Hindware Home Innovation Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Top-line hit, margins up: Revenue was flat to down across segments as inflation and weak consumer sentiment crushed discretionary demand, yet EBITDA and margins improved YoY through mix, efficiency and lower input costs.
• Bathware margin story is structural, not cyclical: The 360 bps YoY EBITDA margin jump rests on in-sourcing (removing a 4.5% EBIT markup), premiumisation and domestic procurement, not just raw material tailwinds.
• Pipes: volume up, value down, margin thin: PVC volumes surged 27% but lower resin prices dragged revenue; CPVC volumes fell 27%, its first decline in 18 quarters. The business is sub-scale, so fixed overheads crush margins when sales dip.
• Consumer business guidance slips: The ₹1,100 crores-plus by 2025 target will be missed by 12–18 months; the retail unit (Evok) is under strategic review with a decision possible in 3–6 months.
• What to watch next quarter: Whether the promised Q3 demand recovery materialises, CPVC volume stabilisation, the pace of bathware margin expansion toward the ~2% guided improvement, and any concrete decision on the retail business.

Bathware: Margin Expansion Despite Flat Demand

• Flat revenue, high base effect: Bath business revenue was flat YoY because Q1 last year carried an unusually large price increase to pass through input costs; underlying demand was muted by higher land prices, interest rates and EMIs hitting building materials.
• Demand split by segment: Premium real estate demand held up relatively well; mid and affordable segments saw a larger impact, with degrowth visible in smaller towns. Unpredictable rains and erratic weather also hit renovation demand.
• Margin improvement drivers: EBITDA margins improved 360 bps YoY and 140 bps sequentially. The four drivers: (a) price increases taken earlier when input prices rose, (b) moderation in input prices now, (c) product mix shift toward premium sanitaryware and faucets, and (d) in-sourcing of manufacturing from a group company, which eliminated a 4.5% EBIT margin markup previously paid.
• Faucet mix dilutes percentage margin: Historical 19–21% EBITDA margins were when the business was primarily sanitaryware. As faucets grow faster, the blended percentage margin gets averaged down even though absolute EBITDA increases, because faucets carry lower percentage margins due to higher-cost brass inputs.
• Marketing spend managed: Q1 included IPL sponsorship spending; Q2 is leaner; Q3 will have festive season and media spots. Management is taking an optimal call on marketing spend to sustain margins.
• Import substitution underway: Import dependence to reduce from ~16–17% in FY23 to mid or low single digits by FY25, adding to the committed margin expansion. Domestic suppliers have been developed for sanitaryware and faucets.
• In-house premium production: The transition to produce larger, more premium sanitaryware products in-house is on track and will be completed by Q3 end.
• Working capital improvement: Bathware working capital improved by 7 days in Q1 (from 112 to 105 days), driven entirely by inventory control; DSO is similar to last year. The full-year target is a 15-day improvement.

Pokhriyal: "I would really urge all the investors who look at market shares and trends on a slightly longer-term basis and in my view reacting to on a quarter-on-quarter"

Pipes: Volume Growth Masked by Price Deflation

• Revenue down despite volume up: Revenue fell primarily because lower PVC resin prices pulled down value terms, even as overall volumes grew ~12%. PVC volumes grew ~27% while CPVC volumes declined ~27%.
• PVC growth partly agri-driven: Part of the PVC volume growth came from agricultural pipe sales used in household applications as a cheaper substitute, not just core plumbing demand. Management declined to break out the agri vs housing mix, calling it a very small component.
• CPVC decline, first in 18 quarters: CPVC sales saw a marginal dip with around 27% volume decline, contributing 40% in value terms vs 47% last year. Management attributed it to global housing demand weakness and a China effect, and expects growth from Q3 onwards.
• Margin pressure from sub-scale operations: The pipes business EBITDA margin is low because the business is only in its fifth year with a small base, so fixed overheads have a disproportionate impact when sales are low. Q1 revenue was ₹156 crores vs Q4 which was the highest sales quarter.
• No inventory losses: The company did not have any inventory loss on CPVC, and very little impact on PVC because it is not carrying huge inventories unlike 1–1.5 years ago.
• Distribution expansion continues: Added 30–35 new distributors in Q1 (total ~280), a net addition, though revenues declined due to pressure on secondary sales and stocking.
• New product launches: Forayed into PTMT faucets and accessories; exclusive collaboration with Reliance Worldwide Corporation introduced TRUFLO SharkBite, a line of multilayer composite pipes with AENOR certification and a European patent for push-to-connect joining.
• Roorkee Greenfield project: Work has started; will add 12,500 tons per annum capacity in ~18 months, scalable to 25,000 tons with Board approval. Total cost ₹180 crores, with ₹60–70 crores spent this year and the rest next year. Management wants to accelerate the project.

Pajnoo: "See, the margin, in fact, is basically, Nikhil, because the base is very small since we are a very small player. We are in our fifth year of operation. So, all our operational costs are there."

Consumer Appliances & Retail: Rationalisation Underway

• Kitchen strength, cooling weakness: The kitchen division demonstrated strength on the back of a technically superior product portfolio and focused multi-channel distribution, gaining market share and improving margins. Cooling products demand declined due to delayed monsoon, and increased inventories compelled market players to offer discounts.
• Consumer demand soft: Consumer demand, particularly in small towns and rural areas, was impacted by inflation concerns.
• Guidance miss on consumer business: The target of ₹1,100 crores-plus by 2025 for the consumer business will be missed by 12–18 months. All other guidance remains intact.
• Portfolio rationalisation: The business, launched ~7 years back with a full product portfolio, will shrink its canvas to focus on kitchen chimneys, hoods, hobs, water heaters and air coolers. Some products need rationalisation and review. The company claims leadership in creating smart appliances for the first time in India.
• Water heater JV: The company has a JV and its own production facility for water heaters, which will improve both products and margins.
• Retail business under strategic review: The Evok retail business, which used to do ~₹100 crores, has seen its business model disrupted by online competition from dedicated furniture players and platforms like Amazon. The company shut down its own online furniture business ~3 years back and is evaluating various alternatives, with a decision possible in another 3–6 months.

Sikka: "We have spoken about this business as on date the status remains the same. We are looking at various alternatives what should we do with this business. Definitely, I understand what your question is. I can only sum up by saying we are evaluating various options on this business right now."

Balance Sheet & Capital Allocation

• Debt reduction plan: With ₹40–60 crores capex this year, the company should clear off debt by around ₹100 crores. Next year, another ~₹100 crores repayment is planned.
• Equity dilution rejected: Management pushed back on an analyst suggestion to dilute 10% equity to raise ~₹400 crores and repay debt, arguing the company is optimally leveraged and the cost of equity is much higher than 8% debt. It may look at diluting equity at the right stage and right time.
• Lease liability accounting: The consumer business does not own factories or warehouses; all warehouse rentals and contracts are long-term, so the entire rental gets allocated to depreciation and interest per accounting standards.
• No price hikes planned: No price hike was taken in Q1 or Q2, and none is expected in the second half of the year. Input prices have stabilised for most product categories.

Sikka: "I appreciate your observation, but from the financial fundamental perspective, each company, each growing company should be optimally leveraged with the debt on a consol level and with much bigger growth paths. We have seen that we are optimally leveraged right now, and we may look at diluting equity at the right stage at the right time, but I think proposing to the Board of Directors that I will raise equity to pay off 8% debt, I think the cost of equity is much higher as..."

Guidance & Commitments

Key Metrics