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

Ladies and gentlemen, good day, and welcome to the Prince Pipes and Fittings Q1 FY '22 Earnings Conference Call hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajesh Ravi from HDFC Securities Limited. Thank you, and over to you, sir.

Yes. Thank you, Mallika. Good morning, everyone. On behalf of HDFC Securities, we welcome you to the Q1 FY '22 earnings con call of Prince Pipes and Fittings. From the management team, we have Mr. Parag Chheda, Joint MD; Mr. Shyam Sharda, Chief Financial Officer; Mr. Anand Gupta, Deputy Chief Financial Officer; and Mr. Nihar Chheda, Vice President Strategy in this call. I now hand over the call to Mr. Parag Chheda for his opening remarks. Post which, the moderator will open the floor for Q&A. Over to you, Parag sir.

Yes. Thank you, Rajesh, and a very good morning to all. Thank you for joining us for our quarter 1 FY '22 earnings call. Hope you and your families are safe and well. The presentation and the press release have been issued to the stock exchanges and uploaded on our website. I will be keeping my opening remarks in brief so that we can have more time for Q&A. In quarter 1, we had a revenue growth of 9% and a volume degrowth of 26%. Operating margins stood at approximately 12.5%. Our results were impacted due to 3 reasons. Firstly, as we had indicated during the last quarter's call, we took a strategic decision in March that we wanted to have a high product availability in the market due to the uncertainty of a potential lockdown. Also, with the anticipated decline in PVC prices, we kept our capacities running high to produce and sell to align with the above goal. Hence, in April, the channel inventory was relatively high. Secondly, due to the restriction of the second wave, both the urban as well as the rural markets were impacted. Lastly, agri demand was muted. However, the plumbing in the SWR segments continued to deliver. Also well supported by the strong inroads gained by Prince Flowguard Plus plumbing systems in the urban, semi-urban and Tier 2 and 3 regions. Moving forward, June performance had been better than May, and July performance has been much better than June. We are returning back to our regular growth trajectory. We are moving in the right direction with strong business. The real estate sector has been reporting positive growth. This augurs well for us signaling traction piping products. As we progress, sustainability of our growth momentum is our key focus. Alliances and profitable collaborations will continue to play an important role for us across all our operating categories. Aligning with our strategy of winning in many Indias, the Ultratech Building Solution and Prince Pipes synergy is well placed to be a mutually beneficial partnership, especially for the semi-urban and rural markets. The UBS platform has a vast network of around 2,000 dealers. And Prince can now leverage the relationship of registered dealers on the UBS platform. This presence will further expand our brand visibility in our Tier 2 and 3 cities and towns, which are growing markets for our segment. Over the past few quarters, we have been highlighting how ESG is core to our overall strategy. In alignment with this, we announced the Ab Ghar Ghar Mein Ganga Campaign in Haridwar during the Maha Kumbh. As a part of this, visitors were given miniature Prince store-fit water tanks, containing holy Ganga water at special booths. We were able to provide a solution to citizens who could now take this holy water back home in a safe and hygienic manner, thus helping the government authorities to maintain the COVID guidelines. Furthermore, the miniature store-fit water tanks signified a message urging people to save water. Through this campaign, we distributed more than 10,000 small tanks with holy Ganga water to family members of senior citizens who were unable to visit ghats during the pandemic. Thank you for your time and mind share. I will now hand it over to Nihar to introduce to you our new product launch.

Thank you. Good morning, everyone. This is the day I have been looking forward to for some time now. At Prince, we have been able to build a range of innovative products, consistently catering to applications across the board in a market like India, which has typically been late in the adoption curve of technology and products that are well accepted globally. Right from the 1980s, we were ahead of the curve by driving a shift from GI to PVC pipes for domestic use. In 2017, we were early movers in bringing a global product, double-wall corrugated DWC pipes to replace RCC pipes for underground drainage. I strongly believe that this product will be able to change the face of our sanitation standards across India in the years to come. For us, the next such high-performance product is one that will improve the user experience and impact yet another segment. I am excited to introduce Prince OneFit industrial CPVC pipes. We are confident that this product will replace the conventionally used product, mild steel pipes, for industrial application. OneFit will be licensed from Corzan with our global partner of choice, Lubrizol. This Corzan product of Lubrizol gives a preferred industrial CPVC solution across the globe. Now that I have walked you through the high-performance standards of Corzan, let me also walk you through the rationale of Prince entering into this segment and the potential opportunity. Firstly, the Indian industrial piping market size is expected to be around approximately INR 16,000 crores. This is, today, dominated by the conventional MS pipes. In India today, CPVC is majorly used only for the domestic application, whereas globally, CPVC pipes are very well accepted for the industrial application as well. Thus, I believe there is a tremendous potential for industrial CPVC pipes in the Indian market. Secondly, the industrial CPVC segment is under-penetrated and has low competitive intensity. Hence, this product is an ideal complement to our existing product portfolio. Also, the pipe to fitting and valve ratio is favorable, making this a key value proposition. Lastly, this segment has high barriers to entry because of high gestation periods for orders and the required techno commercial expertise. This results in relatively high barriers to entry. Prince OneFit will provide an optimum solution to industries such as chemical, power generation, metal treatment, paper and pulp, mineral processing, water treatment plants, among many others. Now with this new product, Prince is India's first company to have a 3-polymer solution for the industrial application: EASYFIT in PVC pipes; GREENFIT PPR pipes; and now OneFit CPVC pipes. I strongly believe we are now in an opportune position to impact the industrial piping segment. Thank you all. I will now pass it on to Shyam to walk you through the fiscal performance.

Thank you, Nihar, and good morning, friends. I will be taking you through the Q1 FY '22 financials now. In this quarter, the company saw a robust revenue growth of 9% at INR 331 crores compared to INR 302 crores in Q1 FY '21. Volumes have reduced by 26% at approximately 18,500 metric tons. EBITDA was at around INR 41 crores in Q1 FY '22 compared to INR 32 crores in Q1 FY '21, a growth of 30%. EBITDA margin was at around 12.5% in Q1 FY '22 as compared to 10.5% in Q1 FY '21, indicating a margin expansion of 200 bps. The profit after tax stood at INR 18 crores compared to INR 11 crores, translating to a growth of 58%. This was owing to an overall improvement in performance at EBITDA level, aided by a sharp decrease in finance cost by 60% due to the complete repayment of long-term debt and continuous improvement in cost of short-term borrowings. On the key balance sheet parameters for the quarter ended, we would like to state our gross debt as on 30th of June 2021 stood at INR 157 crores compared to a gross debt INR 256 crores as on 30th of June 2020, thereby indicating a reduction of INR 99 crores from the previous year. We have repaid our long-term outstanding debt and have become long-term debt-free as on date. Our working capital will improve as markets open up and the inventories will normalize. It has been our priority, one, to reduce cost of borrowings; second, move recourse on channel financing facility. While we have been able to reuse the borrowing cost over the past 6 quarters, I'm glad to share that we have achieved partial recourse terms on our channel financing facility. We are in the right direction towards achieving our dual goal of customer centricity and a stronger balance sheet. With this, we would like to open the floor for questions, please. Thank you.

[Operator Instructions] The first question is from the line of Sujit Jain from ASK Investment Managers.

I just wanted to quickly check, Nihar, with you is what is our -- if you can give that number for FY '21, what is our sales mix in CPVC, PVC and others in agri, plumbing and infra? And looking at the numbers for Q1 of competitors, have we lost some market share?

Sure. So firstly, in terms of the breakup, you are aware that we do not give up segmental data from a competitive intensity point of view, but roughly around 65-odd percent is building materials, 30-odd percent is agri and 5-odd percent is infrastructure. Secondly, on your question of market share, no, we have not lost market share. I think if you -- it is not a fair thing just to look at year-on-year or Q-o-Q because the bases are very different for different companies looking at the kind of impact the 2 waves had in the past quarter 1 and the current quarter 1. I think the only reason there has been a significant volume degrowth like we mentioned, the channel inventory was very high. And if you look at the March quarter, we were actually the -- had a very strong volume growth relative to the industry. And again, if you -- like we said that if you look at the July numbers, I think we are back on our strong growth trajectory. So to answer your question, no, we have not lost market share.

Sure. But is it safe to understand that CPVC would be roughly 65%, 70%, PVC would be 15%, 20% and then the remaining other without getting into numbers?

Yes. PVC would be around 65%, 70%. CPVC would be around 18%, 20%. And the balance would be the other polymers.

Yes, yes. I'm sorry. Yes, yes. And the other thing is, I was just noticing in your FY '20 release, when the cash flow from operations got revised from minus INR 152 crores to plus INR 102 crores. So if you can explain that.

So I will take this. Actually, what was done in March '20. There was a point which was mentioned in operating activities against the financial activity, which got regrouped in the subsequent quarter. So that was in discussion with the auditor itself. So there was a realignment being done. So the classification was suitably being made thereafter.

So if you can explain further actually what went above the line of cash flow from operations when you declared FY '20 results and then what got recast in FY '22 results when you restated FY'20.

So it was basically the fixed deposit part of the thing, which was a part of the investing activity, which ideally should have formed a part of the investing activity is clubbed in the operating activity. So that got rightly classified at a later stage with the consent of auditors. So it was mainly FDs which was being raised, the money that we raised from IPO, which was parked in FDs, that classification got changed.

Okay. And one last question is on inventory. If I look in the P&L, the inventory is high at about INR 104 crores. Not just you, but would the industry be staring at some inventory losses if the prices were to go down?

So there is -- the inventory level is high right now relative to what it usually is. If you see the PVC trend, actually, it has started moving upwards as demand is normalizing and supply continues to remain tight. There was a slight inventory loss in the June quarter of around INR 5-odd crores. But I don't see a major threat of inventory loss going forward simply because PVC will only tighten from here on.

And versus making PVC compound ourselves sourcing it from, let's say, Lubrizol at least 1 player in the industry, the leader in CPVC is making their own compound. How much margins we forgo when we source PVC compound and then make CPVC pipes?

So it is tough to quantify an exact margin, firstly, because this is not a commodity. Every organization has their own sort of contracts with their suppliers and a price is formed. It is not like PVC where there is a sort of global benchmark pricing or something like that. So it's very -- it is impossible to quantify the margin. And for us, I've always stated that Prince was always perceived as a strong brand in the PVC space, also trying to sell CPVC products. So now with this tie-up, we have that inherent first-mover advantage and brand equity in PVC. And with Lubrizol, now we get that in CPVC as well since the FlowGuard Plus brand is still very strong in India. And whatever -- definitely, our costs would be higher. But I think at the operating margin level that would be set off as we ramp up market share in a space where we are under-penetrated.

And last question on channel finance, what is the guidance there? And what is the exact amount, absolute currently?

So we are at around INR 54 crores in terms of the utilization so far. And we wanted to be slightly moderate over there because we are also moving, as I said on my call, we are moving to a partial recourse type of a structure. But slow but steady is what we are looking at. Say it's around INR 54 crores to INR 55 crores as on date.

But as a percentage of sales, where do you want to keep it?

So we don't want it to be -- I think we should be in the range of around 15% to 20%, around that range and not beyond that.

Sorry, I didn't get that. INR 2,000 crores of sales, 20% of that is INR 400 crores of sales.

Yes. So yes, I'll take that. It's around 15% to 20% of our distributors are on channel finance, not as a percentage of sales. This is not something that we can have as fixed as a percentage of sales. It is basically -- we are very clear as a management that channel finance is something that we don't want give to each and every distributor. There are a handful of distributors who have a strong credit history and trust built with the company. And only those distributors are on channel finance. This is not something that we are looking to expand on aggressively. The simple point being that only we have moved from full recourse on our books to partial recourse. That is the only change.

So to understand this correctly, the absolute number is what we should be tracking and which remains at INR 55 crores. And broadly, it should remain thereabouts, and we should be focusing on the absolute number.

Correct. So it would be range bound. Yes.

The next question is from the line of Madhav Marda from FIL.

I just wanted to ask on the new product launch, which we were talking about. Who would be the key customers for this product? And how are the margins and the receivable cycle? Like does it vary from our existing business or will it largely be the same?

Sure. Thank you, Madhav. So this is still going to be through the channel. But there is no trade as such where there will be no retailers or anything in this space. So -- but we will not take any direct exposure. We will still sell through distributors, where -- our specialized distributors for this segment, industrial distributors, where we already have a decent experience because some of our PPR already sold through the industrial channel. And if I have to talk from an end user point of view, it would be various industries, like chemical, power generation, metal treatment, paper and pulp, water treatment. So these are the potential end users that we are looking at. And the gross margins are very favorable relative to our existing portfolio. And that's why I think it's a very good complement to my existing portfolio today because of the kind of value proposition that we are seeing in this space. So it may not be huge in terms of contribution to the top line, but the gross margin is going to be favorable.

Got it. And the second question is, last year, the larger players benefited from market share gains from the smaller players. Are we seeing any of the smaller players coming back in the market? Or it's the main status quo, sort of is still feasible for the larger players to gain share in the coming years?

Yes. So that's an interesting question, Madhav, and it's something that we internally try to evaluate and brainstorm on that. So if I see what have -- to answer that question, it's very important to understand what has caused that market share gain in the first place. It was a multitude of factors. Whether it was the sort of cash crunch that the smaller players were facing, the tightening of BIS norms, and now especially, post COVID, the kind of volatility that the commodity of PVC has seen. Today, if I see globally, PVC continues to remain tight. Supply of PVC continues to remain a challenge. And as demand normalizes in the Indian market, I think PVC is going to see an uptrend. The extent of the uptrend is something that needs to be understood. But to answer your question, I don't see the smaller players coming back any time soon because of this sort of environment.

Understood. And just look for demand for the rest of year, especially on like the plumbing in the agri side, how are you all seeing the market shaping up?

So agri now, I think we need to see how it will perform from November onwards because that will be the next season. On plumbing, I am optimistic about plumbing. The kind of growth that the real estate sector has been showing, I think there is still that underlying buoyancy for real estate demand, whether it's in urban India or whether it's semi-urban, rural India and the affordable housing. So I'm still optimistic for plumbing and SWR, which is anyway 65%, 70% of our overall business.

And what about the Nal se Jal program? Has that picked up in a good way and is it favorable for a larger player like us to supply volumes, sir? Or are the margins not great so we want to sort of limit the amount of volume to that business?

Madhav, could you repeat your question, please?

No, the Nal se Jal program, we were hearing that you were picked up in a good way in some of the states in the country. Just wanted to understand how you're seeing the takeoff in the demand there? And is our company looking to sell meaningful volumes or because margins are lower, we might want to limit exposure to that business?

So with government projects, the key thing has always been credit and the receivable cycle, which I think has been fairly disciplined. So we will continue to participate. And because, yes, at the gross margin level, it may not be favorable, but the volumes do help with cost absorption. In the December and March quarter, we did see a good contribution. Of course, in the current quarter, it was slightly subdued due to the lockdown. So we will continue to participate as long as the credit cycle is disciplined.

[Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

My question is on -- with the FlowGuard coming in the half year last year and now the industrial CPVC side, so over the next 3 to 5 years, how should the CPVC share in our total business should rise? And what is the incremental gross margin in CPVC over our base business of PVC?

So especially with the FlowGuard Plus brand now, it is very well aligned with our overall strategy of premiumization, which we began much before our tie-up with FlowGuard Plus as well. So I think now with this tie-up and with industrial CPVC, it may not be a huge contributor in terms of top line, but I think it will help us improve the overall market potential for CPVC over the next 5 to 10 years. I think we need to target double-digit growth in CPVC every year. It's hard to comment on how -- what that will be as a percentage of the overall revenue, but I'm pretty optimistic about strong growth in CPVC from here on.

On the incremental gross margin there?

Yes. I cannot comment on segmental margins, but CPVC is a value-added product for us. And focusing on CPVC will improve our product mix, which has been a lever for margin expansion and will continue to be a lever for margin expansion.

Okay. My second question is, there has been a lot of volatility in your margin what we saw in the last 3, 4 quarters now. What would be your best guess incrementally on the margin profile, either percentage or EBITDA per kg, whatever you are comfortable with over the next 12 months? And what kind of volume growth at the company level is what you're seeing?

Yes. So I think, firstly, if I see last year, of course, the margins were strong because of multiple reasons, like improving pricing power, better product mix and inventory gains, all 3 led to an increase in margin in the past financial year. Of course, this last quarter, the margins have reduced because of a small inventory loss. Even the sales was fairly muted. So we did not have the usual cost absorption benefits as well. So there are enough and more levers for margin expansion. What we have been consistently talking about, whether it's pricing power, value-added product mix, which will only improve with such new launches like the industrial CPVC. And operating leverage would be our third lever for margin expansion. So we need to keep working on these 3 segments, and that will lead to strong margins going forward. And I'm sorry, I missed the last part of your question.

Volume growth expectation.

So volume growth, I think, again, we are very confident that the real estate segment is underlyingly buoyant. We are also going to be making market share gains, whether it's due to -- from the unorganized segment or from other organized players because of the kind of network expansion we've been working on, because of the kind of branding investments that we've made. So whatever the industry growth is over the past few years, we have been able to outpace industry growth by 2% to 4%. And I am confident about that continuing over the next few quarters.

Just a clarification on your margin answer. The reference there for expansion, is it the expanded margin of 17% which you reported in '21, and there is an expansion case by virtue of mixed operating leverage, et cetera. Or your reference is something else?

No, I'm referring to FY '21 margin. where there was the pricing power, product mix and inventory gains. So that is -- in FY '21 on an annual basis, the EBITDA margin.

You're referencing, there is an expansion scope over that 17%?

No. I'm saying that has expanded to 17% because of these levers, and we will continue working on these levers going forward.

The next question is from the line of Chirag Lodaya from Valuequest.

Sir, just 1 clarification on margin. So first, how you look at your margins internally? Is it more EBITDA per kg basis? Or it is percentage of sales basis? How you internally evaluate this?

So we internally evaluate on a percentage and per tonne basis. But in terms of discussing it with external stakeholders or any projections, we will stick to a range in percentage terms.

And just a clarification, one more. So FY '21, you reached 17% margin. So whatever you have stated, you are saying that FY '22 and beyond that, margins will be at least 17.5% or more? Is that understanding correct?

No, that's not what I'm saying. I'm saying that there were multiple reasons for margin expansion, whether it was pricing power, product mix or inventory gain and better cost absorption because of the kind of growth we had. And I'm simply saying we need to continue working on those levers the way we have.

Right. So but in terms of range, if you can help us, what kind of range we should consider for annual margins going ahead?

So it's hard to give guidance, and we've always been conservative as a company. I understand what you're trying to get at. So I think 13% to 15% is something that we have already guided at, and I would like to stick to that. And then we are happy to keep working and trying to exceed. We are not happy with 13% to 15%. And we want to always strive to improve, whether it's on the top line or on the bottom line.

Right. In terms of annual volume, so it was in that we'll at least do whatever volumes would have been in last year. Is that base assumption correct?

I think -- do I think it is possible? Yes. And do we want to? Obviously, yes. So we need to keep working on. I think rather than speculating on what the annual number would be, I think we need to put our head down and focus on network expansion, invest in branding, trying to create a further pull for our products across that. And whatever results are going to be is going to be a result of that process. So of course, there is -- is it possible, it is very much possible.

On the run rate basis [indiscernible] so what was the reason for the decline?

I'm unable to hear you.

Sir, Q4, your employee cost for the quarter was around INR 27 crores. And in this quarter, it is at around INR 21 crores. So what has led to decline in employment cost on a Q-o-Q basis? And how we should look at this number going ahead?

So I think employee costs will remain uniform. I think in the last quarter, there are usually some incentives that is there for the team based on a strong performance. There has been no layoff or no salary cut or anything. This is just something that will -- it's usually there linked to the performance in the March quarter. And I think this is nothing as a cause of concern for layout or salary cut or anything.

The next question is from the line of Dhaval Shah from Girik Capital.

Sir, how is the demand scenario after the second lockdown? What sort of year-over-year growth are you seeing currently?