Hindware Home Innovation Limited (HINDWAREAP) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q3 and 9M FY '23 Earnings Conference Call of Hindware Home Innovation Limited hosted by PhillipCapital Private Client Group Desk. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Apurva Shah from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Thank you, Vivian. Good evening, everyone. On behalf of PhillipCapital India Private Limited, I welcome all of you to Q3 and 9 Months FY '23 Earning Conference Call of Hindware Home Innovation Limited. We take this opportunity to thank the management of HHIL for giving us the opportunity to host this post-opening conference call. From management, we have with us today Mr. Rajesh Pajnoo, CEO Pipe Business; Mr. Sudhanshu Pokhriyal, CEO of Bath Business; Mr. Sandeep Sikka, Group CFO; and Mr. Naveen Malik, CFO of Hindware Home Innovation Limited. I now hand over the call to Mr. Gavin Desa from CDR India for further proceedings. Thank you, and over to you, Gavin.

Thank you, Apurva, and thank you for the introduction. Welcome, everyone, to this call. I'd just like to add that statements made during this call may be forward-looking in nature and are subject to risks and uncertainties. The management of the company does not take any responsibility to revise these in the interim or make any changes. I now like to hand over to Mr. Naveen Malik to start beginning his opening remarks. Over to you, Naveen.

Thanks, Gavin. Good evening, ladies and gentlemen and a very warm welcome to Hindware Home Innovation Limited Q3 and 9 months FY '23 earnings call. I am sure you would have seen the numbers in our presentation. Now I will touch upon some key aspects of our overall performance and of our Consumer Appliances business, post which Sudhanshu will share an update on Bathware business, and Rajesh take you through the Plastic Pipe and Fittings business. Our business performance should be considered in light of a challenging macro environment, whereas demand has been subdued consigning with the period of interest rate hike and high inflation leading to a slowdown in consumer discretionary spend. We have achieved decent growth in pipe business, but inventory losses impacted margins. Although our margin and profitability have been affected, our revenue performance remains healthy, owing to our established brand and product effectiveness. Our 9 months FY '23 EBITDA increased by 40% and we plan to further improve efficiencies by increasing local sourcing in our Bathware and Consumer businesses. Further, Hintastica Private Limited, a joint venture entity formed between our company and the Groupe Atlantic of France has commenced manufacturing heating appliances at its advanced facility in Jadcherla, Telangana. We are optimistic that the commencement of the new manufacturing plant will enable us to strengthen our market share and further concentrate our position in the water heater segment. I would also like to talk about a change in the status of Hindware Limited announced on 3rd February 2023. In order to incentivize and encourage certain employees who are critical for its business, the Board of Directors of Hindware Limited has approved the allotment of 9 lakh partly paid up equity shares or 1.8% of equity to members of its senior management team. Subsequent to the assorted allotment, the status of Hindware has been changed from wholly owned subsidiary to subsidiary of SHIL, with effect from 3rd February 2023. The shares are issued at a valuation arrived by independent valuers and will also be subject to lock in, release and transfer restrictions as agreed between Hindware and [indiscernible] subscribers. Looking ahead, we continue to focus on expanding our product portfolio, improving our product mix, expanding our distribution reach, enhancing operational efficiency and implementing cost [indiscernible] initiatives. We remain confident about our performance and will achieve sustainable profit and revenue growth for all of our stakeholders. With that, I would like to call Mr. Sudhanshu Pokhriyal to take you through the Bathware business. Over to you Sudhanshu.

Thank you, Naveen. Good evening, and welcome, everyone. So we are very encouraged by our performance for the quarter under review. In a period where market demand was muted. We have achieved revenue growth of 12% in Q3 and 33% for the 9-month FY '23, while -- of course, gaining in our market share. Despite the calibrated price increases, which we undertook across our product categories during the quarter under review to counter the effect of increasing input prices, we continue to see decent customer offtake, which we believe is a reflection of the success of our innovative launches in our strong brand salience. As a part of our growth focus, we've been strengthening our distribution network. In the year-to-date, we have added 123 new distributors and 29 in quarter 3 alone. We launched 186 new brand shops and 46 in quarter 3 alone, taking our total to nearly 425 operational brand stores for brand [indiscernible]. We have expanded to many new Tier 4, Tier 5 towns because of our distribution expansion initiatives and enhanced the brand awareness through focused advertising and promotion, which I'm sure you witnessed during the quarter as well. Our enhanced product mix and new product launches growth of our [indiscernible]. Higher input costs combined with overall inflationary environment, showed that -- saw the growth to be lower than our expectations, though. During the period under review, we have introduced various innovative products and designs such as Aspiro faucet range, [indiscernible] range of colored faucet [ for use ], more than 50 new models of EWC in one piece in wall mount types. Our NPD launched -- NPD, which are launched in the last 21 months have contributed to more than 20% of our sales in this financial year. Our marketing campaigns across all platforms have been strongly supporting these launches. Our growth strategy is multipronged. First of this is consistently expanding our distribution reach, and we believe there is still a significant opportunity in Tier 2 and Tier 3 series. Nearly 70% of our sales comes from non-metro towns. Secondly, our focus is to continue to expand and strengthen our faucet business and institutional business, while maintaining our position in the sanitary ware business. Our third area of emphasis is on strengthening our luxury brand through a vibrant media and promotional campaign. All these efforts are underlined by a strong influencer program, which also includes the plumber and architect loyalty program, which plays a significant role in product decisions to the -- of the end consumers. We have taken strategic decisions to reduce imports and increase local sourcing to better safeguard us from the vagaries of international freight, foreign exchange and international inflation. We believe this will help us to increase our efficiency, which will start reflecting in the coming quarter performance. Although we do not have any significant CapEx plans over the next year as we are not setting any greenfield manufacturing plant. The CapEx we proposed to incur in the coming FY '24 will be setting up more brand stores to drive market growth and also on efficiency CapEx to optimize our own manufacturing capacity to build higher ASP, higher margin products. In the past 12 to 18 months, we saw a spurt of demand, which was pent up during COVID. Currently, the inflation in cost of land and cost of construction, we believe the demand is going to be muted for at least 2 quarters, 2 coming quarters. Additionally, home loan interest costs have increased, which is making customers a little more cautious while considering taking a decision to buy a home. Some big projects are definitely being launched because of the distinct shift sector is undergoing from unorganized to organized sector. Additionally, we also see many new players coming into sanitary ware and for business as extended categories of their existing business as has been happening in the last 7 to 8 years. In this environment, our diversified quality offering supported by a strong brand and a first-on aggressively expanding our presence and reach will help us in our endeavor to drive profitable growth. We believe we have the brand strength, manufacturing excellence, quality, system processes and the team to deliver robust results. With that, I'd like to call Mr. Rajesh Pajnoo to take you through the pipes business. Over to you, Rajesh.

Thank you. Thank you, Sudhanshu. Good evening, everyone. Thank you for joining us. I'm glad to report that our pipes and fittings business continues to be the fastest growing in the segment with revenue up by 41% in 9 months and 27% in Q3 year-on-year basis. EBITDA stood at INR 2 crores in quarter 3 and in 9 months, it came to INR 20 crores. Margin pressures persisted due to the decline in PVC raw material prices, leading to huge inventory losses, which stood at around INR 17.5 crores this quarter. Since December 2022, as you all know, our prices have stabilized now and begun to rise. Further, should PVC prices remain at present level or don't fall again, we expect no further inventory loss in Q4, which is already reflected in our January performance and believe we are well-positioned to deliver early double-digit margin. Despite the persisting macroeconomic challenges, we are happy to report that our business has witnessed increasing volume growth in the last 2 quarters. This growth is driven by our CPVC pipes and fittings, which presently contribute close to 45% of the pipes business, 9 months revenue. Our focus on expanding our distribution and reach continues. We currently have a network of over 290 active distributors along with approximately 25,000 retailers. Our expansion strategy, including both brownfield and greenfield initiatives align with our planned objectives. Our Hyderabad plant brownfield capacity expansion project commenced commercial production in January 2021 increasing our capacity to 48,000 metric tons. Additionally, our greenfield project in Ghurki is progressing as planned with the new plant expected to commence operations in mid-financial year '25. Considering the sale of around INR 200 crores, which we achieved in the past quarter, we are hopeful of the growth construct for our pipes and fittings business. We, in fact, anticipate that the business may exceed this target of INR 1,000 crores in sales well before it stated financial year '25 target. That concludes the opening remarks, and I would like to ask the moderator to open the floor for question-and-answer session. Thank you all.

[Operator Instructions] The first question is from the line of Kaushal Shah Dhanki Securities.

I have two questions. One on the Bathware segment. If you can maybe throw some more color on the drivers for the margin expansion that we've seen in Q3, that is one. And the second is on the pipe segment. We've seen, you mentioned in your opening remarks about the INR 17 crore inventory loss. So that seems a little higher compared to some of the peer companies, particularly also given that your commentary in Q2 was that we're not expecting significant inventory loss. So where do we see pipes, while the volume growth continues to be quite strong, but where do we see the margin trajectory going forward in the pipe segment?

So I would request, Sudhanshu if you can take on the bath one, what are the key drivers and followed by Rajesh, if we can throw some light on, although you've spoken about inventory and that going forward [ none, ] so still talk about the inventory -- or maybe you can talk about the inventory followed both Sudhanshu.

And I'll answer your first question -- the second question, that's on the pipe side. Since we have already said what happened is in the last quarter, the prices of PVC raw material lowered from 126,000 to 99,000 per metric tonne. It was almost around 30% drop in prices in a single quarter, and we were carrying some inventory. So that was the reason. And as I said, that this looks now positive because market has gone up by a few rupees per kg. And also, we have realized it. And as I said already, we are on a right track and January -- since January is already promising [indiscernible], and we don't see any inventory loss in quarter 3.

Just one question related to that. You've seen obviously a realization drop. So while volumes continue to be very strong in the pipe segment, do we expect that Q4 realizations also will rise because obviously PVC prices have increased.

They have already started realizing, and they will really realize it. As I already said, since we have not declared is already on the rise.

Right. And sir, some comments on the margins you did mention about targeting double-digit margins.

So they will be somewhere around 10% of EBITDA.

So that will be for the next financial year, FY '24?

Yes.

This is a guidance on a broad few quarters, next few quarters, given the fact that the current inventory fluctuations, which were there that has been absorbed. And based on the current market prices, given the fact there shouldn't be any substantial further drop. So that's what Mr. Rajesh Pajnoo is saying. Short- to medium-term guidance is around double digits. And then future as we move forward, the operating leverage will come into picture and the further margin expansion should happen by another 1% or 2%.

Sure, sure. On the Bathware segment, sir, if you can...

So this is Sudhanshu. So in the Bathware segment, of course, we've had the gains which are coming to us now because of the fact that we are now a relaunched company along with our manufacturing. So that's already a part of our financials right now. We've, of course, seen a further increase in our input costs, especially in the gas side. And in Q3, we've taken a price increase of about 6% in sanitary ware, and about 3% to 4% in faucets, which came about in the middle of the quarter 3, so we have seen that gain coming towards perhaps only in 1 month in the month of -- in quarter 3. However, we expect that to benefit us entirely in the Q4, so we believe that margin expansion will happen in the quarter 4 of the differential itself. Additionally, what's also happening for us is that we are continuing to reduce their dependence on imports, which were a substantial portion of our -- wasn't substantial, but a significant portion of our total outsourced products. We have started in-sourcing some of that, and we've also started converting into domestic sourcing for some of the sanitary ware requirements, which we've had. I think that also will have significant impact on our overall profit margin expansion. Lastly, to improve our efficiencies, we have taken up multiple DTV projects designed to value projects. Many of these projects are under execution. We believe that some of the benefits will start flowing through to us in quarter 4.

There is no response from the line of Mr. Shah. We'll move on to the next question. The next question is from the line of Praveen Sahay from [indiscernible].

So the first question is related to the Bathware segment. And just to add in to the last participant's question. If I look at the PBT margin from last year same quarter on the lower side. And I believe because of the AGI Greenpac acquisition, this is on the lower side. So by any chance, we will reach to the PBT margin at that level of the last year?

So basically, if you see like until 31st March 2022, this entire operations of at product was in two different companies in free entire building products. So we have historically communicated that the rationality of the acquisition. So now everything is into one company. We were historically buying on [indiscernible] business based on an independent pricing mechanism. So whatever the cost of production there was in the previous company and the markup margin that entire thing is now getting accumulated here. But the margins of those 1:1 apple-to-apple is not being seen at the EBIT level because there has been fluctuation in the raw material prices like we've talked about price rises. We have talked about gas prices in the past historically, so we are not able to demonstrate on the entire costing, how the costing behavior has changed as such. But the entire benefit of that is getting flowed out here. The only difference is that majority of some part of the CapEx, which was incurred before the acquisition in the other company. There was some interest component, but our transaction was on an EBIT basis. So since we have acquired this now through our debt. So there is an interest component, which in the next 1 or 2 years, we have given guidance to come down with the profits we are going to run. And ultimately, those margins will start going back.

Okay. Okay. Got it. And because Q-on-Q also, we can see that the net banking debt has increased. So last quarter, we had not conducted entirely or there is incremental of INR 124 crores?

So generally, in Q3 -- by the end of Q3, we accumulate some inventory. -- because we are still buying a lot of inventory from China. And being a Chinese New Year for month of Q4, the inventory accumulation generally happens in the industry. So this -- by the end of March, you will see some inventories coming down. And accordingly, with the realization, the bank debt will also come down.

Okay. Okay. Got it. And the next question is related to the Consumer Appliances. There also -- there is a contraction in the margin. So what's the basic reason for that?

So if you see historically, we've also spoken about this, this market in which we operate, these are highly fragmented market, let it be kitchen chimneys, air coolers and other things. So the overall increase in the input prices, the industry as such has not been able to pass on to the consumer. So if you see many of the competitors, their margins also have shrunk. And in order to sell more volumes, we had to do more BTL activities on the ground. We had to incentivize the distribution, so that is why we feel that with until unless some recovery happens in the market for 1 or 2 quarters, we expect the current trends of the margin will continue. And thereafter, with the volumes picking up and also some easing happening on the input prices when the margin expansion should happen.

The next question is from the line of Nikhil Gada from Abertis AMC.

First, I would like to with the previous question. Regarding the margins in Consumer Appliances business, I believe that we were targeting the range on an EBIT level. We were targeting a range of close to 5% to 6% in the next couple of years. And now that we are seeing such kind of an impact in discretionary demand as well as the input prices still being on the higher side. Do you want to revisit that guidance? Or is there any change in the guidance for that specific margins, if you can highlight, please?

So generally, all these guidances are given based on the current market conditions like we had historically given guidance on price and the Consumer business. So on the price business, we feel that we will be achieving those targets much faster than what we have committed by 2025. But on the consumer side, based on the current market condition today, we may feel that it may take another year or so in achieving those targets. But on the pipe side, we'll achieve a year ahead of it. On the margin side also, Nikhil, we feel that the problems may still be there in the economy on the macro side with the inflationary trends, rise in interest prices and off-lays in many IT sectors, the job losses are there, which has been there, which may have a short-term impact on the margins. But that's why we said for 1 or 2 quarters, we feel that margin pressure will be there and then it should start easing out.

Sir, if I rephrase the question according to you, I'm just specifically asking for FY '24, I'm not going to hold you for that. But just from your perspective, what kind of sustainable margin do you believe is achievable for FY '24 in the current scenario.

You are talking of EBIT margin for Consumer products?

Yes.

So somewhere -- I can talk about EBITDA margins here, broadly, so EBITDA margins ranging around 6% to 7% for the next financial year as a whole. But again, this have some variations on the quarter because few of our products are seasonal in nature. So then it does impact. It is based on the current market condition and the current input prices trend.

Understood, sir. Got it. Secondly, sir, just on the pipes business and you also mentioned...

And this was relating to Consumer products only.

Got it, sir. Got it. Yes. Sir, just on the plastic pipe business, could you help us in terms of the inventory that we were carrying in 3Q in terms of finished goods and resins. Because just to sort of understand what led to this such high kind of inventory loss because obviously, you mentioned it, but definitely still very much similar to what we saw in 2Q as well. And in 3Q, we in fact saw some improvement in prices as well. So a bit confused was that, please?

So if you see on 31st of March -- we can give not on a quarter-to-quarter, 31st of March total inventory in pipes was around INR 213 crores, which is right now at INR 182 crores. But there is a substantial volume increase also. But on a number of days basis, we reduced from 129 to 85 days. The challenge in the market was that last year as the prices were rising, input material availability was a question. And with a sudden drop, the absorption of that pricing became a problem in the market.

Understood. Okay. Fair enough. And sir, just quickly on the entire balance sheet perspective, we already have seen that the debt levels have increased by INR 200-odd crores broadly maybe because of working capital and also as we are expanding our business. Can you just give us a number in terms of what kind of peak debt levels from both long-term, short-term borrowings perspective, do we envisage at least for FY '24 beyond which we don't see the absolute debt levels increasing.

So if you see, there is -- there are two things. The overall input cycle cost has increased, point #1, as compared to last year for many of our products, like based on like whatever sanitary ware we were sourcing last year, the input prices broadly, broadly would have increased by 15% to 20% plus. Let it be the bath or let it be sanitary ware products. On the pipe side, [indiscernible] which is there, so we feel that there will be some reduction in the ballpark estimate is, in next one year, we should be able to pay off that ranging between INR 100 crores INR 125 crores. Based on the reduction in working capital. And the profits which we are going to earn will also -- actually because there is no other -- we don't have a subsidiary, and we don't have any other investment opportunities. So whatever we earn, EBITDA net of interest and the taxes, I think it will go for the reduction of debt only.

So if I assume around INR 700 crore to -- INR 600 crores to INR 700-odd crores for FY '20, that is something at a debt level that you should work with that is what you're guiding for?

Yes. But there will be some expansion like pipe expansion we had to do because of the fast growing.

I'm asking including that number, so if you put sort of because I think we are doing some INR 180 crores in that. So...

Then we'll have to work out and maybe separately, we can communicate this to you.

Okay, sir, fine. And sir, just lastly on the working capital aspect as well, specifically for the Bathware division, I think prior to the acquisition of the manufacturing -- or rather once we had done the manufacturing acquisition, you had said that between 12 to 18 months, we should see a normalization in working capital days. I know we are 9 months into it. But do you think in this next 6-odd months, you believe that we will see the normalization in inventory and overall capital cycle.

Yes. We stand by that, right, we believe the inventory reduction. What you're seeing currently is the enhanced inventory, as I explained earlier, is because of seasonality, because of our dependence on imports right now and because of the fact that in Q4, we get the Chinese New Year. Like I discussed earlier, we have all our plans to in-source as well as locally source some of our non-manufactured items as well as correction of inventory, which will happen, which happened -- the increase, which happened because of the acquisition there. So we stand by our guidance of anywhere between 12 to 18 months, we will see a normalization of inventory in the Bathware.

[Operator Instructions] The next question is from the line of Vignesh Iyer from Sequent Investments.

Sir, yes, I just want to know your quarter 3 -- in quarter 3, what is the utilization levels for faucets, bathware and pipes separately?

Realization levels?

Utilization levels.

Capacity utilization.

Capacity utilization, sorry.

103% utilization for sanitary ware -- 100% utilization, you can say. And then the faucet was underutilized with an extent to about 42%. Rajesh, can you just...

See, Q3, actually, we saw a huge drop in prices, which I already said so for to do -- realize -- tell you to -- we had a growth of value growth of 31%, but a volume growth of 100%. So we had to produce all this in the same infrastructure. We were running at around 90% capacity utilization in Q3, and on an average 9 months basis, it is 78% utilization.

You mean, blended are running at 90% and pipes was 103% and faucet was around 43%, right if I am getting this right.

Sanitary ware was about 103% -- or let's say, 100%, faucet was about 42% and pipes was 90% in quarter 3.

Okay, okay, okay. Right. And if I could understand for the 9 months, what would be the cumulative taken separately I mean price sanitary ware and faucet, but cumulative for 9 months?

Your voice is not that clear.

Am I audible now?

Yes, it's much better.

So I wanted to know for the 9 months, what is the cumulative price hike taken for pipes and sanitary ware, faucet separately, if you could give?

So on the pipe side, the adjustment to prices on a day-to-day or a week to big week basis, which is there on the price hikes on sanitaryware and faucets, Rajesh you can...

So I just shared with you in Q3 middle of the Q3, we increased sanitary ware prices by approximately 6% and faucets about 3%, and we had taken a price hike in May as well, which was to the tune of, if I remember correctly, 6%, 7%. So I don't recall exact number but give it to the tune of this 5% to 6%, I would say. So the cumulative would be a little different because they are having at different points in time. So from a point in time to another point in time, we can say about 10%, 12% in at sanitary ware and about 8% to 9% to 7% to 9% in faucets.

Okay. So now as you see the PVC prices more or less stable at this level or it is better as things signed better for the company. Are you seeing them pressure where we might have to roll back the hikes?

This is for pipes.

In general, I mean, Yes, pipes. It is for pipes.

Pipes, it's like if the prices increase and decrease proportionately with the same percentages this and price increases and decreases. So since we have gone down by around in March, there is a correction and we have gone back up well by 8%. And we expect that in the next quarter, the prices are going to go up and we'll be taking those hikes only, there will be no drop in price.

The next question is from the line of Ankush Agrawal from Surge Capital.

Firstly, so I wanted to the hear the valuation...

Sorry to interrupt, sir, but there is an echo coming from your voice. Can you use the handset if you are on speaker phone.

Yes. Is it better now?

Yes. Kindly proceed?

So I wanted to know, like employee stock that we have given the Hindware Limited level. So what valuation have you given it up?

So this is based on an independent valuation done by 1 of the big 4...

I wanted to know the absolute valuation.

Being a listed entity, we do not disclose that, but it is done at eminent basis and an independent valuation business.

Okay. So in continuation to go, so what is the reason for doing it at the subsidiary level and not at a, well, at a HHIL level? I mean is there a kind of plan to have the Hindware building materials business separately listed in the future?

There are different plans for different entities. So this is one of the first steps for wherein the incentives for the employees in terms of -- the shares have been allotted to the key strategy people will contribute directly to the growth of the businesses. We will review this and we are in a process that how we can do it for the other companies also as such. So because this is a very common trend now across the industry, so that each of the employee has to be aligned strategic -- employees have to be aligned with the business objectives. So there are plans we have historically spoken about that we will be raising growth capital at the level over a period of time, we'll see how the business emanates.

Secondly, sir, in the Bathware business. So what would be cumulative price hike we would have taken in the last 1.5 to 2 years?