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

Good morning, ladies and gentlemen. Welcome to Prince Pipes and Fittings Q2 FY '22 Post Results Conference Call, hosted by Antique Stockbroking. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Zade from Antique Stockbroking. Thank you, and over to you, sir.

Thanks, [ Suzzane ], and good morning, everyone. Thanks for joining us on the call. We thank the management of Prince Pipes and Fittings for giving us the opportunity to host this post-result quarterly conference call. Today, we have with us the senior management team of company, represented by Mr. Parag Chheda, Joint Managing Director; Mr. Shyam Sharda, CFO; Mr. Anand Gupta, Deputy CFO; Mr. Nihar Chheda, VP Strategy. Without further delay, I hand over the call to the management for the opening remarks. Post that, we can open the floor for Q&A. Thank you, and over to you, sir.

Yes. Thank you, Amit. A very good morning to all, and best wishes for the festive season to all our participants today. Thank you for joining us for our quarter 2 FY '22 earnings call. The presentation and the press release have been issued to the stock exchanges and uploaded on our website. In the September quarter, the economic activity started normalizing. This normalization has been supported by the ramp-up of the vaccination drive, favorable sentiments in the Indian real estate sector and an overall revival of the global growth. India's economy, which contracted by about 7.3% due to the COVID-19 pandemic, has been projected by IMF to be the fastest-growing economy in the world in 2022. I believe we at Prince Pipes are well placed to ride the industry tailwinds, which is augmented by positive economic momentum. On this quarter's performance, we have been able to drive a robust growth in both value and volume. Our volume in quarter 2 FY '22 was at approximately 42,845 metric tons, which is a growth of 22% compared to the base of quarter 2 FY '21, which was already a robust quarter in terms of volume delivery. On the back of this, I'm delighted to state that we have delivered the highest quarterly volume performance in our history. We have been able to achieve this by focusing on network expansion, product portfolio expansion, combined with strong supply security. Furthermore, this has been attained on the back of ongoing industry consolidation and in the face of a global supply chain crisis. Given the current trajectory, we are moving in the right direction as we continue to strengthen business fundamentals. On behalf of the team, I'm delighted to share that my Jaipur facility has won gold in the eighth edition of National Awards for Manufacturing Competitiveness 2021, organized by The International Research Institute for Manufacturing. The jury audited several core attributes of leadership, expertise, quality and excellence. The program recognizes manufacturing organizations that have excelled in their business through implementation of strong competitive strategy, coherence to its growth plans to become world-class. Also, I'm glad to share that our team in Hyderabad conducted a vaccination drive to secure the health of retailers and plumbers in Hyderabad city. Our plumbers are an important part of our ecosystem, and we have been undertaking several activities for their welfare, which we will continue as we move ahead and work together. We also realized our sustainability report ahead of mandatory time lines of next year, signifying clearly that we are committed to sustainability goals in true spirit and not merely on paper. Prince has been making steady headway on the ESG front. As you're all aware, we manufacture plastic pipes and fittings using 4 different polymers, which is UPVC, CPVC, PPR and HDPE. Our deep technical know-how offers our channel quality-driven and ecosystem eco-friendly products. Furthermore, this also helps us to design our systems that are energy efficient, adaptive to climate change and promote environmental production with easy installation. Our products are majorly led free, easy to reuse and recycle low noise, low-bacteria growth and assured of leading quality while minimizing any corrosion and leakage issues. While our annual sustainability report outlines our ESG initiatives in detail, our focus continues on the following goals: first, adherences to environmental protection and focus on product innovation; second, increasing our solar energy usage and reducing the dependence on grid; third, focus on social causes and community services with the measurement of impact; fourth, increasing women participation workforce in our organization; fifth, ethical and integrity-led business growth; and lastly, sixth, adherence to the highest governance standards. Through this quarter, we continue to take various brand-building and CSR initiatives to make powerful impact in not only the marketplace, but also in our society. We distributed STOREFIT water tanks of 500 liters capacity to villages along LOC Kashmir, with the assistance of the Indian Army. Water distribution and transportation is a critical issue across our country, especially in remote locations along the LOC. We are very grateful to the Indian Army for helping us drive this activity, and we hope to better the ease of living, health and quality of life of rural India. This quarter, Prince also participated in the Rath Yatra in Odisha by distributing food grains and groceries to devotees. I'm proud to announce that Prince is the co-branding sponsorer of the blockbuster Sooryavanshi. The much awaited film stars our brand ambassador, Akshay Kumar, and we believe the film shall have a strong mass connect with retailers, plumbers and homeowners across India. This is in continuation with our co-branding association with Akshay Kumar's film, Mission Mangal in 2018, through which we were able to foster better brand recall and stronger brand positioning. Thank you for your time and mind share. I will now hand it over to Shyam to take you through the key financials.

Thank you, Parag bhai, and good morning, friends. I'll be taking you through the Q2 FY '22 financials now. In this quarter, the company saw a robust revenue growth of 66% at INR 761 crores compared to INR 459 crores in Q2 FY '21. The volume grew by 22% at approximately 42,845 metric tons. EBITDA was at INR 123 crores in Q2 FY '22 compared to INR 80 crores in Q2 FY '21, indicating a growth of 53%. EBITDA margin is at 16.1% in Q2 FY '22. A&P spend increased by 36% over the previous year quarter and was at INR 9.6 crores during the relevant quarter. Further, our finance cost has reduced by 40% due to the complete repayment of long-term debt and continuous improvement in cost of borrowing. Profit after tax stood at INR 76 crores compared to INR 47 crores, translating to a growth of healthy 62%. Given the current raw material supply shortage, we have taken a conscious decision to have higher inventory levels, and our inventory is presently at 86 days, while our creditor is at 64 days. Despite the robust volume growth, we have seen an improvement in debtors, which is currently at 48 days. In a consolidating market, we need to achieve sustainable growth by driving discipline in our receivables. We have started to further realign our overall trade policy visible using multiple levers. One further step in this direction in the application of interest on overdues in certain markets. We hope to tighten our debtor levels without compromising on the volume growth. With this, we would like to open the floor for the questions, please. Thank you.

Should we open up for questions?

Yes, please.

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

Congratulations on higher volumes. My question is related to 6-month volume, which are up [ 40%. ] Could this run rate of 42% per quarter be sustained in Q3 and Q4?

Yes. Thank you, Sujit. So if I look at the first half, like you rightly said that we have been able to grow year-on-year if you look at it from a Q2 to Q2 and H1 to H1 perspective, even in the challenging circumstances. And I think it's more important to look in volume terms rather than in value terms because of the kind of increase we've seen in the realization. As far as run rate going forward, I think what we need to understand is that last year, December quarter and March quarter also were very, very robust for us. I think if I look at Q3 last year, we posted 18% year-on-year volume growth. And in Q4 last year, we posted more than 25% of volume growth on a year-on-year basis. So again, similarly, like the base of the current of the second quarter, we are looking at a very high pace going forward. And I think given the environment today, the kind of supply security that we have and the various initiatives that we're doing as far as network expansion and product portfolio expansion is concerned, we would like to consistently sort of deliver this kind of growth. And I think today, the environment is present for us to be able to do it consistently.

Right. So for the full year, would we be reaching 145,000, 150,000 kind of a volume, 150,000?

See, I will refrain from giving that sort of specific detailed volume numbers. We are sitting only in the half year today. So it's not fair for me to give an exact volume guidance. I think our focus has to just be on network expansion, product portfolio expansion and keeping our supply security strong. And we will be in the right place to be able to consistently deliver growth. But I will refrain from giving such sort of quantified guidances today.

What I'm asking is basically there is issue with the dealers at high prices, taking up inventory, their reluctance. Would that affect -- would that impact or that would not have impact?

Of course, it does have an impact. It has an impact across the value chain, right, from the processor, distributor and then downward as well. So even if I look at my current quarter, we have been able to deliver a 22% volume growth and still reduce our receivables, which is a testament to how we've been able to balance bringing in a discipline on the receivables and still being able to post this kind of a volume growth. Yes, there is going to reach a certain amount of resistance in the channel, but we are having those conversations with our key distributors in our principal markets, encouraging them to increase the investment in the business. And it is a logical conversation we are having because today, anyone who is investing in the business is bound to make a profitable investment, the way the commodities have moved and the way the PVC cycle is moving, distributors are ready to invest because they see that if they invest and play, they will have a more profitable bottom line rather than not investing.

Sir, very helpful. And one question is on your realization versus the realization of the industry leader in CPVC. Because of very high realizations in the market and some down trading in the market, has the gap narrowed down?

Yes. The gap in CPVC, if I look at it on a per tonne basis, Prince realization versus the market leader realization has narrowed down. I think this journey of narrowing this price gap down not only in CPVC, but in PVC as well, started around 2 or 3 years ago. Specifically coming to CPVC, the gap used to be maybe 10% or even 15% in some markets, which we were able to reduce. When we got FlowGuard, the gap was around 7% to 8%. And now post FlowGuard, we've been able to further reduce that gap to 2% to 3%. In fact, in some markets where we are strong, and we have received a very encouraging take off of our CPVC product, we are selling at a parity or even at a premium in some markets. So that gap has more or less moved out. And despite that, we've had high double-digit growth in CPVC polymer as well in volume growth.

Yes, please go ahead.

So all I was saying is in CPVC, the growth has been high double digit in volume and value terms.

The next question is from the line of Rahul Agarwal from InCred Capital.

Sir, 3 quick questions. Firstly, on the sales mix. Could you give some detail as in how was the plumbing and agri mix for the second quarter and first half, please?

Yes. So as you are aware, as an industry norm and as company policy, we don't share segmental breakups, but again, we'll give you a direction. The growth, especially in the September quarter, has been led by plumbing and SWR segment both in B2C and in B2B where we are making some early entries. So this growth has been largely driven by plumbing and SWR. I think this trend will continue in December quarter as well. And if I have to look further ahead into March quarter, I am pretty optimistic about agri season seeing a fair amount of resilience and a come back in the March quarter, simply because of the monsoons being robust. We do believe that the income per capita in rural India will be increasing, and there will be a positive sentiment amongst rural India. And especially since the past agri season, agri pipe season has been poor in the first quarter. I think fourth quarter, we could see plumbing continuing the momentum, which will then get enhanced by the agri volumes as well in the March quarter.

Got it, sir. The first half mix for agri would be how much in terms of whatever you want to give, revenue volume or either way, just a percentage in terms of agri, non-agri?

So it's usually around 30% to 35% is usually agri in terms of contribution.

Got it, sir. Sir, secondly, on the inventory, obviously, you mentioned that it is higher than normal. When does this normalize? The inventory has gone up by INR 300 crores in the first half when I compare balance sheet between March and September, that is also impacting the cash flow, the operating cash flow was negative for the first half. Could you help understand that, please?

Absolutely. I think that's a very important question, which needs to be understood. So there are 2 parts to this. One is the per tonne cost -- the rupees per tonne, itself has gone up, so there is -- because of the upward cycle in PVC. So one is that even if I'm keeping the same volume in crores or in value, the inventory will be looking higher. So that's one impact. And the second impact is the fact that we took a conscious decision at the beginning of this year, somewhere in the first quarter, to work with higher inventories given the kind of global supply chain issues we are seeing, or I would rather call it a global supply chain crisis. So I think one of the reasons we've been able to outperform the industry in the September quarter has been the kind of supply security we've had. We've had the ability, the flexibility to have this kind of volume growth because apart from all the marketing initiatives that we're doing, we've had a very, very robust supply security across all 4 polymers, and that will continue in for the rest of the year. So inventories will continue to be slightly elevated. It is tough to comment exactly when it will normalize. It's a function of how the global supply chain moves and how the commodity prices move. So that's something that our internal think tank has to take those calls, and these things are monitored closely on a monthly basis.

Got it. Sir, could you help clarify for all across 4 polymers, how is your sourcing, as in domestic versus import?

Sure. So I won't go polymer-wise, but broadly speaking, we have dependence both on domestic and on import. CPVC, if I have to talk specifically, then that is completely with Lubrizol, which we source locally from the Dahej plant. The rest are a combination of domestic and import.

Got it, sir. And lastly, if I may, just on the CapEx first half of INR 80 crores. Any direction for the full year this year and next year, please?

So I think it should be similar sort of CapEx in the second half of the year, again, depending on the demand/supply situation, but a similar CapEx in the second half of the year.

The next question comes from the line of Madhav Marda from Fidelity Investments.

I just wanted to check that, has there been any shift in demand that you're seeing from PVC to CPVC because of the higher prices? And could you also help us understand -- we understand that PVC prices has moved up a lot. How much has been the percentage -- percent increase in CPVC prices in the last ?

So we have seen some amount of structural change in demand to some extent from PVC to CPVC because of that pricing gap between CPVC and PVC really narrowing down. So we have seen a shift in demand in the September quarter towards CPVC. Going forward, I do think that it's important that this gap stays this way for this to be a structural change in the consumer trend. I believe that this is only a temporary phenomenon. I think, again, the gap between PVC and CPVC will widen. I cannot quantify what the gap will be or how it would compare to what the gap was previously. But I think that for a structural change to happen from PVC to CPVC, this kind of gap needs to remain for a few continuous quarters. And I think we will have a better assessment of this at the end of the financial year.

And how much of the gap broadly between PVC and CPVC, like maybe 6 months or 9 months back? And how much has that gap narrowed down to today?

So it used to be around -- so I don't have the exact numbers, Madhav. Happy to share offline. You can get in touch with my team and we can share the exact numbers, but broadly speaking, CPVC was maybe 1.5 to 2.0x more expensive than PVC and that narrowly -- has significantly come down.

Got it. And obviously, I think CPVC is -- in terms of gross margin per kg, I think it's a higher-margin product that must be helping us on a margin cycle.

Absolutely. I think the focus has been not only on CPVC, but on overall plumbing and SWR, the entire household segment or the domestic use segment, is more value-added at the gross margin level relative to agri. And there has been a conscious effort to have a higher contribution from that segment, which has been reflected in our performance over the past 2 to 3 years.

And there is no element of like an inventory gain or loss in any meaningful way in Q2, right, like subsidy, like straightforward number set?

Yes. No significant gain or loss in September.

And just the last question was on the government spending for -- on the pipe water supply, et cetera. Is that -- are we seeing good momentum for that on the ground now? And do we expect like once the season picks up like January onwards, it could be pretty strong? Or is it still sort of in a nascent stage?

I think we did -- it was -- this Jal Jeevan Mission was a major contributor to the growth that we were able to deliver in the December and in the March quarter last year. I would say it have cooled off to some extent in the first half of the current fiscal. However, in certain states, we are seeing green shoots of demand. And I am pretty optimistic that in the second half of this year or maybe in the March quarter, we should see an increase in the orders for the Jal Jeevan mission.

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

Congratulations for the great performance. My first question is, in terms of the -- you said the receivable days, you want to tighten it further. Can you help us understand: a, is there a change in terms of the credit norms? And b, the channel financing scope build is counting, what has been the quantum for September and March?

So I think it is a clear -- internally, we have a clarity of thoughts that we want to improve on our receivables days. Again, this journey has started 4 or 5 years ago, and our receivables have significantly reduced from where they were 4 or 5 years ago. Even today, if I look at my receivables days relative to my peers, we are still not happy with where we are today. There is definitely room to improve from hereon. To answer your question specifically, is there a change in the credit policy? Yes. And the existing credit policy also, we are -- we have made certain changes in. So like we said in our initial remarks that we have started charging interest on overdue payments in certain markets. And if the -- if we are able to see a positive impact of that, we will ramp that up to a national level eventually, phase by phase manner. We have also started implementing our credit policy in a much tighter manner and are trying to find a better balance between growth and receivables. And specifically, again, on the channel financing outstanding as of quarter end was 60 days -- INR 60 crores. Excuse me, it was INR 60 crores.

And which is -- which means it's actually kind of reduced a bit actually compared to March, is that right?

Yes, yes, yes. So just to clarify, as a part of our overall credit policy tightening, we do not have any intention of ramping up channel finance. As we have repeatedly stated that now all our key distributors in principal markets, whoever needed channel finance is now enrolled in the program. This is not something that we are trying to scale up in a major way. So this outstanding amount should be ranged down. And you're right, we have seen a slight reduction in this amount relative to the March end.

Great. If I look at the first half volumes and see it on a 2-year because last year, first half was impacted. I see actually, the volume growth is just steady, actually for us, even for the others, it's barely positive, if not mildly negative. So how do you see this demand? A, do you see that it's entirely attributed to the agri drop and the plumbing has grown? Or you think timing was just flattish and now you will see the momentum there?

Yes, that's a good question, Achal, and that's something we've been analyzing internally as well. If I look at our 2-year volume performance, you're right, it is pretty stable. Am I happy with that, of course, not. But if I look at the context, one, relative to the industry or relative to the other organized players, I think we are in a much better position, if I look at the 2-year growth in terms of H1. Secondly, I think what -- if you're coming to why this has happened is, of course, because of the pandemic and the lockdown has severely impacted our H1 last year and severely impacted our quarter 1 in the current year as well. And that then also impacted the kind of agri sales we would have had in a normal year. So I think it's largely attributed to that. But if I look at the full year basis, even in the -- with the tailwinds of COVID and the lockdown, et cetera, last year, we were able to give a 3% or 4% volume growth relative to FY '19. So I think if I look at an overall basis, we've done pretty well. And we need to -- I think the focus needs to be on outperforming the industry in terms of value and volume.

Is it possible to give some color how the industry growth has been for the plumbing? And how it is looking like for the coming, let's say, 12 to 18 months?

So I think these sort of segmental growth at an industry level, I think we usually have a better off picture at the end of the year in March. But if I have to give a qualitative perspective here, whatever end users I have been interacting with over the past quarter, builders and contractors across the country, metros like Delhi and Bangalore, Hyderabad, Pune, et cetera, even Bombay, there seems to be a very buoyant sentiment in real estate. And I think over the long-term or even the medium-term of 2 to 3 years from now on, I think we should be very, very bullish on the plumbing and SWR segment, given the kind of recovery and resilience we are seeing in the Indian real estate market. And with our partnership with Lubrizol and our entry into the B2B segment, I think the timing has been opportune to be able to encash on these headwinds that the real estate sector is seeing.

Great. And just one more question, again, pertaining to the industry. With respect to the unorganized players, we have seen in the last couple of years, there has been a significant shift. Now you think what would be the mix? I know it's very hard to say, but your opinion on the same. And given the current demand, pricing, et cetera, you'll see how much for the reduction in the unorganized mix?

Yes. We've been a pretty firm believer in terms of market consolidation, which obviously [ orders ] well not only for the organized players, but also for the end homeowner and plumber. In terms of how that has shaped up, I think the market consolidation has only accelerated in the September quarter, simply because of 2 reasons. One is PVC, in itself, the per tonne cost has increased by 60%, 70%, 80% on a year-on-year basis. So that kind of working capital, that kind of strength in the balance sheet is required to be able to have supply security, which the smaller players have -- obviously do not have. And second is, even if they do have the balance sheet or the flexibility, the material availability in itself has been a challenge. So these times, when you look at purchasing commodity, like PVC, it is not about price. This market is about supply. So even if these players have the kind of working capital strength, availability in itself has been a challenge. In fact, availability has not been a challenge only for the smaller players. Some of the larger players also are facing a supply security issue. So I think there has been -- I cannot quantify it, but I think this consolidation will continue to accelerate, and it has definitely moved in the right direction in the September quarter for the reasons that I have discussed.

We will move on to the next question. That is from the line of Chirag Lodaya from Valuequest.

Yes. Congratulations on the great set of numbers. Sir, my first question was on channel inventory. So you mentioned at the company level, we have a robust security going into H2. But how is overall channel inventory and how dealers are behaving at this moment?

Thank you, Chirag. Again, I think that's a good question. I think channel inventory right now would be moderate, again, would depend from market to market and some type of distributors. There are some distributors that are larger in size and have further flexibility to invest. And the conversations that we've been having with our distributors, like I said earlier on the call, is urging them or pushing them to invest in business, so that they are able to still pay us on time, adhere to our credit policy and still end up winning in the marketplace. And the way the PVC cycle has moved, any of my channel partners, who have invested in the business, invested in stock and worked in the market have earned very well because of the kind of movement that we've seen in PVC. So -- and this is a phenomenon not only of the last quarter, but I'm talking about the last 2 years. So certain distributors, who are financially well off and our larger in size, have worked with larger inventories and certain distributors, I think, would have a moderate inventory.

Okay. Sir, second question was on price passing on to the dealers. So we have seen 2, 3 price hikes now in August and then substantial price hike in October. So is there a time lag, which has increased for passing on the prices? Or we are easily able to pass on the price?

Yes. This is something which is important to understand. We have the lag with which we used to pass on, maybe in a normal scenario would be 1 to 2 weeks, which I think in this kind of a scenario is maybe 2 to 3 weeks or slightly higher than that. And the reason for that is these kind of -- this kind of PVC prices is unprecedented. It is going to create a certain level of shock in the system, if we pass it on immediately with full effect. So what we have done is we have tried to pass on the price hike in a phase-wise manner. So for example, if you have to pass on an 8% increase, we would pass on maybe 3% immediately, another 3% after 15 days and then another 2% 5 or 7 days after that. So it has been done in a phase-wise manner, simply because we had stock, we had supply security. We wanted to focus on a balance of margin as well as healthy volume growth and outperforming the industry. And that's why we have taken a call to do this sort of sales-wise passing on. So the channel does not freeze or does not shock with these kind of increases.

Right. So is it fair to understand or, say, conclude that whatever inventory gains we would have enjoyed last year? Definitely this year, despite prices moving up and we're having the inventory, will not be able to get inventory gains this year. It will be more focusing on volumes rather than profitability.

So I think you're in the right direction, but if it may not be that in the coming quarters, it really depends on the demand/supply situation. It's not that the inventory gain might be completely passed on to the market. But I think today, when the rest of the market or a large part of the market is struggling with supply and certain players, who have strong supply security, need to -- we have now the luxury or the privilege of focusing on a balance between margin and volume growth, simply because we are in a unique position today. And with volume growth, I think, we must not underestimate the operating leverage benefit and the cost absorption benefits that come in with volume growth. And that has certainly helped us in the September quarter, and I think will continue to help us as long as we are able to have healthy volume.

Right. And sir, just lastly, on advertising spend...

Mr. Lodaya, I request that you return to the question queue, that our participants waiting for their turn.

Sure.

Thank you. [Operator Instructions]. The next question is from the line of Sneha Talreja from Edelweiss Securities.

Congratulations on strong set of numbers. Just 2 questions from my end. Nihar, you rightly said I think that you would be looking at continuing with this sort of a volume growth. What I wanted to understand is after 2 sharp price increases, which have taken in the month of October, October 4, and then I think on around 15, which is around INR 20 odd. What is the sort of a reaction in terms of demand that you've already seen. So if you could give some color on terms of volume growth that has been going on. I think that would be helpful.

So Sneha, yes, thank you for that. I think the focus, like I said, needs to be on volume growth, but with a balance of at least sustaining margins and to some extent and growing in a profitable manner. And of course, that's going to be a function of how the demand environment is going forward. See the pricing has been in an upward trend, a significant upward trend. And like you correctly pointed out, we've seen a INR 20 increase in the October month. So one, I think the channel, it was expected. This kind of an increase was not something, which was unforeseen. It was a foreseen increase simply because we had been actively interacting with our channel partners and encouraging them to give this kind of information to their channel at the retailer and the wholesaler level as well or even to contractors and consultants. So this kind of an increase was firstly foreseen. It was not unforeseen. And further more, this kind of an increase has been seen in other building material categories, like steel and cement as well, which you guys would know better. So I think, of course, these prices, I would not say are sustainable in the long term. But currently, given at the feedstock prices, given the electricity prices that we are seeing globally, I do not see any major correction or major softening in the prices in the coming quarters or in the rest of the year. That is the situation as of today, and that is the information that we are passing on to our channel, who are then passing that on to their channel further. So I don't think there is much debate about that.

Right. That means there is no hesitance in terms of picking up inventory from channels in, given that price we expect it to contribute to the mean at high levels?

So I would say there is a certain level of resistance at every level. I think if I look at even last year where we saw sharp rises, immediately, after the price hike, there was some level of resistance, but then the market also is absorbing that. Market also needs time to get used to it. And we are -- that is exactly why we are doing it in a phase-wise manner. Both the INR 10 increases, we took 15, 20 days to pass it on to the market in a phase-wise manner. Initially, there is some level of resistance. But then the market knows that in December and January, there is going to be further tightening in PVC. So initial resistance, but eventually, the market has to absorb given what is going to happen in the next 3 to 6 months.

Got that. That is helpful, Nihar. Nihar, my second question was related to the BIS norms implementaiton. We understand that Kerala has put a stay, but rest of the states have not put any stay. So what is the situation right there? Are those manufacturers have shut the operations? And are we getting some such of benefit of consolidation already there, because that started from 1st of October is what I have -- just wanted to have a clear picture on that?

Sure. So I think if I'm being honest, I do not have a 100% clear picture as well. I think it will take some time to get further clarity. But you're right, in terms of there have been major processors in that space, who are operating in this non-ISI segment. I would say partially some have stopped and some continue to give the non-ISI products, while some have stopped. I think it's too early to assess whether we have started getting the benefits. But one thing I do know for sure is if this continues and there is no further stay from the rest of the states on maybe a 9- to 12-month horizon from today, this should definitely give a major, major impetus to not only Prince, but to the entire branded segment of the industry. So I am still a firm believer and continue to be optimistic that any such kind of regulation from BIS, which, if implemented in the right manner with the right resources, will lead to a good consolidation. And this, whatever improvement in regulation we've seen, it may not be ideal, it may not be perfect, then still maybe question marks around the implementation. But I think the overall direction is very clear. The overall intent is very clear. Now it's not a matter of if this is going to happen, it's only a matter of when this is going to happen.

Sure, got that Nihar. Nihar, just last question is that, if I can just...

Sorry to stop, Sneha. We will...

I'll come back in the queue.

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

So I have only one question that's related to the volume growth and the PVC resin prices. So in the first half, I can see that you had given us good numbers. So can you give us some color on is it driven by the market share gain or end user industry or the pent-up demand, how much is the contribution from these? And in the scenario of the PVC resin prices on the uptrend, what's your view especially on the resin prices in the coming quarters to sustain over here? Or how that's looking at because that's all driving your, I believe, the margin to some extent as well. So where you will see this margin to stabilize?

Yes. Thank you, Praveen. So in terms of contribution to our growth, I think it has been a combination of 3 key parameters. One is network expansion; second is product portfolio expansion within our existing applications, coupled with the last reason, which is strong supply security that we've had. So it's been a confluence of these 3 factors that have helped us grow and gain market share in such a inflationary environment as well. And if I have to comment on resin prices, I think it's something which is obviously not easy to comment on given the way all commodities have moved over the past 12 to 24 months. But if I have to talk in terms of fundamentals for PVC raw material manufacturers, their feedstock prices and their power cost across the globe is only increasing. So I think going forward, PVC should continue to remain stable to tight. There could be minor corrections here and there, but if I have talk on a 6-month basis, I think it will remain -- it will continue to remain tight.

So in that case, as you had mentioned earlier in the call that the PVC versus CPVC prices, which has narrowed down the prices gap, so that will not happen also?

No, I think, see, we need to understand CPVC is made out of PVC.

Sorry...

Yes, am I audible?

Yes. Yes, go ahead.

So I think the gap -- like I said, we need to assess at the end of the year, whether the gap of CPVC and PVC widens or narrows. My view is at end of the day, CPVC is made out of PVC. CPVC is chlorinated PVC. So eventually, that gap will normalize over the long term. I think we need to wait and watch.

We'll move on to the next question, that is from the line of Ashish Poddar from Systematix Institutional Equities.

So my question is on the operational front. So if I look at your EBITDA per kg, historically, this used to be around INR 16, INR 17. Over the last 4, 5 quarters, it is now in the range of INR 27, INR 28. So while -- I mean while we believe that in the next 2, 3 years time frame, the PVC prices will normalize, but do you think that this EBITDA per kg will again go back to the earlier range or because of various measures taken, this will remain at the elevated level of INR 25 plus? Your comment on that.

Yes. Thank you, Ashish. I think, if I have to look at the operating performance or a per tonne basis or a percentage basis, I think there has been multiple factors, firstly, that a player part in this. Definitely, there is no denying that there has been a good amount of inventory gain over the past 4 to 5 quarters. In the September quarter, we have not seen a major inventory gain. But in the past 4 to 5 quarters, we have shared the inventory gain numbers on a quarterly basis as well. So I think going forward, I think, PVC will continue to remain tight. But what you need to understand is that why this EBITDA per kg has moved up. One of the reasons is inventory gain. The second reason is product mix as we move towards plumbing and SWR, towards more CPVC and PPR, our gross margins are bound to improve. And third is pricing power. Like I said, they're in a consolidated market with higher investments into branding that we are making in a conscious and strategic manner. I think the pricing power for a national brand, like Prince, is bound to improve going forward, which we have tried to consciously improve and trying to balance that with volume growth, which also delivers operating leverage and cost absorption benefit. So I think we have to try to find that sweet spot between volume growth and operating leverage versus pricing power, which we will continue to sort of track and implement on a quarterly basis.

But any number, which you can think, is sustainable over the long term?

I will refrain from giving a specific guidance on that, given the current scenario.

So that's why I'm asking about the long term, not the immediate quarters. But do you think that this INR 20 to INR 25 or any sort of number, which is sustainable for you or which you are targeting in the long run, maybe next 2, 3, 4, 5 years, whatever?

So we do definitely have long-term targets, but I would keep that as internal targets, which we want to achieve. But from a guidance perspective, even on a short-term or a long-term basis, we need to focus on volume growth. We need to focus on pricing power and we need to focus on finding the right balance between both. I will refrain from giving these guidances.

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

Wanted to understand first thing on the sourcing for PVC as well as CPVC, that's one. Basically, how much of it is domestic, how much is the imports? And if one could actually put some number or sense to around, I think, INR 300 crores of inventory because they're on the books, which is visible from the cash flow statement? That's the first question. I'll come to the second question, which is more specific on CPVC.

Yes. Thank you, Ritesh. So like I said earlier in the call that our polymers sourcing is a function of -- or rather a balance of import and domestic. The ratio of import and domestic is dynamic and dependent on how we see the trend in PVC prices going forward. So it's a balance of domestic and imports.

Possible to quantify it? Given we are a large player, I think, I would assume the local sourcing should be higher and it should benefit us on the working capital as well as on pricing.

Yes, I do not wish to quantify that. It's a balance of import and domestic.

Okay. My second question...

And I don't think it's something as an industry norm to share these kind of details. But at least we would try to maintain that it's a balance of import and domestic. And I'm sure you would appreciate something like sourcing is very important in this kind of an industry.

Sure. How can you give comfort on the amount of inventory which we have? How much of it is PVC and CPVC? The reason over here, I seek some clarity is, to our understanding, CPVC, I think the compound prices by Lubrizol has got increased, and they are also seeking a further increase. So I just wanted to understand the inventory that we have, if you can split it up between PVC, CPVC? And you also made a comment that the differential in pricing versus the top player has reduced from 10% to 15% to 7% to 2% to 3%. If you can put some sense to it with respect to the cost of increase, how should one understand that?

So looking for a breakup in terms of my inventory, it's going to be a function of my sales. So it's largely going to be PVC, followed by CPVC and then PPR and HDPE. So we would keep inventories accordingly. In terms of -- so I didn't understand the second part of your question.

So second part of the question relates to how much is the CPVC inventory? Because what we understand, I think, the industry, even the larger players are actually out of CPVC resin as well compound. So if you can provide some comfort that there won't be any disruption on production, specifically on the CPVC side. That would be useful. That's one. And secondly, we understand that Lubrizol has already increased prices from, I think, from 2.4 to 2.8 plus, and they are looking for further increases. If that is the context of the cost increase for the company and what you indicated is against the top player in CPVC, the differential has reduced from 10% to 15% to 2% to 3%. So is it what we are implying is that the price increases that we have taken is higher than the market leader? Or are we okay to give a market share and play on better pricing?

So I think it's obvious again, it comes down to the same thing that we have to find the balance between pricing and volume growth. I think no -- we are never going to take a call of letting market share go, and we are never going to take a call of selling without profit. So I think that the core of business is to be able to find a balance between volume growth and pricing. I think -- I'm sure, yes, Lubrizol has taken price increases, but so has the rest of the industry because the fundamentals of cost have gone up everywhere for all polymers, for all commodities. What I am very sure of is that today, we have a robust supply security across all our polymers, which is why we have been able to drive this kind of a volume growth. And our tie-up with Lubrizol ensures that we have -- we are in a position today to fuel our aggressive growth aspirations in the plumbing and SWR segment. And in the short term, in the medium term and in the long term, we have a superior supply security relative to the industry.

And on price increases?

Yes, we have taken sharper price increases relative to the market leader in the last 1 or 2 years, that has been the trend, and that is how we have been able to reduce the pricing gap.

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

So my first question is, if we see, then you were sitting with a pretty large inventory at the end of June quarter. And despite the resin price environment, our gross profit per unit has still gone down from INR 53 per kg in June quarter, where we have booked M2M inventory loss of around INR 5 crores, to INR 50 per kg in September quarter. Can you please explain the reason for this? And if previously resin prices stabilized at the current level, then do we see our gross profit price unit to come under pressure, going forward?

So I think, again, thank you for your question, Utkarsh. If I look at the total increase in the September quarter, it has been INR 24 per KG increase. Out of that INR 24 increase, around INR 17 has happened in the last 30 days. And like I said earlier on the call, we have been able to pass on the price hike with a lag of maybe 15 to 25 days. Hence, that kind of an inventory gain was not seen, which we saw maybe in the earlier quarters last year. I think the focus was on the EBITDA in terms of margin or in terms of a per tonne basis simply because we had a strong supply security, and we wanted to leverage that for volume growth and for operating leverage. And this kind of a volume growth has helped us absorb cost and make up for whatever we lost at the gross level, and we have been able to largely sustain that at an EBITDA level.

Okay. So like going forward, if the resin prices remains at a stable level, do we see that our gross profit is because even during favorable environment time period, if we are seeing a decline in the gross profit per unit. So my question, I just wanted to understand from you that, are we seeing some kind of pressure at the gross profit per unit from, say, December quarter onwards?

No, I do not foresee any major pressure on the gross profit going forward. What you must understand is these kind of calls need to be taken on a quarterly basis. At the beginning of this quarter, we realized we had a strong supply security, where the industry did not. So we wanted to have a good volume growth, which would help us absorb cost and net-net increase our overall value that we are able to create. In some quarter where we feel like it is more beneficial to hold on to price and not go aggressive on volume, then we would take that call depending on the demand/supply scenario. So it is really a function of what the demand/supply environment is and what our reading of that situation is and then what is the resulting strategy. This quarter, we had a clear strategy to focus at the operating level. And as long as we were able to sustain EBITDA margins and have this kind of a high double-digit growth, I think it was a sound strategy at the end of the day.

Okay. And sir, my second question is how much CapEx we have done on Telangana plant in the first half of FY '22? And how much more we need to spend to take the capacity to 50,000 tonnes. And what is our present pipe and fitting capacity at Telangana?

So existing we have only fitting capacity. Pipe capacity is in the process. And hopefully, in the December quarter, we would be able to build up the right piping capacity. So I think at the end of the December quarter, we would be able to give a very clear picture as far as the Telangana capacities are concerned.

Okay. And sir, how much CapEx we have incurred on Telangana in first half?

So total CapEx on Telangana right now is around INR 75 crores.

The INR 75 crores is the aggregate CapEx we have spent on Telangana till date?

Yes. So this is the amount which has been capitalized. Apart from that, there is a substantial capital WIP as well. So we would be almost like INR 18 crores has what has been deployed in the Q2 of this year. And as of September, it will be like INR 171-odd crores, total capital WIP along with the capitalized amount.

The next question is from the line of Karan from Asian Markets Securities.

So first quarter, which is seasonally heavy for agri, was a washout this year. So correct to assume that some bit of demand has flown to the second quarter?

I think maybe to a very small extent, but largely September quarter has been driven by plumbing and .

Right. Right. Right. Correct. Correct. And second thing from my end is just wanted to understand the momentum. So we closed October. So is it correct to assume that it is similar to the monthly averages sold in the second quarter?

I think it's -- I do not want to give mid-quarter numbers. I think it's best to assess the quarter at the end of the quarterly performance. I think we can maintain that as a company policy going forward.

We'll move on to the next question. That is from the line of Dhaval Shah from Svan Investments.

Sir, my question is again on the PVC side. I mean, last couple of days, you see a lot of volatility, especially coming from Chinese. PVC future is going up and down 10%, 15%, 5%. So in such scenario, how do you decide in terms of pricing, sourcing? What sort of conversations you have with your suppliers? And how relevant are these prices for you to in a purchase cost?

So I think quite frankly, if I look at the past quarter, the -- I'm sorry, I would request you to go on mute, there's some disturbance.

Sure. Sure.

Yes. Thank you. So I think over the past quarter, if I have to look at what the conversation has been with suppliers, it has been more about supplier rather than price. I'm talking at an industry level, not only about Prince, because price is then only on paper if you do not have the right supply. So it is -- even if I look at our strategy going forward, I think the first principle of sourcing has to be supply security and keeping the channel, the end retailer, the end plumber, who is loyal to Prince, ensuring that they are not starving for material. So I think first focus always has to be on supply security. And we have always maintained that inventory gain or inventory loss is a part and parcel of doing business in this industry. And more or less at an annualized basis or over the long term, it evens out. So our focus has to be on supply security and how we can keep our channel -- keep their appetite with the right stock.

Okay. So but the Chinese prices, are they reflective of the cost at which companies like Prince buy PVC domestically or from the import? Or are they very irrelevant in the actual set?

They are not reflective of the actual market. Like you correctly mentioned, there is a high level of volatility. Currently, there has been -- the regulators have tried to crack down on the speculators in the Chinese market. And we have seen an extremely high level of volatility in the Chinese PVC prices, which is not accurately reflecting of what the global pricing is. China, just to point out, is not a major supplier of PVC to the Indian market because of the duty structures we ended dumping duty structures that we have as a country on Chinese PVC. So of course, China is a big part of the global supply chain, and it would have an impact on global trade flow. But yes, the -- to answer your question in short, these prices that we are seeing on the index in China is not reflective of the prices in the physical marketplace.

Sure, sir. And my second question is that right now, we would be roughly having around 2 months of inventory, 2- to 3-month raw material inventory?

Yes. It would be around closer to 2 months.

So this is much higher than given the current scenario? And is the -- compared to the past, it's much higher, and we are planning to run with the same kind of number at least till FY '22, right?

Whatever it takes to keep my channel secure, depending on how the supply situation tightens or softens. We cannot let our channel be dry. So whatever is required to keep our channel full and grow, will be done as far as sourcing is concerned.

The next question is from the line of Aasim Bharde from DAM Capital Advisors Private Limited.

So actually, I wanted to just understand some -- rather get some insights on the CPVC market. So you did talk about ever since Lubrizol has entered -- rather has partnered with you guys, your CPVC other pricing parity between you and the leaders has come down and in certain markets, currently, it is probably either at par or at a premium. So CPVC prices going up are maybe one factor. I just wanted to understand that is, is there a supply issue amongst competitors so they are not able to see the market to a greater extent, which Prince has been able to capitalize on since you guys are completely procuring it from locally, while the others are also depending on exports, and there is a logistical supply issue there?

I think it's the kind of growth that we've had in CPVC has been two parts -- or I would attribute it to 2 reasons. One is the kind of initiatives we are taking on the market on a marketing front whether it's our entry into B2B and building a whole new vertical internally for the project sale. Second is the kind of working that we've been doing in the secondary markets with our retailers and plumbers. So all those initiatives have helped us improve our positioning as a premium brand, as a CPVC brand, not only as a PVC brand. Along with that, the weaker supply security at the industry level has helped us grow. So it is -- both these parameters have contributed to the growth.

Just as a follow-up, assuming that the supply situation improves at the industry level, would you still be able to maintain the current improvement in pricing that you've done? Or would there be competitive pressures and that might affect you as well?

So what I would like to point out is this narrowing of the price gap has happened much before the supply security challenges, much before tying up with FlowGuard as well. I think FlowGuard is one part of our overall strategy. But this narrowing of the price gap across polymers,have started a few years ago now as the investments into brand building and brand positioning have been ramped up and making Prince a premium brand in the marketplace. So these steps we have started taking maybe 2, 2.5 years ago. FlowGuard was an important part of that overall strategy. And now the supply security issue has been one part. So I think the narrowing of the price gap is not because we signed up with FlowGuard or not because there have been supply security issues. These have just made it a more conducive environment to be able to pass on these prices. But this journey has started a long time ago much before.

Would you be able to just maybe roughly quantify how much was the improvement before FlowGuard came into the picture and how much would it have been after that?

So I'll give you a range. I will not be able to give you exact simply because market to market is different side. But I think, initially, the gap used to be around 10% to 15%, which was down to around 7%, 8% before FlowGuard. And post FlowGuard, this 7%, 8% has been brought to 2%, 3%.

Okay. Okay. And sir, my second question, so basically, we have a high PVC price environment, there will be a rub up on CPVC prices as well as you talked about. Would it be possible to encourage PPR or HDPE pipe as an acceptable substitute, both on construction or on the agri side? And are we doing something on the ground to encourage this?

Yes. I think there is going to be a certain level of migration to other polymers, like HDPE and PPR. But there are challenges in that as well. So it's not easy for that change to happen. It is happening to a certain extent, simply because of the jointing process. CPVC and PVC today, you can join the pipe and fitting, it's cold fusion, which can be joined using solvent cement. Whereas with the other polymer, hot fusion is required or electrofusion is required. So in India, unfortunately, the applicators, who are plumbers or contractors, are not as well trained or do not have access to the equipment. Hence, we have become primarily a PVC and a CPVC country. So any such migration can take place in the long term. If PVC continues to surge and CPVC continues to surge, that will happen, and we are trying to do our bit in terms of promoting other products and trying to do a better range selling in the marketplace.

But has there been any traction on that side given the fact that PVC prices have been very high for almost a year now?

We have seen some green shoots, I would say.

The next question is from the line of Rahul Ramakrishnan from Vista Investments.

Congratulations on the good set of numbers. Sir, could you please talk a bit about your Prince OneFit that caused on CPVC. How is that particular product line down?

Yes. Thank you. So introducing Prince OneFit was a key milestone for us as we try to build a robust portfolio, not only in plumbing and SWR, but also in the industrial space. And like we had said that the main rationale for entering into this space was this would be a very high gross margin product and would complement our existing product portfolio very well. So currently, we are in the process of building those relations with the influencers and channel partners building that network as we build the capacities at the back end. And I think by the end of this fiscal, we would be able to give a good direction as to how our industrial vertical is doing internally.

I have just one more question. Could you also give me an update on how your B2B real estate project sales is going sir?

Yes. I think we have been able to successfully build a pretty strong team internally, with a pan-India head dedicated for the projects business specifically. And I think we have been able to get good entry into some top prestigious projects across the 7 or 8 metros of India. And again, this is a very relationship-oriented business and having the right relationships with builders and plumbing consultants. And we're in the process of strengthening those relationships, and we are moving in the right direction. And I think B2B has delivered for us in the September quarter, and over the long term, will be a major driver for Prince going forward.

Sir, any -- do you have a percentage in mind as in, let's say, by FY '25 that B2B should contribute, let's say, 10% or 15% of your total revenue? Is there a benchmark?

So there are -- so it's -- I would not put it in a percentage way because we are still -- B2C will continue to be the core of the business, and B2C will continue to grow aggressively for us. So I do not want to put a percentage on it simply because the rest of the part, which is our bread and butter today, will continue to grow as well. We have internal 3-year targets in absolute value that has been given to the project team. And I'm fairly confident that we would be close to achieving those targets over the long term.

We move to the next question that is from the line of Rajesh Ravi from HDFC Securities.

While most of my questions have been answered, I had a query on the CapEx numbers. So first half year I see around INR 80 crore CapEx spend, and of which around INR 35 crores is gone into CWIP. So first, if you could enumerate how is this INR 90 crores -- where is this INR 90 crores going through? And you mentioned second half would be similar run rate. And secondly, if I look at your presentation, the quarterly presentation, the capacity retail keep on fluctuating between the factories. So what is driving that?

So I will answer the second part of the question first before handing it over to Shyam to answer the CapEx-related question. We are always realigning our capacities within the plant to understand what local demand is like. Because for us, freight is a very big part of our cost structure. And whatever SKUs are required in a particular market and have more running in that particular market, we then try to shift that to the closest plant so that we are able to move closer to the market, have a more efficient supply chain and also reduce the net freight costs. So I think that's going to continue to happen in a small way. And as far as CapEx is concerned, I think Shyam can answer.

Yes. So in CapEx, basically, apart from the Telangana, which is, of course, the bulk of the CapEx goes there, we continue to spend close to around INR 45 crores to INR 50 crores for our normal 6, 7 -- 6 plants earlier, and we have some time for the seventh plant. So overall spends on the CapEx would be in the region of around INR 130 crores, INR 135-odd crores, of which majority has got spent in the first 6 months itself.

Sorry. So INR 135 crores you're saying is for the full year?

Yes. Yes.

Of which INR 90 crores is already done, right?

Yes.

Yes. What is the total CapEx size for the Telangana, sir?

Telangana is around INR 180-odd crores full amount, the amount which we have raised for IPO for this specific process, and the major of the portion of that has been spent and the remaining would spend in the next couple of quarters.

And how much is that pending sir, post Q2?

Almost like INR 40-odd crores.

Okay. INR 40-odd crores. And capitalized or it is all -- how much of this INR 180 crore is capitalized?

So capitalized so far is around INR 80-odd crores and remaining is all in capital WIP.

Right, CWIP 100-odd crores, we see.

Yes.

Okay. So by -- when you spend INR 40 crore next year -- by next year, the full capacity of 50,000 is expected to be operational by then.

So this INR 40 crores is basically to be invested in the second half of this current fiscal. Maybe there could be spillover into the next financial year. But we would -- as long as demand supports us, we will try to do it as soon as possible to have the capacities in place so that we are able to grow in South India, which is a key market for us going forward.

Okay. Okay. And lastly, what sort of logistics benefit do you see when this plant is fairly available to you on the demand that you're seeing in the southern markets? Souther and in some of the eastern market you would be servicing?

Correct. So currently, that the entire fitting part of the portfolio for South Indian service from the Haridwar unit, so it's fairly logistics heavy, which now we will be making locally in Telangana. Initially, I would pass that on to the market to ramp up capacity utilization and ramp up market share. And once we feel that we are in a good position in South India, the way we are in North and West, we would then start taking that benefit for ourselves. But at least for the first 12 to 18 months, post ramping up production, we would like to share that benefit with the channel to ramp up -- to wrap up the capacity utilization and ramp-up of markets. I think apart from the logistics benefit, what I'm more excited about is the better service and better supply chain that we will be able to offer the market, coupled with this freight benefit is going to be a real ticker for us in South India, which is also one of the biggest CPVC markets in the country.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.

Thank you to all the participants and wish you a happy Diwali. Thank you.

Thanks, everyone, and wishing everyone a happy Diwali.

Thank you, ladies and gentlemen, on behalf of Antique Stockbroking. That concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.