Hindware Home Innovation Limited (HINDWAREAP) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Hindware Home Innovation Limited Q1 FY '23 Conference Call hosted by Monarch Networth Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vineet Gala from Monarch Networth Capital. Thank you, and over to you, sir.

Good afternoon, everyone. I'd be outside, I would like to thank the management for giving us the opportunity. On behalf of Monarch Networth Securities, we welcome you all to the Q1 FY '23 conference call of Hindware Home Innovations Limited. I hand over the call to Mr. Naveen Malek, CFO, HHI. Thanks, and over to you, sir.

Thank you. Good evening, ladies and gentlemen, and a very warm welcome to Hindware Home Innovation Limited Q1 FY '23 earnings call. Let me walk you through our financial performance, post which the business will discuss the key highlights of their respective businesses. Figures we are discussing here are on a consolidated basis and rounded up to the next level. I would like to remind all participants that some of the statements or comments made on today's call may be forward-looking in nature. These may [ include, but are not necessarily limited to, financial ] projections or other statements of company plans, objectives, expectations or intentions. The company disclaims any obligation to update these forward-looking statements to reflect future events or developments. Kindly refer to Slide #2 of the earnings presentation for a detailed disclaimer. Now coming to performance. We are pleased with our performance for the quarter, considering the challenging macroeconomic environment [ emit ] in the quarter 1 FY 2023, while the company sustained its top line growth, margins were moderate largely owing to the higher input and commodified system. On a year-on-year basis, our top line grew by 98% to INR 678 crores. On a consolidated basis on an absolute profitability basis, consolidated EBITDA grew 29% and amounted to INR 67 crores. [ Constant ] profitable tax asset conceives of joint venture is set at INR 11 crores in FY '23 to Q1 FY '23. Tailor segmental performance, the Building Products segment delivered yet another healthy performance during the quarter. In quarter 1 FY '23, revenue from operations stood at INR 535 crores, registering a growth of 102%. EBIT grew 185% year-on-year to INR 43 crores, translating into a margin of 8%. It is important to understand that this decline in EBIT on a quarter-on-quarter basis resulted from an increase in prices of key inputs, namely Brass around 6% to 8% from quarter 3 FY '22 onwards and around 15% to 20% in fuel and power in Q1 FY '23 for our Parcel business of passive products. This increase due to a stressed macro environment and gains derived from [ management ] of manufacturing operations post the acquisition of the building product division of [ HH Innovation ] Limited. We have undertaken calibrated pipe hikes to offset the impact of higher input prices in coming quarters. Our fast-growing plastic pipe and fitting business reported sales of INR 170 crores, registering a growth of 96% in quarter 1 FY '23 on a year-on-year basis, supported by solid fundamentals and a resilient business model, the company has a sustained strong growth momentum over the past year. Plastic pipes and fitting margins are also impacted due to decrease in polymer prices around 14% to 16% in quarter 1 FY '23, while fuel and power increased by 10% to 12%. Now coming to the Consumer Appliances. Our Consumer Appliances business reported revenue of INR 125 -- INR 129 crores and EBIT of INR 2.3 crores during the quarter. The overall performance of the business was modest, going to rising input costs and macroeconomic challenges. Our retail business, revenue stood at INR 14 crores, having grown 48% year-on-year while EBIT stood at INR 0.12 crores in quarter 1 FY '23, sitting into a margin of 1%. Across our product portfolio, anywhere to counter the staff increase in input prices, we have taken receiver prices any products in our portfolio and may be compared to continue to do so. At the same time, we have continued to place the strong emphasis on launching innovative new products. Looking ahead, we will continue to focus our resources on producing a diverse range of smart, connected products that indicate innovation and aesthetics and provide value to our customer live in homes. We are optimistic about our future performance and are committed to our goal of delivering consistent revenue and profit growth. Now I will give you an update on the Building products business also. Our sanitaryware and faucet continue to report industry-leading growth in the renewed quarter, contributing a solid performance with close to 20% revenue coming from new product debits. The company is still growing at the faster pace across all the categories its competing. This performance reflects our [ several sense ] primarily among these is our proven innovative capability, both in product and design, which has contributed to a diverse product portfolio. This combined with an increasingly strong awareness of our brands and our expanding distribution network has considerably helped to drive growth. We, in fact, have added 75 new distributors in the quarter under review. A key word to highlight is the fact that this is the first time in the last 5 to 7 years, where quarter 1 sales are comparable to quarter 4 sales, which is a true reflection of the gaining momentum in our demand. EBIT margin declined, however, compared to the sequential preceding quarter, and this was a result of the significant input prices, which we all discussed, such steep increases in the prices of fuel and brass, which are some of our key inputs over a short period has seldom been [ seen as ] before. To confront this challenge, we are cementing regional price increases throughout our faucet and sanitaryware range, and this will take some time to fully reflect. The heightened input costs have for now or have tapered over the benefits of the commencement of manufacturing. During the quarter, we launched a few more bathroom products including Easy Clean, which is a self-cleaning basin and it which is waiting with space for TP items like toothbrushes, et cetera. Our current focus is on driving profitable growth. I would now like to hand over the call to Mr. Rajesh Pajnoo to take you all through the plastic pilot betting business. Over to you, Mr. Rajesh.

Rajesh here. So your pipes. Thank you Naveen. Good evening, everyone. Thank you, everyone, and thank you for joining us for FY '23 earnings call. During the quarter, our parent business, reported sales of INR 170 crores, registering a growth of 96% on the other -- since our brand is now well established and our products continue to deliver high quality. I'm pleased to report that we are still as of full the fastest-growing bank in India and an industry segments. In the recent quarter however, polymer prices have decreased by 13% to 16% and also the full prices have gone up for our [ intake ] price and leading to a margin impact. We continue to diversify into or developing in line with our company's accelerated growth strategy. Aligned to our strategic growth, our expansion plan entails both Brownfield and rental initiatives. Our Brownfield capacity expansion project at the Smart facility in Agrawal is progressing according to the schedule. Furthermore, our greenfield project to install a new high manufacturing facility in the North, that is we have selected [indiscernible] is on track. During the period, we introduced 2,000 [indiscernible] sales in this category. Additionally, we continue to witness a significant market demand for our overhead water storage tank. As we continue to grow and add new distributors to our pipes, we continue to engage with plumbing consultants and plumbers [ education ] about our diverse product offering. I would now like to hand over the call to Sudhanshu to take you through consumer appliances and retail business. Over.

It's over to Rakesh. Rakesh?

Over to you Rakesh.

It's Kaul here. I'm sorry, it was on mute. Can you hear me, please?

Yes, sir, we can hear you now.

All right. Apologies for this. So first of all, thanks, Mr. Pajnoo for handing over me this call. I want to say good evening to everyone, and thank you for joining us for our Q1 FY '23 earnings call. During the quarter, there was a significant growth in the consumer appliances business to the tune of 92% over the last quarter of -- over the first quarter of '21, '22. It was driven by strong performances in the cooling and the kitchen segment. In the category of kitchen appliances, we continue to maintain our focus on superior technology-driven products like patented technologies like MaxX Silence, MaxX AutoClean. And we have now become the largest range of silent chimneys in the country amongst all the brands. And we received a tremendous response from the consumer for these products. Our cooling products gained an attraction and grew by more than 200% in this quarter on the back of a good summer season and our sustained dominance in the kitchen and cooling category and e-commerce platforms also help us register a robust growth. Towards the end of the quarter, we did notice a slowdown in the consumer demand. Additionally, higher product costs and ongoing inflationary pressures, which create a little impact on consumer purchasing the area. While largely the raw material prices have stabilized towards the end of the quarter 1, the continuous rise over the last 12 to 14 months has actually helped in depressing the demand to some extent because of the huge price increases over the last 14 months. During the quarter, we undertook prepared price hikes to help combat the impact of stubborn input prices. And this, we believe, will help lower pressure on our margins for the segment. We continue to maintain a greater level of focus on the recently introduced fan categories where we have introduced more than 100 SKUs in the last 9 months. This has helped us achieve triple-digit growth in this category, which otherwise is a very competitive category. In the coming festival season, we anticipate the consumer demand will swing favorably. In the upcoming quarters, we anticipate reaping the benefits of our continued focus on product innovation. As a result, we are committed to introduce smart products to market in order to enhance the lives of our consumers and make a significant impact. In fact, we have rebranded our Hindware appliances and on the smart appliances. In our consumer appliances areas, we have now filed for more than 33 patents and all this has been done in the past 3.5 years. We are dedicated to our goal of developing an attractive and innovative product portfolio. We introduced 5 new category items in Q1 FY '23. Totaling over 14 SKUs across Chimney, cooktops and water heaters in the smart segment. Currently, we have an account of more than 1,300 distributors and modern retail shops across the country to meet expanding consumer demand. And we have now touched a retail touch point number of 30,000. Our retail business in Q1 also grew by 48%. And despite the margin pressure, the business remained positive for yet another quarter, and we faced our strategy of focusing on franchisee model much more strongly. At this stage, this concludes my opening remarks, and I would like to ask Mr. Sudhanshu Pokhriyal take over for me.

Sudhanshu is, for some reason, not [ doing ] this. So we've already done with it. So Mr. Naveen Malik has already spoken about the building product business. So we just hope the Q&A session here. Thank you.

[Operator Instructions] We have the first question from the line of Mr. Vineet Gala.

Sir, just wanted to understand on the pipes division. Can you quantify the EBITDA hit on account of inventory loss because of the polymer prices?

So your question, if I can understand is that how much is the quantification on the EBITDA?

EBITDA on the inventory loss?

Yes. So basically, in the quarter 1 working, it is around -- it's around INR 7 crores, which is due to the inventory change. But in quarter 2, there will still be some carry because the entire inventory has not yet been consumed. So we feel that from quarter 3 onwards related to the normalized mode with an assumption that PVC prices now should stabilize ranging between INR 92,000 crores [indiscernible].

And sir, on deal pricing, what is the kind of pricing that you are offering, like we've taken a hit on the pricing as well, that what you've done?

Yes, because I think, Rajesh, if you can take a...

Yes. So understand that whenever the prices go up, your item prices also go up and the raw material prices come down, the prices -- you have to sell at a lesser price to the consumer. So we are selling it at a lower point and thereon, the inventory is it by around 4%, it amounts to INR 7 crores.

The breakup of the kind of volume growth that you are looking at, I mean the reduction in pricing that we've done, so over the next couple of quarters. So what is the breakup of that, the volume growth?

Like it has gone up per year. The pricing has come down by around 14% to 16% in the first quarter. And there has been a differential of almost around 11% to 12%, the pricing has come down.

Okay. And so against that, what is the kind of volume growth that you're anticipating?

See, we have growth Q1 last year also it's not actually comparable. So we have grown by around 90% -- Listen, we feel that the latest will be there in the second quarter, but prices are going to get stabilized, that is what has been given to understand. And definitely, what happens is these prices are more -- [ the hit is ] more on the imports. The current raw materials which you have [indiscernible] current prices. So there is not much impact on that.

So I think you can easily drive the trajectory that despite the pressure on the margin on the selling prices. So this remains the best ever first quarter sales number. Like quarter 4, we did INR 200 crores of sales. And in the quarter 1, we have done INR 170 crores of sales. Our long-term guidance, which you know already we made last year that -- which we made in May 2021, that in to 4 years, we'll be crossing INR 1,000 crores in this business. So I think we are moving on a path to that direction.

We have the next question from the line of Varun Jain from Edelweiss.

So my question was related to the segment-wise price hike, which we have taken for all the segments. And also, what is the -- any expected -- is there any expected price hike in the next few quarters and the raw material outlook for the next few quarters,. How do we see that?

So I'll primarily talk here about parity where we are in constant -- There has been incremental info price increases because natural gas prices and other fuel prices have already increased substantially, although now they're getting stabilized. So in quarter 1, on the sanitary ware, we had taken around 5% to 7% price on various SKUs and similarly on the process because the input gas prices also have increased sequentially from quarter 3 to quarter 4 and quarter 1. We expect a few more price hikes to happen, to normalize the overall cost impact. On the pipe segment, Mr. Rajesh has already explained that it is a factor of upward and downward adjustment. Our CPVC prices have more or less remained same. So not much change as such. PVC prices get adjusted on a regular basis as a whole thing also.

Okay, sir. And what is your outlook for the raw materials in the coming few quarters?

We feel that the majority of the price hikes which have to happen now have happened, and we are seeing that some-- The download has started... Maybe in next 2 -- maybe 1 or 2 quarters, there should be some reduction in the input prices. This is our view. But again, contingent on a number of factors, externally, how the whole market pans out, especially we get impacted by PVC price, fuel prices on the -- on stores and prices. And on the other thing, which is consumer products, essentially copper, steel. So our prices, we are seeing that are now getting stabilized after the last 2 quarters increase.

And in the -- if copper and steel prices reduce, do we also reduce prices like we do in pipes? Is it like a pass-through model? Or are the price increases sticking in that division?

Rakesh, can you take this on the consumer side?

Sure. Sorry, I could not hear the question properly.

If you can do one, please.

No, no, I'm fine. Can you hear me?

Yes, we can hear you. So what will the increase or the decrease in the speed in the comp -- so Rakesh, the question was that with the increase in steel prices and now the price is getting stabilized, what impact will it have on the selling prices on the -- on our products?

Yes. Thanks for the question. So if you would see in the last 3 to 4 quarters, we have continuously done price increases on these products that are led by the commodities increases what has happened over the past 4 quarters. But I have said at the same time that the prices have stabilized. In fact, in some cases, the prices have actually come down also from the last quarter as well. So in consumer appliances business, at least, I don't see -- understanding the situation does not turn dramatically differently in the next quarter. I don't see any further price increases happening in the next quarter or so. So the selling side

[indiscernible] in case it goes down?

Sorry?

If in case these prices of your inputs go down in this segment, do you roll back price increases or not?

So if you would see, I think, if there would be a price decrease in one or the other area, so we would also have to closely look at the freight part. We'll have to look at the fuel part and the crude part as well. So I think -- so there might be a decrease in some part of the business, but there is an increase in some part of the business. So overall, I don't see any reason for any brand to lower its prices in the upcoming festive season. But I see the prices would remain stabilized for the next quarter at least.

We have the next question from the line of Nikhil Gada from Abakkus.

My first question is, please, if you could help with the EBIT numbers for plastic price for the current quarter as well as the last year same quarter, please?

With numbers, [ a year ]...?

Yes. EBIT numbers for plastic prices. And the same for sanitary ware and profits.

So EBIT for this quarter is at 5.2% versus Q4 at 9.7%. And last year at 7.6 quarter 1.

Understand. So EBIT is 5.2% for plastic price versus 7.6% year-over-year.

Yes. And for sanitaryware and faucets, it is 13.3% for quarter 1 of this financial year versus 15.1% for Q4 and 7.3% on year-on-year basis, quarter 1.

Sir, and I don't know whether you have done this breakup but how much would have been the addition in the margins because of this manufacturing now coming into the numbers for 1Q? If you can say, x of manufacturing in this current quarter, what would have been the margins like? So we get a comparable picture as in how much has been the margin impact?

So basically, the manufacturing margin has been added to the numbers, but it gets camouflaged because of some input prices, as we said, at around INR 7 crores is an impact on the pipes. Another INR 6 crores is an impact on sanitaryware and faucets, the input cost of material has increased for which in subsequent quarters. So if you see INR 13 crores is something which is directly coming from the impact of listing on the EBITDA. So that is up, you can see incrementally the margins will build up or...

Sir, if I add the INR 13 crores to the overall EBIT of the building products, then that is something like a normalized EBITDA margin is this what you are saying, right?

Yes. Very near to that.

Okay.

And one more impact is this because since for -- in the [ slam scale ], we did transfer to London by 2 London buildings. So there is a lease rental, and then we fairly instead of buying them to land and building because they were very costly. So we took it on a long-term lease. So that impact gets now detected under the India into depreciation and interest.

And what was that amount, sir?

So that is around INR 3.5 crores, INR 4 crores on the overall growth sanitaryware and faucet...

So that explains the reason why the depreciation is higher because I think once this transfer was done, you had said that mostly the depreciation on a quarterly basis would be around INR 18-odd crores, and it has come to close to INR 22 crores. So is that...

So early INR 18 crores because I remember this question was being asked that how much of the depreciation of AGI Greenpac will get accounted here. So basically -- and we also spoke that there will be a lease on the top of it. But [ lease/rental ] gets accounted into depreciation and interest under Ind AS.

Understood. Okay. Got it. And then, sir, just on the -- sticking to the plastic pipes business. We don't really share the volume data, but if you can at least help us explain what has been the volume growth versus the realization growth for this particular quarter?

In terms of volume you are asking PVC, utility [ and concrete ]?

Yes, on that. And if you can just give on a total volume basis, sir?

So particularly the ratio of CPVC, like if you see year-on-year, the volume growth is almost 100% as such. And the production volumes basically when you see all the sequential quarter is that far with Q4 as such. And in terms of the value, in terms of CPVC to utility, 44% is CPVC.

This is for this particular quarter, you see...

This is not as compared to 34%, which was EF. So we are doing a lot of high-end business here on the CPVC.

Understood. So, basically, sir, a bit confused over here because when we have seen a volume growth of 100% year-over-year and our CPVC mix sale has increased so much. Then the realizations are down, right, actually year-over-year?

And we have given the number also that around INR 7 crore is an impact on the EBITDA.

No, sir. I'm talking about the realization because I assume CPVCs are a higher realization product -- so in that case, because the share has increased and the realization should have been on the higher side. Right?

The CPVC prices, if you see, they have remained in the trend as such. So there has not been decreased assets. But [ fusion ] has happened on the PVC.

Okay. I'll just take this offline, and then just quickly on the consumer products part of the business. Rakesh mentioned that there would be no further price hike to be taken. But in terms of the margins, we are back to positive territory and 2Q and 3Q remain our best quarters per se. So are we to say that we will go back to the 8%, 9% sort of levels in specifically in 2Q, 3Q, which we had seen somewhere in FY '21 in margins, EBIT...

Yes, you are very right. I think we move to the positive territory in the sense because our EBITDA at 4.5% or stand-alone of consumer appliances business against the last year is minus 1.1% was a huge traction in terms of the margin increase. Again, as I told you, because of the cooling season getting picked up for us because if you remember, the last year, COVID had devastated [ quarter 1 ]. And having said that, we've got the momentum built into the -- in the upcoming festive season. And we believe that our margins would be closer to what the last year level in Q3 for sure. And sustained by ongoing consumer acceptance of our products. And at the same time, we also have a cautionary note to make that as long as the customer demands really picks up, I don't see any reason why we won't come back to those margins that we attained last year, in quarter 2 and quarter 3.

The last year quarter 2 margin was 6.2% in 2Q and 3.4% in 3Q. So just from that margins prior to that were close to 9% to 10%. So that is the reason I'm asking.

So I think, yes. So as I told you, because of the ongoing price hikes, what we have done for the last 3, 4 quarters and not us only, tender competition as such, the growth if you would see as muted to some extent, or would be muted to some extent in Q2 and Q3. And having said that, even if you see our growth versus the peers in Q1, we have almost a majority of the competitive brands we have registered a 2x growth percentage in Q1 against most of our competitors. So we believe the kitchen category is a very key category in Q2 and Q3. And we believe that we should be able to deliver what we delivered last year as well, if not more than that.

Understood, sir. And just to stick on that kitchen appliances point. We have a few players now coming in someone like Crompton also now announcing specifically into chimneys and hobs they're planning to expand. Do you see there's as a sort of category expansion that we can see in chimneys and hobs? Or do you think that this can sort of impact us in terms of how our business has gone through.

While I respect the competition, but at the same time, I must let you know which I've told you in the past also that we have a very, very strong #2 player in the category of cooker hoods. And among the top 5 players in the category of hobs. So we have clearly established ourselves with a 20% kind of a share in the category of cookers. Having said that -- the penetration of cooker hoods or hobs in India is not even 1%. So the chance of the market growth is humongous in a market like India. So I don't anticipate any competitive pressures with the introduction of some more competitive brands. I think it will only help in expanding the market. And we being among the top 2 players, we believe that we have enough ammunition with us in terms of our technology, tool products. Our focus on smart appliances, our focus on building the first India silent chimney, building on India's largest silent chimneys, building on India's brilliant trade of MaxX Autoclean chimneys which are not only consumer friendly, but make the lives of the consumer easier. So we have enough in the technology pipeline to keep our consumer engaged with our larger kitchen appliances segment. And I don't see any reason why we won't continue our robust growth in this category in the future as well.

Understood, sir. And sir, I have one last question. So if I may, please. Lastly, on the sanitaryware and faucets part of the business, there is a sort of a tactical shift that we are seeing in the numbers which are coming across for all the companies. And we have definitely done even better than all of them. So specifically, if you can highlight what has really worked for us and what is changing in this industry post-Covid . Are we seeing such kind of strong growth? And secondly, on this, you mentioned that you have taken a couple of price hikes in this particular quarter as well. And you might have to take 1 or 2 more. So when will the margins go back to the normalized levels from which quarter? So just on that.

Yes. Sudhanshu is here, financial request he can take it.

Thanks, first of all, for the kind words. I think the market has been pretty buoyant post-Covid and that's reflecting in every single players number right now. Of course, we have done well for multiple quarters. And for us, I think the gain has been our relentless focus on, first of all, on our product. We have actually introduced a lot new product examples. In Q1, nearly 20% of our revenues have come from the new products which we have launched in the last 5 quarters, that's what we see anything which has been launched in the previous year and in this year, is that it contributes 20% of sales right now. Additionally, we've been focusing extremely heavily on distribution expansion. We believe most of the companies have very limited distribution reach. We started off very similar to FMCG style distributors in pantry ware and something which was unheard of in this business, and it's really worked for us. Our reach is standard multifold in the last maybe 2 years now. Similarly, in forces as well, we've seen our reach expand multiple across the country. That really helps us in a big way. You would have seen the efforts that you have done in terms of the relaunch of our brand. Our brand identity has been changed. We are focusing a lot on the Italian collection. We are focusing a lot on iconic relationships like with IPL and also we have a focus on always being on air with our brand in there. I think all these focuses have really helped us additionally we have created a separate team within our organization for the institutional business, and that's also giving us disproportionate results. We were not focusing on that earlier as much as our company would desire. So I think all these aspects and the execution of all these strategies in the market has been far better than most of our competitors. And that has given us relatively superior results over an extended period of time. I hope I answered your question.

And sir, just on the margins, if you can sort of...

Yes. So of course, our margins have got impacted by the input prices, which Sandeep has actually shared with you earlier as well. We have taken commensurate price increases. However, it takes a little while because there's a bit of a lag effect on margins perspective. We believe there are further price increases, which are expected as we go forward in the coming months. We believe Q2 will be better than Q1. And I think by Q3, we should be starting to clock absolutely, I would say, industry-leading margins.

We have the next question from the line of Puneet Khanna from [ BOB Investment ].

Yes. Congratulations, everyone, for the great results. So I have a specific question on bathroom segment. So I need some basic details in terms of the breakup of sanitary and faucets and the capacity utilization details from both the plants and the working capital, how the inventory days and the [ receivable ] days have been. So if you can throw some light on this, please?

The sales -- the overall sales are is kind of slow in the segment of reporting for the BPD, of which INR 170 crores of sales is relating to pipes and balances towards the bath products. In terms of margins, we have already spoken of extensively over a few minutes. If we see the overall inventory working capital days, we have odd 105 days [indiscernible] of net working capital, which is there in the bath product. It has slightly increased. We worked on it last year in reducing it. But with the acquisition of the building product manufacturing, so the inventory, which came along, so that has increased slightly. So I think in next 2, 3 quarters, we'll work on it as we did last year to optimize it. In terms of the pipe segment, again, we have odd 100 days of inventory, which is there, which includes our imported inventory also we have not [indiscernible], so a number of days is slightly higher on this. But are also set us like we work on a very sharp things on better days is around 23 days profiles and 30 days for receivables as such in the market.

Sir, but I specifically want sanitary and faucets breakup of building products.

So faucets now constitutes around 35% of the bath products.

Okay. And can you compete the capacity side of the plant capacity utilization for both the plants?