Prince Pipes and Fittings Limited (PRINCEPIPE) Earnings Call Transcript & Summary

Thank you, Bilal. Good evening, everyone. On behalf of Reliance Securities, I welcome all for the conference call of Prince Pipes and Fittings to discuss 4Q FY '20 results and industry trends. From the management, we have Mr. Parag Chheda, Executive Director of the company; Mr. Nihar Chheda, AVP Strategy; Mr. Shyam Sharda, who is the VP and Group CFO. Good evening, gentlemen. First of all, thanks very much for giving us opportunity for hosting this call. I will just request you if you can just share the current quarter results and also the trend in the industry, then we can follow up with the question-and-answer session. Over to you, sir. Please, go ahead.

Yes. Thank you so much, and hello, everyone. A very warm good evening to all. Thanks for joining us for the quarter 4 FY '20 earnings call. We hope you and your family are safe and healthy during these challenging times. The press release has been issued to the stock exchanges and uploaded on the company website. I hope you all have got a chance to go through our performance. Firstly, I'm very excited to welcome Mr. Rajendra Gogri, Chairman and MD, Aarti Industries and Mr. Satish Chavva, Investment Director of Oman India Joint Investment Fund to our Board. The company is ready for their strategic value addition and direction as we embark on our next chapter of growth. Let me now give you a perspective on strategy before I hand it over to Shyam, my CFO, who will walk you through the fiscal performance. As you are aware that the COVID-led lockdown has had a major impact on the economy a large as a result of which, we have lost out on a significant of our March sales, which is a peak month of dispatches for Prince. However, we've had a solid performance during the months of January and February where we had a 16% value growth year-on-year, which has mitigated the lockdown impact on the overall quarter 4 performance, resulting in a degrowth of 14%. Prince was one of the first few companies to restart dispatches from our facilities post partial lifting of the lockdown. This not only helped us liquidate our inventory at plants, but also helped us penetrate the market effectively being one of the first movers in opening up our value chain. I would like to highlight that we've had a manufacturing excellence and safety function at each plant for more than 6 years now, which helped us hit the ground running during the COVID era of plant activities. As a result of being able to liquidate our finished goods inventories at the plant level, we were able to ramp up our production at a decent pace to timely fulfill our orders from the trade. Hence, we operated at about 40% utilization level in the month of May, which is better than I would have envisaged. Once again, our execution intent and hunger for growth, coupled with systematic approach to business has set us apart from our competition. Moving on in our war against COVID, we wanted to go beyond just educating. We wanted to make a meaningful contribution to society we hit upon an innovative idea, a contactless sanitizer made of Prince Pipes and Fittings. This product has been named as SANIFIT. We have been the first mover in not only innovating this product, but also scaling it up. We've taken the various steps across the nation. Firstly, we introduced hand sanitizer and hands-free pedal pushing sanitizing dispensing units under the SNIFIT brand. Secondly, all models extensively tested for durability and effective usage. Thirdly, order received from the defense establishment and shipped the first batch to their southern facility. Fourth, products in process of evaluation by one of the largest FMCG company shortly would supply a large quantity towards their rural outreach program. Lastly, as a part of our CSR initiative distributed these units to various government departments and hospitals across the country. I'm also very pleased to announce that we have expanded our product portfolio and entered the vertical of storage tanks. Unlike our peers, Prince there's always been a pure-play pipes and fittings manufacturer. Our core strength has been Prince's B2C and retail pull. We wanted to encash on this B2C pull via extensive rain selling. We have been very selective and conservative in making an inline product portfolio expansion. Storage tanks hit the sweet spot of 2 things Prince knows well. First, plastics; and second, building materials. I believe that we can use our current distribution network to scale up the storage tanks business. Storage tanks will be sold in the same distribution and retail network as pipes. Hence, we will not have to spend major time and mind share in building a new distribution model, which could have been an uphill task. Therefore, I strongly believe that storage tanks is the perfect fit for Prince. Moving on to the client industry metrics. The market size, we estimate, is about INR 4,000 crores. The organized to the unorganized split is 35 to 65. As you are all aware, it was primarily one national brand ruling this market, which has been having certain challenges and constraints currently. The rest of the market is largely fragmented via regional players since logistics costs is a significant part of the cost structure in the tank industry. I strongly believe that our strategic manufacturing network spread across 6 different locations in India will help us penetrate the market effectively. I also think this industry is waiting for national player with a robust distribution and manufacturing network to leverage the muscle of our brand power. To conclude, we will not put pressure on immediate volume growth. Instead, we will focus on providing a premium product and use quality and brand power to establish our place as a market leader in the long term. In fact, we have received very encouraging and exciting feedback on our product quality from our first dispatches into the Gujarat market. This strategy of focusing on a premium product combined with a fierce distribution network has made us a force to reckon with in the piping segment, and we will stay true to this approach in tanks as well. It is my strong belief that this approach is more sustainable since we have our eyes on long-term value creation. Moving on our strategy of winning in many Indias continues to be as effective. Our distribution network spread across urban, Tier II, Tier III as well as rural India has been a major reason for sale, especially in the COVID era. Along with this robust distribution network, our strong brand power across different applications like plumbing, sewage, agriculture, underground drainage and borewell has actually helped us drive in such a challenging global scenario. All 6 in-house manufacturing facilities and our outsourcing units have scaled up production. This demand was initially led by agri products, which has been a major demand driver. Next, the momentum was followed by green shoots of demand for the housing segment, which includes CPVC as well as PVC pipes in the plumbing segment and SWR pipes used for the drainage purpose in domestic application. This housing demand has primarily emerged from semi-urban and rural markets. In such times, our exposure to semi-urban and rural India has helped us differentiate ourselves from our peers. We continue to bolster our strategy of winning in many Indias. Lastly, I would like to reiterate that though we lost out on approximately INR 120 crores to INR 130 crores of sales that would have not only contributed to our top line, but also improve our margins. Having said that, despite this loss of sales, we have broadly met our guidance on EBITDA and net margin. As we continue our debut on the capital markets, we intend to be a conservative and transparent organization. I'm glad that even in the face of COVID-19, Prince as well as our peers have shown strong signs of recovery. Thank you all for your time and mind share. I shall now hand over to Shyam to walk you all through the fiscal performance. Thank you once again.

Thanks, Parag Bhai, and good evening, friends. I will quickly take you through the numbers of the results under review for Q4 financial year '20 vis-à-vis Q4 financial year '19. We are all aware that there was a challenging economic scenario on account of the COVID lockdown in the second half of March '20. Further, it is known that in our business, March is a very critical period and so is the case with us. Revenue from operations degrew by 14% to INR 431 crores vis-à-vis INR 499 crores. The volume degrew by around 16% to 33,140 metric tons vis-à-vis 39,641 tonne. January and February '20 sales grew by 16% and the volume by 10%. However, the March sales was impacted due to lockdown, which led to an overall degrowth, which was mitigated by the robust performance for the month of January and February. The onetime duty hit of INR 7.65 crores was accounted for in this quarter, which was paid in the previous quarters. Q4 financial year '20 EBITDA with the impact of ADD is at INR 57.6 crores with an EBITDA margin of 13.4%, while Q4 financial year '20 EBITDA adjusted without ADD would have been INR 65.3 crores, translating to a margin of 15.2%. Despite this, we were able to deliver a robust EBITDA highlighting the inherent strength of our business model. EBITDA at INR 57.6 crores vis-à-vis INR 58.3 crores indicates margin improvement by 169 bps to 13.4% vis-à-vis 11.7% during the corresponding period. EBITDA improvement due to the better product mix, depreciation has increased largely due to commissioning of the Jaipur plant and other CapEx. Finance cost has got reduced due to repayment of long-term debt during the quarter. PAT ] is at INR 28.3 crores vis-à-vis INR 29.9 crore during the corresponding period. Now I will run past year-on-year number for financial year '20 vis-à-vis '19. Despite a challenging environment, we have managed to deliver healthy performance overall. Revenue from operations has grown by around 4% to INR 1,635 crores vis-à-vis INR 1,571 crores during the corresponding period. The volumes have grown by around 3% at 132,816 metric tonne vis-à-vis 129,111 metric tonne during the corresponding period. April to February, the 11-month period, the value growth was at around 13%, and the volume growth was 11%. Despite the March '20 impact, we were able to deliver overall growth. EBITDA has grown by around 25% to INR 229 crores vis-à-vis INR 184 crores, indicating an improvement by around 2.28% to around 14%. This is mainly on account of favorable product mix, better pricing power and the production efficiency and effective cost control measures. CapEx stood at INR 175-odd crores, of which around INR 112 crores was towards our Jaipur plant. The term loan was INR 151 crores in the previous year and is now at INR 56 crores, which indicates a reduction of INR 95 crores, which is quite substantial. This reduction was owing to repayment to our IPO proceeds and internal accruals. The total debt at present is INR 261 crores. The gross debt to equity is at 0.31x. Our debtor days have shown improvement from 58 days to 40 days owing to the disciplined debtors management. Working capital is at 58 days, which is an increase largely owing to the higher inventory days due to lockdown in March '20. However, this inventory helped us an effective market penetration in May 2020. On our credit rating, we have moved to A family owing to our overall financial performance. Our long-term facilities have improved to A- from BBB+ and short-term facilities have improved from A to A2+. With this, we would like to open the floor for Q&A, and would be happy to answer all your queries. Thank you.

[Operator Instructions] We have the first question from the line of Rajesh Kothari from Alfa Equity Advisors.

First of all, congratulations for good set of numbers in such a challenging time.

Thank you so much.

My first question is, can you give some color in terms of the new business, what you're planning the tank business. You said that you have a strategic location. So will it be manufactured across from all your across plants? And how do you see in terms of year 1 and year 2 and year 3 slowly steadily? How do you plan to ramp up that business? That's question number one. My question number 2 is on pipe business. If you can give you insights on your margin inventory, of course, is very high because of the lockdown maybe, so may be you can explain on that? And considering there was a significant oil and the raw material price volatity, do you think any hit in first quarter because we are almost near to end of first quarter? And then last but not least, the question is on overall outlook. What is the current capacity utilization? And how do you see the ramp up in 2Q and 3Q?

Yes. Thank you for your question, Rajesh Bhai. So if -- I'll answer the point wise. The first one was on the tank business. So like we said, I think 35% of the business is organized, 65% is unorganized. It's largely the fragmented players who are in the market because of the logistics cost. We are very clear that we don't want to do multiple product diversifications. We want to stay true to our core products, which will be pipe fitting and now tanks. So it's very important for us to scale up the tank business to a Pan India level. So number one, yes, we will be a Pan India tank player. We have started from our Dadra unit to do some test marketing in the Gujarat market. And like Parag Bhai mentioned in his opening remarks, the initial feedback on quality is very, very exciting. So we plan to then scale it up. We've already devised a plan in terms of what next markets, which we will be revealing soon. So we will become a Pan India player. We think that there is a vacuum in the market today because there was obviously one national brand who was ruling that market. And we feel like we have the distribution network along with the manufacturing network to really become efficient as far as logistics costs are concerned. And really use a similar approach to our camping strategy, which is, one, to have multiple locations to become efficient in terms of supply chain and then have a very strong focus on giving a quality product to the market. And we feel like we can replicate strategy very well in tanks. This, I think, is a very sustainable approach towards creating long-term value. So that was your question on tanks. Second, margin.

So basically, in terms of EBITDA margin and in terms of return on capital employed, this time business will be accretive -- further accretive to your EBITDA margins? Or it will be lighter [indiscernible]?

So while it is too early to really comment on margins, what I can give you a direction thought process is, we are getting a healthier margin in banks than in our current business of pipe fitting. So on a margin front, it is more lucrative is what the initial reading is, which is why we have ventured into it. While like Parag Bhai again mentioned in his opening speech, I don't think we're trying to make it into a volume game. We want to come as a premium player, as a quality player. So we will not put too much pressure on volume growth from day 1. We have our eyes, like I said, on long-term value creation. So that's as far as tanks are concerned. Second, I think was your -- I'm sorry.

So you do not expect any major year 1 set up cost or onetime business cost or onetime brand and marketing costs. Do you expect any of such onetime costs in year 1 or year 2?

No. So like I said, we are what we like about this business is distribution network is exactly the same. We are seeing the building materials segment is plagued with companies who have done over diversification of their portfolio and then don't have enough bandwidth to manage that model of distribution. So we are very conservative when we are going to do that. What we like about this business is that the distribution network, retail network, plumber network all is the same, which is why there is not going to be major investment to marketing. In terms of investments into manufacturing, there will be that normal whatever CapEx cost that is going to be incurred, which is not going to be very material compared to our current balance sheet. And if I can answer your last question was in terms of piping, I'm sorry to be honest, I forgotten your question. Can you please repeat your question?

My second question was on inventory. And third question was on your outlook and your CapEx utilization as we move forward.

Sure. So one was inventory was 77 days, both raw material and finished goods as opposed to 47 days. So there is a 30 days almost a 1 month increase in inventory, which is quite sharp, but I think that has been an industry-wide phenomena. Like we said, March is a peak month for sales. So we are always sitting on a sizable amount of inventory to be able to cater to your channel and the lockdown, obviously, no one could have predicted it. And when that came, that is the reason we are sitting on a higher inventory, which has actually been a blessing in disguise because when the market opened up in May, we had permissions to be price material not necessary to produce initially in the initial days. So that is when we could really use our this high level of inventory to really, really penetrate the market and maybe make some market share gains as well. So it has turned out to be a blessing in disguise cum Q1. And as far as overall outlook for the piping business, I think agri demand has been robust in May and June where we were actually running in severe shortages, which is a good problem to have, I think, in such scenarios. So agri has been robust. Plumbing, there has been a gradual recovery. So one, there is always pent-up demand from the March, which has obviously helped us in May. Channel inventory, we noticed was very, very low. So that has in short that there is a recovery. In terms of sustainability of that recovery, I think only time will tell. But I think there is a very uncertain macro environment to really comment on any guidance, any quantitative guidance. And to be honest with you, a lot of people have been asking this. Real estate has been right for the past 4 years now. So it's not that we are coming into -- we were running with a bull run in real estate, and certainly, there's been a drop. But despite that poor real estate, us and our peers have posted that sort of robust year-on-year growth, which is because of market consolidation. And we only think that COVID will accelerate this market consolidation because the small players cannot take the type of cash flow hit, inventory loss hit that our balance sheet can take. So I think there will be further shift from the unorganized to the organized within the organized, big will continue to get bigger, which is a silver lining for us in such hostile conditions.

[Operator Instructions] The next question is from the line of Ashish Poddar from Anand Rathi.

Congratulations on good set of numbers. So if I recollect in our case, the agri pipe business is about 15% to 20% in the overall mix. If you can confirm that? And also in the current scenario, especially for FY '21, you really see that it is agri pipe, which will drive the overall pipe industry or you see even the plumbing will get its space in coming months, and it will be like we were seeing in earlier year? Your comments on these will be helpful, sir.

Sure. Yes. Thanks, Ashish. This is Parag here and a proper question for the current times. So typically, I have to correct you a little bit with our information. It's not 15%, 20%. But almost agriculture is about 30% normally, and the rest would be the building material. Now if I have to give you a current picture then so far in the month of May, June, there has been a very good demand on the agriculture sector. So today, what we see is it's almost to the tune of -- agriculture could be contributing to the tune of about 40%. So there has been a good increase on the agriculture front.

So just to build off of that, this is where our expertise across many applications really help us because if you look at us, we are in a very unique position compared to our peers, as one peer may be very good in plumbing, one may be in only agri. I think Prince have a very unique position where we are equally -- we have a very strong network across agriculture, plumbing, drainage and borewell. So this exposure to multiple applications has really helped us. To further sharpen my answer to your question of what will carry demand going forward, I think that's a good question. The agri business is a seasonal one. So there are typical agri months, which is, I would say, quarter 1 and quarter 4 of the financial year are typically strong for agri. So that is the seasonal business. Where the housing demand comes in is we are all aware, COVID has largely affected metro economies and the urban economy. And again, here, Prince pipes can differentiate ourselves -- has differentiated ourselves from our peers because of our strong distribution network in semi-urban Tier II, Tier III as well as rural India. And we feel that, that part of India is really going to help us drive our housing segment sales as well because we would be surprised as to how much of our CPVC is actually well penetrated into semi-urban and rural India as well as our other domestic application products. So we are bullish as far as rural and semi-urban India is concerned to drive the non-agri part of our portfolio, which is larger chunk like Parag Bhai indicated.

So any sense on the mix in our revenues. I mean in whatever way you define the semi-urban, rural and urban. Any ballpark trends, what will be the mix in our case?

I want to -- as a company policy, I want to stay away from giving any quantitative breakout because we do not largely track.

Fair enough.Yes.

I can give you a detection thought process is that I will give you an example. Let's talk about the ground reality. We, Prince Pipe has like more than 50% to 60% market share in an urban metro like Bombay, while still having very, very strong brand equity in the villages of UP, Haryana, Bihar, Punjab, and all these sort of markets. So we believe that our distribution network is very, very core to our business model. And the spread of this network across different Indias and the effective strategy of winning in many Indias.

We have a next question from the line of Vishal Varma from Oman India Fund.

This is Vishal here. First of all congratulations, Parag Bhai, Nihar and Shyam for very good set of numbers for the year. I have a few questions. One, in the current year, as we all know that there has been a revenue loss, but still we were able to meet the guidance due to the strong EBITDA margin expansion that we have witnessed. If you can comment a little bit more than what Shyam has already mentioned that it is due to product mix? If there is more you can comment on, one, why there has been such a strong EBITDA margin expansion and what is the sustainability of this? The second part is the debt levels have come down in terms of the long-term debt, and we all know that it is part of it has been repaid using IPO money. But after March, have you taken more or have you reduced any levels of debt, pose that? I would assume if there has been a working capital spread, have you utilized more debt? Last part is on the receivables. How do you -- how have you seen the receivable collection post-March?

Thank you, Vishal, for your question. So I'll answer the first question before I hand it over to Shyam for the part on the debt. So your question in terms of margin expansion, I think there have been multiple reasons. So let me walk you through them. One is a favorable product mix. So we've grown higher in our value-added products be it our plumbing products and, our SWR products have outgrown our agriculture segment in quarter 4, which always does good things for the gross margin. Second is -- and I believe this is the most important region in my opinion for margin expansion is the pricing leverage that we are enjoying in the market today. The pricing power of a big processor increases as the market consolidates. And we have seen a fair amount of market consolidation that has taken place. So this does not just mean that we have just been increasing our prices left and right. What this means is your sales is more sustainable because it is done on a pull basis. So you don't have to resort to month-end throwing of discounts to the channel to really sell more. Your are able to sell in a very sustainable way and on your own terms. So this is a really positive for us. The third is that we have worked out very strong charters for working on our production efficiencies, which have led to cost control. These are, of course, more medium- to long-term measures that we have taken across our plants, which has helped with the margin improvement as well. And lastly, is the operating leverage benefits also kick in when you grow the way we have. So really product mix, pricing power, production efficiencies and operating leverage. So it's not really only 1 or 2 reasons that have led to this growth, which makes this growth a lot more sustainable in our eyes. In terms of giving a guidance for EBITDA, I think we want to stay away given the current macroeconomic scenario, we want to stay away from giving any guidance on EBITDA. We will work very hard to sustain our margin, but it's too uncertain, I think more certainty is expected post-September in the second half of the [indiscernible]. Shyam?

Yes. So Vishal, basically, in terms of debt repayment. So we had INR 167 crores of debt, which we have reduced there on INR 95-odd crores. So we've repaid to the major institutions and also what we have done is in terms of all the banks, Bank of India, ICICI, all the banks have been repaid from our IPO proceeds and also from the pre-IPO as well. Further, the short-term borrowing also has -- there has been some increase in short-term borrowing, of course, while there is a decline in long-term borrowings. INR 58 crores is a net increase in our short-term borrowings. So net in net, it is like INR 40 crores overall reduction in my debt from what we have seen in the previous period. During the current 3 months, starting from April onwards, there is an addition of around INR 30-odd crores to my working capital facility, which you have taken from one bank, DBS. And in terms of answering your third part, in terms of the collection. So we are seeing a good uptake in collection as well. And I think we are almost at 82% to 85% of our average collection in the normal pre-COVID months as well. So I think the recovery is pretty steep, and we will see a good collection coming in the last 1.5 to 2 months.

If I can just add some color to Shyam. I think the reason for the increase or the good recovery in cash flow post-COVID as well is the robust agriculture sales. So as we know, agriculture is a lower realization product compared to the rest of the segment, which is why we do this sale on a cash and carry or a 3-day payment model, which has helped us improve cash flows.

[Operator Instructions] We have next question from the line of Ritesh Shah from Investec Capital.

Sir, my first question is, can you provide some color on the product mix like at the time of IPO ...

Hello? Ritesh, are you there?

I think the call dropped.

I think the call dropped. Ritesh, are you there?

I am there, sir. Hi, can you hear me?

Yes. So can you please repeat your question?

Yes. Sir, I was referring to, can could you provide some color on the product mix on a year-on-year basis. And at the time of the IPO we had indicated that we grow significant chest of our volumes and, it also aided our margins. If you could provide some color, it will help us understand with the margin profile of the company?

Sure. So like you are aware, Ritesh, we're, again, staying away from giving such specifics because it is heavily competitive industry. But like we did last time, we are happy to give a directional thought process. I think, like I said in my previous questions, what we like about our product portfolio is we're able to strike a very strong balance across plumbing, agriculture, drainage and borewell products. I think like we mentioned, agriculture used to be around 30%, usually 30% to 35%, which at such times has gone from around 35% to 45% because of the strong agriculture season and a strong demand. And as far as the fitting is concerned, I think we had last time also mentioned, we are the gold standard in terms of price-to-fitting ratio in the industry ... [Technical Difficulty] Hello?

Yes, I am there.

Yes. So like I said that we already have a very strong pipe-to-fitting ratio. And we are just doing our best to try to sustain this ratio. There is no further improvement expected or possible. So sustaining this ratio in itself would be an achievement, which we have able -- which we have managed to do so in the past quarter as well.

Okay. Nihar, I just had a request basically to understand and appreciate the hard work you're doing. It would be great to have some disclosures at least on the PVC, CPVC, PPR and DWC mix, which you have given for historical numbers. And if in fact, one looks at the presentation also, we earlier used to company versus SWR separately in the prior quarter's disclosures, that's also something which has been coupled up in the prevailing quarter's presentation. So would really appreciate if there are more disclosures on the credit mix, that was one? And secondly, I wanted to understand how much the CPVC costing moved on a sequential basis? I'm looking at the raw material cost per tonne number. So we do have some flavor on how the PVC price has moved. But just wanted to have some sense on the CPVC price movement actually consumption price versus the inventory that we had -- that we used to have and once you look at the strength going forward?

Sure. So firstly, thank you, Ritesh, for appreciating the hard work we are doing on improving our VAP portfolio. I think it's a tricky one because we don't -- we want to stay away from giving quantitative numbers, but like we used to mention -- so are you looking for a polymer-wise breakup or application-wise breakup?

Only CPVC pricing. I'm looking at raw material cost per tonne. It has more by 5% up on a sequential basis from INR 85 to around INR 90. So just wanted to understand how is the consumption price moved for CPVC resin or compound whatever we use for import?

Sure. So we use CPVC resin, which, like you are aware, we used to import from Korea, which we shifted to Japan. And that would have led to an increase in the CPVC prices and a large portion of which we have been able to successfully pass on to the market. Like I said, CPVC is a -- in PVC, it is a -- 70% market is organized, 30% is unorganized. In CPVC, 4 players are having 65% to 70% market share. So it is very, very competitive at the top. And there is no way we can share any pricing. We know that -- we all know that the pricing has moved upward. We all know that the top guys have been able to pass on a large part of that to the channel, which is what matters. And I think our numbers sort of speak for themselves in terms of sustainability.

Right. So that's encouraging. So just wanted to check I think the prior quarters I had asked this question on CPVC inventory, you had indicated there was some high cost inventory. So are we done with that? So margins were, what we look at it, this is really nice. But just to have some comfort on how actually it can play going forward. So is that high cost done with?

Yes. Yes, I think that is done with. And like I said, the reason for expansion has been -- margin expansion has been multiple, which shows that it's a very sustainable margin expansion. And we have different functions working on it, whether it is my marketing and branding team trying to inculcate a pull sales, which helps our pricing strategy or my manufacturing team, which has worked out very robust charters to really get a strong cost control on production efficiencies. So it has been a real sustainable and long-term sort of margin expansion.

Okay. And the last question if I may, it's encouraging to see you entering into the water tank market, but it's a very competitive market like we are a new entrant over here. You have like Sintex, Plasto, Patton et cetera, et cetera. So what is our strategy over here, like is the margin profile and the working capital but on our existing operations? How should one look at the business on a rupees per liter basis? How do you look to tackle the market it's far more competitive?

Sure. So it's around INR 4,000 crore to INR 5,000 crore market today. And if you look at the metrics in terms of the lack of water availability, especially in rural India, where our network is strong, I think there should be sort of market potential is a lot larger than more market size today. And we believe that we have the right reach. In terms of competitive landscape, it is flipped. Pipe is -- 70% is organized in tanks, 70% is unorganized because it is such a freight cost sensitive industry because you are essentially transporting air when your transporting tanks, which is why it has really been fragmented by local players. Our approach is going to be slightly different. We see that if you stick to giving a quality and a premium product and not put too much initial pressure on volume, it is a very sustainable way of ramping up business. Like you are aware, there is one national player that used to be ruling the tanks industry, and that vacuum is still there today. And no real other regional manufacturer has the muscle as far as network of distribution or manufacturing network is concerned, which is why we feel like it is a very opportune time for Prince to make this entry and fill this vacuum up. We have 6 plants, 2 in the North, 2 in the West, 2 in the South. So we feel we are very well placed to effectively penetrate each zone of India and really fill that vacuum at the top of the pyramid of tanks. And our eyes are only at the top, and we want to use a similar approach like we have in pipes, give a quality product, give a premium product, don't put initial pressure on volumes, and you will be able to cement yourself as a force to reckon with.

So is there any specific segment that we are looking at interatrial, pressurized tanks, multilayer, anything that we have looked at or we entail to launch?

Sure. So first, I think retail is our strength. We will be focusing on retail. Let me give another clarification for the benefit of everyone is a lot of these unorganized guys or even smaller organized guys have given 3-layer tanks, 7-layer tanks, 10, 12, 13-layer tanks, which is really a marketing gimmick. Our strategy with thanks is to build a very strong trust equity with the end consumer. Outside of 2- to 3-layer tank, it's all the same. It's just the marketing gimmick done to try to create a value-added product and charge more money from the end consumer. Our campaign is going to be one, which is going to be built on trust that we build with the end consumer, whether it is a plumber or a homeowner. And even our branding strategy is done to clarify that we are not here to grow marketing gimmicks and give 7,8-layer tanks just to try to make higher realizations. We are going to give premium quality products with -- made with virgin polymers and 2 and 3-layer is what we are at least going to start with at the premium end to run a really trust-based branding campaign coupled with a superior premium product.

Okay. And on -- lastly on working margins, that will be my last.

So like I said, margins with tanks are looking more lucrative on paper today. We have just started our test marketing. Feedback is encouraging. People have really accepted the brand prints, which is already very strong in this channel. Quality has been really, really very well appreciated, which is what excites us because focus, like I said, is not on immediate volume growth, it is on giving a quality product. And as far as working capital is concerned, these sales will happen on a cash-and-carry model. So debtor days should be lower. That is the norm of the tanks industry. But of course, margin and working capital profile, I think we'll be able to give a lot clearer and certain color in the next 1 or 2 quarters to come.

We have the next question from the line of Achal Lohade from JM Financial.

Congratulations for the great numbers. My first question is -- can you hear me?

Yes. Go ahead.

My first question is with respect to the capacity. What is the kind of capacity as of March '20? And what is the kind of capacity we would look at in March 2021 and '22?

So Achal, for March capacity in terms of -- is almost 65% in terms of capacity utilization. And we are looking at maybe at around 60% to 65% on a sustainable basis in tonnes. In tonnes, I mean, it is around 140,000 metric tonnes. Is that ...

I don't know. I think 140,000 tonnes, that's the production capacity we are talking about. And what about the expansion, what kind of number would we look at?

So we are looking at -- so we are saying in terms of installed capacity, really like 251,000 metric tonne, 255,000 metric tons as on March '20. And future going, we are looking at maybe around 263,000 by March '21.

Okay. And -- so that's about 8,000 tonnes kind of a capacity addition on a net basis, is that right?

So Achal, while we have, of course, Telangana plant is going to be done from IPO proceeds. So let me give you some color on that. This was -- usually, it takes 12 to 15 months to have a greenfield project. Now of course, we've had 3 to 4 months of natural delay due to COVID, but we intend to follow the normal time line and not further intentionally delay the timelines for Telangana. We are bullish in terms of the market that will be there once we resume normal. And we feel like the market will consolidate, and we feel like we are in a very unique position to capture this market. The unorganized players and the fringe organized players will be moving out of the market, and the consolidation will only accelerate. We strongly believe that we are in a very unique position to be able to do this capacity addition and really capitalize on these encouraging green shoots of demand. Having said that, macros are very uncertain. So it is -- while Shyam did indicate the number we are looking at for the end of this fiscal or the end of next fiscal as well, the numbers -- the environment is too uncertain to really comment. We want to wait and watch. We are closely monitoring the situation on the grounds. And depending on that, we'll be -- we are trying to strike a balance in terms of aggressiveness and still being focused on the quality of the balance sheet. Yes, Achal, are you done? Achal, are you there?

Yes, can you hear me?

Yes. Now, I can.

Yes. So can you help us understand in terms of the count total amount, total money raised? And you highlighted that you have used part of that for debt repayment, so how much has it been used? And how much is lying in the escrow account as of now?

So overall, we have raised INR 355-odd crores. And we have repaid our term loans. So we have repaid almost INR 95 crores of term loan, and that includes increasing interim from our internal accruals as well. So while part of the major amount was through our IPO proceeds, including pre-IPO and plus main IPO, part is in internal accruals. We still have INR 244-odd crores, which is lying with us, which is mainly on account of our usage for Telangana plant, and upgradation of our equipments as of now. So we have used the balance amount. So INR 244 crores is what is lying with us as an FD for meeting requirement for Telangana plant and also the upgradation of equipments.

So just to summarize, we have utilized around INR 112 crores, and the money that fits in the escrow account is around INR 244 crores. INR 184 crores of that INR 244 crores is for Telangana facility and INR 60 crores is for upgradation of existing plants, which is done in a staggered manner depending upon the demand scenario.

Got it. And just to clarify, this INR 112 crores includes the general corporate purpose, which we used, I believe the ...

Yes, please.

Is that right?

Yes, Achal.

Okay. Understood. So that's a good thing. And in terms of the cash flow statement, if I look at, there has been 1 item of INR 249 crores or INR 250 crores. Can you help us understand that? What is it about for better understanding?

Yes. So Achal, this is basically our FDs itself. I mean the months funds that we are lying because this is not only FD debt we have put it off IPO, but there is also some margin money because of our LCs and all. So that money is getting classified in the head in the cash flow, which you're looking, INR 249-odd crores.

Got it. And with respect to interest, a, what is the imports mix in the raw material consumption for FY '20? And given the way things are, we are talking -- we are hearing about delays in terms of clearances of imports from China. Do we see any risk for us or for the industry in general for the raw materials?

Sure. So firstly, we don't import from China, 0 import is from China be it CPVC, PVC, HDPE, any of that. So I don't think there is any risk to us. So any player who would have exposure to China would be better able to comment on that. In terms of mix, it's largely a 50-50 or 60-40 mix of import to domestic. So the good thing is we have a decent dependence on the domestic producers as well. There has been minor supply chain disruptions, but nothing material to affect production or the entire value chain. There has just been minor immaterial disruption of value chain which is manageable.

We have the next question from the line of Nehal Shah from ICICI Security.

Congratulations, Parag Bhai and Nihar for a great set of numbers. A couple of questions from my end. First thing on the brand spend. What was the actual brand spend numbers for FY '20? And also what would be our branding strategy in the post-COVID-19 environment? So that's first. And second is, as regards the distribution network, considering the kind of consolidation, which is likely even going further, which you rightly said, what kind of dealer addition -- net dealer addition would we be looking at in the near term?

Yes. So absolute brand spend has been around INR 30 crores to INR 35 crores, which is around 2% of net sales. In terms of outlook, it's a really interesting question, to be honest, because this is a good amount of discretionary spend can be cut in times like COVID. So we like to have that flexibility and that management discretions. At the same time, I think it's also a great opportunity to have the strength of the balance sheet that we do and still consistently invest in branding because I think the key to building a strong brand perception is over the long term. And in such times, when all brands and cutting on their brand and cost, I think you have more eyeballs on your brand if you're able to invest into branding. So it's a really balanced approach that we want to do because we are still -- the macro environment is so uncertain, and the demand scenario is pretty uncertain. So it's a good means to have to be able to cut costs. But at the same time, I think it's an opportune time to keep investing in brand building, which is a very long-term exercise. So it could be an opportune time. So it's really a, to answer a question, wait and watch, keep a very strong ear to the ground reality and really play off strategy according to that.

Sure. Yes.

As far as your second question on distribution network, I think, again, bang on. I think we have around 1,500 partners today, which is the strength of, to be honest. As far as distributor addition, it has been around 135 distributors over the past annum. We are very keen to add distributors because of the consolidation. So there's a lot of fringe organized players, which are going out of the market. So it's a great time to not only gain market share, but if you gain distribution network, your sales becomes more sustainable and that growth is a lot more sustainable. But at the same time, you can't just look at it in terms of, we need to keep adding new distributors because we have a very strong criteria when it comes to opening up a new distributor. So for example, they have to be very good pay masters. A lot of these distributors of these unorganized brands or smaller organized brands are used to extend their credit cycles and don't have a very disciplined approach to business. So we want to stay away from those sort of channel partners. And lastly, it's hunger for growth, right? We want to have distributors who are ready to invest in infrastructure and their wavelength of growth has to match my wavelength of growth, only then does it make sense to add your channel partners. So while we are working on improving our channel and our reach across India, we will be very, very out of savvy while doing that.

Sure. Sir, is it fair to assume that major part of the brand spend will be more on BTL activities rather than ATL at this -- in the post-COVID-19 environment?

Absolutely. It's more likely. I think even outside of COVID, I would say, our first 2 years when we got on brand ambassador, got the eyes on the brand and really had a very effective marketing campaign. We were able to create that brand awareness. I think the second phase of this branding exercise was to further bolster the connect that Prince has with its loyal plumber and retailer network. So yes, regardless of COVID, I would be spending more on BTL and now with COVID more so on BTL, of course.

[Operator Instructions] We have a next question from the line of Nitesh Jain from Birla Mutual Fund.

So I have 2 questions. Number one is on the -- this inventory -- higher inventories. So since the April, May, June have gone by largely, has this been declined or come to a normal levels? I mean the question is have you calibrated your production in line with the sales and the inventory? This is question number one. And question number two to Mr. Shyam is, what will be the total CapEx, capital expenditures in fiscal '21 for the next full year? These are 2 questions.

So yes, I think first on your question of inventory we were carrying more than 2 months of inventory because of the lockdown. Like we said, there was a lot of pent-up demand and robust agri demand. So this has really helped us penetrate the market effectively. We have -- we are -- inventory has significantly reduced. Of course, we'll be able to give a better clarity on that at the quarter end. But as of today, there has been a sharp reduction in inventory because of the strong sales that is happening. So there is a sharp reduction. I will be able to comment in a quantitative manner only at the end of the quarter.

Yes. Sure, no problem.

And Shyam, on the CapEx?

Nitesh, on -- basically on the CapEx front. So while we have Telangana, which we intend to start in terms of the work over there. So we would -- while we have targeted INR 184 crores to be spent over a period of time, I think we should be able to use maybe 60%, 70% of that funds in this current financial year, plus we have a normal CapEx of around INR 40 crores, INR 50-odd crores. So both put together, we should be in the region of around INR 120-odd crores for -- INR 120 crore, INR 125 crores for this current financial year is what we are looking at. Plus what is more important is since the situation is quite dynamic, we need to be slightly more flexible and take a call on a quarter-to-quarter basis in terms of the spends that we intend to do on CapEx. So in case the demand gets up or we see a good demand coming up, we can further invest more in CapEx. We -- since the IPO funds have also been raised, plus because there's good internal accruals happening, but that should not be a challenge any time that we decide to do that.

[Operator Instructions] We have a next question from the [ Darshan ] from Spark Capital.

Hello. Am I good?

Yes.

I had 2 questions, actually. I wanted to know post this lockdown, how has the demand been from your distributors? And the second question is regarding how many distributors you have added for financial year '20?

Sure. Thank you for your question, Darshan. So firstly, I think on the demand side, agri demand has been robust from the channel. And I think that has been the situation not only for us, but for the entire industry. And it has -- some players had challenges in opening up their plants if they were in containment zones or red zones. So whoever was able to start dispatches, including Prince Pipes, we were really able to garner a better market share in agriculture. As far as plumbing is concerned, of course, it's been a more gradual recovery. Luckily, since channel inventory was low, there was a lot of pent-up demand for the housing segment. And furthermore, I think in rural and semi-urban India has performed a lot better than urban India. And our distribution network is as strong in rural and semi-urban as it is in urban. So we have been able to see a decent recovery in the housing segment as well. In terms of channel addition, we have added around 120 to 140 new distributors somewhere in that range. Again, just for the benefit of everyone, we do not give major significance from a number of distributors. It is the quality of your network, the reach of your network, like I answered in the previous question as well, whether they have an ability to be good pay masters, invest in a stock point and infrastructure, in technology and the hunger for growth. So I would really encourage everyone to look at distribution network from not only a quantitative, but also qualitative outlook. And even the spread of this network across the different zones and different types of India is really time to us.

How has the western side of India particularly Gujarat or Mumbai has been fairing after this COVID unlock?

So I think everyone is aware. Maharashtra and Gujarat have been heavily affected by the lockdown. So of course, there has been a -- it has been tepid compared to the rest of India. But again, it's a mixed bag, right? If you look at Gujarat, maybe the metros like Ahmedabad and Surat are maybe not doing as well, but the semi-urban places of f Mehsana, Vapi, Valsad are still having a stronger recovery than their urban counterparts. So it's really you cannot give it a one-blanket answer. And I think agri demand in Maharashtra and Gujarat, both is usually very robust, and that was the same from rural parts of these markets as well. Of course now post-Monsoon, agriculture being a seasonal product, it will vary.

We have the next question from the line of Sunil Jain from Nirmal Bang.

Congratulations on good set of numbers. Sir, my question relates to more of a cash flow. If I see your cash flow in that operating cash flow is negative, whereas you had included one item other financial and nonfinancial assets, which is making all these negative. Can you explain exactly what is this and why you need to include it over here?

Yes. So a couple of points over here. One is in terms of a negative in spite of getting into IPO thing also. So our inventory, which we have said is actually piled up as on 31st of March on account of the sales that we expected for the month of March, they were up, which has moved to 77 days. Generally, we have around 40% to 50% of the sales, which is generally sold in cash. I mean, this is on a cash-and-carry model, which if it would have been effectuated, would have flown into the cash flow as well. So that was one reason say, if we are sitting in even in spite of getting IPO money at around INR 8 crores of a negative cash flow, that is one. Secondly, we have repaid a substantial amount of IPO money towards our term loans, long-term loans. So while, as I said earlier, INR 95 crores has been paid from the system, including from the IPO. So that is actually putting up marginal portion on the cash flow, but we are very comfortably placed. And I think going forward, this will be much, much more positive than we are looking today. So I mean we've already taken this as a priority because debt reduction and importantly the long-term debt, which has been reduced substantially from almost like INR 156 crores to INR 51 crores, there's a substantial decrease there. And also in terms of our objective of an improvement in our overall debt mix as well, we are well on course of doing that.

Yes. But I was able to understand one item in that, that is the other financial and non-financial assets, which is somewhere around INR 249.12 crores?

So that is what -- I think, Achal has asked the same question and what we have actually clarified as well. So this is my fixed deposits along with the margin money, which is sitting in my cash flow. So it is mainly around INR 243-odd crores, which we have parked in our various accounts, INR 208 crores coming from IPO and prior debt. So that is the money along with the margin money, which is lying in my other financial assets, which has been shown in the cash flow. So it's largely our IPO proceeds that we have parked into the banks once our CapEx starts, that will -- didn't get utilized, and this will come down.

In fact, that is a bit distorting the picture. That's why -- was it a mandatory requirement since we have not seen the cash balance sheet accounted in -- before operating cash flow?

So this is like a normal accounting treatment that one would have been given. And of course, it was with all consideration. Obviously, this is the way it has to be reflected. So there is no deviation over here. This is perfectly the way it has to be.

Okay. And sir, second question relates to gross margin. I'm sorry, if I'm repetitive because I dropped off in between. To gross margin, if I see quarter-on-quarter has come down, whereas your EBITDA has increased quarter-over-quarter excluding that INR 7.65 crores, which has increased substantially. So it means there is something you had gained in operating costs and also all, which are -- had you got benefited where you had reduced and your EBITDA margin has increased.

No. So one, I think there has been a gross margin expansion. This duty hit was from the previous quarter because the provisional duty became actual. So there has been a gross margin expansion. This has been due to 3 major factors: favorable product mix and pricing power towards the gross margin and one, like we said, below the gross margin for the has been the production efficiencies, which have led to cost control. So we have really worked up some robust charters to help us reduce our manufacturing costs as well, which is more of a long-term measure which has been given some short-term low-hanging fruits as well.

This INR 7.65 crores is accounted in the current quarter. And was this in material cost or ...

Material cost.

Material costs -- it is there in material cost. It's a part of that ...

It's actually an expansion in the gross margin. This is a previous quarter hit that we have taken.

We have the next question from the line of Rajesh Kothari from Alfa Equity Advisors.

My question is in terms of the cost savings because I'm sure you guys must have worked very hard considering the significant pressure in 1Q. Would you like to give some details on that? How do you see the cost savings to be reflected on the full year basis? How much on absolute basis your cost varies from fixed cost to semi-variable and variable?

So largely -- if you look at our industry, it is largely fixed and semi-variable costs. While we have worked on reducing costs like production efficiencies, we have, of course, been very, very conservative with branding costs in Q1. We have a fixed cost of around -- it ranges from INR 16 crores to INR 20 crores per month. I think we'll be able to give better color on the cost-cutting measures at the end of the quarter in terms of absolute. But we see a lot of cash elements, which can be cut.

So I'm sure, I mean, you would have already worked upon, am I right? If any major cutting drive if you have taken on -- particularly on fixed cost side, then probably it would have been already worked by now, correct?

No, these are ongoing processes. There has been -- most of the cost cutting has actually happened on the production front, which was even before the COVID era where we thought that there were some facts that we could cut if we worked on reducing manufacturing costs. And that is actually -- these are long-term measures. They cannot happen overnight. We have seen some improvement in EBITDA margin on basis of this because there was some low-hanging fruit that we could have -- that we have cut. But these are long-term measures, and these are ongoing. There is no short-term way of cutting costs.

Okay. And bulk of your employee cost in the -- is fixed in nature, like which last year was 5% or something like that. Is it a variable part of its contract manufacturing or how it works, contract labor?

So employees, of course, are always -- it's a fixed cost. And as the plant, there is a largely 50-50 or 60-40 breakup between payroll and contract. What we -- like a lot of companies, we have seen have resorted to salary cuts or layoffs. We think that this is the perfect time to back the team to build a very strong culture and improve the team's morale. We have, even in these tough conditions, not resorted to any salary cuts, not have done any layoffs, are not planning to do any layoffs. I think this is where you can differentiate the men from the boys. And we are intent on delivering a very strong team culture, which will be able to create long-term value. As far as the laborers are concerned, I think it's a 50-50 breakup on payroll and contract.

Okay. And my last question is in terms of the mark-to-market losses, if any, because of the volatility in the raw material prices. How do you see that for this quarter, current quarter?

For Q1?

Yes.

Yes. So like you -- everyone knows PVC had a sharp decrease of, I think, around INR 11, which is roughly 14% in 3 weeks' time. First, there was a significant inventory loss. But the good part is, this has already been 100% recovered by Reliance where they have increased this INR 11 margin. So there will be a loss for a 1-month periods, but that has already been covered as well. And the good ...

I have not understood. My question is very simple, whether in first quarter, is there any major mark-to-market losses?

So we cannot comment on that as of now. I think we'll have a better picture as on the end of the quarter. What I was trying to say is that PVC has had a recovery. So it dropped by INR 11 per kg, it has again picked up by INR 11 per kg. So PVC is at similar levels post-COVID. The good part is that we've been able to pass on this complete increase to the market without any lag and 100%. And even when there was a decrease, we passed on only 50%, 60% of that decrease to the market. So there will be an inventory loss, but it will be mitigated, and we will be able to give better color on it by the end of this quarter.

We will take our last question from the line of Ritesh Shah from Investec Capital.

Sir, I wanted a breakup of the inventory at the end of the year, just a borad breakup between the INR 180 crores, how much of was PC and CPVC?

We -- again, Ritesh, I want to stay away from giving these sort of breakups. I don't think anyone in the industry is doing it, and we are part of the same industry. In terms of sales, you know lion's share is PVC, 60%, 70% is PVC; 20%, 25% is CPVC. I will stay away from giving polymer-wise inventory breakups, I will say away from.

Okay. And my second question was you did indicate ... [Technical Difficulty]

Yes, please go ahead.

Yes. In the prior question, you did indicate that there has PVC resin price increases. So the question is, has the end product prices increased in proportion to the increase in raw material prices? Or is there some proportion left, which is yet to be increased?

Fully passed on with immediate time. No lag in passing on and 100% passed on by Prince Pipes.

Okay. This is after also taking into account that the March-end PVC inventory will be relatively higher cost and the prices dropped in April and it moved up in May and then in June. So basically, what we are seeing is, in May, the priced products even taking into account the high-cost inventory that we had in March-end basis. Would my understand be right?

Sure. So there was a INR 11 drop. At that time, we did not pass it on completely to the market. So the inventory loss was mitigated. Of course, there was an inventory loss, like there was for the rest of the industry. But if you see the industry norm followed by the top 4, 5 guys that only maybe 50% to 60% of that drop was passed on to the market. Hence, the loss was mitigated. And then once that has been recovered, of course, we have passed on that balance portion immediately and 100%.

Okay. Okay. So that also is an effect for the May sales?

Of course.

As there are no further questions from the participants. I now hand the conference over to Mr. Arafat Saiyed. Over to you, sir, for closing comments.

Thank you so much once again for giving us opportunity, sir, for hosting the conference call. I also thank all the participants who have participated in the conference call for Prince Pipes. All the best to the management going head. Thanks a lot. Thank you so much, sir.

Thank you so much, Arafat.

Thank you. Thank you, everyone.

Thank you. Thanks, everyone.

Thank you. On behalf of Reliance Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.