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

I'd now like to hand the conference over to Mr. Nehal Shah from ICICI Securities. Thank you, and over to you, sir.

Thank you, Vikram. Good evening, everyone. On behalf of ICICI Securities, I welcome all to the conference call of Prince Pipes and Fittings to discuss the Q1 FY '21 results. From the management, we have Mr. Parag Chheda, Executive Director of the company; Mr. Nihar Chheda, Executive Strategy; and Mr. Shyam Sharda, VP and Group CFO. I would request to Mr. Parag Chheda to start the call with his opening remarks, post which we can then proceed with a Q&A session. Over to you, sir.

Yes. Thank you, Nehal. Hello, everyone, and a very warm good evening to all. Thank you for joining us for the quarter 1 FY '21 earnings call. We hope you and your family are safe and healthy during such challenging times. The press release has been issued to the stock exchanges and uploaded on the company's website. I hope you all have got a chance to go through our performance. This past quarter has obviously been an unique quarter. It has not only been an unique quarter for business and earnings but it has also been unique from a human standpoint. This lockdown has obviously led to an economic crisis. But as we all know that every crisis also comes with an opportunity. This lockdown gave us an opportunity to step back from business as usual and recalibrate, an opportunity to evaluate the big picture. On the first day, when we resumed the operations at our head office, I called for a meeting in the conference room with all my CXOs and the functional heads. One simple question was posed before them: "What would you do differently if you knew about this pandemic 6 months in advance?" So today, I would like to share with you the thought process and the core strategies for Prince that have developed as a result of that meeting. Two clear broad strategies emerged from this meeting: first, resilience; and second, revival and future readiness. First, I will talk about resilience. The lockdown was the ultimate test for the sustainability of business model. We believe that our business model is resilient because of 2 major reasons. The first reason is a range of applications that our product portfolio caters to. Prince has always been an application-driven company. Today, Prince has an exposure across plumbing, sewage, agriculture, borewell and industrial application. So across India, be it plumbers, farmers, borers, contractors and homeowners associate the name Prince with quality and dependability. Post the partial lifting of the lockdown, the demand from the agriculture segment was the momentum driver. Crops being an essential good, the entire agriculture value chain becomes essential. The agriculture products witnessed a robust sale during May and June. Prince is a preferred brand amongst the brands across agriculture and domestic applications. We will keep adding to our range in the existing applications as well as add new application segments to our portfolio. Now coming to the second reason for resilience is our distribution network and reach. Our strategy of winning in many India's is of the prime importance now. Everyone is well aware that urban metros have been most impacted by the lockdown. Our reach across urban, semi-urban and rural India will help us differentiate from the industry. The demand in the semi-urban and rural India was strong across agriculture, plumbing and SWR application. While we have a robust distribution network, the goal is to constantly improve the retail penetration as well. We have always been a retail-oriented brand, and this is the time to play to our trends. We will continue to foster our retail network. Due to COVID, the market consolidation will further accelerate, and the big will continue to get bigger. In the medium term, distributor reach will be a key in order to strike these incremental market share gains. The combination of product range and distribution reach create the resilient business model. Most organizations today need to think about survival. Due to the resilience of our business model, we have the ability to think about not just a survival but revival and future readiness. Now I will come to the second thought process from the functional head meeting, revival and being future ready. Here, I would like to quote about Javier Meza, the Chief Marketing Officer of Coca-Cola. He quotes, "The moment the pace of change outside the company is higher than inside, then you start to lose." Now this quote actually reinforces the list of measures undertaken by us to ensure that we continue to thrive in this business environment. Firstly, I'm absolutely thrilled to announce that Prince has entered into a technical collaboration with a European company known as Tooling Holland. Tooling Holland has a rich 40 years experience in mold making and tooling. The goal of this technical partnership is to achieve optimal product design and more layout, which will also help us optimize production costs. We will gain access to state-of-the-art technology in mold making and follow best practices of production processes. This collaboration will also help us to improve our OEE, the overall equipment efficiencies, from the existing capacities. Second, we have chosen a widespread adoption of solar technology in order to embrace the green energy and help the planet mitigate the effects of global warming. Renewable energy helps us meet not only our financial goals but also our sustainability goals. Spread across our manufacturing facilities across multiple roofs in their respective campuses, the captive solar panel rooftop projects consist of approximately 6,700 highly efficient mono PERC and polycrystalline solar PV panels and would offer a multitude of benefits as listed below: first, curb the carbon footprint while achieving these savings in our power cost; second, reduce their direct heat radiation and temperature in the manufacturing area; third, be future-ready in fulfilling the renewable purchase obligations when enforced; fourth, save the expensive land parcels for future expansion by utilizing the vacant rooftops. Now to sum up, the positive impact on the environment from our widespread adoption of solar technology. The energy generated shall be equal to approximately 1,200 metric tons of coal burnt each year. In proportional terms, carbon appropriated is equivalent to 40,000 tree seedlings grown for a decade. This adoption of solar power will help us meet our triple bottom line goals, that is not only meet our financial bottom line goals but also environmental and social bottom line related goals. The third topic, our manufacturing excellence team has developed a principle: smart factory, smart processes and remarkable insights. Here, we will take a huge stride on digitalizing production, quality assurance processes and integrating cyber physical systems, sensors and all devices connected within existing processing cycles. As a result of this, at enterprise level, we shall have improved data sanctity and also, importantly, actionable insights to make faster and more accurate decisions. Fourth, further product range expansion. In line with our strategy of having a comprehensive product portfolio, we have successfully developed more than 50-plus products in consultation with various influencers in different categories and applications during the lockdown period. These new products are designed in-house and perfectly engineered to the specific purpose and application. These products will enhance the number of applications served by the product portfolio, for example: industrial application, pipes that have superior insulation and resistance; second, recycled water, color-coded purple pipes to encourage reclaim of water in high-rise buildings; and third, cable-ducting pipes. I strongly believe that these 4 strategies will help us accelerate the pace of change inside the organization to revive and be future ready in this business environment. We believe that the accelerated market consolidation post COVID will lead to a major opportunity to grab the market share. Hence, at the heart of these strategies our CapEx cycle for Telangana facility will be as per schedule and will be a kicker of increasing market share. With the growth capital raised, we believe that this places Prince in a unique position to continue our capacity addition and grab this incremental market share in the medium-long term. This will truly make our future ready in every sense of the word. To complement the CapEx cycle, we have a slightly different view on branding investments during such abnormal times. Branding costs are discretionary in nature, and we will have -- we have been able to cut branding costs in quarter 1 when business was uncertain. We will keep a closer year to the ground reality of the markets and will adjust our branding investment strategy. While we are cautiously optimistic in the short run, we are bullish in the medium-long term. With more brands cutting promotional branding costs, the clutter reduces and the organization that invest in branding can truly come to the forefront. It is my strong conviction that future readiness will help us pull away from the rest of the market. Thank you all for your time and mind share. I will now hand it over to Shyam to take you through the financials.

Thanks, Parag, and good evening, friends. I will quickly take you through the numbers of the results under review. For Q1 FY '20 vis-à-vis Q1 FY '21, I will spend a few minutes in giving an understanding on the scenario during the quarter under discussion. Despite the lockdown, we were able to mitigate the COVID impact better than what we have anticipated. April being a washout, not just for us but across all industries, led to a considerable loss in sales. May month saw a healthy traction, and we recovered more than 80% of the sales from the previous year, May '19. Despite the headwinds of the pandemic, June saw a full recovery over the previous year as we saw an encouraging growth over June '19. Post the partial lifting of lockdown, on 23rd April, essential products witnessed a surge in demand. In the month of May, demand for agri products observed higher demand is being classified under essential products followed by plumbing and SWR segments. June witnessed a robust growth from both agri and plumbing segment. Coming to the manufacturing utilization. In May, the utilization was 30% to 40%, while in June, it stood at 65% to 70%. May was largely agri-driven with June seeing a healthy spread between agri, along with plumbing and SWR. Now I will be taking you through the financials. Revenue from operations reduced by approximately 20% to INR 303 crores vis-à-vis INR 380 crores in Q1 FY '20. Volume decreased by 27% at 24,791 metric tons vis-à-vis 33,982 metric tons in Q1 FY '20. The 6% to 7% difference between the value growth and the volume growth indicates 2 significant improvements for us: first, better pricing power that we have gained during the market consolidation; and second, finance sales mix of value-added products in the second half of Q1. For the month of April '20, sales at INR 9 crores vis-à-vis INR 79 crores in the previous year April, a reduction of 89% in value was owing to lockdown. Post the partial lifting of the lockdown on 23rd of April, we were among the first companies to start dispatches to the trade. This helped us cater to market demand and gain incremental market share. May saw more than 80% recovery over the previous year May and the sales stood at INR 122 crores vis-à-vis INR 184 crores. June saw a complete recovery with sales at INR 171 crores vis-à-vis INR 153 crores in June '19 translating to a growth of 12%. Even in this uncertain business environment, we did not give us any salary cuts or layoffs as we believe this is the right time to build employee moral and strong team culture. Coming on EBITDA, which was at INR 32 crores vis-à-vis INR 53 crores, a margin of 10.5% versus 13.9% reduction by 343 bps. Margins were impacted due to the adverse operating leverage due to the complete shutdown of the operations in the month of April. Further, there would be some minor inventory loss as well owing to the sharp decline in PVC in the first half of Q1. COVID-19 situation led us to recalibrate and assess internally on our fixed cost. Some of the costs have reduced due to reduced business activity. However, we are in the process of identifying cost, which can be reduced on a continual basis and will aid margin performance. Despite the tough business scenario in the quarter under review, we have been able to decrease our finance cost by 9% due to repayment of long-term debt. It will be our endeavor to closely monitor and look at the possibility of a further reduction. PAT stood at INR 12-odd crores vis-à-vis INR 27 crores and was largely impacted by the loss in the top line. Coming on the balance sheet. The term loan, including current maturities as on June 30, 2020, stood at INR 53 crores. And as on date, the term loan outstanding including current maturities is at INR 48 crores as we further reduced the long-term debt by around INR 5-odd crores. The short-term loan as on 30th June was INR 203 crores. And as on date, the short-term loans is at INR 190 crores, which indicates a reduction of INR 13 crores during this month. Total debt as on 30th of June 2020 stood at INR 256-odd crores. The gross debt to equity is at 0.3x. Total debt as on date is around INR 238 crores due to the repayment of INR 18 crores during the month, which includes both short term and long term. Our top priority this year is to continue to strengthen our balance sheet by deleveraging the borrowings and focus on improving our cash management cycle. CapEx for the quarter stood at INR 1.38 crores, lower than the previous year owing to the lockdown. We shall continue to maintain a cost over CapEx during the year as has been scheduled earlier. Though the business recovery has been decent, we will refrain from giving any revenue or margin guidance, which could be misleading as the COVID impact is still unpredictable and dynamic. We remain cautiously optimistic on our current situation. Before I hand over the mic to the moderator, I would like to inform you that I have added 1 colleague of mine, Anand Gupta. He has joined as a Deputy CFO, and he has worked with ACC for over 14 years. He will be part of our team and will be joining us for a question-and-answer session as well even going forward as well. With this, I would like to open the floor for the question and answers. Thank you so much.

[Operator Instructions] We have a first question from the line of Sneha Talreja from Edelweiss.

Congratulations on a good set of numbers. Sir, my question is more pertaining to -- sir, you mentioned in your press release that what has been the revenue and dip in the month of April and how was it in the month of -- I mean, till the month of June. Can you quantify that in the volume terms as well?

Just give us 1 minute here.

Yes, sure.

In terms of the tonnage -- just 1 second. So I'll just give you some directional thought process till Shyam gets the exact number. So largely, the first half of the quarter had more of the agriculture sales whereas the second half was more towards the plumbing and SWR. So that gap between the volume growth and the value growth is actually higher in the month of June. As the quarter progressed, the sales for value-added products improved.

Yes. So in terms of the metric tonnes sales in the month of April, we did 857 metric tonne of sale. In the month of May, it was 10,905. In June, we did 13,030, having 24,792 as a total metric tonne for the first quarter under consideration.

So to answer your question, Sneha, the degrowth in volume for April was 89%, May was 19% and June was 1% growth.

Okay. That's helpful. And if I may ask how is the progress June? So after -- as you said, that I mean, later on, the shift moved more towards plumbing. And of course, with this season also, I think agri sales must have slowed down. So how was the month of June? And I mean, how was the month of July? And how it is progressing now?

So July has also been a decent month. where we've seen like a 90% recovery, more than 90%, 95% recovery. As the channels open up, we are able to sell better. But -- like you are also aware states are going in and out of lockdown. So there are some sort of key markets that have gone into lockdown and have been more tepid, despite which we've seen broadly in line July compared to last year July.

Okay. Secondly, Nihar, as you said that you have been focusing on winning in many India's. I mean we have got a widespread distribution network, both in rural, semi-urban and urban. Can you provide us with some amount of revenue breakup for the same? And what would have been the urban de-growth versus the growth in, let's say, semi-urban and rural areas?

Sure. So first, let's talk about urban India. A lot of our principal markets, be it Bombay, Delhi, Hyderabad, Ahmedabad have gone in and out of lockdown and a lot of them have stayed in lockdown. For example, Mumbai is a key market for us, which has been very, very tepid this year for all industries. So definitely, there has been a sharper degrowth in urban. I will stay away from quantifying segment-wise degrowth or anything like that, but it is the semi-urban and rural India, which continue even in the month of quarter 2 -- in the month of July in quarter 2 to sort of sustain the growth till now. And urban India continues to be tepid in this current month as well.

Can you just provide us a rough breakup? If not, I mean what has been the growth in these areas? What would be the rough breakup for you as a company's concern with respect to rural semi-urban or urban?

Yes. Again, I won't -- urban could be around 30%, 35%. A large chunk would be semi-urban at around 40%, 45% and balance would be rural.

Got it. One last question...

This is thumb rule I have given Sneha as a directional thought process because a lot of these things are vague. Like, do you qualify Jaipur as urban, semiurban. So this is again, I'm just giving you a rough sort of directional thought process from my best estimate.

Sure, sure. That's helpful. The last question from my end would be, can you also -- you, of course, mentioned that there's consolidation happening in the industry. And could you give qualitative comments on what are you seeing on ground? How is the competitive intensity on smaller players? Which is the region where you see the bigger guys like you are able to gain market share, some qualitative comments on the same?

Yes. See, the names of the people who are under stress, I will not dwell on that. You know as well as I do, who is struggling. There are major balance sheet constraints and working capital issues. And I think the reason we sort of keep talking about market consolidation is, post COVID, this is only going to accelerate. So in the piping industry, real estate has been tepid for the past 4 years now, despite which the big guys in the piping industry have been posting sort of decent year-on-year growth, and the reason for that was consolidation. And this will only accelerate post COVID because of 2 major things. One is the kind of cash flow hit that companies have had to take owing to the lockdown. And second is the sort of losses on account of a volatile PVC. These kind of hits balance sheets like can absorb, but unorganized players and even smaller organized regional and national players will worsen off in such a scenario, where in this past quarter, we have also added distributors from some of these companies, which shows that this incremental market share gain is sustainable because their entire channel is shifting from a smaller company to a bigger company. And I am only sure that this will continue to happen at a faster pace in the coming quarters.

We have next question from the line of Maulik Patel from Equirus Securities.

Yes. A few questions. One, you mentioned that the agri was going mid-May onwards. And June was more for the plumbing and SWR. Where do you see the PVC has been heading, given that what changes we had in the last August in terms of an antidumping duty? What is the situation of the security side, if you can add?

Yes. Thank you for your question, Maulik. In the second half of quarter 1, when we say that domestic has performed well and plumbing and SWR has performed well, in June, if I compare to last June, we have posted a growth in CPVC as well. I think you guys are aware by now that as a company policy, we will not share segment-wise revenue or anything like that, but I can give you a directional thought process. We have grown in CPVC. If you look at June to June, we continue to outpace industry growth in CPVC. And I think any concern on sourcing, pricing, supply security have been put to bed by us in the past few quarters. I think the numbers of quarter 4 and quarter 1 answer that for them themselves. So yes.

And you have a sizable capacity and investment we put for the DWC, given that it is in a state or the general board or the municipality driven, what's the situation on that front?

Yes. So DWC is, of course, interesting now because, of course, last year, the DWC industry also was pretty tepid because of the delayed monsoon and the election cycle in some key states. I think going forward, DWC is -- as far as infrastructure and government projects is concerned, I'm not sure whether infrastructure will be the top priority for government expenditure. But what we have seen, even before COVID, was our sales team for DWC was more focused on private projects and working with consultants and developers. So the way a lot of the larger contractors we're convincing government organizations to start accepting DWC because it is a superior product. And over the life cycle, it is also more economical than RCC. We are seeing a similar acceptance for DWC pipes in the private project space where developers, consultants, contractor in the private space are also seeing higher acceptability of DWC. And I think moving forward, that is going to be the driver of sales.

Okay. Got it. And the last question I have a -- so you mentioned that now the agri season is largely over, right? Once the monsoon start and it progress gradually across the country, the demand for the agri pipe reduce drastically. Has the indicator in month of July for the rest of the business has been improving month-on-month wise? I mean there's more demand from the construction activities of the plumbing, SWR, PVC?

Yes. So agriculture is a seasonal product. I think usually, the demand is strong from, I would say, January to June once the monsoon starts hitting the country, especially Maharashtra, Gujarat, et cetera. Agri demand typically does drop off in July. And in July, like I said, we have seen again a decent recovery. I would say, like 95% or higher than that recovery, which has been primarily supported by the domestic applications of plumbing and SWR in the month of July.

Thank you, sir. We have next question from the line of Madhav Marda from Fidelity.

My question basically was, given that we've seen good growth in June and a decent recovery in July as well, could you give us a sense in terms of how the industry demand overall has been doing? Like, I understand being a stronger player, we are gaining market share, but any broad indication as to what the industry number would be?

Sure, Madhav. Thank you for your question. I think a good question. If I'm being very honest with you, I think it's becoming more and more challenging to get insights from the market because the sales team travel also is restricted in the market. So it sort of -- it hampers our ability to understand how other players are doing, how the industry at large is doing. But what I can give you color on is, there have definitely been market share gain for us in quarter 1 and that purely comes down to sort of agility and execution intent. I think there were some players across sizes who have had a challenge in opening up their facilities, opening up their supply chain and providing the right product to the right market I think our organization was very agile in terms of whenever we got an opportunity, whenever there was a partial lifting of lockdown, we were closely monitoring it state-by-state for every application, be it agriculture, plumbing or SWR, and we were able to sort of capitalize on each opportunity that we got and execute the delivery that we've had in quarter 1. Yes. But there is no clear picture as to how market demand has looked. Of course, agriculture has been robust. And broadly, rural and semi-urban continues to be the supporter of demand.

Just something that I was wondering, given agri pipe sales are a bit weaker given the seasonality in July. But despite the lockdown plumbing and SWR is still sort of holding forward for us. So I mean where is the demand coming from? Is it like market share gains? Or is it semi-urban doing so much better? I mean, what's driving the sales?

Yes. Yes. So again, it's a combination of both, Madhav. Because the way I see it, okay, we've had like a 95% sort of recovery in July. The way I see it is any sort of key market being in lockdown and being hampered by the pandemic is almost being offset by the market consolidation and market share gains that are being made. And I think as the year progresses, as the quarter progresses, we will get a better clarity on that. But I think as of now, the performance of semi-urban and rural, coupled with market consolidation has been able to at least offset the impact of the lockdown in the month of July. I would also like to say that quarter 2 last year was a very robust quarter for our earnings. So we are also dealing with a higher base in August and September. So I think that would be the crucial month for our performance.

All right. Got it. And generally, would you think our gross margins would largely hold up through the year? I think it should be -- this should get better because competition is receding, right? So probably that's it so far.

Yes. So like Shyam indicated in his opening remarks, we've seen a 20% degrowth in value and a 27% degrowth in volume. That definitely -- that delta of 6%, 7% shows that we have gained pricing power in the market, and we've also had better market penetration for the value-added products. While that is not reflected in the gross margins is because of the M2M loss that we incurred because of the volatility in PVC that we had higher cargo coming in when the domestic price was extremely subdued, which meant that we had, especially in the month of May, around INR 10 crores to INR 12 crores of hit on the PVC imports as an M2M loss. But today, PVC is back to what it was pre-COVID. In fact, PVC is more expensive today than what it was pre-COVID, which I think in itself talks about how robust the recovery for the plastic pipes has been in the country.

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

My first question is with respect to the cash flow for the quarter. Would it be possible for us to kind of get some color on the cash flow from operations for the quarter vis-à-vis last year same quarter?

Yes, Achal. So let's dissect each element of the working capital. Firstly, on inventory, we ended March quarter with a higher level of inventory due to the sudden lockdown. This actually turned out to be a blessing in disguise since it helped us penetrate the market effectively post the partial lifting of the lockdown. So end of March quarter, total inventory was approximately INR 350-odd crores. We were able to liquidate INR 100 crores of inventory during this quarter. So inventory level is now normalized as of June 30. As far as receivables are concerned, we have resumed to normal levels. We have been able to grow sustainably especially in the second half of quarter 1, we have had a healthy collection, which has led to a solid liquidity position for us. And in fact, we have paid down around INR 4 crores to INR 5 crores of debt within quarter 1. Further good news is that we have made a prepayment of INR 18 crores of debt in the month of July itself. So this will not be reflected in these numbers because this debt repayment has taken place from -- between the end of the quarter to the current day today. So this reflects how the cash flow cycle also has played out.

Right. And what about the creditors if you've talked about debtors and inventory?

So creditors, there is a decrease because we did not import as much. So there is a significant decrease in the creditor days as well.

Understood. Understood. The second question I had was with respect to CapEx. You said probably you will continue to look at the same time line for Telangana plant, possible for us to get some more color in terms of, a, what kind of CapEx we would look at for FY '21 and FY '22 each? And what kind of capacity addition we would look at in the current year as well next year?

Yes. So that's obviously an interesting question given the current market dynamics. On Telangana, like you correctly mentioned, we will stick to our normal sort of schedule. Telangana showed to commence production in the next 12 to 15 months' time. So maybe September of next fiscal is when we are aiming to have Telangana functional completely. As far as CapEx guidance is, most of Telangana CapEx will happen in the current year. So more than INR 150 crores at least will be spent on Telangana in the current year minimum. Apart from that, whatever normal sort of INR 30 crores, INR 40 crores of maintenance, CapEx and upgradeation CapEx should happen. And of course, on CapEx, these are obviously extraordinary times. We have the liberty to see how it plays out month-on-month and how the recovery in sales is if we are able to sustain the current recovery in sales where we have posted growth in June, we've had a robust recovery in the month of July. If this trajectory continues, then we will not shy away from this capacity addition. And of course, if there is any sort of major bottleneck that is coming in terms of market demand, we are happy to be flexible on the CapEx as well. We have to keep a very strong pulse of the market and a close ear to the ground. And that will, of course, in such times, you have to sort of monitor and track it very, very closely across the organizational hierarchy month-on-month. And as far as capacity addition, I think your next question should -- was Telangana in 2 to 3 years' time should totally get around 50 Kt. But by next year, it should give us around 20 Kt of additional capacity. And in the current year, very minimal capacity addition apart from Telangana, maybe another 5 to 10 kt. And this, again, is with -- we will monitor the situation closely. And as required, we can ramp up or slow down any capacity addition given the dynamic situation of the market. So like we mentioned in our opening remarks, while we are cautiously optimistic in the short run, we are bullish that there will be a vacuum in the market, and we will be in a unique position to sort of eat up this market share with the kicker for capacity addition since the growth capital has been raised.

Sure, great. Just a clarification on this consolidation part. Now what we understand is actually been...

Hello?

Hello.

Sorry, we lost the line of Mr. Lohade. We have next question from the line of Anmol Thakkar from Anmol Equities.

Hello?

Yes, Anmol.

Yes, am I audible?

Yes.

Yes. I have only 1 question. How is the branding strategy going to be for this fiscal?

Sure. So in quarter 1, branding spend was around INR 2 crores to INR 3 crores, which means it was less than 1% of sales. Branding is a very dynamic element now. And I think it's a similar concept that it is to -- that we have answered for CapEx is that if sales trajectory continues the way it has and market demand remains robust, I think it is a great time to invest in branding. We often internally say that it's not branding spend, it's branding investment, and it's always a long-term play to sort of build a strong brand equity and brand perception. Prince has always had a very strong brand recall amongst the entire value chain as far as the piping industry is concerned. And during the past 3, 4 years, we have heavily invested into the brand. And if sales trajectory continues the way it has, we think that with more and more organizations cutting down on their branding investments, it is a great time with the clutter being low to actually invest in the brand and continue to create long-term value. And then with the eyes on the long term, I think it's always good to keep investing as long as the market demand supports us. And again, it's very important to be balanced here. And if we see that market is facing the bottlenecks as far as sales is concerned, this is a very discretionary cost. It's very flexible. So like in quarter 1, when we did not see a strong business, especially in the first month because of the lockdown, we were able to reduce branding costs to less than 1%. So it's a discretionary spend. which we will not shy away from if market demand is strong.

[Operator Instructions]. We have next question from the line of Dhiral Shah from Phillip Capital.

Can you please remind you stated that in the month of June, we have seen a good growth in plumbing as well as SWR pipes. What has led to this kind of a demand? Is it a pent-up demand or you are eyeing some fresh inventory in the system?

Yes, that's a good question. I think it's been a combination of both, where there has been pent-up demand, definitely. I think channel inventory across the value chain was definitely low going into the quarter. So pent-up demand is why we've seen like a double-digit value growth in June. So I would be wrong if I said there is no pent-up demand. Having said that, I think there has been fresh demand as well, especially from semi-urban and rural, especially due to supply constraints for other smaller players, which has helped us penetrate newer markets and grow better in markets that we are already existing in. We have also added our distributors in the first quarter from a lot of these brands who are struggling. So when you add distributors, your sales gain is a sustainable one and a long-term sales gain, which is very important. So to answer your question, it's been a combination of pent-up demand with fresh demand as well.

So how many distributors have you added in Q1?

So see, it's very important to not look at distributors from a quantified point of view. Firstly, we have distributors who are doing more than INR 40 crores, INR 50 crores of business for us per annum, and we have distributors who do like INR 1 crores of business per annum. So size of distributor is really important. And apart from size, quality of distributor is also very important, where how is his wavelength in terms of hunger for growth, readiness to invest in technology and infrastructure. So what I will say is that we are very selective with adding new distributors, especially since we already have a very robust existing network, but we have been able to add distributors of high quality from these smaller players -- We also don't want to entertain any distributors who expect extended credit cycle than any -- that sort of treatment. So we will be very selective in adding new distributors, But we will add these distributors only if they are of high quality and especially in markets where we feel like we need to improve our market share, given the market potential of that market that we are talking about.

[Technical Difficulty]

I'm sorry, you're not audible.

Sir, I'm sorry to interrupt, this is the operator. Your voice is not very clear, sir. If you can come close to the mic or the device.

[Technical Difficulty]

Sir, I'm sorry, we can't understand what you're saying. The voice is distorted. Hello, Mr. Shah. Sir, I'm so sorry, we're not able to understand. Would you like to dial back again. Maybe that would help.

Yes, Sure.

We have next question from the line of Ritesh Badjatya from Asian Markets.

Sir, just on the last question regarding the distributor side. Can you tell us, sir, which geography you added the distributor? And is it fair to assume that the value-added product contribution has increased because of this new distributor?

So we have added distributors across markets, specifically in the west and north. We continue to add to our strength and our retail sort of network. So it's -- the market penetration has only improved in this areas. I think as far as new distributors, no, it does not have a direct relation with value-added product sale. We -- today, Prince is one of the few brands in this industry who has a very strong brand recall for all our product range across agriculture, plumbing and SWR. And we don't just have this range on paper. Our range sell in every market, agriculture, CPVC, SWR, UPVC, plumbing, we have a good market penetration across these verticals. We are -- range is not only on paper, which differentiates us from the rest of the industry. So we encourage all our distributors. In fact, it is mandatory for most of our distributors to cross-sell and sell all applications. And while, of course, certain applications are more lucrative and as far as margin is concerned, it is very important for us to be a strong force to reckon with in all product applications. And whatever distributor we add, we will make him sell all our products.

Okay. Okay. Sir, secondly, like in the month of June, there is a combination of the pent-up and actual demand for business once this lockdown is opening and majority of this demand is coming from the semi-urban and rural side. Now once the rural -- once this urban market also become normal and opening up started taking place going ahead, so can we also expect a significant pent-up demand because this pent-up demand is just indicating for 1.5 to 2 months. But when the urban market actually become normalized, the number of months is quite more. So can we expect some significant in the next 2 to 3 months once things become more normal in the urban side?

I hope so. We are hungry for growth. We want to grow more. And we are -- a lot of our principal markets are in urban India. And if we are able to sort of recover without the urban market, I think only once the other urban markets open up, I think that is -- could be very exciting. So we are hungry for growth, and we are monitoring the lockdown situation in every state very closely. And whenever we get an opportunity, we will sell until the last mile. Having said that, I think quarter 2, like I said, has already had a very big base because of a robust Q2 last year, so this will be a very key month. I think if we have a good Q2, we will have a good year is the way I would like it.

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

Yes. Congratulation for good recovery. Sir, this -- my question relates to gross margin. You said that around INR 12 crores got impacted because of mark-to-market on PVC. Was there any other element as well of like product mix, which may be impacting the gross margin? And what could -- if you can quantify what could be the impact of that?

So yes. So INR 10 crores to INR 12 crores of M2M loss on account of more expensive PVC coming. As far as product mix is concerned, I think the difference between value and volume growth in itself shows the kind of growth that we've posted in the value-added products and the pricing leverage that we have gained in the market today owing to the consolidation. So I think if there was -- if the M2M loss of cost, which is a onetime hit, if that was not there, of course, I think there would be a better gross margin performance. But as far as to answer your question, I think value-added products, especially in the second half of the quarter have been also seeing a good recovery.

Okay. Just I was comparing it with fourth quarter. Fourth quarter, you had certain one-off of CPVC duty and all. If I adjust to that and whether the gross margin, if I compare it with adjusted for this value product -- sorry, product composition then whether the margin has improved or remained comparable to fourth quarter?

So I think it has sustained maybe a marginal improvement as well. So yes, I think it -- if we take hit off, I think there would be a good improvement as far as gross margin also is concerned.

Okay. And sir, one data keeping question. Can you repeat the exit loan amount, which is outstanding, and how much is the cash against that is outstanding?

So the position of debt today, we have improved, as indicated by Nihar and my speech earlier. We have paid around INR 18 crores in this quarter itself in the current quarter. And I think today, we are at around INR 222 crores, INR 223-odd crores in terms of the overall debt. So our long-term debt is coming down and even short term also, there has been a reduction.

And how much was the cash balance as of 30th June?

So we had around INR 9 crores.

Apart from cash balance?

Yes.

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

Just a clarification on this cash and bank. I guess you -- are you excluding the IPO proceeds, cash in line from the IPO proceeds in this cash in line?

Yes, yes. Achal. So that, of course, is a different line item altogether. I mean, excluding that IPO proceeds, this is around INR 8.9 crores is what is in cash in bank.

And how much is IPO proceeds which is lying in the bank?

INR 243 crores. INR 243-odd crores.

INR 243 crores.

Yes.

Another question was, if I try to figure out in terms of inventory loss, what you mentioned is about INR 10 crores to INR 12 crores. Is it that now whatever we sold in the month of May also we had an inventory loss on that? Or is -- because the -- I mean on a 900 tonnes, the number appears very large in terms of rupees per kg?

Achal, it has been April and May put together.

April and May put together. Okay.

Yes, yes, very much.

The entire May volumes you would be saying that it's at a higher cost what we sold.

Yes, yes. In fact, maybe even some starting days of June as well.

Okay. Okay. Understood. The other question I had was when you talk about market consolidation, okay, one is, what we know broadly is that there are 3 to 4 players who are seeing the challenges, which is what is creating some amount of market opportunities. But in your view, is that the number? Or do you think there are more numbers to it in terms of the number of players who are facing the issue?

I'm sorry, the last 2 lines, could you repeat? You were slightly inaudible.

So in terms of the market consolidation, what we know broadly is that there are 3 or 4 players who are struggling in terms of the balance sheet and the servicing part. Are there more numbers to it? Or is that only people we're talking about, which have same issues?

Yes, Achal, of course, there is. I think this is just the tip of the iceberg. These 3, 4 names are the names you and I are familiar with. There is a lot of smaller fragmented manufacturers, a lot of organized regional guys as well. So this is not only on the unorganized side, on the organized side also, there is this challenge. So to answer your question, it is not limited to 3 or 4 players. I think these 3 or 4 players are only the more known names that you and I and the industry know of, but they definitely represent a larger chunk of players.

And with respect to this unorganized or the regional guys, what happens to their capacity? Is that up for sale? Or what happens to that?

Yes, that's a good question. I think a lot of them we said it would be up for sale as well. Yes, I think so.

And would you be interested? Do you -- have you heard even other players are looking at it or not, it really doesn't make sense?

So there are opportunities. But the way you have to look at -- we have never -- we have not shied away from inorganic growth. I think we have acquired the 2 plants from Chemplast Sanmar in 2012, which helped us improve our footprint towards South India. But what's important, especially in the piping segment when you're looking at inorganic growth is that brand is not really -- there's no brand value of a smaller player because if I were to take over his capacities, I would still sell Prince pipes. So there is not real -- not much brand value as such. I think there is asset value. And today, we are very well covered in terms of having a strategic manufacturing network, where we have 2 plants in north, 3 in west, 1 in south and additional Telangana coming up within next fiscal. So while we are open to hear out any possibilities, we will be very, very super conservative with any such sort of investments, especially in current times.

Got it. And just on the same consolidated consolidation point of discussion, is that, is it largely in the agri or do you think it is also a significant proportion in the plumbing, SWR segment as well?

It has been across applications: agri, plumbing, SWR. I would also say across geographies as well. Yes, it has not been skewed towards any 1 application or 1 market.

Understood. And with respect to the new distributor addition, you did talk about west and north you've added distributors. I suppose, west and north were the key markets or are the key markets or are the key players for us in terms of the overall mix. A, does it create any conflict, and if yes, how are you able to factor the same when you add a distributor in a particular region there already you have a distributor?

So for us, we are very clear that the company has to grow, and we are very hungry to grow. I think despite whatever our recovery has been and it has maybe even better than expectations of The Street or better than our expectations, I am not happy, I am hungry for more and we want more. And we will continue to add more distributors. As far as existing network, I think it's a good point. I think it's always good to be balanced. A lot of these distributors have grown with the company and really are the extended arm and the face of the company in the market. So of course, it's a very close line. It's something that we have to monitor. And that's where I think it really helps that we have a very good combination of a professional team who takes care of the operation and a very hands-on sort of professional team with a combination of, of course, the family being involved. So it's between the 2, we are able to sort of navigate this. It's usually a very sensitive topic in terms of trying to add more distributors but it's something that we monitor closely. And I think our mix of professionalism as well as the family business help us sort of grow across markets.

Got it. And just a last question. With respect to the storage tank, last quarter call, you did talk about this storage tanks. A, what has been the investment as on 30th of June in the storage tank product segment with respect to working capital as well as any CapEx? And B, what kind of investments are you looking at over the next, let's say, 2 to 3 years? And what kind of revenue would you look at for the same? Or rather asset turnover if you could talk about?

Yes. So before we get into numbers, let me just again give you a directional thought process here. I think it's obviously a very fragmented market, where we need a very strong manufacturing network, which we already have in place to minimalize freight costs and penetrate the market. And we also have the right distribution network to be able to sell this product. I think obviously, with the larger player going out of -- largely out of the market, I think there is a vacuum at the top of the pyramid. And we are very clear, we don't want to focus on immediate volume growth. For us, it is very important to give a quality product and consistently give a quality product. It's not that we start with the quality product then we have pressure on growth, so then your pricing comes under pressure, then you're forced to -- your quality may come under pressure. We don't want to deal with any of that. We are very clear. We want to play at the top of the pyramid. We will give -- constantly we will give a quality product with an excellent design, which we've got a very good feedback on, and that's a more sustainable approach of sort of creating value. As far as road map is concerned for next 2 or 3 years, I think internally, we have our benchmark set both quantitatively and qualitatively. We have our next target market also mapped out for the next 18 months as to where we will start manufacturing. We will use a combination of in-house and outsourcing for the production. And we are very clear how we will phase-wise improve our coverage and scale up the tanks business. It's a very small baby right now. So we have to give it time. But internally, we are very clear in terms of strategy for marketing, for production, and we also have our internal quantitative targets.

But in terms of investment?

Sure. Sorry, I missed on that. I think the investment till now has been very negligible. I think over the next 2 years, it would be anywhere between INR 15 crores to INR 20 crores of investment.

And when you say investments, you're including the working capital asset, right?

So working capital, I'm not including. I'm including the CapEx. I just want to maybe give you some color on the working capital as well for tanks. It's a cash and carry business where the money is recovered from the channel in 3 days. That is the industry norm. That is how right from the top national player to the smallest tank manufacturer, no one gives credit in this business. So that's on the working capital side as well.

And just, sir, clarification on consolidation thing...

Achal, I don't think in terms of revenue, this is going to start showing up on our balance sheet for the next 3 years. I think we should play it very conservative. We are not looking at numbers. We are looking at product quality, product design, distribution and improving the range of the tank portfolio as well. So we should be very, very conservative with any revenue or investment sort of projections for the tank business.

Understood. And just on the consolidation part, again, I'm coming back to -- I mean we know that this has been actually kind of undergoing for the last, what, 4 to 6 quarters now with respect to consolidation. You think it can go on for another 4, 6 quarters? Or you think it is more 3- to 5-year kind of a story we can play out?

That's a good question. I don't have an answer to that honestly. I think I'm at least fairly confident for the next couple of years, it should support. Do I have a 5-year vision on what the market consolidation will play out then no. I'm not sure is my answer to your question. But at least in the medium term, it is definitely -- it is aiding us currently and it will continue to aid us. Post 3 years, I will not even pretend like I have a clarity on that as well.

Got it. Got it. And just a clarification on the debt part. You said INR 222 crores is as of 31st of July, I suppose. As of 30th of June, was INR 250-odd crores. Right?

Yes. So it's been INR 18 crore...

Reduction.

So on -- just give me 1 minute, sorry?

INR 223 crores. So Achal, this is around INR 223 crores as on the current date as we speak today. So there has been a reduction in terms of overall debt. So as on June, it was INR 254-odd crores.

INR 254 crores and INR 9 crore cash and INR 243 crores of adjustment. Is that right?

Perfect. Yes. Yes.

We have next question from the line of Anil Kumar Madholia, Investor.

Yes, sir, in presentation, you have not given the figure regarding inventory days, debtors day, creditors day. You provided only for March figure only.

So we -- the presentation includes the annual numbers. So we have our March end numbers that we have provided. As far as working capital is concerned, I think we did give a strong qualitative direction, which I'm happy to repeat for clarity's sake. I think on each element, inventory we ended up in the last quarter with high level of inventory around INR 350 crores, which we have been able to reduce by selling off around -- liquidating around INR 100 crores of that inventory. So inventory today is around INR 250 crores, which is our normal level. I think it's also important to understand that in our business, it's 3 or 4 brands who have a majority of the market share. So service and on-time supply is very important to the market. As far as receivables is concerned, also, we have resumed to normal levels of around INR 180 crores to INR 190 crores of receivables that we have. Debtor days, of course, has come down because we have not imported much, especially in the quarter 1. But as a result of our strong control on the working capital, we today are in a very strong liquidity position even in such an environment where we have reduced INR 4 crores to INR 5 crores of debt within Q1. And post Q1 till date, we have paid down other INR 18 crores, INR 20 crores of debt which in itself speaks about the working capital and liquidity position of Prince today.

And one more question, sir, regarding related party transaction. You have submitted in exchange that one advance has been made of around INR 40 crore for real estate. What is that, sir?

I will take this. So basically, this is related party transaction for Prince marketing, which is a partnership firm. So there was a capital advance of close to INR 40 crores, which has been classified in the last 2 or 3 balance sheets in the company. This is for our existing property in Ruby itself. What we have done is, we have taken a valuation report from 2 valuers and basis that we have made a valuation of closer to around INR 47.3 crores and that documentation of the same would be executed in the next 2 weeks' time. So post this, the transaction would go off.

[Operator Instructions] We have next question from the line of Deepak Mehta, investor.

So my question is that for talking about distributors and leadership. So how our company's attention in the Tier 2 cities and small townships -- are we penetrating that level? Or what is the focus area to penetrate in the market?

Yes. Thank you for your question. I think for us, we have always, even before COVID, had a very strong mandate to work on one key area and that strategy is winning in many India's where we not only focus on urban India but also semi-urban and rural India. We are closely working on improving our penetration in each zone, be it northwest, south or east till the last district, till the last taluka and improving our supply chain and improving our penetration to the last mile. So our focus absolutely of the entire sales and marketing team is to improve our retail penetration. We have always been a retail-oriented B2C brand. Our distribution network, in my mind, is our biggest strength and we will continue to remain true to our strength, which is distribution.

Okay. And in future, do you see the online sales channel as a platform for pipes and all?

Sure. It is possible. I think we already are also working on something like that. But in the future, it should be better.

So you are in top e-commerce companies. Is it so, sir?

So we are not in touch with the e-commerce company as of now. But considering the -- this is like a business thing which keeps on evolving, I think there could be a possibility where in future these products could be sold online as well. As of now, the number is very miniscule, and it is not significant at all.

We have next question from the line of Anmol Takkar, an investor.

Thanks for having me back. So Parag, in his opening remarks, mentioned about a new technical collaboration with Tooling Holland. Firstly, why tooling Holland? And what is the scope of the collaboration?

Yes. Thanks, Anmol. So Tooling Holland is -- they are actually one of the global leaders in mold manufacturing. And as I mentioned, that they come with a very rich experience of more than 40 years in the mold making. They are pioneers in many critical technologies that shall help us in getting a competitive edge. We have seen huge potential in them, not only in tooling but also in projects related to productivity improvements. And of course, they have a very strong inclination towards research and innovation right from designing to the mold manufacturing. To answer your second part of the question, which is what is the scope of this collaboration, I think improving the uptime of the mold by structured method for the mold maintenance. Skill building, I think, is one of the very important areas for us. So skill building in accordance to the international standards for our technical team. Also lastly, building the knowhow related to the improvement, enhancement and modification in the process and the tooling. And with this collaboration, we are expecting a huge improvement in improving our OEE, the overall equipment efficiency, for both our processes for the injection molding as well as for the extrusion. Yes.

Anmol, just to add one more point, we'll be shortly coming out with a detailed release on this partnership, which will probably highlight a lot more in detail what exactly the entire partnership is about, probably in a week or 2.

Thank you, sir. Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to the management for closing comments. Over to you, sir.

So thank you, everyone. Thank you, Nehal, Jigar. And if anyone has any further questions, we are happy to talk to you one-on-one post this call in the coming weeks. So please drop in an e-mail or get in touch with Basu, who is our IR Officer.

Thank you so much.

Thank you very much, sir. Ladies and gentlemen, on behalf of ICICI Securities, that concludes today's conference. Thank you for joining with us. You may now disconnect your lines.