will also chip in. So I think in any kind of consumer business, when we look at our business, there are a couple of elements to look at. One is the kind of the brand that it has, the business model and the kind of distribution opportunity. So we have looked at all those elements. If you look at Araldite, which is the brand as part of the Huntsman acquisition that we've got in the process for the Indian subcontinent, this is -- has leadership position in the epoxy adhesives segment. And this is essentially very, very high-performing adhesives used in marble, stone, metal and bonding purposes. And therefore, with the leadership position that, that company has and the opportunity to improve distribution in the geographies, given our -- the way we operate the Pidilite model, connect with users and all that, these are the 2 primary elements. And of course, it is a -- in terms of the business and the nature of the particular business that we have, it is in a shape which is obviously in the right box in terms of profitability, in terms of opportunity to grow from a distribution perspective. And these are the reasons why we have looked at that brand. Apurva, you want to just chip in on this?

Yes. I think you have said -- you have covered most of the points. But Abneesh, Araldite is obviously an iconic brand, an extremely well-known brand in this particular segment. And acquiring Araldite completes our adhesive portfolio in some manner. We were always present in epoxy adhesives for many years, but Araldite was the market leader. So with the acquisition of Araldite, we have now a portfolio of very strong brands, including Fevicol, Fevikwik, M-Seal and now, Araldite. So the acquisition, the main purpose was this. It was a very, very strong brand with a very strong position in epoxy adhesives segment.

Sir, that was my question that now in epoxy, you will have your own brand in Araldite. Similarly, Araldite Karpenter or Araseal, you will have your own brand. So how does the brand architecture work in the medium, long term? You will retain both brands? Or there will be a price laddering which will distinguish between the 2? Or reason why there could be some difference?

Actually, the overall strategy and business plan will evolve over a period of time. But generally, in all brands, as we acquire, we maintain the brand and each brand has its own position in our portfolio. So certainly, we will maintain and strengthen Araldite and the related brands like Araldite Karpenter. But the exact positioning of that and how exactly we will grow that is something which we will develop over the coming months.

So just 2 last small follow-ups here. So will there be a royalty which is required to be paid? And similarly, you have the trademark license for Middle East, Africa, Asia. So in these geographies, already is Araldite present? Or you would need to go there and tap into your own distribution which might be there?

So Araldite in Indian subcontinent has been assigned to the entity which we are acquiring, so no royalty will be payable. As far as license goes for Middle East, Africa and Asia, it is a business that we will have to study and then decide how to grow. It's not a very large business, but I'm talking about the segment for which we have got licensed. And we will have to assess that market and then grow it, and we will have to determine the appropriate distribution network for that.

Right. My second and last question is on your waterproofing businesses. So there, this quarter also, the services business that's been acquired. There, this quarter also, there is a big dip. Obviously, Q1 was a washout. So Nina, [ most of them ] are company also. What is the way over there? What are the issues that you could discuss? Because this was an acquisition done a few years back and now suddenly, things are looking quite different from your main business and your international business, et cetera. So is there any specific issue here? Or it's more of a competition or decision to spend?

Pradip, you want to talk about it? Go ahead.

Yes, yes, I'll go ahead. So see, there are 2, 3 things here about Nina Percept. One is that as you actually said, it's waterproofing services, but in a way, it is one entity of all, which has an absolutely direct link with the real estate sector and the performance of the real estate sector. The real estate sector even prior to COVID was going through significant challenges. And those challenges have actually got accelerated during the last 6 to 7 months. Having said this, while the quarter 2 performance, what you are seeing, obviously, is the performance in terms of revenue growth and profitability. The positive side that we are seeing is that there has been sequential improvement in performance of that entity even during the quarter. And that is something that is giving us certain -- much more confidence going forward. Having said that, it is too early to say whether things are going to be a complete turnaround. It will be linked with the overall sort of performance of the real estate and the speed with which that sector recovers. While you see the Consumer and Bazaar segment, et cetera, you've seen the recovery in that segment, we are not obviously seeing the same pace of recovery there. And therefore, we'll -- it's still a watch out, yes.

Yes. But essentially, this is new homes. How much percentage of sales is to new homes from Nina?

Apurva, you want to just take this?

Yes, virtually, for Nina Percept, the entire business is new homes. See Nina Percept, their business model is to provide waterproofing services largely for new projects. So there may be some repair and rehabilitation work, but their work is related to largely new buildings and new commercial complexes’ infrastructure. So a significant part of their revenue is from new construction activities. And just to add, of course, this segment is going through a very difficult time, but Nina Percept is a strong market leader in this segment. Of course, this segment is stressed. But if you go back to -- we had a very good performance in '18/'19, '19/'20 had difficulties ending the year with corona. And of course, this year, there has been a lot of difficulties. But inherently, it is in a unique strong position. It is a market leader in segment where people require specialized waterproofing services for large projects. And it has a very good synergy with Pidilite. So we are hopeful that as economic conditions improve as the construction activities pick up, this business should also start performing better.

[Operator Instructions] The next question is from the line of Latika Chopra from JPMorgan.

My first question was again on Araldite. If you could elaborate a little more on what kind of revenue growth profile, what kind of margin profile has this business seen so far? And what kind of revenue or cost synergies do you anticipate here? Any quantification, if you could share, that will be useful.

Yes. So in our press release, we had already covered the calendar year performance of the brand. It was about INR 400 crores for that business in 2019. As far as the synergies on revenue and cost is concerned, I think it's a bit too early. Obviously, we have some internal thoughts and things, but it's too early for us to really talk about it in a public forum for the simple reason that we need to take some time to understand the business. So we believe that in about within 3 to 6 months' time, we'll be able to come back with a clearer picture to the external investors on where we see the opportunity. At a very principal level, the strength of Pidilite is, of course, deeper distribution and penetration across markets and across geographies. So obviously, we see some opportunities there, but it's too early to call that out at the moment.

Latika, just to add to it, we know, obviously, this business very well. Araldite business with its distribution structure, [ permitted ] end-user profile, we understand this segment well and we have also been a participant in epoxy adhesives for a very long period of time. So we understand this segment well. We have good understanding and expertise in terms of both distribution and end user activities. So we believe that all of this should help us to accelerate growth of this brand. And in addition, we did the valuation at both reasonable revenue and EBITDA multiples. So we are hopeful that as we accelerate the growth, they should be beneficial to the company.

Sure. What I was actually looking was for any kind of revenue growth in the past that you could share, but probably with your distribution footprint and initiatives maybe that growth might not be relevant.

The past period growth is not relevant. And also, last 3, 4 years in India also has been through a little sort of a different kind of a situation in India, where the growth rate of almost all big companies were impacted. So I would not really look a lot at last 3, 4 years. I think going forward, with the value that we will add, we are hopeful that we can accelerate the growth rate.

Sure. And my second question was, you touched upon the waterproofing services segment, but there are a lot of focus on initiatives to scale our presence in the other growth and pioneer categories, which you outlined over the last few years, like flow coatings or wood finishes, tile adhesives, joinery. How do you assess your performance in these categories so far versus your own internal benchmarks? And we’ll exclude the COVID impact here. And how should one think about growth for these segments going forward?

Pradip, you are saying something? Should I answer that?

No. Please carry on, Apurva.

So I think, Latika, amongst the segments that you talked about, some of the segments are doing quite well, for example, tile adhesive with our [ planned draft ] and joinery adhesive where we sell a variety of high-end adhesives for joinery market. Both of these segments are doing quite well. We have focused hard on developing the right products, building route to market and doing other activities. So we are good in those 2 segments. The other 2 segment -- other segment that you talked about was floor coating. That was the acquisition which we did of a company called CIPY. Now this company like Nina has -- is impacted somewhat because of the new construction-related activity. A lot of their business is into new construction, including flooring for various projects, parking lot, the large buildings. So that segment is impacted. But again, like Nina, CIPY is also in a unique position as far as market position goes. And we believe that as market improves and some of our initiatives take shape, we should be able to improve the performance. So that is on CIPY. But otherwise, both the tile adhesive and joinery business are doing well. There is some COVID impact, but both businesses are doing well and have started to recover very well.

The next question is from the line of Arnab Mitra from Crédit Suisse.

My first question was on -- you mentioned that the India recovery is driven -- has been led by waterproofing and DIY. So I wanted some sense on how the woodworking adhesive business is doing. Is that still relatively weaker because of the higher linkage to real estate? And we do hear that there is a pickup in the real estate market, a lot of registrations at least in the bigger cities starting to happen. So are you seeing trends where this woodworking adhesive segment is now starting to see good improvement?

Yes. Thank you for the questions. So as I said in the opening remarks, we are seeing a sequential improvement in demand conditions during the quarter. And it's like every month has been better than the previous one. And that is also true for the woodworking adhesives. And we are seeing a similar trend in those segments as well. Having said that, in terms of the -- what was the second part of your question? Whether you're seeing any other trends? What was the second part?

No. I was talking about the real -- the top of the potential pickup in the real estate market. Any sales that you're seeing that is happening in the larger cities?

Yes. So again, real estate, it's too early to really take the call because in the whole process, but certainly from a demand situation, we are seeing things which -- where there was no demand or there was hardly any offtake. We are seeing that improvement in the quarter. There are certain projects which were not -- which were sort of stopped. There could be also, frankly speaking, there is also an impact of Q1 where there was no offtake at all. And when the things open up, there will be some bit of pent-up demand also coming through. I think that is something we have to be cognizant of. But having said that, we are not seeing any very, very clear signs of a real estate pickup or a recovery. Too early to call that out.

Okay. My second question was on margins. So a couple of questions here. One is the VAM hardening despite crude being low. Is it a short-term supply issue that you feel is there? Or is there -- is this now that prices are going -- in your sense, it is not driven by the supply kind of issue right now? And second is the other expenses, which have seen a big reduction this quarter year-on-year. How much of this is kind of a permanent reset of your cost structure due to cost efficiencies? And how much would you say would come back in the due course of normal business?

Yes. I think that's a good question. So I think on the VAM, you see, I think when COVID happened, there was sort of a sudden abnormal drop in the prices of VAM in terms of spot prices. We are seeing the costs going back to the pre-COVID level. So that is really what is happening. We are not saying that there's an inflation over last year or something. At $900 last year, similar time, the VAM prices were about $900 as well. So it is more a movement from the current low going back to the previous situation. Sustainability or otherwise of these prices, very difficult to say that. There have been certain force majeure, lockdowns of capacity in parts of the world where the production is happening which has impacted it. Now whether all of that will come back, supply will come back, prices will come back to lower levels due to lower crude, very difficult to predict at this stage. But we are right now operating on the assumption that the prices have gone up. And obviously, we need to run our business, et cetera, et cetera. So there will be an impact going forward from the higher prices. As far as other expenses are concerned, there is some element of cost controls which may stick, for example, travel and so on. Because all of the original way of operating and the physical meetings and the travels have not gone back to the same stage as it was as it happened pre-COVID. However, the bigger impact is coming from the lower amount of spend that we've had in the advertising and marketing space. And that will obviously come back now. We want to invest behind both advertising and sales promotion going forward to drive volumes. So a lot of that drop in costs will not be sustainable. It will come back in the coming quarter. I just want to add one more point before we move to the next question. We have always said that our -- we like to operate in an EBITDA range of between, let's say, around 21% to 24%. So that's the kind of range we want to operate. Obviously, this is well above those ranges. And we see an opportunity to invest behind the brands, which we have not been able to in the past few months. So that -- and of course, the cost is coming back.

The next question is from the line of Jay Doshi from Kotak Securities.

Congratulations on a great quarter in context of the environment and acquisition of Araldite. I have a couple of questions on Araldite, and I know you've answered some of it. How big is epoxy adhesives market in India? And can you give us some color whether it is under-indexed versus polyvinyl adhesive and rubber-based adhesives as compared to other developed markets? And if you can give some idea about distribution of Araldite today, what -- how does it compare versus your distribution? That's my first question. And I have one more which I'll ask later.

Yes. Apurva, you want to take this?

Yes. So I think you asked 3 questions in that. But I think, first, I'll address about the distribution. Certainly, the distribution reach of Pidilite is much higher. As even Huntsman in their press release said, they could bring it to a certain level. And they expect us to take it forward with our distribution reach. So clearly, Pidilite as a company has a far deeper distribution reach. We don't have...

Any color you can give in terms of the towns that they reach or any you might comment?

No, no, no. As you know, this kind of information is not shared during acquisition stage. But generally, from our idea, our distribution reach is far more deeper, they will have direct and indirect reach, but our direct reach is far greater. But we'll have much greater clarity on that as we take hold of this particular business. As far as usage and penetration, Araldite like PVA, the epoxy adhesive as a category has similar kind of penetration level, I would say, like PVA because it has been in market for a long period of time. And there is a widespread understanding and usage of this as a product category. What was the third question? The market size.

Yes.

The market size, it is difficult to estimate. Like in PVA also, we sort of shy away from saying what is the estimated market size there because if there is no official or there are no well-known figure to state that. But Araldite had good market share. I know I would not again like to say what is the kind of market share, but Araldite had a fairly large market share. So you can derive based on the Araldite here as a company, the sales figure that we have shared. But it's not a market, it is not as big as PVA kind of a market but it's a fairly sizable market.

Just a small one. Would this need competition commission approval? Or it won't be required?

No, no. The transaction is already closed. So transaction is already completed. So it did not require any regulatory approval and transaction is already completed.

The next question is from the line of Avi Mehta from Macquarie.

I had -- just on the margin side for Huntsman. Just wanted to understand how should we look at your thought process on their EBITDA margins. Is there scope for expansion? Or is it going to be largely sales driven that you are initially thinking? I know a lot of it might change, but I just wanted to provide your thoughts, first thoughts on how are you kind of looking at this acquisition, sir?

Yes. So I'll give it a short and I'm sure Apurva will have additional points. So I think one is that it is a profitable business. So I think the focus at this moment is to make sure that although we identify the opportunities on growing the business, the profitability is not really the #1 agenda as far as we are concerned. Having said that, if -- as we go along, we identify any opportunities of optimization of costs, we'll look at that. But driving distribution and operating and bringing the Pidilite we are working, that's the kind of focus that we have.

So what I'll add to what it is -- what I would like to add is Araldite business already has very healthy margin. But in addition to that, we believe that there is -- there will definitely be a lot of cost and revenue synergy. Araldite is a very, very strong brand, so there is multiple ways in which we can use the brand to grow the business. We can potentially add new products. We will expand distribution. So a number of initiatives are possible because this is in our product category and segment which is very well-known to us. So a number of ways, but the primary thing would be to grow the top line to accelerate the growth rate. And once we do that, it could result in overall higher EBITDA. But as far as profitability goes, it is a very profitable business. So that is something which is good. And our primary focus would be to accelerate the top line.

And who would be the next biggest competitor for after Araldite?

See, in epoxy adhesives segment, there is Astral and Pidilite. Pidilite would be -- so Astral and Pidilite are the other 2 competitors other than Araldite.

It would probably be Resinova after that only, right, sir? I mean or there's no other...

That is what I meant by Astral, Resinova is owned by Astral, so that is what I meant.

Okay. And sir, secondly, I...

And there are a number of others like in PVA, also a number of other regional and other players. So there are a large number of players in any adhesive category. And so epoxy adhesive is also similar. But top 3 are likely to be Araldite, Astral and Pidilite.

Okay, sir. Okay. And sir, just had a few bookkeeping questions. One was on the reduction in inventory. I just wanted to understand, was this largely raw material rate? Or was there any finished good? Or was there any -- is this sustainable, this inventory reduction that we have seen on Y-o-Y as well as 4Q -- from versus 4Q?

Yes. So typically, the inventory numbers this quarter versus, let's say, March or even previous year may not be strictly comparable. Because you've had -- if you just look at it from a balance sheet perspective, if you look at March, we did have a lockdown where sales were not there for last 10 days of the month and therefore, inventories were higher. So that's certainly not comparable. Having said that, the levels of inventory that we're having in and around these levels are sustainable.

And lastly, sir, the VAM price data, if you could kind of give me 1Q, 2Q as well as current, so I missed that. I joined a bit late.

Sorry. Yes. So the quarter 2 consumption was USD 765 per tonne. Quarter 1 was $823 per tonne, and current spot prices are going around $900.

[Operator Instructions] The next question is from the line of Percy Panthaki from IIFL Securities.

Congrats on a good set of numbers. Sir, my first question is on the Consumer and Bazaar products. The sales growth there is quite robust at about 9.5%. So if you can give some flavor within that, but basically which subsegments are growing faster than average, which segments are lagging? And if there is any subsegment which is actually not yet in positive territory.

Yes. So we did give a color in the opening statement, so I'll just repeat some of those points. I think one is we called out from a geographical perspective that the rural and semi-urban areas have recorded double-digit growth. This is within the Consumer and Bazaar segment. We have seen Tier 2 cities sort of the -- while urban overall is recovered, but the metros are still not yet at the pre-COVID levels. But the Tier 3 cities, that smaller cities are, obviously, come back to positive territory. This is from a geographical perspective. If you look from a business perspective, construction chemicals and do-it-yourself products, these are the ones where we've had growth momentum. In fact this, we have also called out in our previous quarter commentary, so that momentum continues. And there is -- and even as far as woodworking adhesive is concerned, as I said earlier, that has also gone into a positive territory albeit, of course, not at the same level as the construction chemicals or DIY. So that's the overall color of the growth.

So sir, construction chemicals is -- just correct me if I'm wrong, is mainly the waterproofing segment, right?

Yes. So you've got tile adhesives as well in that, so together.

But waterproofing would be a fairly large part of the construction chemicals. And you mentioned earlier that -- I mean, in some respects, it is linked to the real estate cycle and the real estate, there is no sign of sort of revival yet. So then how do we tally these 2 statements? And how do we sort of make sense of this growth in construction chemical? What is really driving that? Is it not linked to new asset creation? And is it just people redoing their houses which is driving the growth? Or what is it?

Yes. So there is -- there are 2, 3 things playing out here. One is, typically, these waterproofing, there is a significant amount of work done in Q1 before the monsoons. Because Q1 was a locked down kind of condition, there was a lot of, obviously, things in terms of demand which slipped from Q1 into a subsequent period. And once the monsoon is repeated, obviously, the demand has come back. What part of the recovery or what part of the demand is coming exactly from new construction or from repairs and renovation is difficult to exactly pinpoint. It could also be certain constructions, which are ongoing, where work has stopped and now recommenced. So difficult to put a finger on it, but that's the way you have to read this.

Let me add to that, Pradip. Sorry to interrupt.

Yes.

But just to sort of to help you reconcile, see when we look at -- when we talk about real estate, we are talking about these multistory large projects in bigger cities, metros. Now that segment, particularly, that segment is impacted. And when we look at NCR, Mumbai, that kind of market was multistory large construction. So that is what typically people talk as real estate and that segment is impacted, and that is showing in the lower growth or decline in sales of our subsidiary like Nina. A large amount of construction in India is 1-story, 2-story construction which happens outside of metro, and that is a much larger share of the market. It is a very significant share of the market in terms of if you see construction, cement consumption and everything else. So that segment is doing well. That is not impacted. When we all say what is impacted, is this real estate in larger cities. But otherwise, the smaller 1- or 2-story construction or construction activity in smaller town or rural area, that is doing well and that is aiding the growth. So I hope that allows you to sort of...

Very, very helpful, sir. My second question is on the margin. You did mention that you would like to be within a 21% to 24% band. And right now, this quarter is much higher at like 27%. So I just wanted to understand whether this reversion to your guidance is something sort of which will happen at some point of time in the future. Or is it something sort of more concrete and palpable, which we can see that the reversion can happen within sort of nearer time frame?

Yes. So obviously, very, very difficult to put a number and a month where it will happen. But certainly, in the next 6 months within this period, we do see this coming back. As I said, because the input prices have gone up and that will have an impact on future consumption, from a raw material cost consumption perspective. And we are going to start to invest behind our brands in the coming months, you will see that coming back in the next -- within the next 6 months.

The next question is from the line of Mohit Pandey from Citigroup.

Yes. I just needed some data points on the acquisition. If you could share the 2019 PAT number, that would be helpful. And also the current gross block?

Okay. I'll start with the gross block. I mean you're saying gross block in terms of assets.

Yes, sir.

Yes. So this entity is having a very, very miniscule amount of fixed assets. The arrangement that this entity has is in terms of tolling. So the assets -- hello? Yes. Yes. So I think they have tolling arrangements and the tolling arrangements for the assets are not necessarily in their books, but it is the -- the assets are in the conversion through the conversion cost route. So asset block is not a material number to look at. Coming from a PAT perspective, et cetera, I don't know whether we can really have that specific number to share. Suffice to say, as we have said earlier in the call, that it is a profitable business. And the PAT will also be quite a sort of a healthy set of numbers. That's the number and whatever we had in terms of external communications we have given in the press announcement.

Okay, sir. And secondly, how is the acquisition being funded, the INR 2,100 crore?

Yes. Yes. The acquisition has been funded from internal resources. As you know, we have a large treasury. And so essentially, it is through liquidation of the treasury investments.

The next question is from the line of Anand Shah from Axis Capital.

So just a question on EMEA about on the construction chemicals market. I mean we've seen this sort of a market expanding quite well even in such times, and we've seen a lot of players now especially in the organized segment, getting very active in this space, especially the plain players. And this time, we are seeing growth all across broad-based for everyone. I mean so what kind of underlying drivers are you seeing for this market? I mean is it now at an inflection point? Is it that all of these guys are spending a lot and you are seeing a big offtake for categories across?

Yes. So...

Yes. Yes, go ahead.

Okay. No, I think, see, we would not like to talk about things like inflection point or what about what others are doing. But if you know what consistently we have been saying for many years that this is a very large market, and this is a market where there is a great opportunity to expand consumption, and that is what we have been working at. But we would not like -- so we believe that, and we continue to believe that this is a large market which requires serious effort to really grow the consumption. And we have been doing this and we will continue to do that. But we would not like to comment on the state of the market or whether it's an inflection point or not based on the current quarter or anything. We continue to remain very bullish on this market. We continue to invest in building brand, expanding distribution and introducing new product. You have seen various activities from us in last couple of years, including some tie-ups, joint venture. So we are very committed to the market. We have continued to invest in the market. And we are hoping that this market will continue to grow at increasing growth rates over the coming years. But we would not like to comment on the activities of others or whether it is at some kind of an inflection scape.

Sure. Sure. And just a question for Mr. Puri. I mean you've always referred to the growth in the pioneer categories in the portfolio. So any comments especially you can give on some of the pioneer categories, how they're doing and sort of the growth plans over the next 2, 3 years?

We are clearly well positioned in the pioneer categories. Some of them are already on the high-growth path. If you look, for example, at our tiling adhesive businesses, they're already in the high-growth path. The others were in , for example, 2 of them were in factory construction phase which will be complete by the middle of next year. So absolutely in line with our plans, as we've always said. We will have a set of growth businesses that will be firing for growth today and a set of pioneering businesses which will start firing for tomorrow. So absolutely online.

Okay. Perfect. And just lastly on -- any new launches that you have done or sort of planned out for the next year within any of the categories that are doing well?

See, we have an innovation program that runs across each of our divisions. So as we speak, for example, each of our divisions will be rolling out a set of products. For example, we've rolled out a whole range of sanitizers, et cetera, for the trade as well as for our masons, plumbers, carpenters rather than -- we will leave the end consumer to the large FMCG companies. So we believe there's a larger opportunity with the trade and, therefore, with our intermediaries. So we have a range of products there. In each of our divisions, we have sets of products. We've got a whole range, for example, of sealants that we've launched under the Feviseal brand which is across divisions. So we have an innovation program that is ongoing. We've recast it in the context of the current pandemic, but that's an ongoing program. And on a regular basis, we are very clear that about 1/3 of our growth should actually come out of new products or products under launch.

The next question is a follow-up question from the line of Abneesh Roy from Edelweiss.

Mr. Puri, so congrats to you also in person for the acquisition. So my question is because you also have the FMCG experience, [ standards ] experience. So I wanted to ask 2 questions related to that. One is, all FMCG companies have doubled, tripled their online sales within 1 year because of the COVID crisis. So how is Pidilite getting for this by bringing exclusive products on online or maybe much higher focus on online, more partnerships, maybe even at some stage your own e-commerce site? So could you elaborate on that?

So we've obviously absolutely ramped up online. Remember for us, online is largely in the context of our consumer product businesses. The intermediary-led businesses of the large Fevicol-led businesses currently still don't have an online component even outside India. In these businesses, we've ramped up. We've done very well in the last 4 months, and we have a set of plans on how to make this, in a sense, an independent, large channel. Some of the products, for example, if you look at WD-40, the online sales has now become significant. Now we're learning from that, moving on. So in the interest of keeping some of the things confidential for our competition, you will see that for us, this will become a significant channel over the next 12 months.

And you would have also doubled the online sales in 1 year?

Pardon me?

Would you have doubled your online sales in 1 year -- last 1 year?

Much, much more than doubled.

My second one, again related to FMCG background, if you see actual or even maybe temporary, I don't know. But actual, for example, in the same product category, we'll have multiple brands. So Huntsman and Pidilite, can they also play a similar role? I had asked this question earlier in today's call only. But now my question is more in terms of different price points because they will obviously be competing with each other, so they would need to have a different price point, different proposition. So is that something you would be thinking of?

Absolutely, yes. [indiscernible] continued with... [Technical Difficulty]

This is the operator. Sorry to interrupt you, sir, the audio is breaking from your line.

Okay. So let me try and figure out a better location for that. Can you hear me better now?

Yes, sir. Please go ahead.

So yes, Abneesh, absolutely yes. Based on our own consumer goods experiences, we will keep looking at the certain offers which are exclusive for e-commerce, some of which we believe for certain audiences may be introduced through e-commerce. So there is a whole set of plans. You will keep watching as we go forward.

And sir, one question on cement sales and putty sales for the industry. So cement sales’ numbers have been also quite different for the industry. And putty sales, you must have seen the paint companies, most of the growth is coming from putty only. So if you benchmark against those numbers against your own adjacencies, how does Pidilite compare? Because we don't have the number, that's the very reason why I'm asking this question.

See, very difficult because remember, putty is really a commodity business and it's not, therefore, a business that I would say is a long-term brand-building business so as to say if you are transporting large amounts of calcium carbonate, a little bit of polymer. So -- but I leave that aside. As far as we are concerned, as we look at our adjacent businesses, we are clear where we can add value, where we can create brands, and that's where our focus is. We are not interested in operating in the low-value end of the market where, over time, commoditization will happen.

Right. And sir, last question. So Nina, I had asked questions, but last one follow-up there. So Nina has been struggling because of the exposure to new homes, essentially it's that only. So why isn't Nina targeting the stand-alone properties, the old properties? Because that's a much, much larger than new homes. In Mumbai I see so many players addressing that part. So what is the reason for that?

See, that business is not what I would say a margin -- a good margin, long-term business. So what we are doing with Nina is as real estate is suffering, we are pivoting the business a lot more towards larger corporates. For example, we did the new Kia factory in Andhra Pradesh. We did the Samsung factory in Noida. So what we are doing is we are pivoting the business again towards larger customers, but towards larger customers who are not dependent only on real estate but are across the whole, what I would say, the larger construction and infrastructure sector. So for example, we've done some tunnels now in Jammu and Kashmir. So we're actually turning the business where there is value, there is technology required and, therefore, there is a long-term value proposition. What happens in the repair -- and this is -- it's a commodity business which is good for the very, very short term, but not good beyond that.

The next question is from the line of [ Farhan Amlani ] from SBI Life.

Basically, 2 questions. First is like many paint companies, for example, Berger Paints, are actually entering the waterproofing space and they have better synergies. So how do you take the competition from that? And the second question is that what are your future plans, like mainly they'll be inorganic? Or you are looking for organic growth opportunities?

See, I think, firstly, let me just, [ Mr. Amlani ], take a little exception with you. I don't think Berger has better synergies than us in this business. Remember, construction chemicals is about new construction and repair and renovation. In most markets, new construction is 70% of the market, 30% is repair and renovation. Where the paint companies play is in repair and renovation. They -- largely new construction goes via the steel and cement channel, where a lot of the times the paint companies are not present. Having said that, to win in waterproofing, what you require is strong brand, great service delivery and a great network. Now in all 3, remember, we have a 10-year lead. So it's -- I mean -- and we've always said that given that 3 out of 10 Indian homes do any form of waterproofing, competition will actually help expand the market which is what is happening. But please remember, in a large marathon, we are at the halfway stage. A lot of these companies such as the Berger are just going around the first band, probably most in the race, let's see, let them come and participate in the race and after some months, you can ask or after some years, you can ask them the question. The fact is, if I look at my last -- if we look at our last quarter, our fastest-growing business is the construction chemicals business. So we were getting impacted, and it would not be our fastest growing business. And remember for us, we are growing at a pace much, much -- many times our [ inadvertent ] commerce, newer competitors.

Okay. I was talking about like they have -- they have an upper hand in painting and anything...

Well, same thing, yes. But remember, the painter does not do -- the painter does repair and renovation, a painter cannot do waterproofing for a new construction. He doesn't understand it. It is done during the stage of construction. That is 70% of the market.

The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher. [Operator Instructions] The next question is from the line of Ritesh Shah from Investec.

Sir, first question is, can you break down the transaction value? I think it's $285 million, which includes a closing amount of $158 million and the balance is subject to certain milestones. Can you provide some more color on this? So that's the first question.

I'll give that to Apurva.

Hello? Yes. The transaction value, the question, the breakdown of transaction value?

Yes. I think its total is $285 million, which you indicated. But it's $157 million on closing and the balance is subject to certain milestones.

Correct. So 90% is paid upfront and the 10% is linked to a deferred consideration, which is linked to the revenue achievement over the next 18 months. So 90% of the transaction value has been paid upfront.

Okay. And this revenue achievement, can you provide certain numbers over here? Is it like something product-specific or...

Yes. No, it's a very simple thing for any 6-month period. The annualized sales for any 6-month period, once it exceeds the 2019 sales figures, then the amount is payable.

Okay. Sir, so how should one understand this? Like will be having control of Araldite's retail chain. Or how should one look at it? Because the financing...

See, we have bought the entity in India, which owns the Araldite trademark to India. So they own the Araldite trademark to India. And that particular entity we have bought. So we have the control on the trademark in India. We have given trademark license to Huntsman for certain usage in manufacturing industry. But otherwise, we are the owner of Araldite trademark, and we have the full control on the business. [ Huntsman ] is just a mechanism by which the part of the consideration is paid on a deferred basis. But we are running the business effectively day before yesterday, since closing. So we are now managing. The closing has already happened, and the business is now in our hands.

Okay. So if at all, the top line doesn't come, we probably get the business at a lower price. Would that be a fair conclusion?

That would be a fair conclusion, but that is not the objective. The objective is obviously to accelerate the growth and to pay out the deferred consideration. But because of the current uncertainty, this is how it was structured, which was mutually acceptable to both parties. But the objective, of course, would be to accelerate the sales growth and that would result into payout of deferred consideration.

That's wonderful. Sir, my second question is, we have a rich proven history on acquisitions and all. I was just thinking about it, like we already have Fevitite. We already have quite deep penetration which you indicated, it's one of our core strengths and we have a solid brand. Then what was the need for Araldite? The Fevitite product itself, we could have made it into Araldite when it comes to market share. So if I had to retrospectively look at things, how would you look at it? The reason I'm saying is we have all the ingredients to actually consolidate the marketplace. Then why is there a need to acquire such a brand? Because we are a larger brand when we look at things optically.

I will take that question, Apurva.

Yes. Go ahead, Bharat. Yes.

See, I think that's a great question. I mean the simple thing is Araldite is an old, established and iconic brand. Now for us, today, it will take us a certain -- yes, can we win with Fevitite over the longer term? The answer is yes, but it will take a number of years and a great amount of effort. We felt for the price that we are paying for the Araldite brand, it actually accelerates our leadership in that segment. It gives us a brand on which we believe we can build substantially both from a brand as well as a sales and distribution perspective. So we thought the value works for us and, therefore we've gone ahead with Araldite. We will still keep our portfolio of brands. In a sense, it now gives us a full portfolio into one chemistry where we were not leaders, we've become leaders. Otherwise, it probably would have taken us a large number of years to do the same. So really, what we've done is we bought the accelerated position via the acquisition.

Correct. Sir, that's helpful. But sir, if I have to ask you, if you had to quantify the numbers from a capital allocation decision, like we have a solid balance sheet, we can easily afford to achieve this equation. But if one had to look at it from a payback period or from an IRR point of view, what is our internal thought process when it comes to something inorganic or organic, taking this Huntsman transaction into perspective?

You take the Huntsman transaction, we are a conservative management. A lot of -- we now, what I call, your cousins in private equity are paying very large prices. But we believe we work with our internal benchmarks, so as to say, where we can generate a decent IRR. We can generate, in our view, good revenue and cost synergies. If all of that adds up and therefore it makes a substantial difference to us and is much higher than our IRR benchmark, that's when we go ahead. And that's the formula that has worked for us over a number of years. If you look at our successful history on acquisitions, that's our formula. There's no secret to it. And we believe the same applies to this Araldite acquisition.

The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher.

I have a couple of questions mainly on the Huntsman acquisition. The first one being that like the earlier caller also talked about the kind of money which we have paid, and we already have a presence there. So is the size of Araldite bigger than the sales which we have got in these epoxy adhesives? That is my first part of the question. Secondly, is it EBITDA margin-accretive for Pidilite? And thirdly, what will be happening to these intangible assets or goodwill? Will Pidilite be writing it off in the balance sheet? Or will they remain assets?

All yours, Apurva.

Yes. I think the first question you said was in terms of the size? Or what was the first question?

Sir, we are already present in light of -- seeing we are in the sales. So is the size of Araldite bigger than our existing presence over there?

Yes, of course. As we said earlier, Araldite is a strong market leader, iconic brand and a strong market leader. So the sale of Araldite is higher than our brands in this segment. Yes, it is. It is much higher.

Okay. And sir, is it EBITDA margin-accretive?

EBITDA margin, yes, it is a very profitable business, and its EBITDA margin is comparable to Pidilite's EBITDA margins.

Okay. And thirdly, sir, what will happen to the intangible assets which will come along with this acquisition?

So right now, we have acquired the shares of this company. So we have right now invested and bought the shares of the company. So the intangible value remains in that company. And then going forward, we would determine the right structure of it, and that would then determine the write-off of the intangibles. But as of right now, it's a stand-alone company and the investment, it will be shown as an investment in our books.

Okay. So no plans as of now to merge the -- this year, Huntsman into...

As of right now, plan is to run it as an independent entity and to grow it well. And then we will take consideration in terms of what needs to be done. But in short term, we will run it as an independent company, and that is the current plan and thinking.

The next question is a follow-up question from the line of Latika Chopra from JPMorgan.

Just one clarification. You mentioned that you're running at capacity utilization levels with 90% in the beginning. Are there any thoughts of any significant CapEx around the corner?

Yes. So I'll take that. So as you know, we operate with a CapEx in a range of about 4% to 5% of our revenue. So that is going to be the kind of spend that we will have. As we speak, there are almost sort of 9 plants in India, which are right now work in progress. None of these are going to be beyond this range of 4% to 5% of revenue that I mentioned. So all the spends that we will be doing will be within this sort of range. And therefore, that's a continuous process of evaluation of our capacity versus our ability to service. So that process continues. But nothing -- it's not going to be a significant amount of differential spend. I hope that clarifies, Latika.

Yes.

The next question is from the line of Ritesh Shah from Investec.

I'll just continue where I left. Sir, my question specifically was on capital allocation. Now specifically for the Huntsman transaction, if I understood, you said INR 2,100 crores, 35% margins. It would essentially imply, if on no growth basis, we are looking at a 15-year payback, a rough math. Sir, I would like to understand, what are your internal numbers? Or how is your thought process when we go for something inorganic? Again, the question bounces back to we are a solid company brand distribution. We know the market better than probably anybody else on the street. How does one -- how should we justify the multiples that we are paying over here?

Apurva, you want to take that? Or should I give a basic introduction? Hello?

Sorry, my line was on mute. I think, Ritesh, no valuation is done based on a fixed growth basis. So a payback period of 15 years, assuming no growth, would not be right assumption. Certainly, we expect Indian market to grow, we expect our business to grow and we expect growth to accelerate. So we have a proper internal valuation methodology for evaluation of all our acquisition. And we believe that we have done the acquisition at right valuation and having a reasonable growth assumption. And besides that, it is a market leader and it is an iconic brand, which also allows us to have a number of other cost and revenue synergies. So overall, we believe that our valuation has been reasonable. And Bharat, if you want to add to it.

Yes. And Ritesh, I mean, we've always said, even if for a moment, I consider Araldite it will probably fall somewhere between a core and a growth category. But even if I call it a core category, our objective would be to grow it at 1.5x GDP at a minimum and then add on synergies from a revenue point of view. The fact that, obviously, Araldite today, given its limited presence does not reach 2/3 of the places that Pidilite as a company does, is an obvious opportunity. In light of that, we also believe the brand has opportunities. So I think the best time to again revisit this question will be 6 months later when we see where we -- what we are doing with the brand, we've got our arms around it and what we're doing with it.

That's helpful. Sir, just to add, would it be possible for you to scope at what rate is the market growing at? Basically, it will help us understand...

Right now, leave aside the pandemic, the market for this has been growing at between 1 to 1.5x GDP on a regular basis.

Okay. And Araldite would probably have like 1/3 market share?

Probably more than that.

The next question is from the line of Avi Mehta from Macquarie.

Hello? Hello? Sorry. Can you hear me? Hello?

Yes, we can hear you.

Yes. Sir, actually, on the epoxy adhesives market, which is what Araldite is all about, I just want to understand, is the applicator very different from either construction chemicals or the Fevicol kind of key business?

See, there is a certain amount of overlap and there is a certain amount of, for example, the putty contractor when he does stone application, et cetera. It's our waterproofing guys who deal with him, the construction chemicals, he is the consumer. There is a lot of wood-to-wood consumption, which is via the top venture. There is a certain amount of glass and PVC, so on, which is another set of contractors. So I would say there is a fair degree of overlap and there are some newer customers.

So what is done, is my understanding correct that large portion is nonwood in nature, current consumption? Or is that understanding wrong?

That would be correct. A large part of it is still in new construction. The contractor?

No, nonwood, I mentioned. I meant more nonwood for Araldite.

A larger part, nonwood will be greater than wood-to-wood.

Nonwood to wood. And in that context, would it be more of a number or something of that sort that we are kind of comparing?

It is actually all 4. It is the putty contractor, it is the mason, it is the glass fellow, it is the carpenter. It's the granite and stones, stroke tile layer. So it is all of them. Apurva, you want to add?

Yes. I think these are the major user. Also, there is a user like mechanic, auto mechanic, some small handicraft type of industries. But what Bharat said are the major 4 or 5 end user segments.

So where I was coming from is one of our strengths has been to meet this -- we obviously have a very strong brand here, but the handicap or if I may -- if I'm wrong in that understanding, the handicap would be the applicator is quite different. Is that the hurdle that we are going to be kind of focusing on? Or is that understanding incorrect in the first place?

That's not a handicap. But yes, now that we are now approaching him with our formula of handling the applicator, but with the brand that he trusts and has used for years is -- makes it much, much easier.

Okay, sir. Okay. And the second part, sir, is that the understanding that I have at Araldite is operating in the -- from a pricing perspective is at the premium end, and the products are kind of focused on that segment. Would there be a thought of kind of -- Fevicol in contrast has almost completely covered the market in terms of pricing, in terms of usage. Is that an opportunity that currently does exist in Araldite, that's a low-hanging fruit? Is that a fair understanding or no?

It's too early to say, Avi. Give us a little bit of time, let us understand the market, let's understand how we'll play the portfolio game. But yes, as Pidilite, we always make sure that we have a product from each kind of customer. But right now, too early to say how will the portfolio evolve.

Okay. And lastly, sir, see, as you highlighted not just Araldite, but if I'm correct, in contrast, when you had Dr. Fixit, there was a manufacturing footprint that came with it. Is that a big driver over here or not really? And would you kind of look to invest in that? Or how is that, sir?

See, it's not a big driver. We obviously get the know-how and the technology along with it. There are current tollers. But again, remember, we make Fevitite, we made Bluefix. So we know this technology. If we need to invest, we will invest in further manufacturing. But let's -- I think, again, it's a question 6 months down the line.

Thank you. Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Yes. Just on behalf of the Pidilite team, a big thank you to all of you for attending the meeting, and please stay safe. And as we approach the festive season, best wishes to you and your family. Thank you.

Thank you all. Thank you.

Thank you.

Thank you. Ladies... [Audio Gap]