Pidilite Industries Limited (PIDILITIND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pidilite Industries' Earnings Conference Call, hosted by Prabhudas Lilladher Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amnish Aggarwal from Prabhudas Lilladher. Thank you. And over to you, sir.

Yes. Hi, everyone. So on behalf of Prabhudas Lilladher, I welcome you all to the conference call of Pidilite Industries. Today, we are joined by Mr. Bharat Puri, who is the Managing Director of the company; Mr. Sudhanshu Vats, who is the Deputy Managing Director; Mr. Sandeep Batra, who is the Executive Director, Finance, and CFO; and Mr. Sunil Burde, who is the Senior Vice President, Finance and Accounts. So without, you can say, spending further time, I will hand over the dais to the management to take us through the proceedings.

All right. Thank you, Amnish. And good afternoon to all on the call. I take great pleasure in sharing with you a brief commentary on the results for the second quarter, which were approved by the Board at its meeting yesterday. Our stand-alone revenue growth for the quarter was driven by robust underlying volume growth of 8.2%. This growth was broad-based, with the domestic Consumer and Bazaar segment delivering underlying volume growth of 8% and a 4-year CAGR of 14%; and the domestic B2B business growing by UVG of 20%, which translates into a 4-year CAGR of 11%. Growth in rural markets continued to be higher than urban markets. Input prices continued to moderate and suitable price adjustments were done. Stand-alone gross margin percentage in this quarter expanded both sequentially as well as year-on-year. For the quarter, it grew by 230 basis points over the first quarter of this year and by 1,095 basis points over same period last year. VAM consumption in the quarter was around $1,000 a tonne, as compared to $2,500 in the previous year. A significant amount of this is translated into the margin expansion. We continued to remain aggressive in investing behind our brands, with spend on A&SP being 2x of the same period last year. Despite passing on some of the benefit of these lower input costs to customers as well as increased A&SP spend, stand-alone EBITDA margins have improved by 600 basis points over same period last year and by 50 basis points over the first quarter and stand at 23.2%. Our domestic subsidiaries continued to deliver robust sales growth driven by the C&B businesses, and EBITDA margins improved sequentially as well as year-on-year. Our international subsidiaries, excluding Pidilite USA, which is in the process of -- the business is in the process of being wound down, reported modest sales growth despite uncertain global economic conditions, inflation as well as currency devaluation challenges in these countries. EBITDA registered a robust growth, and EBITDA margins improved both sequentially and year-on-year and are now kind of in the double digits. The working capital situation continued to remain healthy, resulting in conversion of most of the profits into cash. As an organization, we remain focused on building a resilient supply chain and investing behind upgradation and setting up of new manufacturing units. In the last quarter, we commissioned 4 new plants, which together with 4 that were commissioned in the prior quarter takes us to 8 new plants in this financial year. We continued to increase our distribution touch points across India, in both urban and rural geographies, along with effective use of digital tools. Very recently, in October, we have commissioned a regional distribution center in Hyderabad for strengthening our supply chain ecosystem. We continue to remain optimistic in the near term with tailwinds coming from the extended festive season, increase in construction activity as well as the government's focus on CapEx. Though input prices are currently stable, we remain watchful of the current geopolitical situation and its impact on input prices as well as global demand. So these were my opening comments. I'm very happy to deep dive into questions that the audience would have. Over to you, Amnish.

Thank you so much, sir -- yes, sir, Amnish? Sir, please go ahead.

Yes, yes. So now I hand over to moderator to start the Q&A.

[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.

I have 2 questions. First is on the domestic consumer, bazaar volume growth of 8% Y-o-Y and 14% 4-year CAGR. Now a lot of your demand comes from discretionary segments like furniture, apparel, footwear, et cetera, which is currently seeing a slowdown, so if you could tell us, the good volume growth you have reported, where this is coming from. And you have also diversified your business significantly over last 4 years, so when you see that 14% CAGR, if you could give us over a 4 year, how has the mix changed over 4 years? Whatever details you can give.

To answer your question. See, as far as the -- first, let's stay with this quarter. And then we'll go to the 4-year picture. As far as this quarter is concerned, really, when you're talking of things like footwear, textiles, et cetera, we are finding a clear trend that, wherever people are based -- that demand is based on overseas demand. That still remains challenged. Domestic industry and domestic demand is quite solid. A large part of this demand comes under our B2B section. So as far as B2C is concerned, actually, our growth is pretty secular across the divisions and therefore across categories and geographies. For us, rural and semiurban is growing faster than urban. And you know and you're pretty much a Pidilite expert. You know that, over the last 3 to 4 years, we've invested substantially behind rural and semiurban. And that is giving us a lot of dividends as we go forward, [ I mean ]. And I can talk about the initiatives in detail if you want me to. On a 4-year picture. If you look at the product mix, you remember we talked about core, growth and pioneer. About 5 years back, core to growth and pioneer was 75, 25. This has slowly and steadily now pretty much become 65, 35. And the way we are going, it will soon become, by the end of the year, probably 60, 40, so a lot of the growth categories are really delivering. I mean, if I wish to give you an example, for example, Araldite: Araldite has grown at a consistent rate of over 20% by volume ever since its acquisition. Now clearly, for us, therefore, that's become a substantial category, if you look at tile adhesives. We started from behind the starting line about 5, 6 years back. We now have 10 plants. That itself tells you where the business has gone. So therefore, our growth businesses and pioneer businesses continue to deliver. The good thing, however, in this is our core businesses are still growing ahead of GDP, so it's not that you've got these new businesses leading the growth. And even if you look at this year or you look at the 4-year period -- think of our flagship, Fevicol. It's still double-digit growth.

That's useful. My second and last question is on the lending business. So 2, 3 key questions there. One is why acquire a promoter group company. And why was this a 0-debt company? And why promoter started this and nothing much happened, it seems; and why you acquired. Why not do it from scratch? That was first question. Second is 50 crores per year, 100 crore 2 years seems too small, so is this a pilot project? And if it is successful, it could be much bigger. You are such a large company with 3,000 crore EBITDA, so 100 crore over 2 years seems too small to have a big business impact. So if you could tell us, what is -- is this pilot, or is this the final amount? And third is no consumer company seems to be doing this. You are known to be out of the box, but why not do third party? What is the big benefit by doing it in house? I understand data access. I understand premiumization. A lot of that could have been done by third-party also. So if you could cover all these points.

Great. Arnab -- sorry. Abneesh, we've been asked these questions a fair amount. See, first and foremost -- I'll answer the smaller part of the question. Just for simple ease of doing business since we had this old NBFC already in the promoter group, we felt the easiest way to, without losing any time, move this forward was to do this. I mean this is not -- has been inactive for a long period of time. You're absolutely right. Pidilite's basic strategy always is to pilot, understand, learn, recalibrate, move on. This is exactly going to be the strategy for this NBFC. Now based on the response we get via the pilot, the -- it will be piloted actually only in one geography. It will not be piloted across the country or any such thing. Once we've got our learnings from the pilot or options are on the table, we intend following an asset-light model, so we will be co-partnering with a lot of other fellows, as far as assets are concerned. Why we want to do this ourselves very simply is, a, we believe one of our strongest assets is the information base. I mean this whole Pidilite ecosystem, be it a carpenter, be it a mason, be it a tile layer, be it a plumbing contractor -- and of course, the whole list of dealers across 6 or 7 different routes to market, from things as diverse as stationery to sanitary, to pipes, to obviously plywood, hardware, paint and various other sectors. We want -- we are the only people who have a history of each of these parties. We know their credit history. We know their buying capacity. We know exactly, in a sense, what they are capable of doing. And therefore, we wanted to keep this in house. This does not mean that in the future we can't have partnerships, but as of now as a start, as a pilot, we would rather do it ourselves. But remember, just to make sure that management does not get distracted, management bandwidth does not get distracted, this is a separate team completely different from the Pidilite team. And once we announce the team, you will see it's a very heavyweight team.

Sure. One follow-up, and that's the last question. So essentially, you have said that this has been a longstanding requirement and demand of the industry, so any other part of the world, any consumer company, not necessarily in your categories, [ does it do it ]? And second is, where do they get currently credit from? And how important is credit for the ecosystem in terms of doing this? Because they also get credit, right? Contractors also do get credit...

Normally, contractors will get credit from the people they buy from. These could be dealers. The -- et cetera. Dealers get credit from companies like us. We also give credit, but what tends to happen, Abneesh, is, especially with the contractor universe, you have these -- all credit, by definition, is lumpy. So suddenly you have a requirement for a short period of time, et cetera, and that impacts their business. In fact, just anecdotally, I was with a set of contractors in Gurgaon last week. And what they were saying is, now when they have a sudden rush because of real estate going up, et cetera, they are struggling because the labor wants money every evening, but their builders are paying them only in like 3 and 6 months. They know the money is going nowhere. And therefore, like [indiscernible] I must tell you, very welcoming of this and says, "Yes. Can we start tomorrow?" So really, the issue is -- and remember we're not looking at big ticket items. We're not looking at large capital spends, et cetera. These are all small ticket spends from -- for an ecosystem that we are fully in control and know a lot about.

[Operator Instructions] The next question is from the line of Arnab Mitra from Goldman Sachs.

Again, my first question was on the lending business itself. So I think there are 2 concerns, essentially, I wanted to -- like, you to address. One is that this is an area where you don't have expertise, which is lending, and it's one of those businesses which can be very cyclical. You can have good years and you can have very bad years, so how does one get comfort around your ability to do this business, in the first place? Second, of course, is what the previous person asked, is that is it that you think lending itself in this segment is a good business. Or there is some rub-off effect you expect on your overall business if this becomes successful. And the third is that, again, lending is a business where it can take a lot of capital in the long run, so are you -- do you have some number in mind that our investments even in the medium term won't cross a certain value or certain percentage of your capital employed?

Great questions, Arnab. See, again to go in the reverse order, first, let's take out the NBFC questions. As far as the team is concerned, you will see that the team that we put in place for running this NBFC -- you will see they're extremely experienced and, I would submit, blue chip team. Just wait until you hear the details. And you'll be clear that we're -- obviously, we are clear that we don't have the expertise. And this is not [ where I've got the second ] Pidilite executives to run this. This is a completely new team and, I will submit, a very competent team. The rest of -- again, now from a capital and our exposure, as I said, post the pilot, we will decide what's the best way forward for this. We are clear that this is not a core business for us. As far -- and there will definitely be some amount of rub-off because, obviously, this ecosystem which already knows us, if we are able to make their lives easier and help them expand their businesses, then there is a rub-off not only via reconnect, via loyalty but also via the kind of products, the premiumization. I mean the link is with the company, but really from the opportunity point of view, we want to test our assumptions via the pilot then be clear. This is, again, an area where we -- once we are clear, "This is the scope. This is what we want to go," maybe at this time next year, we'll come back to you with a firmer plan of where this has to go, but we don't see ourselves [ employing ] a large amount of capital on this. We're going to limit the amount of capital that Pidilite puts here and take it forward from there.

Okay. My second question was on the growth in the -- growth from the pioneering businesses. So one of the key initiatives has been the expansion of PKD stores, where I think you are now at around 10,000 from what you mentioned last time. Now my question was in these villages there are some 10,000 -- is there any demand for outside core products? Or this initiative on distribution into rural is more about Fevicol, the woodworking adhesive business itself? Or is there actually demand even for, let's say, waterproofing, tile adhesives in villages and these small areas where one would ideally expect those to be very, very [indiscernible] in this kind of categories?

See, a, now I must tell you we are rapidly expanding the Pidilite ki Duniya network. We are now actually at 12,000, and we are pretty much adding between 1,000 to 1,500 every quarter. As far as demand is concerned, a lot of times, we may start with the core products, but actually, what we -- or one of the reasons, Arnab, why for us rural and semiurban continues to drive growth at a much higher rate than urban is actually the innovations as well as the new products getting used here. So whether it's waterproofing, base waterproofing; whether it's something like Araldite; surprisingly, tile adhesives, we are actually finding that, in each of these rural areas, these are completely new products. And in most cases, we are the first company to reach these places and actually the first fellows to directly deal with the fellows, so on a consistent basis, we are seeing demand not only from the core products but also from these categories.

Okay, understood. And...

I -- the example I can give you is Araldite. When we took over Araldite, it virtually had no rural sales. It's now slowly and steadily building a strong rural presence for itself.

Got it, got it. And one last question on the quarter itself. So this price, the gap of 4% to 5% between volume growth and value growth in the Consumer and Bazaar domestic business, is this -- given that you may have taken some price corrections, is this likely to continue into the second half till those price [indiscernible] price [ with ] 4% to 5% gap? And the other related question was volume growth. While 8.5%, 8% is a good number, it has slightly slowed down from the 12% you had last quarter. Is there a little bit of an impact of the festive timing here?

So again good questions. Firstly, as far as the, again I'll go in the reverse order, slowdown of growth is concerned, really, in this quarter -- actually, if you see, it was fairly challenging from a physical environment point of view. You had this extremely wet July. We had massive disruptions for 10 [ to ] 15 days, especially in the North. I mean one of our own warehouses was out of action for 7 days because it was like I -- we thought it was in a safe area. It was almost as if it was in the middle of a lake. So we had a fair amount of disruption. And therefore, if I look at the overall growth vis-à-vis the disruptions, it's we don't find any great difference between quarter 1 and quarter 2, while obviously there is a difference in the number, but steadily, it is moving forward. There's no -- it's not that some categories have slowed down, some are slower. We are not so festive oriented and so seasonal. There is some amount of seasonality for us also. The quarter 3 tends to be a big quarter, so having said that, therefore, as far as we are concerned, we're fairly optimistic about -- as long as this geopolitical situation doesn't get out of hand from an oil price point of view, I think the next 2 quarters should also, in a sense, mirror the first half, right?

Will the -- his question was will the volume...

Yes. As far as the volume-value gap is concerned, I think it will take about 6 months to bridge. We are clear that -- offer value to the consumer. And if we are getting the benefit of input prices, we must do that in the form of price adjustments to our customers and therefore the final consumer. The last -- therefore, in my view, it will take another 2 quarters before it actually evens out.

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

Yes. First, a bookkeeping question. What is the difference between domestic Consumer and Bazaar and stand-alone Consumer and Bazaar? And last quarter, I think standalone had a volume -- UVG of 8%, and in domestic at 12%. In this quarter, both are very similar, so just want to understand the -- what is the difference there? And again, on a 4-year basis, when we look at the numbers that we have captured, historically reported, maybe some of the quarters, you reported standalone or only volume. So that 4-year CAGR comes to about 11%. So a request if you could -- in the next quarter, in a presentation, if you can have a time series data of the past few quarters, either domestic or standalone, something that is consistent UVG and -- yes. So that's the first question, in terms of what is the difference. And then I'll have...

Yes. So the difference is basically the exports that we do from India of Consumer and Bazaar products. They get exported to many geographies, Middle East, Africa and such like. And exports both of B2B and of Consumer and Bazaar have been challenged for the last few quarters. We did see a small recovery in this quarter. So exports also were in the positive -- of Consumer and Bazaar products were also in the positive territory. So the difference between domestic Consumer and Bazaar is, a, the exports that we do. And at a consolidated level, the Consumer and Bazaar would also include sales of ICA and -- Pidilite ICA and a couple of the other units that we have outside Pidilite which serve the domestic Consumer and Bazaar segment, but your point is well noted, Jay, that in the next quarter, we will share historical data so that the definitions and the numbers are comparable.

Second is what is the cumulative price cut that you have sort of taken, so far, at a portfolio level over the last 6 months or maybe 9 months from the peak pricing.

Just 1 second...

See, that's a very difficult question because, remember, pricing across, say for example, woodworking adhesives is very different, across the waterproofing range. It's difficult -- consumer products. So weighted average is different, but at a gross level, it will be about -- close to about 3%.

Yes, understood. And will there be further price reductions or price cuts? I mean I heard your response to Arnab's earlier question, but I'm assuming that has more to do with the base effect. But are you going to further cut prices? Or do you think at the -- based on the commodity prices right now, this level is a right level to be?

Based on the commodity prices, this seems appropriate, but if we again get some windfalls, so on, so forth, we don't -- we are clear that our focus will remain on underlying volume growth, keep pushing the volumes. We know that we will recover the values as time goes by, so if there is some further reduction in input prices, we see some other -- some more opportunities, we will do that because finally we must offer value to the consumer at the right margin.

Sure. And final one: I read the press release about doubling of A&P spend. So that kind of explains the high -- increase in other expenses to a large extent, but employee costs are up about 20% both at a stand-alone and a consol level, so I just want to know. Are these investments in the decorative paints initiatives? Or are these investments in the rural penetration that you earlier talked about? Because employee costs had come off as a percentage of sales during COVID, but it seems to have gone up to a pre-pandemic level, so...

See, this is basically 3 things, Jay. One is, clearly, we are investing for the future. I mean, just to give you a perspective: We put up, in the last 18 months, 12 new plants, right? It will take time before they reach capacity. And they're obviously manned at a certain level, so therefore, a, it is investments in the future. B, it is definite investment in new categories. As categories grow, the growth in pioneer categories grow. My definition, pioneer categories are front loaded in terms of people investments and the return comes back a little later. And therefore, that's the second thing. The third is, last year -- please remember that inflation was also high. And therefore, the overall increases across industry have been high. And since value growth are not high, the number is, in a sense, reflecting, but it will -- it's nothing out of the ordinary.

The next question is from the line of Latika Chopra from JPMorgan.

My first questions are just again clarifying on this volume-value gap. Do we expect this to moderate as you progress through second half of the fiscal? Is that the fair understanding?

Latika, Sandeep here. So I think we took our -- just to give you some data points. I think our last price increase last year was in the second quarter, so after second quarter, we did not take any price increase. The first reduction that we did in pricing was around the end of March, so to that extent, yes, whatever has been the price adjustment in the second quarter kind of would remain for the rest of the year. And the second quarter price adjustment, while for the first half it was 3% reduction, for the second quarter was 5%. And that certainly will continue for the next couple of quarters, but as things stand on the input cost front, we are not looking at any additional price adjustments as of now.

Sure. And you mentioned, I think, the WAM (sic) [ VAM ] consumption price of $1,000, if I'm not mistaken. And does that imply that there's a very good gross margin progression that we are witnessing now? So this should continue to improve through remaining part of the year, so we probably -- you're already at 22% margins in this quarter. I understand the range is 20%, 24%, but hopefully, we should be on the higher side of this unless you see firming up of raw material prices in a significant manner.

Latika, we're already actually seeing some amount of firming up, as far as VAM is concerned. It has started to go up a little. We're comfortable right now from the -- for the extent of the increase because we would expect it to remain in a range and it's within our range. From -- therefore, from a margin point of view, we will stick to 20% to 24%. Let's see how it actually pans out. We will continue to invest behind the volume growth rather than worry about the margin going higher.

Sure. And then the last bit was any comments or any updates you would want to share on your paints foray.

Sure. Again, Latika, you know this as well as I do. All big companies, when we do something new, everything is a great success for the first 3, 4 months, so give us -- as we said, this is a pilot which we will take 6 months to come back on. Give us till the first quarter of the calendar year. Then it will be clear where we are. How are repurchase rates, so on, so forth? Right now we're, so as to say, in the, still, what I would say launch or a little post-launch state, so there's a lot of excitement in the field, but I would wait to declare success maybe 4 to 6 -- maybe 4 months later.

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

Congrats on a good set of numbers. My first question is on this Pidilite ki Duniya; these 10,000, 12,000 outlets that you have. How much do they contribute to your turnover?

See. Let's just say, to our rural turnover, these are what I will say a good investment. I won't like to go into the numbers of exact numbers, so on, so forth, but obviously, they're at 12,000 and they are slowly and steadily moving up. This is an initiative that is working for us.

And are these purely Pidilite products? Or this is like a branded store where Pidilite is more visible, but there might also be some other company products also in them.

No. It's definitely a branded Pidilite store which may have different -- remember, as you go to these villages, the shop tends to keep everything, from hawai chappals to Fevicol, so they will have a lot of other products, but a lot of times, our experience per se is that in the home improvement category they may have other products, but we are normally probably one of the few companies that reaches directly.

Right, right. And what exactly is the sort of channel here? These people who run the stores, I'm sure they are the village entrepreneurs and then you supply them directly from the depot. Is that how it works?

We supply them via a distributor network. And what we do is we normally have a 2-member team which is a demand generation cum servicing team and which helps the village entrepreneur also learn and develop demand for the product so that it gives them regular rotation. It's a completely stand-alone team.

Understood, understood. And in your experience, do most of these 10,000, 12,000 stores sort of make decent ROI for the entrepreneur? Or do you have to sort of give an additional support to him over and above the normal terms of trade for him to make an ROI?

See, in India, all the entrepreneurs are smart at making the ROI. We don't give [ additional ] incentives and so on. We may spend more in terms of training, so on and so on, but we don't give extra margins and so on. Automatically, they find their own level and they will reach a certain rotation. And remember these guys, again, stock a vast variety of products, so therefore, it depends on what's the variety of products the person has.

Right. And last question on this Pidilite ki Duniya. Is that -- on an average, what would be the [ pop strata ] of these towns or villages in which these 10,000, 12,000 outlets are there?

Basically between 5,000 and 10,000.

Okay. Okay. Second question. Again, I know this was asked by the previous participant, but on paints, I just wanted to know. Which are the states in which you are running the pilot currently?

AP, Telangana and Orissa.

And...

In AP, Telangana and Orissa, only in towns with a population of below 50,000.

Okay, okay. And to the extent you feel comfortable, can you tell me, what is your sort of take on the paints initiative, in the sense that what are you going to do in order to sort of differentiate yourself or win in the market? Is it going to be mainly a small town? Or is it going to be mainly in the low-end business? Even within the low end, I'm sure a lot of the top players still have a fairly wide range, even in the low end, so really what's here for a consumer or a contractor to choose Pidilite's products over some of the more established names?

Percy, what I would request is give us 3 months. And we'll give you all the answers. Right now we're quietly -- and like the proverbial duck, we are paddling under the water. Let's keep paddling for some time before we give you the answers.

The next question is from the line of Tejash Shah from Spark Capital.

Sir, you spoke about rural or non-urban doing very well for us relatively, but there's no consensus, if we pick up from other players this time and then consumer companies, on rural growth, so just wanted to know. Is it an outcome of -- you also spoke about the distribution initiatives that we have taken in last 24 months. Do you think it is largely an outcome of that? Or the rural demand itself was very -- relatively better for the industry at large.

See, I think what we have to distinguish in our case is, as far as Pidilite is concerned, we don't have any items -- or very few items of mass consumption, so in our case, we have to first create the demand, educate the user. And this is a process we've been at for 3 to 4 years. Our products also from a perspective of usage tend to be middle class and above. Lower middle class and above is how I would put it, so I will say it's a mix of both things. It is also innovation across the newer categories that we've put into rural areas. We've done specific work on innovation in rural and semiurban. And also, as far as construction is concerned -- and you will see this even via cement sales and so on, even accounting for the boom in infrastructure. We are not finding demand as much. While it could be better, and we would all want it to be better, it's not depressed, as far as our sector is concerned.

Got it. And you also spoke about Araldite doing very well in rural, so was just wondering. Before we took Araldite to rural markets, were they not using this product at all or any substitute product? Or were they using anything from our own portfolio of Fevicol and now they have moved to Araldite?

See, a lot of them didn't realize that a lot of stuff -- when you want to create an unbreakable bond, there is a solution available, okay? So actually, a lot of times, you were competing against non-usage, right? You just assume that there is not a solution possible. Also, in some of the markets like Gujarat, UP, Madhya Pradesh, companies like Astral were stronger in the rural network. And Araldite, being a Huntsman product, was not there, so I suspect there's also some element of market share gain.

Got it. Got it. Sir, second question is on competitive intensity in waterproofing. So all paint players are kind of -- have made foray in last 2 years. And they all are kind of sharing -- initially they are sharing very good traction there on the respective earning calls, so I just wanted to understand from you as an industry leader. How are you seeing competitive landscape shaping up? And is there any pressure point building in terms of pricing or shelf space war?

See, as far as waterproofing is concerned, you are absolutely right that every single paint company has moved into the space. The cement companies are also moving into -- have not -- are moving, are in the space, but what we are finding is, given the large causal market that exists because -- where people were not using waterproofing, the market has started growing at a faster pace. Plus, a lot of these people tend to be -- to be fair, if I was to say, listen, [ as far as waterproofing ] is concerned, of the paint companies, I think, at best, 2 of them are making any substantial headwind. And that is also largely in the repainting and renovation segment, not in the new construction segment. When I look at my growth rates, whether it be in this quarter, this first half or the last 4 years, for us, waterproofing continues to be a strong driver of growth. Now the market is also growing, but I don't believe in any way we are losing share. So in a sense, it's helping the market grow faster. Our, obviously, emphasis therefore keeps on, a, building our brand -- c, making sure that we innovate more than the others; and d, that our route to market also keeps expanding rapidly. Remember there is also a substantial route to market which is nonpaint in waterproofing.

Got it. And sir, last one, if I may. So we have a now tail of pilot projects. I won't call it long tail yet but a tail of pilot projects like paints and now lending business, which are very execution-heavy business. So for example, lending, we call it lending, but it is more of a collection business, so you need a lot of feet on street. And paints also, it's supply chain heavy. So we don't have dearth of financial capital, for sure, because of very good cash flow, but how are we going about the managerial or execution capital which we'll need on the ground to kind of see some scale in all these businesses?

See, one is remember -- as I told you, remember, in -- first, let me separate the 2 businesses. The lending business is going to be a stand-alone business not drawing upon any Pidilite resources in a substantial fashion in any way of Pidilite people, so on, so forth, et cetera, right? So -- and therefore -- and based on its requirement, we will look at it; study from the pilot; come back and tell you fellows, in 6 to 9 months in the pilot, how it's worked and therefore whether the business model needs tweaking; and how it is going to go forward. As far as paint is concerned, remember we are already in the channel. As I told you, one of the reasons why we got into paint was that we were already servicing these dealers. And they were saying, "Listen. To just complete the range, we have to go to another company. Why don't you come to us?" So actually, for us, paint is not manpower accretive. I mean in all of these towns we already have people. Remember -- in the small towns, why have we gone into the smaller towns first? This is normally counterintuitive. Every other company goes to the large cities first. We've gone to the smaller towns first because the outlet is common. We are already servicing the outlet. We already have a relationship with the outlet, and therefore, we are building from there onwards. And therefore, for us, the accretive manpower will only be around education and demand generation, not around servicing the trade.

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

A couple of questions. Sir, first question is very simple. When we look at incentives or basically rewards for carpenters or influencers, what is the typical tenure? Is it less than 12 months? Or does it extend for over 2 years, 3 years?

See, what happens, Ritesh, is it depends on the size of the carpentry contractor, but a lot of fellows like to bank points for a large period of time so they can get a more substantial gift. I mean somebody wants a motorcycle. Somebody wants -- at times, fellows want something, so it's not fixed, but the relationship is a long-term relationship.

Sir, would it be possible for you to quantify, sir, what percentage of the rewards is less than 12 months? So 60% is usually 12 months, 40% over next 2 years. The reason why I ask is, sir, I just wanted to understand on the accounting side. When we report the revenue number, is it net of incentives? Or there is something, there's a bucket that sits in the working capital. And as it stands [ and realized ], it gets adjusted on the top line because it will have implication on both working capital as well as margins.

So it has no implication on working capital. We recognize these and they get netted off from sales, so our sales number is net of whatever contractor reward program we would have run. Typically, the life -- these are all today digital. Nobody puts any physical tokens. And generally, the token or the QR code or whatever is -- has a life of about 3 years.

Okay, but we will recognize as -- so if I'm a carpenter, if I get something, if I buy something big, immediately the company will recognize it. And that's the net revenue that we look at. Is that the right way to understand that?

Yes, yes.

We follow the appropriate revenue matching concept, yes.

Okay, that's helpful...

I mean our -- yes, yes. I mean our accounts are reviewed by reputed auditors, so rest assured that we will follow accounting policies which are acceptable to the auditors, right?

Yes. Sir, the reason to ask that question is there are a few other listed companies which do not do so. So obviously, we looked at -- you're a gold standard, so I just wanted to check that. Sir, my second question is on Araldite. You did indicate around 12% volume CAGR since acquisition. You also indicated there could be some market share gain. Sir, is it possible to give some numbers? I think, at the time of the acquisition, you had given [ a proxy ] around INR 1,200 crores to INR 1,500 crores. And I think Araldite at that point in time was around 400 crores, so can you give some numbers over here? Have you recouped the INR 2,100 crores, I think, that was the amount which was paid? [ How should we look at this ]?

What I can tell you very safely, Ritesh, is 2 things. One is, prior to the acquisition of Araldite when Huntsman owned the brand, their average growth rate of the brand was in a volume sense between 6% to 8%. Ever since we have acquired the brand, on volumes, we have grown the brand in excess of 20%. The second thing, which again to answer your question, therefore, when we had done the acquisition and made an acquisition case, we are beating the acquisition case by a long -- by a large amount, by a large measure. And therefore, it is something that has worked very well for us.

Sure. And sir, would it be possible for you to quantify on the market share gains that you indicated?

It's very difficult because we did not know the size of the rural markets as we have gone in, so I would say we have -- if you look at, for example, in this business, pretty much, we have one big and a few small competitors, the big competitor being Astral [indiscernible]. And you can see that their adhesives have been fairly stunted ever since Araldite has come, so I suspect there is an impact there, but we have also helped in expanding the market substantially in small towns and rural.

Sure. Sir, that is helpful. Sir, just I had 2 follow-ups. Sir, would it be possible for you to qualify PVA as a segment, what percentage of it's -- that's in retail versus joinery and how the trends have been recently? And how do you see this going forward?

See. This is a question that keeps getting asked. The fascinating thing in India is, while joineries are growing faster than the retail business, they offer very -- so I -- 10 years back, we did a study. And we were under the assumption that, at that point of time, the market was 90% on site; and 10% off site, which is in joineries. This will -- the assumption then which a set of consultants made was 70%, 30%. Frankly, 10 years later, it is still 85%, 15%, so it's -- I mean, while joinery is growing, I mean, remember in large parts of India, minus the metros, people still prefer to get the furniture handmade at home.

Correct. And sir, for us, how would the mix be like? Will it reflect more of industry benchmarks? Or is it something more on the retail side [ as presumed ]?

No. Actually, the good thing is we are leaders in joinery and we are leaders in retail, in both. So in our case, we made sure that in both cases we lead.

Sure. And sir, lastly, would it be possible for you to some -- provide some color on waterproofing? What have been the trends like, market sizing, where we are, if possible, any numbers? That would be really helpful, sir.

See, it's very difficult, Ritesh, to put market sizing because every paints company keeps adding all exterior paints to waterproofing and adding a lot of paints to waterproofing, coatings. Some of it is used for waterproofing, some of it used for painting. And there's a space in the middle which could be common between the two, so it's very difficult to estimate the size of the waterproofing market. Given our estimates, what we are seeing, we would say, for example, that the market is definitely growing in double digits. The market is growing. Anywhere between, I would say, 10% to even 12%, 13% by volume is our estimate currently; and it is growing at all 3 levels. It's growing large at the institutional level because -- as more organized buildings, factories, large commercial complexes, hotels are coming up. That's a large segment. It's growing substantially in individual housing, which is new construction. And it's also going in repair and renovation. In each of the three, competitors tend to be different. In the large institutional space, the competitors are mainly the multinationals of Sika and Fosroc. In the new construction space, a lot of times, we will compete with the cement companies or the similar Fosrocs of the world. In the repair and renovation, the competition would be with the paint companies. Now -- so that is therefore difficult to ascertain across. I would say that, over a 3- to 4-year period, the market has grown substantially. And the fastest part of the market probably is right now the new construction.

Right. So sir, if I have to put it the other way around, how would we gauge our success in waterproofing? Like are we beating the market growth rates by a significant margin? What's the benchmark that you use to gauge...

Our benchmark is simply we must grow faster than the market across all 3 segments.

The next question is from the line of Sachee Trivedi from Trident Capital Investment.

One of my question is that, the last 4 quarters, we have been growing top line in single digits. And I understand you've been taking pricing cuts. And the prior 4 quarters, we were growing double digits, and that was more because we were taking price increases. And I'm just -- going forward, I mean, what should we expect in terms of top line growth? And can we go back to steady double-digit numbers that are based on volume growth rather than the pricing ups and downs that we have seen in the past couple of years?

See, Sachee, I think that's a great question. If you look at our 4-year CAGR, you would see on a revenue basis it is double digit. And on a volume basis, it is close to double digit. You will have these ups and downs because of this extreme volatility that we've had in raw material prices. We saw VAM touch $2,500 a tonne, and it's now $950 a tonne. So really it's these -- but if I equalize over a 4-year period, we clearly believe that, again both from a revenue and a volume perspective, our objective is grow volumes double digits; hopefully, premiumize, improve mix a little bit and therefore also grow value at a little above the volume. That would be our steady state if life was a lot more even. That's what we would be aiming for, so right now, for example, our focus is to get from our current volume growth to double-digit volume growth. We believe, in the next 3 to 6 months, the value will start coming back. And we will be well positioned because, again, we would have added another a few hundred thousand tonnes to our volume.

Got it. Actually, I mean, I'm glad you pointed out the 4-year numbers because the 4-year numbers, whether I look at Q2 versus the 4-year prior Q2 or H1 versus the 4-year prior H1 -- and those numbers are like on a 15% CAGR. We do, I think, believe that we can grow 1.5x to 2x, kind of, of GDP. And these numbers, at least on a nominal GDP, seem shy of that, so how should we think about the growth correlation with the GDP of the overall...

I would definitely say that there would be 1.5x volume of real GDP. And when we track us -- actually, we have done this thing around -- over the last 10 years. Almost on a consistent basis, we have beaten the 1.5x real GDP, on volume. Value, we've had so many ups and downs, whether it be the GST; before that, demonetization. Then we had the COVID issue; then Russia, Ukraine, so the best thing is -- to do is see it over a longer period of time. A, I would submit, in the whole home improvement sector, still from a volume and possibly revenue, we will be in the top quartile and maintaining profitability at very healthy levels.

Okay. And in one of your comments you mentioned that where you are seeing sort of pickup or growth is in the new construction kind of space. Now I think, again going back a few years, I mean, you said that if the -- both the new construction and the renovation, if both of those engines fired, then you kind of look at very strong volume and value gains from there. And what would it take to -- or what is holding back the renovation? Because I thought like new construction was the harder one, right, and renovation was the regular one that keeps going.

See. I think your guess is as good as mine, but this famous rural slowdown, I mean, it has -- post COVID, there has been a bit of a K-shaped recovery. And I suspect, for life to be good for all of us, it has -- from K, it has to become a hockey stick.

Yes, yes, but you don't -- I mean you mentioned in the call that your target segment is the lower to upper for -- lower middle class and above, so you are in the better part of the K, isn't it?

Without a doubt, which is why if you notice vis-à-vis -- I also head CII's FMCG committee. And it's, when I'm speaking to them, for them, like, 8% volume is a massive movement forward because most people are struggling between 0 and 3% or 4% largely because of again this "items of mass consumption" suffering. And it's not that demand for the rest has been buoyant across large parts of the country, but I would say, if I was to take a step back, Sachee -- what is our goal? It is double-digit volume growth and, hopefully, with a certain amount of premiumization, better mix, innovation that is [ more ] at the top end, improving value to a larger -- and inflation, hopefully, will come back stably to around 3% to 4%.

The last question is from the line of Jay Doshi from Kotak.

Bharat, you mentioned about the new construction is growing the fastest, so what is your reading of we are seeing a real estate up cycle? And normally, in such times, you tend to benefit. What is your reading of -- what is the benefit that you're seeing in the business? Does it come with a lag, so you expect more sort of a traction in some of your businesses that are linked to new construction going forward? Or right now you -- the numbers that you're reporting already captures that. And finally, as I -- as per my understanding, there are 3 legs. One is the urban real estate -- residential real estate. One is commercial. And the third is independent housing units in small towns, so what's the growth or traction or activity you're seeing in each of these segments? So broader overview of this.

Sure. See, what we are seeing is clearly organized real estate. See, frankly, individual housing in the towns has not suffered a large amount, except during COVID. That has been one segment that has held up well. It's residential real estate in the 10-lakh-plus towns, especially the organized real estate. We tend to see, Jay, an impact which happens -- between, I would say, 2 to 4 years, depending on the project completion, is when -- because a large part of our products, with the exception of new construction waterproofing, all come into substantial play when the flats are at a finishing level. So if now you see a lot of new announcements, you will see our demand start peaking 18 to 24 months, depending on the construction cycle. So given the current situation where, fortunately, also there were a lot of unfinished or unsold flats that are getting sold, you are beginning to see the up, but hopefully -- if this -- you -- these new announcements and therefore new starts continue, you will see good movement forward. Really, the area we are also very hopeful about is the commercial real estate and factories because, if -- manufacturing 2.0 or China Plus One, whatever you call it, if that was to come, that again becomes a substantial driver of growth because a large part of these buildings all use sophisticated products and, therefore, we find a benefit. I mean, just to give you an example: Samsung built this big factory in Noida. Kia built this big factory in Andhra Pradesh. All of these are waterproofed by us. I mean, if you have the second manufacturing boom, then again that tends to benefit, but let's wait and see.

That's very helpful. One just last final one: Do you have a playbook to penetrate into renovation, repair part of waterproofing; the painter-led route to market? Do you have a playbook there? Or it's still sort of...

Yes, absolutely. We have a playbook. In fact, we have a substantial presence there. We -- a, remember that in that area also we have a playbook. We have a set of products. We have again a whole -- we have a dealer network across the country, so yes, we obviously play there. As I said, that's an area where the competition is paint companies, whereas in new construction, it tends to be others. In commercial real estate, it tends to be a third lot, but we play across all three.

Thank you so much. As there are no further questions from the participants, I would now hand the conference over to the management for the closing comments.

Thank you very much. I have no closing comments other than wishing all the participants and their families all the best for the Diwali and the festive season. Stay safe. And we'll connect again in the new year, after the third quarter numbers.

Thank you, everybody; wishing all of you, your families a very happy Diwali. Hopefully, have a restful break. And see you in the end of the third quarter.

Thank you very much. On behalf of Prabhudas Lilladher Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.