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

On behalf of ICICI Securities, I welcome you all to the conference call of Prince Pipes and Fittings Limited to discuss the recent development, which is the tie-up with Lubrizol for sourcing of CPVC compounds. From the management, we have Mr. Nihar Chheda, AVP Strategy; Mr. Vininder Baweja, COO; and Mr. Ashok Mehra, the National Sales Head who have joined us for this call. I would request Mr. Nihar Chheda to start the call with his opening remarks, post which we can then proceed with the Q&A session. Over to you, Nihar.

Yes. Thank you, Nehal. Good morning to all. Thank you for joining in on our conference call to discuss our tie-up with Lubrizol and the overall strategy moving forward. I'm very happy to announce that we have signed a multiyear deal with Lubrizol and will be their second licensee in India. Before I get into the details of the collaboration, I would like to quickly introduce 2 key members of our team here. Firstly, Vininder Baweja our Chief Operations Officer. Vininder has joined our family in the last fiscal from Hindustan Unilever, HUL, and has also worked at Eicher before that. Vininder has developed a rich experience of over 17 years in IT and marketing throughout his professional career. At Prince, he is closely working on developing our marketing strategies, strengthening the IT function to ensure that IT department is not just an enabler but a disruptor as well as improving the efficiency of our supply chain. Secondly, I would want to introduce Mr. Ashok Mehra, who is the VP and National Head of Sales. Ashok has been with us for more than 3 years now and has a total experience of over 30 years in the field of sales and marketing. Ashok has previously worked with organizations like Jaquar and Pidilite and he knows the building material space in great detail. Now that you know my team, let me give you a perspective on our partnership with Lubrizol. Our relationship with Lubrizol should not be looked at as a normal supplier-consumer transactional relationship. It is a change in the ecosystem for our internal and external stakeholders. Not only does FlowGuard help us provide premium and best-in-class CPV (sic) [ CPVC ] solutions to our value chain, but it also creates an ecosystem where we are able to sell these premium products. This will include rigorous sales team and distributor training programs, which will help us understand what parameters apart from price need to be focused on to market intelligently. Quality and technical parameters will be highlighted to premiumize the selling across the value chain. The confidence of my sales team in product quality, and knowledge of product application will be at an all-time high. This is of prime importance and was a major incentive for us to join hands with Lubrizol. We will not just be conducting sales, but we will truly be marketing from now on. We have been emphasizing on our strategy of Winning In Many India's as we try to improve our distribution network across urban, semi-urban and rural India. Our diverse distribution network, coupled with our strategically located manufacturing facilities, help us provide the ultimate penetration for our range of Prince FlowGuard Plus products. Our first mover advantage and brand recall in PVC combined with Lubrizol's brand equity in the CPVC segment, will help us extend our market leadership from the SWR and Agri segment to the CPVC segment as well. We will now be a force to reckon with across both the polymers. I also believe that the brand positioning of Lubrizol will have a ripple effect on the rest of the product portfolio as well and will help us upsell the entire product range in the long-term. Selling as premium is not something that can be achieved overnight, nor is it going to be easy. We are betting on ourselves to create long-term value, which is why we have signed a 3-year deal. Also, we believe that this is the right fit at the right time. When I say timing, I mean that in 2 ways. Firstly, from an internal point of view, we have been heavily investing in building a strong professional team, a robust distribution network, and scaled up branding spends over the past 2, 3 years. This partnership is at the right time for us in our growth journey to help us reach the next level not only as a brand but as an organization. Secondly, from an industry point of view, the organized players currently have very strong tailwinds not only due to the ongoing market consolidation but also because of the antidumping duty on the CPVC raw material. This segment is becoming a big boy's game as essentially 4 players will control the market. I believe that this is the perfect time for premiumization as we look to become a preferred brand amongst brands. Given the above tailwinds, the timing of this partnership demonstrates that our strategy is truly built to adapt. Another advantage of this relationship is that we will now be locally sourcing our product from Lubrizol's production facility in Dahej, Gujarat. This will help us improve our working capital as we will work on just-in-time inventories. This ties up with our overall focus of being practical and disciplined with working capital management and improving the overall quality of the balance sheet. To conclude, I would like to give a perspective on organizational strategy. The partnership with Lubrizol is an important cog in the wheel of an overall long-term strategy. This starts from a series of moves, which includes; hiring a brand ambassador 2.5 years ago and ramping up branding investment, capacity expansion in Jaipur in September of last year, raising the growth capital for Telangana facility, which should be operational by next fiscal, the launch of storage tanks in the last quarter, tying up with Tooling Holland last month for better operational efficiencies and superior quality molds, and now partnering with Lubrizol to enhance our brand positioning. It is my strong belief that this series of strategies are component parts of a larger organizational philosophy which will make us reach the next level in the long run. Thank you for your time and mind share. We can now open the floor for questions.

[Operator Instructions] We take the first question from the line of Maulik Patel from Equirus Securities.

Congratulations for a tie-up. Nihar, in your opening comments, you mentioned that you were a second licensee for the Lubrizol in the country. So I mean, who is the first one? Just for -- because we understand there were already 2 licensees in the -- and you are the third one.

Yes. So out of respect for our competitors, we understand that there are going to be 2 licensees, and we would be the second licensee. I think we will leave it up to the other players to make their announcements at that time. I think that is the basic respect we can show.

Sure. I understand that. I think second question is that you mentioned that the consolidation in the CPVC market that there will be 4 players. So what kind of in a market share these 4 or 5 players will be commanding right now, if you have any data point? And what they were commanding before this antidumping duty came into the picture. So just wanted to understand how much of the market share has been lost by the other players, including the unorganized in this last 1 year?

Yes. So currently, in my estimates, around 60% to 70% of the market should be controlled by the top 4 or 5 players. And I think that has improved significantly. I don't know exactly how much that improvement has been, I think you guys would be better aware than I am actually. But I think currently, 60% to 70% is controlled by the top 4, 5, which I think should only increase because this duty is there for 5 years. It's only -- the only direction from here is up.

Okay. Understood. The next question is on this -- you mentioned about the premiumization of the -- your entire product portfolio, with this tie-up, it will help us. What I understand that earlier, the Prince were largely importing the CPVC before this antidumping duty cam was largely from the China and South Korea. And in the market, the CPVC from the Prince were at a little discount to the other players. So how do you think that the retailers or the consumers will perceive once you start selling this FlowGuard brand and you have to start selling it at a premium than what you are doing it earlier. So what's your expectation or the view on this side?

Yes. This is Ashok Mehra. So I'll just take this question.

Sure.

So what we have been doing is we have been gradually ramping up our pricing even prior to we started discussing with Lubrizol. So we realized that there was a delta between our pricing and the major players. And there we have been working very hard on all fronts, improving our quality, improving our distribution network, as well as, ramping up the pricing gradually. And we are happy that even now we have closed the gap considerably. And going forward now with this Lubrizol tie-up, I'm sure we would be right up there.

Okay. And my last question. And what we understand historically the Lubrizol has made a -- or helping the Indian players like Ashirvad and others in a project business where the FlowGuard brand is approved by the consultant and architectures and which -- so what is your expectation in which particular side of the business segment, either the project or the retail where you can see a significant major thrust coming because of your tie-up within Lubrizol?

So we agree that we have been slightly slow on the project side, and we have been a very, very potent force as far as retail is concerned. Our presence is there all across the country. So this tie-up now helps us leverage this tie-up. We can definitely go ahead, and we are very bullish on the project front as well.

And Nihar here, I would just like to add to Ashok's point is what we have often noticed is that retail demand is driven by project demand. So once we get that acceptability with the top developers, top consultants who are anyway using Prince PVC products, be it SWR or other PVC products. Now they will also obviously accept our CPVC products because of this tie-up. And a lot of the times, the retail demand actually is driven by the project demand. So once we get acceptability in these top sort of prestigious projects, a lot of that is actually -- I can use the word contagious for the retail market as well. So once we get this entry into B2B for CPVC, that will also have a good ripple effect on the retail pool as well.

Okay. Okay. I got it. And when is this agreement is and when you start selling this FlowGuard brand and which state? And will this have any impact on the existing inventory, which you have been selling for the CPVC?

Yes. So operationally, we will work towards liquidating existing inventories as soon as possible. I think from October, we will be having our products into the market.

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

Nihar, first question is for you. What is the size of the CPVC market right now? And would we have any numbers on what the historical growth rate has been in volume terms for CPVC versus PVC?

So should be around INR 3,500 crore INR 4,500 crores market in our estimates. I think over the past, I think there has been a healthy double-digit CAGR over the past 4 or 5 years. But I think my estimate should be anywhere between INR 3,500 crore to INR 4,500 crore market.

Okay. And in volume terms, any indication on now, how much would be the growth rates, basically like 7%? Is it higher than PVC, how should we look at it to understand -- better understand it?

Yes. So from a directional thought process, from a percentage point of view, I think it would be the highest growth rate across all polymers. The base also is pretty small compared to PVC, but it has been the fastest-growing polymer in percentage terms year-on-year over the past 3 or 4 years.

Okay. Now I think on the press interview, yesterday, in the media interview, yesterday, you did indicate that 20% of our revenues, it comes from CPVC. Is that number right?

Yes, approximately 20%.

Right? So if one goes by that math, roughly the CPVC products would be INR 320 crores -- INR 327 crores on FY '20 numbers. And assuming that the market size is, say, INR 3,500 crores, one would imply that our market share would be around 16%, 17%. How should one look at it?

No, I think market share should be around 10%, 12% in my eyes. It is -- if it is -- we are doing around INR 350 crores, and it's a INR 3,500 crore market, roughly around 10%.

Okay. My second question is on how does the pricing mechanism work with Lubrizol? Does it put us in an advantageous situation because we are associated with the name FlowGuard? But how the local markets work is most of the other larger players, they do revise their pricing pretty frequently on a weekly or fortnightly basis. So what I'm trying to understand is whatever we procure from Lubrizol, we will have to carry a certain inventory. Is that cost fixed for 1 month, 2 months? What is the frequency with which Lubrizol changes its prices? And consequently, that will decide our ability to change the prices in the marketplace.

So Ritesh, I think there has been a misunderstanding on your part. I don't think CPVC prices change weekly or fortnightly. That is not the case. That is the case for PVC. But CPVC is barely rarely do the prices change. It would be -- if there is like a big impact, like when the duty came in or when there was a significant depreciation of the rupee, is when a large part of that cost is transferred. But CPVC is not like PVC at all. PVC would be a fortnightly or a monthly change. CPVC would change -- it would be very, very infrequent. I can't even put a time period to it. But that's not how the CPVC market works.

Okay.

Yes.

But for how long do our prices get locked. So we procure material from Lubrizol. It's a function of that. And basically, if we stock it up for 15 days or 30 days, that is how we lock our prices?

No. It's -- I mean we will not share such information. It is contractual and confidential. But all my limited point is that it's an event-based changing in pricing for the entire market. And with FlowGuard coming in, I would want to just impress this on everyone that definitely it's a premium compound, and that is why we have signed a 3-year deal. It enhances our ability to premiumize our end products and upsell and makes it easier for us to transfer that pricing to the market over a long-term. But yes, that's how the pricing mechanism will work.

Okay. And are there any minimum volume optic commitments that we have? How does it work?

I will stay away from giving contractual details. I'm sure you can appreciate the confidentiality.

Sure, sure. And just last question. You made a very interesting point on upselling the entire product range. I would like to hear it from Mr. Vininderji and Ashokji on how they plan to do it going forward, given they have come from HUL, Jaquar, and Pidilite. So there's a lot of variables that can be touched upon. So some initial thoughts from there will be quite useful over here.

So we have been working on all fronts in terms of upselling our product range, and that can be -- I think it would be visible in terms of the profits that we see in the results. It's a process, which I'm again repeating, it's a process which we decided on since the last year or so. And we have been working on all fronts, again, improvement in terms of the product quality, in terms of distribution network, in terms of pricing, in terms of our promotions, -- So it's all put together, and we have been pretty successful in that.

Vininder here. Just to add to what Mr. Ashok called out. In terms of our product mix, we are also trying to focus on how we are building on the strategy of Winning In Many India's by doing some intelligent selling. And that has been one of my key mandates here coming from Unilever that how do we get the visibility for the go-to-market and our route-to-market across my channel partners. And the more visibility I get there, it helps me to understand how my channel partner is further selling and how we as an organization can help them grow more and giving power in the hands of the salesmen to be able to do some intelligent selling basis, the geography topography of that state, that region, that market. So that kind of working, we have already triggered.

Sir, have you already put in new IT systems over here?

So we are in process. It's an ongoing process, yes. But clearly, we, as an organization, would want to embrace the new technologies, which includes things like artificial intelligence and machine learning, which really helps to upsell and cross-sell. And that's our -- that's our long-term vision as well.

The next question is from the line of Madhav Marda from Fidelity Investment.

My question was once Lubrizol FlowGuard pipes, we start selling it in the market. Do our gross margins that you were making earlier on CPVC versus what happened with the FlowGuard? Does it increase? Or does it stay the same? I'm assuming the cost of the compound that we buy would be more expensive versus the fewer sourcing earlier. So if you could just talk about it.

Yes, Madhav. Yes, that's a good question. There's definitely an increase in cost because it's a branded compound. It's a well-known component. It comes with the advantages of being accepted as the best-in-class CPVC, especially in the B2B space. So there would definitely be an increase in the cost once we start procuring from Lubrizol next month. And that is why it's a long-term deal, where we will be passing it on to the market over the long-term. And that will happen over the coming quarters, depending on how we are able to work with the forces of demand and supply and the acceptability of the product as well. So -- and that's the reason we -- even in my opening remarks, I have stated that it's a change in the ecosystem, it's something that is not going to happen overnight because there will be rigorous training of the sales force of the distributors. And I want to be candid with everyone here. We have been a value-focused company. And this is a change in not only strategy but also philosophy. And we are betting on ourselves through this deal in the long-term to create long-term value. And why can't Prince be premium today. And through distributor training, sales training, and many other investments into branding and promotional activities, we will be a premium product in the market. And I would also like to add, this will help us improve our contribution of CPVC to the top line, which in turn will improve margins as a result of product mix. And the more CPVC market that I'm able to capture that I'm able to penetrate, my average monthly sales will also increase, which will also have an operating leverage benefit. So I would like to look at bottom line, not only as a function of pricing, but also product mix as well as operating leverage benefits.

Okay. I understood. Sir, if I understand right, initially, the cost of sourcing the compound obviously goes up as you're buying from Lubrizol, but the process of increasing the prices of Prince FlowGuard CPVC pipes in the market will take some time basically. So our gross margin might take a short-term impact, but they sort of improve over the long-term. Is that the right way to think?

Perfect.

Okay. Understood. And one other question that I had was the other pipe brands in India likes of whoever has been associated with Lubrizol in the past. Any learnings from them sort of having doing their own compounds or buying from somewhere else, like any learnings that we have from there now that we are tying up with Lubrizol.

Absolutely. I think that's a great question. I think one of the things that we definitely as an organization, are really excited about is we have a lot of sort of benchmarks within the industry, a lot of quality organizations and brands, and we learn from each brand and organization. And I will give you a more specific answer here is that a lot of brands have done a good job of being able to upsell of taking that journey from being a value-focused brand to now being a premium brand. And the reason -- as far as doing this deal or learning is the biggest incentive for me to join hands with Lubrizol when that opportunity came knocking on our door was the external tailwinds that are going on. I think with the duty coming in, it's going to be a very consolidated market. And it is the time to become a preferred brand amongst brands. And the way you can do that is you can't just tie hands with Lubrizol and expect an overnight miracle of improving your CPVC sales. I think there are enough and more examples of success stories in the market. It has to be one part, one component part of our larger strategy at place. It has to be combined with investments into branding, into improving the distribution network, which is always an ongoing process. We always talk about how strong our distribution at Prince is and how robust our distribution network today is. But I'm not happy with our distribution network today. I think there is a lot of white spaces in our distribution network. We are hungry for more, and we want to improve our distribution network. We need to not look at branding only as expenditure. It has to be an investment, it has to be a long-term strategy. You can't -- it can't just be like, oh, I'm having a couple of bad quarters of business, I'm going to cut off branding expenditures. You have to look at it as a long-term strategy and be very disciplined and committed to investing in branding. So the biggest learning is, I can't look at this as in a vacuum and just say that now I've tied hand with Lubrizol, everything is going to be perfect, and it's going to be magical. I think it has to be one part of a larger strategy in place, and those dots have to connect and only then will this actually be successful. I think also the tie-up with Tooling Holland was actually a precursor to this tie-up, which will not only now -- not only do we have the best compound and raw material, but we also have a significant amount of technical expertise as far as molding and quality of our product is concerned. So I think it's important to have this series of strategies to make one large organizational strategy.

Maybe I think another way to ask that question, would you -- why did the previous organization sort of move on from Lubrizol is what I wanted to understand?

Yes. Again, so I will go back to -- of course, I don't want to name any names, but I understand your question. I can appreciate why you are asking that. I think it all comes back to timing. I think there are certain moves that were made at certain times in the industry. So if I can again give you a directional thought process, CPVC in India started off as a very niche product where there was obviously, it was a scarcity of supply. Then that graph moves towards an abundance of supply with China and Korea with cheaper material coming in and CPVC becoming commoditized. So at that time, whether premiumization was that easy or was it easier to buy lower-cost material. And -- but now with the antidumping duty coming in, it is that we are going back the way I see -- this is that we are going back 8 to 10 years to that previous mode where there is a scarcity of supply, there is not an abundance of cheap material flowing from China and Korea. So that is the reason this timing makes sense, and it may not be the same as why organizations have left in the past.

Got it. Good. And if I can ask one last question. If you think about the retail market for CPVC India, is FlowGuard the brand that a customer or plumber asks for? Or would it be Prince? Or I just want to understand like what size more, what's the selling points at the retail touch point?

Yes. So I think definitely, see, as far as B2B is concerned, I think FlowGuard is the undisputed market leader. As far as retail is concerned, there are some quality conscious markets, be it metros, be it certain zones of the country where people definitely will get the end -- who is the decision-maker in this value chain or the influencer is the plumber. So the plumber definitely has a very high regard, very high acceptability for the brand FlowGuard especially in certain markets. And why we are bullish on this synergy is because in a lot of markets, Prince already is a top 1 or 2-brand in the PVC segment. So that, coupled with the acceptability of FlowGuard will really make us a force to reckon with. I think it's a combination, basically.

The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

Is it fair to say that our CPVC market presently will be primarily in North and West? And if this is correct, then post this tie-up, does this change materially?

Yes. So we are definitely strong in North and West India. I think East is one of our fastest-growing zones, and we are looking at doing rain selling there. I think we've got a good penetration for PVC over the past 1 or 2 years. And we definitely are looking towards improving our CPVC market share there. And South India, of course, is one of the -- the highest acceptability for CPVC. And that we will improve our market share in the South as well. But I think first focus will be to fortify our CPVC market in North, West, and East where we are strong today.

Just to add to what Nihar said, South has the maximum acceptability towards FlowGuard as well. So we are banking on that. And definitely, we are going to improve our share in the South as well.

Secondly, in terms of finished goods pricing, so essentially, does Lubrizol have any call-in terms of what we price in terms of our finished products or surprising is just to us essentially?

No, see, Lubrizol is an MNC, and they are very -- I think they have a very strong view towards antitrust or anticompetitive behavior. So I don't -- it will be Prince making the call. Prince will be taking the decision. The remote is in our hands. And I think we ourselves are keen to be premium. Otherwise, we would be happy to continue sourcing generic resin and selling at a certain rate. But we are keen to premiumize. But to answer your question, we are the decision maker on all pricing of our products.

Okay. So tomorrow, if we want to sell at a discount to say, Ashirvad in South India, we are free to sell?

I mean, we want to be a premium brand, but the Prince Pipes is going to be the decision maker of the pricing of our products.

Secondly, are we looking at this tie-up from a 3-year perspective or sort of we are looking at this from sort of a long-term arrangement?

Long-term to start.

Long-term.

Okay. So it's -- so why only a 3-year arrangement? I mean any rationale on that part.

Yes. So there is -- it's -- we can -- there is an ability to renew further. I don't want to get into the contractual details. But we do have the flexibility for further renewal.

And lastly, is it possible to sort of know what has been the share of Lubrizol in the CPVC project market?

So we cannot quantify, but we could give you a qualitative thought process. I think whatever consultants or developers, we have been meeting, I think it is -- it's an undisputed leader. And it's just that with the FlowGuard name you get an automatic sort of walk-in to the most prestigious projects in Bombay, Gurgaon, Bangalore, Hyderabad, Chennai. It's a walk-in and it's an undisputed market leader. But we would not have specific numbers.

The next question is from the line of Sneha Talreja from Edelweiss.

My question is actually pertaining to -- so as you rightly said, it's a 3-year contract. So firstly, I wanted to understand what have been the contracts to the previous companies like, for example, Finolex or Ashirvad. How many year contracts do they have? And is it something exceptional to us? Or is it a common phenomenon that you have a 3-year contract and you start renewing it?

Sneha, I'm not sure of what the other contractual arrangements are. I'm not sure about what other organizations have done. But I'm very clear that we are not looking -- while the contract says 3 years, we are definitely looking at this as an absolute long-term arrangement. This just gives us additional flexibility. But you can't always go by what the contract says. The contract is one thing, but it gets more to do with the way we are thinking, the way Lubrizol is thinking. And I think that is very clear that our -- we have our wavelength match that we are doing this for the long-term. And we don't want to take any impulsive short-term decisions. So eyes are definitely on long-term value creation and both the organizations are aligned. And especially as an entrepreneur or even as a third-generation entrepreneur, we are thinking on a 10-, 15-year horizon as far as any strategy is concerned. So while the contract says 3 years, both the organizations are keen to make this a long-term partnership.

Sure. Got that. Secondly, my question was more pertaining to the FlowGuard brands. Of course, a tie-up actually brings this FlowGuard brand into picture, and it has already been associated with names like Astral or Finolex in the past. What do you feel that you adding this brand, how much value now it can add? And what's the value you still perceive because, frankly, what at least, I mean I just want to understand your opinion. How does the market look at because Lubrizol FlowGuard brand has changed multiple brands as of now? So how does it being perceived in the market?

Yes. I think perception of marketing is about perception. I think when we -- before signing the deal, we understood the intent of Lubrizol and it's to create that stronger brand perception. They will be further making investments into the brand in India. For us, what was exciting was B2B. We are nowhere in B2B today. That's a very unexplored market for us as far as CPVC is concerned. And this gives us an absolute walk-in to those projects. So in terms of opportunity or market potential, that was one key immediate sort of low-hanging fruit that we can definitely attack. And as far as B2C is concerned, is a lot of top dealers and distributors where we have strong penetration. We are already selling Prince products for PVC. But it is for CPVC because certain other organizations obviously have a first mover advantage there. The way we do in PVC, they were maybe not accepting our CPVC as much. But now with this brand equity of FlowGuard, there is no reason why our CPVC also will not be accepted. And to add to that, I will also be -- again, I want to be candid, we were -- there is no -- it's no secret that Prince used to procure our raw materials from Korea and China before the duty. We were a value-focused player, where definitely the quality coming in from Korea and China was not as good as other polymers. And the way it's not a secret with anyone, even my sales team knew that. And maybe their confidence or I know for a fact their confidence was not that high when they knew that we are maybe not buying the best compound or the best raw materials there. And for me, what it boils down to is the confidence of my sales team when he is at a retailer or at a distributor or at a project site convincing a key stakeholder to buy a CPVC product of Prince, who are already buying my PVC products. And with this coming in I think the sales team confidence, the channel partner confidence, we have already done some interactions, and it is at an all-time high to replicate our success story in PVC, in CPVC as well.

So Nihar, just to add on to this point on acceptability on a lighter note, our phones have not stopped ringing since the time we made this announcement. And this is -- we've been flooded with congratulatory messages, and this has come from quarters which were really unexpected. And a lot of consultants, a lot of developers, a lot of distributors in the market who are earlier maybe trend setters or skeptical they have all been sending us congratulatory messages, and it's been really a revolution for us as well. We were expecting a good response from the market, but this has been really more than what we expected.

Glad to hear that, sir. We have been one of those well-wishers. So second, my last question would be regarding -- as you rightly said, it opens up your doors for the project business where you were not present. So just one understanding that we have with your project business involves a lower margin compared to your retail segment where you're currently strongest. That's one point. And secondly, as you also mentioned that, of course, tying up with Lubrizol also entails a bit of a premium raw material pricing for you. Of course, you said that some of it you will pass it on. So how do we see margins for the next coming times? I mean how much of it could be passed on and how much is the margin dilution you see in the project business?

Yes. So I think that's a good point. Definitely, it's again, no secret that B2B, obviously, because of the volumes in any industry, not just the piping industry, there is going to be more pressure. But the way you have to look at project costing from a different point of view, you also have to see the operating leverage benefits that are going to kick in. So definitely, the bigger the volume, the more competitive that you have to be. But that then gives your advantages on the operating leverage front. So that is something that we are very clear. And I would also like to say there are a lot top -- a lot of top developers and consultants with whom it is FlowGuard or nothing. So it's -- we are going to get an entry into that -- into those markets as well. And of course, while like Ashok said, the initial birth has been very exciting. The value is only going to be created into -- in the long-term because this excitement has to be translated into actual execution, which will take maybe not long-term, but at least in the medium-term, we will be able to translate that. And which is why it's not just a deal for 1 year or anything like that. We are betting on ourselves in the long-term.

The next question is from the line of Achal Lohade from JM Financial.

[Technical Difficulty]

Sir, I'm so sorry to interrupt. But your audio is not audible, sir.

Is it better now -- better?

Could you please speak a bit louder and if you could speak from the handset, please?

Yes. Can you hear me now? Is it better?

Yes, sir.

Okay. So my question is, given the background of -- the cost increase will be immediate by the price increase of the end product will happen over a period of time, more B2B and investment into brand and other investments. How do we look at the operating margins? What kind of margin range can we look at on next let's say, 2- to 3-year perspective at the company level?

So of course, it's -- like you said, there are so many variables in play, which makes it -- it's a lot of parameters that have to be considered. I think as an organization, we have always been conservative with guiding any investors to consider like 12% to 13% EBITDA margin, and we are happy to be conservative with any EBITDA guidance's. So I know that you're -- I still can understand and appreciate why you're looking for a certain number. So we want to be very conservative, and I think a 12% to 13% margin is what we have demonstrated in the past, and we will continue to stick to that. We are happy to overdeliver.

Right. And is there a risk to this margin assuming that sales are normal, normal situation is there in the market. And given the way the cost will move. Would there be a risk to this 12% to 13% margin expectation, let's say, next -- for next 2 to 3 quarters?

So the only risk I see is that if there is a significant adverse impact on the economy at large. And if there is some other major extension of lockdown and we are not able to do our sort of minimum monthly sales. But as long as we are able to achieve our top line and our basic -- minimum top line, I think a 12% margin is not at risk.

Okay. And that kind of normalized sales, we've already started seeing from the month of June, July onwards, right? Is that fair?

Yes. Let me give you some more color there. So quarter 1, I think we did mention in the commentary as well that May was like an 80% recovery. June was like a double-digit value growth that we saw. And a lot of that was obviously due to multiple factors like Agri being strong, pent-up demand in housing. I think quarter 2, if I look at our performance up to now, it's been a sort of 80% sort of recovery in business. There have been markets that have been going in and out of lockdown. So there is definitely -- there is no -- we are not seeing growth, there is a degrowth year-on-year in the month of July. Of course, August, we do have some time left. But we are -- we did see like an 80% recovery in July. And what everyone must understand is that August and September were really, really robust months last year. We are working with a very big base because Q2 of last year, we were seeing a major of the market consolidation taking place. There was -- the duty actually was announced if I'm not wrong in this quarter last year, which is when there was -- although that channel was stockpiling the inventory. So we are dealing with a very high base of quarter 2. So I would just want to mention that we are -- we have seen an 80% recovery in July and August and September will be key since the base that we are working with is really big.

Understood. Understood. And I don't know if you could answer this, but for the CPVC compound procurement flow from Lubrizol, is there any minimum guaranteed volumes we have signed up for? And would the cost be initially higher and as sale increases the cost decline? Or is the pricing is fairly steady?

Yes. Achal, I'm sure you can understand, we don't want to discuss those details of the contract. And I can -- I'm confident you will understand why.

And with respect to B2B versus B2C, what is the mix currently for us? And how has it changed in the last, let's say, 3 to 5 years?

We are not there in B2B. We were never in B2B, we are not in B2B. I think drop-down, we have always been a retail-oriented brand. A part of that was definitely to do with acceptability within consultants. We were always seen as a value-focused brand. So B2B, since the past 3 years, and even today is a very small part of business, which is why we are harping on it so much. Again, we don't -- we are not expecting any overnight results. But the base in itself is small. So there's a significant amount of low-hanging fruit moving forward over the next 2 to 3 years.

These comments are with respect to only CPVC segment or the aggregate company level you are saying?

CPVC. PVC...

So at the aggregate company. I would like to know at the aggregate company level, how much is B2B already. And how do you look at it, let's say next 3-year perspective.

Yes. So this is Ashok here. On an aggregate level, we would say it's 80/20. 80% would be retail, 20% would be projects where projects also trickle down in the retail platform, you can say. So I would put it at 80/20 at this point of time.

So a lot of projects in Tier 3, Tier 4 are catered through like a big dealer or wholesalers will work with a contractor to do like a G+3, G+4 sort of building. So that does not register as project sales. That is a trickle-down sales, which we don't have visibility of. So our best estimate would be 15% to 20% would be B2B.

Got it. And just one last question with respect to -- even earlier, we were the market leader for the PPR product and CPVC was somewhat lower price than PPR. If you're seeing pricing improvement in case of CPVC at FlowGuard brand. Are you -- do you think there could be a possibility of any cannibalization out there?

So no, we do not see any possibility of cannibalization because there are certain markets where we are selling PPR and we are still strong in those markets. And there have been players in PPR who have been selling at a price much lower than us. And we have seen over a period of time, those players not doing that well currently because we have been maintaining our quality in PPR. And we have been holding those as far as those markets are concerned. And we have no intention to replace PPR with CPVC in those markets.

The next question is from the line of Akash Pipara from Nippon India Mutual Fund.

Most of my questions have already been answered. I just have one query to ask. Yes, I see you are trying to keep your Lubrizol contract confidential. So I just want to ask is there any impact of this as an exclusivity is in place. Do you foresee any change in sourcing for a B2C products? Or is there any change in the cost structure because of this deal?

I'm sorry, I missed on the essence of the -- could you please repeat the question?

Yes. Lubrizol, your new Lubrizol agreement, does it have any sourcing exclusivities which could change your cost structure or sourcing -- your existing sourcing we need to see.

Yes. So it is -- we will be buying -- I'm sorry.

B2C as well as B2B?

Yes, yes. So as difficult at an organization level, any -- every CPVC pipe coming out of our facilities will be with FlowGuard Plus. It is an exclusive arrangement. And like we have mentioned, there is definitely an increase in cost, which we want to be premium, and we will premiumize over the long-term. And I just want to also address another question related to the contract that a couple of people have been asking. As far as the minimum offtake is concerned, there is a minimum offtake of volume, which is well within our reach. So it has been negotiated accordingly. And there is a number, but it is well within reach.

The next question is from the line of Utkarsh Nopany from Haitong Research.

I have a few questions to ask. First is like, what kind of an increase in CPVC revenue share we are targeting over the next 3 years?

So Ashok is smiling at me. I think there is aggressive increase that we would want to take internally. But as far as guidance's are concerned, I will stay away from quantifying that. We definitely want to increase the CPVC share. I think there is no secret. But we -- it's a fine line because of whatever market share increase that we want to do, we want to do in a sustainable manner. So we not only are looking at market share improvement. We also want to premiumize which is why I want to harp on -- we should not expect any miraculous overnight results. This is going to be over the medium-term as we try to sustainably improve market share, but we definitely want to increase our overall contribution of CPVC to the top line from what it is today at around 20%.

So like from 20%, can you give some sense what sort of an annual increase in our revenue share we are looking at, maybe, say, 1% to 2% kind of?

Yes. I think a 1% to 2% increase would definitely be viable.

Okay. And we have talked about premiumization in the CPVC portfolio. So whether this alliance would help us in further reducing the price gap with major brands for non-CPVC portfolio as well?

Absolutely. I think that's something we've been doing for the past 1 or 2 years, brand monetization in PVC. I think the margins speak for themselves, our performance speaks for itself. And there is -- in certain markets for certain applications, there is a further gap, which we have identified. And over the medium-term, this is definitely going to have a ripple effect on the rest of our portfolio. And the positioning of Prince in itself needs to change and which will change, and we will make it change.

Okay. Connecting question to this is that like our gross margin stood at 31% in FY '20. So now since we are targeting an increase in CPVC revenue share, which commands much higher gross margin over other polymers. And since we are expecting further narrowing of price gap with major brands or non-CPVC as well as CPC -- CPVC. What kind of a sustainable gross margin we are targeting from FY '22 onwards?

So definitely, I think, again, I will stay away from quantifying, but from a directional thought process, there is scope to improve margin, not only at EBITDA level, but at a gross margin level itself. There is a decent gap that we need these that we want to cover and that we will cover. But we prefer to -- we want the numbers to do the talking. And once we deliver the results, I think that will be the best guidance or confidence builder. But if your question is, is there scope for improvement, there absolutely is. And we are working internally, but we want to be conservative with guidance's.

So can we assume that 31% is the base minimum margin which we can think of blocking and a bit whatever changes we are anticipating, our gross margin can improve from that level going forward?

See ideally, yes. But given the current business environment, the macros are very uncertain. And like I mentioned previously as well, there is a minimum quarterly sales that we need to do for the operating leverage benefits to kick in. So with the -- given current uncertainty in macros, in this fiscal, giving margin guidance's or a minimum margin is not easy. But from FY '22, I think 31% gross margin is a fair guidance.

Okay. And can you just give us a sense what is your CPVC revenue split by geography wise?

Yes. Again, I'll give you a direction thought process. North and West is a majority of the market followed by South and East would be last for CPVC.

Okay. And can you just give some sense that how much we are or what would be the share of South market in CPVC?

We, again, don't want to give any numbers, but a qualitative thought process can be given.

Okay. The next question is from the line of Praveen Sahay from Edelweiss.

Congratulations for this tie-up, sir. My first question is you have 6 plants. Do you manufacture or do you plan to manufacture CPVC from all those 6 plants?

No, not from all 6 plants, but we definitely want to have a good footprint in each zone. And I think Telangana coming in by next year will help us improve our service and our timely supplies to our channel partners and the entire supply chain in the South. We will be manufacturing CPVC in the South. Today, the CPVC of South India comes from the other facilities. So that not only means higher freight costs, but it also means that the service levels have a scope for improvement. Already, we are manufacturing locally CPVC in North and West and South is the last part of the puzzle.

Okay. And also this agreement is along within Lubrizol for their just the Gujarat plant or you can also import from them?

We are a licensee. So there is a flexibility to import if we want to. It's up to the licensee's discretion.

And there is also no geographical restriction as there is another licensee in the market?

No. We are a pan-India player, and we are a pan-India licensee.

Okay. Okay. And current volume, can you give, CPVC volume of the company right now?

No. I think we have stayed away from quantifying that polymer wise breakup. So I think you can appreciate the competitive intensity that there is. But having said that, CPVC is around 20% contribution in value to the top line.

And is it possible to give any capacity number of Lubrizol plant in the Gujarat?

I actually -- I'm not sure of those numbers. But I will -- I would want to add there that they definitely have given us assurance that there is supply security even if we grew at a very high year-on-year rate, we will -- there is no uncertainty as far as supply security is concerned for the next few years.

The next question is from the line of Arafat Saiyed from Reliance Securities.

Yes. Congrats on your tie-up. Sir, my questions is like you said that this is market size of CPVC is close to INR 4000 crores. So just want to understand in terms of tonnes, how much is that, sir?

Arafat, I was not -- I think there's some disturbance in the background. [Foreign Language]

Sure.

Mr. Saiyed, there is a lot of background...

Hello, am I audible, sir? Yes. My question is you said that the market size of CPVC is close to INR 4,000 crores. So I just want to understand in terms of tonnes, how much that would be, sir?

Should be north of 150 kT.

Okay. Okay. Fine, sir. Fine. And sir, my second question is, the let's say the antidumping duty on provision basis has started last year in August. On six months it was on a portal basis since February, it is not -- for next 5 years. So I just want to understand how you approached Lubrizol earlier also in terms of getting tie-up. Or you just started now only?

No. Lubrizol has approached us, and that has been after -- it's a onetime thing and we grabbed the opportunity.

Thank you. Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Nehal Shah for closing comments.

Yes. Thank you so much for the time. Nihar, would you want to add as well?

Yes. Just thank you, everyone. I think we have seen a good participation today. Thank you to everyone who has attended for your time and your mind share. And thanks, Nehal and Jigar for hosting this.