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

Ladies and gentlemen, good day, and welcome to Prince Pipes and Fittings Limited Q2 FY '24 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pranav Mehta from Equirus Securities. Thank you, and over to you, sir.

Yes. Thanks, Sima. Good morning, everyone. On behalf of Equirus Securities, I welcome you to the call with the management of Prince Pipes and Fittings Limited. The management is being represented by Mr. Parag Chheda, Joint Managing Director; Mr. Nihar Chheda, Vice President, Strategy; Mr. Anand Gupta, CFO; and Mr. Karl Kolah, Head Investor Relations. I will straight away hand over the call to Mr. Parag Chheda for his opening remarks. Yes, sir, over to you.

Thanks, Pranav. Good morning, and thank you for joining us for our quarter 2 and H1 FY '24 Earnings Call. The presentation and the press release have been issued to the stock exchanges and uploaded on our website. I hope everyone has been able to go through the same. Our performance this quarter has been good, driven by higher sales volume in the plumbing segment. Finished goods sales volume for the quarter increased by 8% year-on-year to 41,529 metric tonnes, and overall, revenues grew by 3% year-on-year to INR 656 crores. The correction in PVC prices in early October did lead to some destocking and deferment of volumes in September, but the prices have now stabilized with a slight uptick leading to restocking and supporting volume growth during quarter 3. Improving product mix, rigorous input cost control, efficient marketing strategy and good volume growth have translated into margins rebounding to normalized levels in quarter 2. I'm glad to share that this was the maiden quarter of the Bathware segment, and we have received a very encouraging response from dealers and end customers. Let me share some highlights of our Prince Bathware segment post its launch in June 2023. I'm happy to share that our products have been well received in the market, gaining positive sales traction and encouraging feedback. We continue to build a robust distributor base in Northern and Western India with brand launches in Tier 2 and Tier 3 markets like Srinagar, Jaipur and Varanasi. We plan to launch Bathware in Eastern India by quarter 4 FY '24. We have also started participating at exhibitions and events which have drawn a very good response. I'm glad to share that we have already undertook our first project in Mumbai, where our products have already been installed for the first phase of the project. As our tanks business scales up, we will continue to leverage our multi-location manufacturing presence to scale this segment. In the next couple of months, we would set up manufacturing in Haridwar and Chennai, taking it to 5 of the 7 in-house locations. With these efforts, we plan to establish a strong presence in all segments including pipes and fittings, water tanks and Bathware. Just to give you an update on our Bihar facility, the implementation is going on as per our plan. The layout has been finalized, and the work will start post Diwali as we commence construction at our latest integrated manufacturing facility at Begusarai in Bihar. As we grow, we are investing in building a strong front line of our team in accounts, finance and HR to implement progressive strategies to help us achieve our long-term vision. I take this opportunity to welcome Anand and Ajay as we work together towards fortifying our industry leadership position. Anand is a qualified CA with over 20 years of experience in finance, commercial planning and efficient management of stakeholders, people, performance, risks and opportunities. Prior to Prince, he was associated with ACC Limited for 14 years in different roles and responsibilities. In addition, I welcome Ajay Kumar, our new Chief HR Officer, who brings comprehensive experience of 23-plus years in developing and executing strategic human resource policies. He has extensive exposure to large corporates with multiple manufacturing units spread across geographies in India and overseas. On an overall basis, several strategic efforts have been undertaken over the past few months, and we will bear the fruits from them as we progress ahead. Prince Pipes remains active, agile and growth-hungry to ramp up market expansion efforts. The long-term industry fundamentals remain strong. The real estate sector continues to remain buoyant especially reporting good sales in the mid and premium category. In fact, realtors expect a record sales this year and unsold inventory is at a decadal low, which augurs well for all building material consumption over the next 2 to 3 years. Property developers expect home sales to post a new high at more than 0.5 million units in the top 7 Indian cities this year amidst strong demand and big launches planned by many imminent large developers. Several prominent launches for residential real estate are lined up for this festive season as sales numbers are expected to touch unprecedented levels. We are closely monitoring every aspect of industry momentum and are excited about the untapped potential with several steps in the right direction. As we focus on market penetration and expansion of pan-India footprint, we expect continued growth in the second half of the fiscal as we move ahead with an even greater commitment to transform and strengthen India's water infrastructure. Thank you for your time and mind share. I will now hand it over to Anand to take you through the key financial highlights.

Thank you, Parag bhai for a warm welcome, and good morning, friends. I'll be taking you through the quarterly highlights. In this quarter, revenues for the quarter improved by 3% year-on-year to INR 656 crores. Our finished goods volume grew by 8% year-on-year at 41,529 metric tonne. We delivered a healthy operating performance with EBITDA at INR 94 crores for the quarter, resulting to a margin of 14.3% for the quarter. A&P spend increased by 7% over the previous fiscal period and is at INR 15 crores. Further, our finance costs reduced by around 50% due to improvement in cost of short-term borrowing. Let me highlight the exceptional item for the quarter and first half. The legal matter between Prince Pipes, Ruby Mills Limited and Mindset Estates Private Limited has been amicably resolved, and the corporate office situated at The Ruby, Dadar, Mumbai has now been registered in the name of the company. Based on the valuation report, the property was revalued and there is a net gain of INR 17.93 crores towards the settlement, which is included in exceptional item for the quarter and first half. It is important to note that despite the exceptional gain, margin performance has been healthy. We continue to judicially expand our channel finance program. We have made steady progress since the recourse has shifted to distributors, and have increased the credit limits of our channel partners from INR 105 crores in quarter 1 FY '24 to INR 126 crores in second quarter of FY '24. Commenting on the working capital for the quarter. Our inventory is stable at 62 days, while our creditors is at 59 days and debtor currently are at 63 days. We acknowledge that there is a large scope for improvement in the debtor days, and we are continuously working towards the same. With this, we would like to open the floor for questions. Thank you.

[Operator Instructions] We take the first question from the line of Mr. Rahul Agarwal from InCred Capital.

Best wishes to Anand-ji for his additional responsibility. Sir, my first question was essentially on the trade. You obviously mentioned that October has been stabilized. You had some initial hiccups. Any thoughts on the second half outlook. Any known positive or negatives surprises that could lead to volatility into PVC, either the pricing or the demand, please?

So if I understand the question, you're trying to understand the demand outlook.

Yes. And any known positive or negatives, which would lead to volatility in terms of performance?

So I think hereon, let me start from the raw material on PVC. I think we are well poised as an industry. I think it's extremely low-cost polymer today. And I think at least for the next couple of quarters, we foresee a very low level of volatility, both upwards and downwards. I think PVC will be extremely range bound, which is going to create an extremely growth conducive environment because of affordability and also more certainty in pricing will always help the channel to avoid any heavy destocking or restocking. So I think it is going to be a more growth conducive environment with a more certainty and a better visibility of growth. And as far as the end market is concerned, I think real estate is doing well. Infrastructure is doing well. So there are positives on both sides. And from the medium to long-term perspective as well, we are confident and certain of the growth.

Got it. Secondly, one of the larger peers into pipes has acquired a facility which makes OPVC pipes. What I understand is the margins are decent and the demand is -- looks like sustainable over the next 3 to 5 years given the drinking water problems in the country. Any thoughts on the product and your company's interest in doing this?

So we have been evaluating this product. It's a capital-intensive line to be in. And there is no application apart from infrastructure it's purely going to be an infrastructure and an institutional sort of game, which traditionally we have stayed away from as an organization because of the credit cycles. But as the government's focus on infrastructure is improving, we have seen better credit cycles in the infrastructure and institutional business. So we will keep exploring any new opportunities like OPVC but couple of the new products that we have introduced within piping like PP, low-noise pipes as well as polypropylene surface drainage product, I think we have seen very strong acceptance for these new technologies. Of course, sales numbers do take time whenever you introduce such kind of technologies because we are the first mover in these kind of products where we have to generate demand, do the concept selling. But in this quarter itself for both the products we have already received our first project orders for PP low-noise as well as for Hauraton, which has already been installed. So now with our modern plumbing vertical, we will always be sort of on the lookout for these kind of technologies, OPVC being one of them. But I would prefer to focus more on products that have acceptance in retail projects as well as infrastructure rather than having products which are focused only on infrastructure and institutional.

Got it. And last one small question was, when do we expect to see Bathware financially separately?

From December quarter.

[Operator Instructions] We take the next question from the line of Devansh Nigotia from SiMPL.

Yes, this is Devansh Nigotia from Safe Enterprises. Sir, if we compare our volumes with the peers, it has been relatively tepid. And also the base quarter was a weak quarter for us. So any thoughts if you can share why the volume performance has not been very robust?

Sure. Yes, thank you, Devansh. I think it's an important question to address, and we want to sort of answer this question with as much transparency as possible because regardless of whether the performance is good or bad, I would like to not shy away from the performance. So yes, I accept that the volume growth in this quarter and past couple of quarters has not been at par with industry. And at Prince, we have -- we are used to industry-leading growth. What I can share is that there is no one to two peculiar reasons for this. We continue to be focused on distribution, adding new products, investing in branding, focus on entering into the project segment. So the fundamentals do not change, and we continue to focus on the fundamentals and our entire effort and mind share of the professional team as well as the family is on that. I think a couple of places we feel that a segment like HDPE, we have maybe been laggards with investing in capacity. And those capacity investments have been made in the September quarter, which would start reflecting in the operational performance in terms of volumes from the March quarter, specifically for HDPE. And there has been some corrective actions that we have taken on pricing, where we felt that the largest player has been more aggressive in pricing in certain markets. So we have tried to close down those pricing gaps and certain more corrections that we have done in the past couple of months as well. So I'm confident from a medium-term perspective, that we should be, if not industry-leading at least in line with peers in terms of volume growth.

And in case of Bathware segment, now that it has commenced, what is the fixed cost which will be there in the P&L in terms of expected losses that we're expecting?

So the cost regarding to Bathware will be primarily on 2 aspects. One is the employee cost and the other, the branding costs, which we'll be incurring in our P&L. So that -- these are the 2 costs which will sit in P&L.

So any expected launch contribution we're expecting this year, or let's say, for this quarter, how much would have been the contribution?

So right now, you can see that around INR 3 crores to INR 4 crores is the branding cost in this quarter and around INR 1.5 crores is the employee cost that is sitting in the P&L which you can factor for pipes, pipes and Bathware separately.

Okay. And the revenues for Bathware?

So revenues like I said for the earlier question, we will start reporting from December quarter, because in September quarter we had just started a rollout. So it's just the initial sales that have gone. So I think the -- in the next 3 months, the focus will be on setting up distribution. And from December quarter, we would share the segmental revenues for Bathware as well. So we would be targeting INR 8 crores of sales for Bathware in the December quarter.

Okay. And just last question. How much is the contribution of infra pipes as a percentage of volume this quarter?

Allow me to -- Karl will get in touch with you after the call to share the specifics, I will not have that off hand.

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

Nihar, I have a question slightly on the -- slightly longer side. What's your opinion on these composite pipes, which is basically polymer aluminum polymer or polymer steel polymer as an option, where polymer aluminum polymer has evolved in -- has done some business in India. And can they be -- can they make CPVC eventually a redundant pipe eventually? Because it's quite unique that in India where PVC-based piping solutions are prominent, but globally, it's a different polymer and then there are these composite pipes.

So globally, if you speak, there is -- one is composite, which is still not a very large market globally. You have PPR, which is globally well accepted, in which we are market leaders in India, and we are seeing an acceptance of PPR growing apart from its usual base. It's still very small. But yes, developers today are looking for options outside of CPVC as well as they are trying to upgrade their homes. I think average Indian consumer today, as disposable incomes increase, I think there is -- end user also is becoming more product conscious, more brand conscious for a product which is behind the wall. So I don't think it's specifically about composite pipes or not, it's about what alternate or what next after CPVC, if that's the question. I think CPVC will continue to have the lion's share of the market even on a 5- to 10-year horizon because of the ease of application as well as the cost structure. However, you will see certain niche polymers like PPR or composite pipes coming in, but I don't foresee it being more than 3% to 5% of the overall CPVC market. So we will invest in those kind of products because that helps us build a very strong brand identity and a first-mover advantage. So the way we have done for PP low-noise where we are upgrading SWR drainage systems from PVC to PP. Similarly, we will upgrade water supply systems as well. But I don't foresee it to be a very large volume or top line driver.

So you mean to say that PPR plus composites will just be 5% of the market eventually...

Yes, but...

Or individually 5%, 5%. 5% PPR, 5% composites?

No, I think put together around 5% is what I see.

And does your existing infrastructure and machinery which makes the CPVC pipes can make the PPR pipe or you need a completely different manufacturing setup?

It's completely different.

It's already happening.

It's a completely different setup. But we have been in PPR for multiple decades now. So we have capacity. We process more than 400, 500 tonnes every month of PPR. And we have been in this industry as market leaders since a couple of decades now. So with that entire capacity for pipes and fittings of PPR, we possess. And as and when the demand supply permits us, we will be adding capacity as required.

And any specific comment on PSP where when you put steel in between the 2 layers of polymer, one, the pricing also becomes competitive because steel is INR 50, INR 60 a kg versus polymer INR 80 to INR 100. So you get the strength of a steel and a life of a polymer, which can compete straight away with CPVC. Any specific comments there or it's too early for you?

It's -- I mean, as a product, it's in a nascent stage, but as a market leader, it's very important for us to be ahead of the curve with these kind of technologies. So as far as cost structure is concerned, I think with composite pipes, the cost structure becomes 2 to 3x per bathroom, and the builder the way he looks at piping cost is on a per bathroom basis. So if you replace CPVC with composite, I think the cost per bathroom will not increase from a percentage point of view, but it will increase 2 to 3x. So I -- there is a market for it, but it's not going to become a commodity. Even in the long term, I see this as a niche where more applications would be in bungalows, villas, maybe hotels, but your traditional high-rise buildings will continue to be in PVC and CPVC.

And just one question. I didn't get your answer, why was your volume growth relatively lower than the industry for the last 2, 3 quarters now?

Yes. I -- like I said, the fundamentals don't change. We continue to be aggressive on distribution branding entry into projects. So there's no 1 or 2 particular reasons. And we don't want to shy away from the numbers, where the numbers speak for themselves that we have been lagging industry growth. There is no 1 or 2 reasons for it. But we are confident that we will be back to industry-leading growth or at least in line with peers. One of the corrective actions that we have taken is investing in capacity in HDPE, where we feel that we have been laggard. So that will be reflecting in our volumes from the fourth quarter, and certain pricing actions as well that we have taken in the current quarter, which should help us realign our growth performance.

Pricing actually means you are way off in terms of pricing vis-à-vis of peers in terms of premium or discount -- premium to peers, that's the thought or...

Yes. We feel that in certain markets, we have -- as a premiumization drive that we undertook 2 or 3 years ago in certain markets, maybe we have over premiumized. So we are correcting that to be aligned with our peers. So I don't want to put this all down to pricing. I think pricing is just one aspect, but we need to be sharper and more aggressive with this, and I'm confident that overall, apart from pricing, there's a lot of other factors apart from pricing that go into growth. This is not purely a commodity business. So I'm confident that in the next couple of quarters, our growth will come back to industry-leading growth.

The next question is from the line of Hitarth Kapadia from Valuequest Investment.

I have a couple of questions. My first question is, how has the CPVC performance been so far? And what percentage of volumes come from CPVC route?

So we will share a revenue breakup, not a volume breakup. CPVC would be around 20% to 25% of revenue.

20% to 25%. Okay.

Of revenue.

And -- okay, of revenue. And what is the outlook on the working capital days as of now?

So right now, debtors is at 63 days. And we are using channel finance as a lever as well as the trade policy we are reviewing wherever possible. We are trying to bring it down to around 50s in the next 2 quarters. And then we see further downside is possible. And by next year, we see that mid-40s should be the sustainable time period.

Mid-40s by next year. Okay. And any guidance on margins?

So just to clarify, mid-40s is the guidance for debtor days.

Yes, yes, I got that.

Inventory and creditors will be a function of your procurement pattern and you're seeing right now creditors reduced because we are depending more on local kind, which could be the trend for the next couple of months. As far as...

Local in terms of your revenues?

Yes. Local players like Reliance and Chemplast. Yes.

Okay. And what is the -- is there any guidance for margins that you would like to give?

I think we'll stick to 12% to 14% on a long-term basis.

[Operator Instructions] We take the next question from the line of Akash Shah from UTI Mutual Fund.

Yes, hello? Am I audible?

Yes.

Yes.

Yes. So I had a few questions. One was on CPVC, antidumping duty. So coming -- so in FY -- in August or -- hello?

Please go ahead.

Yes, in August or September, the antidumping duty will get over. So I mean any thoughts whether it will get renewed or it may not come up for renewal?

I think it's tough to comment on these kind of things where the government is the decision-maker. But I think with -- as -- there's 2 parts to it as local capacities increase, definitely, there's a better case for protecting the local capacities, the domestic manufacturers. And we are seeing domestic manufacturers increase capacity as well as our partner, Lubrizol is putting up capacity in Gujarat. So as the capacity is locally increased, I think that builds an even stronger case for antidumping duty. Having said that, the lower cost of CPVC, the lower the cost, the better the growth. So it's -- we can't really speculate on what will happen with the government, but if capacity is increased, I think the case for duties will be even stronger.

Sure. Then just coming to agri, non-agri mix any -- if you can share what was the mix in this quarter? And how was the growth on a Y-o-Y basis?

So we'll -- I don't want to give too much on segmental growth because of competitive intensity. But what I can say is Q2 is usually not very heavy on agri. Agri typically -- the agri season is more -- it is stronger in the March quarter as well as the June quarter. Typically, the September and December quarters are not as strong in agri because, as you know, agri is a seasonal business versus plumbing and SWR, which is more of a perennial uniform business. So most of the growth has been driven by the building material segment in the September quarter.

Sure. Coming to industrial pipe, sir. So we had tied up with Lubrizol and -- hello?

Please go ahead.

Yes, sorry. So we are tie up with Lubrizol. And we had launched pipes for industrial application using Corzan technology. So any thoughts -- I mean, anything that you can share on this front? I mean, how are we doing? Yes.

Currently -- yes, so this is a segment which excites us because of the lower competitive intensity, higher barriers to entry in terms of access to technology and investing capital for a specific niche purpose. So today, we see ourselves as someone who replaces conventional products like MS and RCC. And the way we have been able to create value in DWC similarly, we want to do that with industrial CPVC as well. Currently, we are in the concept selling stage so these kind of orders take an even higher gestation period than plumbing. Because a lot of concept selling has to be done. And when you have to replace metal with plastic, in India, unfortunately, that mental perception is still very high. So I think next couple of quarters, at least, we have to still invest into interacting with stakeholders, creating awareness about these kind of products and then working on specifications and then generating sales. So it's a long process, but we enjoy that process because eventually then that gives us a very strong first mover advantage and brand equity. And we have seen that entire cycle play out with DWC where the first couple of years, we were virtually working at very low capacity utilization. But we focused on concept selling. We focused on nurturing the market, and now DWC has become a very well-accepted product and Prince today is recognized as a market leader in this space. So similarly, we are wanting to play out that process for industrial CPVC. And the important thing is that this will not end at industrial CPVC, we will keep looking for newer opportunities, newer products. We are not in a hurry, depth is more important than breadth. And whichever product we take, we will really give it a lot of mind share and time and effort and investment in terms of people as well as branding as well as capacities.

Sure. Sir, if you can share what is the investment that we have done in this segment? I mean, have we invested in capacity?

Yes, we have invested INR 8 crores to INR 10 crores.

Okay, sure. And over long term, this segment would remain a niche? Or do you feel that this may contribute to a larger percentage of the top line?

So globally, this is very well accepted and has become more than just a niche, but these cycles take very long. It's not a question of 2 to 3 years, it's a question of 5 to 7 years before this becomes more than just a niche. But at least in the next 3 to 5 years, we see a good level of concept selling that we get.

Sure. And just last question. New applications of plastic pipes. So just wanted to check how are we doing on, let's say, fire related -- I mean, the pipes which are fire retardant. So any -- or let's say any other new application that you would like to highlight with respect to plastic pipes? Yes.

Specifically, we have entered into the low-noise drainage and sewage systems with polypropylene, which is noise canceling, which also has better impact resistance compared to PVC and we have tied out with Ostendorf which is the global market leader for polypropylene drainage from Germany. And similarly, for surface drainage we have partnered with Hauraton for surface drainage products where we will replace RCC surface drainage to PP surface drainage. These products are also made of 100% recycled polypropylene. And we are seeing today builders becoming more and more green conscious and looking out for these kind of products. So with these kind of products, revenue is not the only metric that we need to see. We need to see the kind of brand equity that it helps us create a first mover advantage, something unique that we're able to offer to the end users that our peers are not and we need to -- and in the long term, the gross margins are really exciting when we would start in-house manufacturing for both these products, the way we have started in-house manufacturing for industrial CPVC as well. So in the long term, a lot of value can be created, especially at the gross margin level. And this will somewhere help us become more competitive in our core products as well so that we can -- that diversification within piping also helps us become more competitive in our core segments.

We take the next question from the line of Arun Baid from ICICI Securities.

Yes, Nihar, you mentioned that going forward, we would at least be industry standard kind of growth. So a lot of our peers are talking of at least 15% CAGR growth over the next 2, 3 years. Are we trying to say that we match that number, if not more?

So I think we have to look forward. H1, of course, at least Q1 was majorly disrupted by ERP. So whatever I'm talking about is from December quarter onwards. We need to be in line with peers. So I want to be as transparent as possible and take this question head on that, yes, the volume growth has not been in line with peers in the -- not only past quarter but past couple of quarters, certain corrective actions that we have taken, which we have shared in the earlier answers. And now the numbers need to talk rather than us guiding for any kind of growth, I think the actions have to speak louder than words. And we are used to that internally as an organization in terms of having the highest growth in the industry. So rather than us talking, I think the numbers should start talking and we are confident that, that is going to happen.

And just one thing. Last quarter, we had some issue with regards to fitting sales. Is that sorted out?

Yes, that has normalized in the September quarter, and that's reflected in our...

Numbers.

Numbers as well.

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

Am I audible?

Yes.

Yes. Congrats on good margin improvement. So just starting with the first question, sir while you've answered the market share loss related question, just wanted to understand where is this margin growth coming from?

Sneha, one is our pipe fitting should normalize -- am I audible?

Yes, you are.

Sneha, request you to go on mute. I think there is some disturbance. So the question was on the margin performance. So one is pipe fitting ratios normalized from the first quarter onwards, which led to a normalization in margins. Second, there was inventory gain, but which was not material, it was less than INR 5 crores of inventory gain. But mainly, it's the normalization of pipe fitting ratio as well as the product mix in Q2 is always going to be higher from the building material segment. But overall, I will still stick to my guidance of 12% to 14% operating margin is sustainable in the quarter.

But given that now your volumes in Q3 and Q4 are going to be even better, don't you think with operating leverage coming in, this is really a conservative guidance?

Yes. But like I also said earlier in the call that we have taken some pricing action as well in certain segments. So whether that -- whether the operating leverage fully offset that or partly offsets that is something to be seen. So I would much rather have 12% to 14% operating margin and growth, which is leading in the industry. So that's what...

Understood.

Sorry, to interrupt you Ms. Sneha, are you on a handset, ma'am?

Yes, I'm.

May I request you to switch to your handset?

Is this better?

Yes, please.

Yes. Secondly just wanted to understand from you, Nihar, where are we in terms of our HDPE at this point of time? What's the contribution from there? And what's the outlook like, are you now focusing more on that particular segment? Or you would still want to stay away given it's a low-margin business and higher working capital requirements...

So one is we will participate in HDPE only if the working capital is similar because it doesn't make sense to stretch our balance sheet while we are tightening our balance sheet on the core portfolio. But we do see the value in participating in HDPE. I don't mind if the margins are lower, but the credit cycles should be tight, which we are seeing as the government is increasing focus on infrastructure. I think more -- these programs are more funded and well capitalized. So there are certain investments that we have made in HDPE. This has been one of the reasons that we have lagged the industry growth. One of the reasons, not the only reason. And that investment has been done in the September quarter, and this will start reflecting in the volume performance from the March quarter, specifically from HDPE.

So where are we -- so today, currently, we would be hardly anything in this particular scheme of things as a percentage of our overall volumes or revenues?

Yes, it would be less than 3% in terms of volume.

And with this new capacity coming up, what's the vision where does this go?

This should be closer to 7% to 8%.

Understood. And lastly, in case you can just let us know what is the reason for working capital increase in this quarter...

Sneha, you cut out. So I think the question was on -- am I audible?

Yes, sir.

So I think the question was on the working capital increase. So majorly, the payables has reduced because sourcing has been more focused on domestic, where it works on advanced payments or a cash and carry payment, which has led to pressure on the payables. And this may continue for the next couple of months. And I think on the debtor side, Anand has already guided on our short-term and medium-term goals for debtor days.

Sir, the line for the current questioner, Sneha, is disconnected. We take the next question from the line of Achal Lohade from JM Financial.

My question is -- sorry, I joined the call a little late if it is answered, if you could repeat once again. In terms of the capacities where we are -- where competition is adding, do you see an issue with the -- with respect to the geographical capacity footprint creating a disadvantage for us [Technical Difficulty] and what kind of [ difficulty ] could that be with respect to the trade part of it?

Four years, we have added capacity in Jaipur, which helps us cater to the North and West and Telangana in '21, which helps us cater to South and partly to the Southeast markets like Chhattisgarh and Odisha as well. So we feel that the manufacturing footprint is actually our strength and with our next greenfield project coming up in Bihar, which will cater to the entire Eastern market. So with the kind of capacity addition we have done not only in terms of numbers, but also in terms of the strategic location I think we are well positioned for the future. And we will be adding capacities aggressively in Bihar after the first phase as well. And I can say on a long-term vision, 5 years from today, Bihar will be one of the largest manufacturing facilities for the organization. So that's how we see it.

See secondly, Nihar, if I understand correctly, there is no disadvantage you see with respect to our manufacturing locations vis-à-vis the competition? Have I understood right?

Correct.

Okay. The second question I had was with respect to the CPVC segment. We understand that the CPVC prices have kind of hold off [Technical Difficulty], has that been the case with us as well? Or is there -- and with respect to especially the disadvantage of what we had in terms of the cost earlier has that gone away completely or it is still there?

Achal, can you repeat your question, there was some disturbance.

Sir, sorry to interrupt you sir, Achal sir, are you on a headset? If you are on a headset I would request to switch to your handset sir.

Yes, yes, is it better ma'am? Is this better?

Yes, please go ahead.

Okay. So the question is pertaining to CPVC segment. A, we see that CPVC resin prices have come off in last few months. Is that the case with us for our source? And B, earlier, we had some disadvantage with respect to the cost, CPVC sourcing costs. Has that normalized? Or is there a skill gap between us and the peers in terms of the sourcing costs?

So costs have come down as PVC costs came down aggressively. CPVC was bound to come down because CPVC is a derivative of PVC at the end of the day, as a result of which you have seen some destocking in the channel for CPVC as well. To answer the second part of your question, no, I don't think there is a further disadvantage. The kind of premium that we are paying to Lubrizol is similar. So of course, the base changes, but the delta relative to the market continues to stay the same.

The next question is from the line of Udit Gajiwala from Yes Securities.

Major questions have been answered. So just on volume, front, if you can give any specific number, what kind of growth are you looking for '24, maybe the specific year and for medium-term do you stick to that 14%, 15% CAGR that you have already mentioned, but anything specifically for this year?

Yes. So I think like I said earlier on in the call, we do recognize, and we want to be fully transparent and acknowledge that the volume growth has not been where it should be relative to the peers. We are used to industry-leading growth. There have been certain corrective actions taken on sizing as well as certain investments in HDPE. So I want to stay away from sort of guidances at this point. I think the action should speak louder than words. And we are confident that growth will be there, and it will be in line with the industry. Certain corrective actions have been taken. And we are hungry, and we are confident and we are putting up capacities aggressively with that belief.

Understood. Understood. And sir, lastly, on your EBITDA per kg and margin like you guided. So with the price corrective actions that you have mentioned, do you see that these margins could suppress for next, say, a couple of quarters or 1 quarter or so because your raisin prices have also come down sharply in this quarter?

Yes. So I think rather than talking -- see quarter-on-quarter could always go up and down, basis raw material prices, but I will stick to long-term guidance of 12% to 14%. I am confident, which includes the investments in Bathware and the kind of corrective action we have taken in pricing. Hopefully, the operating leverage from the growth and the cost absorption should at least partially offset the pricing action. It will take a couple of quarters. It will not happen overnight. But I will stick to long-term guidance of 12% to 14%.

Sure. And lastly, on your Bathware business, can you give any number in terms of what kind of dealers are we looking to end this fiscal act? And what are the plans for next 2, 3 years, what number do you want to look at?

So this has been just the first quarter of launch, and our focus right now is on distributors. I think number of distributors, again, is not as important, the same philosophy that we used for pipe, it's the markets that we are able to do and the quality distributors. So you'll have to give me a couple of -- at least 1 quarter before we quantify target number of dealers, but our target for December quarter for Bathware is INR 8 crores of sales.

The next question is from the line of Rajesh Ravi from HDFC Securities.

Yes, am I audible?

Yes, sir.

Sir, first question pertains to your capacity data which you shared, this quarter, there has been major release in the capacities any specific reason? Your Athal fittings capacity number has been scaled down. And similarly, there is a sharp increase in the Haridwar capacity. Could you explain what is changes? Even Tamil Nadu capacity has been down by 20%.

So Ravi, the overall capacity right now is around 3.28. So Chennai has gone down because of -- we have not replaced the NPA machine over there because we have in the region, we have Sangareddy. So for that reason, the NPA has gone down. We have not replaced. That's for Chennai. So Haridwar has added some capacity. So in net-net, there is only 5,000 to 6,000 kt, which has been added in the quarter. Yes. So that's how the split is. But yes, you are right, in some of the plants, the capacity has increased and some of the plants capacity has gone down basis requirement of the organization.

Okay. And second question pertains to CPVC, you mentioned 20% to 25% of the revenue is from CPVC.

Correct.

We take the next question from the line of Jenish Karia from Antique Stockbroking.

Sir, my question is on the CapEx guidance. Last quarter, we had guided for INR 100 crores CapEx for FY '24. In first half, I see we have already spent INR 85 crores. So is there any revision in CapEx guidance?

So in the first half CapEx, there are 2 normal items, which are not the regular ones, which needs to be excluded while reviewing the overall CapEx for the plant. That is one is The Ruby number, which needs to be excluded and the other is the Bihar, which needs to be separately tracked. So INR 7 crores to INR 8 crores is Bihar right now, which will scale up in coming quarters. So that's how you have to exclude these 2 things for normalized spend on normal plant and plant operations.

Sir, if you can please quantify these 2 exceptional spends? And how should we look at the full year CapEx number?

So, yes. Right now, we are at INR 50 crore, INR 50 crore for normal, which we have guided for INR 80 crore to INR 100 crore.

Okay. And Bihar plant, total CapEx would be over the next 2 years, '24 and '25?

So it will be around INR 150 crores, and Phase 2 is also lined up which will come subsequent to Phase 1. We are just evaluating how to go forward with it. But right now, INR 150 crores is something which we are going ahead with.

Understood. And sir, if you can just -- the utilization on total level and Telangana facility?

So utilization at current level is around 50%, and Telangana would be around 40% of capacity utilization.

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

A couple of questions. First, Nihar, basically just wanted to have your thoughts on the retention policy from the top management. We had a slew of exodus at the top recently. Any learnings from that and any retention policy? That's the first question.

Yes. No, I think there is no specific retention policy as such, which is over and above the regular policies. As we mentioned in the earlier remarks, Anand, who has been Deputy CFO with us for some time, now is upgraded to the CFO position and new CHRO also has joined. And we believe now that with these changes in the leadership, we are better geared for the future for the kind of vision that we have to take the organization, not only in terms of market and growth but also in terms of organizational identity. So that's where we are.

So would we be looking for some ESOP policy, anything on the retention side or will continue status quo?

So we already had an ESOP policy in place a few years ago. As of now, that's the status quo.

Okay. My second question was more on the operational side. If you look at the realization per kg, what we see for Prince Pipes, it has the least reduction on a year-on-year basis at 4% versus the larger peers where the reduction is pretty sharp, which is at 8% and 10%. So just wanted to understand, we have done pretty well on the price decline as compared to the peers. Can you give some flavor on the product mix? Was it less government sales, less HDPE or there was a contribution from Bathware? How should we understand that?

I think Bathware, the contribution, it's too early to put that in here. But you're right, I think this is not majorly a function only of price, it's also a function of product mix. For us, Q2 is not very heavy in agri, also we -- like I said we have been laggards in the HDPE space which is a lower realization product, which will eventually drag down the margins at the organizational level. Today, it's not a very relevant capacity. In terms of volumes, it's maybe only 3%, 4%. So this will scale up from March quarter. And also, there has been some pricing action that we have taken in the core segments of PVC, CPVC, which should hopefully help us realign our volume growth.

Is it possible to give some color on the mix? Was CPVC higher? Or was fitting substantially higher on a year-on-year basis? Just trying to understand the operating metric.

So fitting was -- fittings normalized from quarter 2 onwards. In quarter 1, we did have some challenges for the fitting dispatches, which impacted our product mix. So in quarter 2, our pipe fitting ratio normalized and overall building material also had a better contribution relative to irrigation.

Sure. And just...

I will stick to my long-term margin guidance of 12% to 14% on a long term is attainable on a long-term basis.

Sure. And just last question. I think the other Chheda family also uses the brand Prince. I understand they are coming up with sizable capacities and which is due for commissioning. So is the brand logo are the rights with the company? Or how should we look at it in the marketplace because there could be some scope of confusion between the 2 logos. So what's the road map to actually address this? That's all.

Yes. The logo is completely different, and it has been like that for many years and that completely is with the company, with Prince Pipes, the differentiated logo. And I think now that the gap is too big and that activity is very volatile, in certain quarters, it's there; in certain quarters, it is not there. So I think the gap has become too big and now the market appreciates the range, the quality, the newer products. So today, Prince Pipes has a very strong brand identity, which was -- it's a very different scenario than what it was 5 years ago.

We'll take the next question from the line of Keshav Lahoti from HDFC Securities.

Sir, in call you spoke about you have taken some sort of price correction. Can you give some sense, is it all across market? Is it specific to some market? What sort of correction you have taken?

So some of the corrections we have taken, some we are about to take. This is in certain markets, not pan India, wherever we feel that we need to be more competitive in certain markets and certain categories with pricing action expected.

Understood. At company level, the impact would be 1% or 2%?

So I will stick to my long-term guidance of 12% to 14% of operating margin on an annual basis is achievable. Of course, for the current year, it will be ex of Q1 because of the challenges in the first quarter. But on a -- even for the next couple of years, I think 12% to 14% annual EBITDA margins are sustainable, including the pricing action because with that, there will also be volume growth and resultant operating leverage benefits, which could partially offset this at the EBITDA level.

Understood. You said that your domestic sourcing has increased. My understanding was earlier you were taken 40% from domestic. So whether that in itself going to change on a permanent basis?

Yes. So this happens annually, the long-term -- the annual contract that we have to do with Reliance and Chemplast. So at the beginning of this year, we had increased our domestic contracts on an annual basis. So that will be permanent. It was maybe not reflected in Q1 because we were not normalized as an organization, but that's reflected from Q2 because we have increased our volume offtake as we grow. And as the overall environment becomes more uncertain, I think it's always prudent for us to increase local and domestic offtake. So we will continue to import and we will continue to be sizable share. But given the way we are growing, I think we decided at the beginning of the financial year itself that we would be increasing our domestic volumes. And even the local players were keen to work with us seeing that we are -- the way we are growing across geographies.

Okay. Sir, is it the proper understanding now your raw material sourcing will be 50% domestic and 50% imported?

For pipes -- for PVC pipes, yes.

Yes. Okay. One last question. East CapEx of INR 150 crores, how will that be split?

So it will be -- you can take INR 60 crores to INR 70 crores in this year and the balance will be in FY '25.

Okay. Got it. Sir, this year total CapEx would be INR 150 crore to INR 160 crore?

Including Bihar, yes.

Including East? INR 150 crore, INR 160 crore including East this year CapEx, right?

Yes.

[Operator Instructions] The next question is from the line of Nikhil Agrawal from Vt Capital.

Sir, my question was on the Grasim plant that is coming up. Will they be supplying only to you and Ashirvad or will they be supplying to other players as well, the CPVC players combined?

So historically, if you see Ashirvad has -- I mean, Lubrizol has always had 2 licensees. And as long as we are growing and we are able to fulfill our volume offtakes, which we are, I don't see the need. And historically, if you see they have always maintained 2 licensees because opening up the market may not -- it may end up diluting the FlowGuard brand. So we believe that it will still be a 2-licensee approach.

Okay. So wouldn't that like really put you on an advantage compared to the other players?

Absolutely. And this was one of our incentive to sign with Lubrizol when they had approached us a few years ago. There have been some delays unfortunately. But we still believe that once the plant is operational, we will be on a strong footing because local capacity, local cost structure with the FlowGuard brand will put us in a dominant position, especially for CPVC.

All right. And that -- the plant is expected to commence from 2025, right, if I'm not wrong?

Correct.

All right. And sir, any reason why your employee benefit expenses have increased during the quarter?

So it's a normal increment which has happened in the increment cycle. That is one. And the provisioning of Directors' commission is also there, which was not there last year because of the subdued performance. So that's the 2 reasons you will find the difference.

Okay. So do we expect this kind of employee expenses going forward as well or any reduction?

It's a normal increment cycle, which has happened and factored in the cost of employees.

The next question is from the line of Akash Shah from UTI Mutual Fund.

Yes. I just had one question. So after taking the pricing action, if you can share how much will our products be at a premium or discount to industry leaders?

It will be at a parity to the industry leader.

Sure. It would be for both PVC and CPVC, right?

So in CPVC, there would be a slight discount to the industry leader in CPVC. And in PVC, it would be at a parity.

Next question from the line of Mr. Rajesh Ravi from HDFC Securities.

On this, Lubrizol, new plant coming up, you mentioned that you and Ashirvad would be selling most of -- almost all of the CPVC from that factory. So if I look at your current volumes would be close to just ballpark like 160,000 volumes in FY '23, assuming 10%, 12% of that would be coming in from CPVC. So it's around [ 116,000 tonnes ] of volumes. And this plant would be how much, 1 lakh tonne something?

First phase is 48,000.

48,000, so are you saying that you'll have -- even if you get 30%, 40% of that incremental volumes, do you see your CPVC portfolio significantly increasing over the next 3 years?

Yes, it has to. It has to grow aggressively and it will grow.

Okay. And do you see any risk to -- with the CPVC, your Lubrizol capacity, Meghmani capacity and [ DCW ], all venturing into CPVC manufacturing domestic -- domestically and these 2 players applying to even many other smaller players. The CPVC, the high margin the CPVC market is enjoying that may come under pressure?

No, I think it's great news that there is local capacity coming in that will lead to growth of CPVC because we are today 95% dependent on import at CPVC industry, and that is not sustainable if the CPVC industry has to grow the way PVC did over the past 3, 4 decades. CPVC needs to have local capacity, only then will become -- only then will CPVC become affordable and only then CPVC will grow. So unless there is growth, there is no point of having very high margin. So -- yes, and CPVC is a very different industry. It's much more brand conscious at the front end, where top 4 of us are controlling 70%, 80% of the market. So I don't see that changing substantially, while having local capacity will really open up the acceptability of CPVC and growth of CPVC. So I see this as a major positive.

Correct. So -- but you don't see there are margins which is 2x currently of normal PVC margins with more supply coming in the CPVC market growing at a faster pace. You don't see a risk to the margin profile coming off significantly?

Yes. What I'm trying to say is it will be more than offset by the growth. The growth will more than offset that, which is why we should see this as a net-net positive.

Correct. At industry level, this will be overall strong volume with slightly lower margin. But overall, the margins should narrow compared to where they are currently. Is this understanding correct?

Over the long term, a lot of...

Yes, over the long term, obviously, next 3 to 4 years?

Yes.

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

Yes. Thank you, everyone, for joining the call.

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