Pidilite Industries Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Strong top-line, margin pressure: H1 consolidated net sales grew 34.1% on broad-based volume growth, but input costs hit all-time highs, with material cost as a percentage to net sales higher by 436 bps YoY.
• Pricing discipline vindicated: Management deliberately under-priced B2C inflation, betting raw materials would retreat. That call proved correct, and VAM costs are now expected to decline from ~200 to ~180 in Q3.
• Distribution engine still scaling: Village coverage below 10,000 population doubled to 24,000 over two years, and a rejigged supply chain with 11 new, nimbler plants now supports over 60 manufacturing locations.
• Profitability inflection promised: With commodity costs declining, management sees margins improving sequentially and expects to maybe report EBITDA margins north of 20% in Q4.
• What to watch next quarter: Whether the expected VAM cost decline to ~180 materializes, the pace of sequential margin recovery, and any B2C pricing action if the rupee or raw material costs shift.

Top-Line Performance & Volume

• H1 growth: Consolidated net sales rose 34.1%, driven by strong volume growth across categories and geographies, enabled by distribution expansion, innovation, a responsive supply chain and digital initiatives.
• Segment breadth: Growth was broad-based, with Consumer & Bazaar up 35% and B2B up 33% in H1.
• Volume trajectory: Q2 Consumer & Bazaar volume growth was about 1.2%–1.5%, while H1 volume growth was approximately 21%. The softer Q2 comp reflects last year's bumper Q2 and Q3, which were inflated by pent-up demand from Q1 closures and substantial dealer inventory build from two large price increases.
• Regional spread: Growth has been fairly secular across all four regions of the country; penetration and market share do not differ dramatically by region.
• End-market mix: Roughly two-thirds of business comes from renovation and repair, one-third from new construction, though this varies by division: tile adhesive and waterproofing are more correlated to new construction.
• Growth framework: Core categories target 1–1.5x GDP growth, growth categories 2–5x GDP growth, and pioneer categories ₹100 crores in 3 years. Over the last three-year period, the company has been fairly consistent on these parameters, in fact beating them by some distance.

Puri: "our objective remains double digit volume growth and we are fairly confident that for the year that is where we always trended and said listen core categories at one to one and half times GDP growth, growth categories at 2 to 5 times GDP growth and pioneer categories at 100 crores in 3 years."

Margins & Input Costs

• Input cost peak: Q2 saw input costs at all-time high levels, with material cost as a percentage of net sales higher by 436 bps YoY and 74 bps sequentially. VAM consumption rate increased sequentially from \$2,231 to \$2,491 per ton during Q2.
• Margin defense: Calibrated price increases and a sharp focus on operational efficiencies helped maintain EBITDA margins in line with the previous two quarters despite the input cost pressure.
• Raw material trajectory: The raw material index rose sequentially from 193 in June to 200 in September, but is now expected to decline to approximately 180 in Q3. Material margin still carries a 500 bps gap versus the same period last year.
• B2C pricing philosophy: In the Consumer & Bazaar segment, management deliberately reduced margins because it believed raw material inflation was temporary and priced only at 75% of the inflation. This stance has proven right as prices have now come southwards.
• B2B pricing agility: Price reductions have already been taken for B2B customers where necessary, because B2B prices are raised and reduced faster given the direct customer impact.
• B2C pricing status: No price reductions taken yet in B2C because the company did not price to the full extent of inflation, and the ₹1,200 VAM price was at ₹73–74, not ₹81–82 as currently.
• Price premium discipline: The company will maintain an approximately 15% price premium in its core adhesives B2C portfolio, net of all discounts. If the premium goes higher, prices will be reduced either via discounts or price list cuts, because any premium above that tends to affect volume growth.
• Forward pricing stance: Management does not see itself taking any more price increases and is currently fully priced in both B2C and B2B. In B2C, future decisions will depend on the rupee and overall raw material cost.

Puri: "In our Bazaar and consumer segment we deliberately called out that we are going to reduce our margins because we believe that this is not something that is permanent and fortunately we have proven right as prices have now come southwards."

Distribution & Supply Chain

• Rural expansion: Over the last two years, village coverage below 10,000 population increased from approximately 13,000–14,000 to 24,000. In 10,000–20,000 population towns, the company now covers a large part of the universe.
• Long runway: Over the next 3–5 years, sales and distribution expansion in small-town and rural India will remain an avenue of growth.
• Supply chain reconfiguration: Over the last three years, the company has completely rejigged its supply chain network: it expanded 20 facilities through brownfield investment and added 11 new factories, now operating more than 60 manufacturing locations across India.
• Nimbler footprint: The 11 new plants are smaller and nimbler, located closer to demand locations, similar to what FMCG companies like ITC and HUL are doing.
• CAPEX philosophy: The company plans on a three-year basis; wherever projections show capacity may run short even three years out, planning begins. Over the next three years, similar supply chain expansion will continue.

Innovation & Growth Drivers

• Four growth engines: Innovation, sales and distribution, digital, and a resilient supply chain are the four big drivers of growth. On all four, an ongoing fairly aggressive program is tracking on schedule.
• Innovation contribution target: In steady state, the objective is that one-third of growth should come from innovation and two-thirds from growing the core.
• Launch pipeline: A whole set of products have been launched in the last 6 months, and more launches are planned across the next 6 months as things normalize and field activity resumes. Innovation intensity will increase, with every division expected to see launches.

Competitive Dynamics

• Smaller regional players returning: Smaller regional players are coming back with greater access and lesser inventory. A large part of their share was taken by bigger competitors, not Pidilite, because Pidilite operates less at the price-competitive lower end.
• B2B value chain strategy: Over the last 5–10 years, the company has consistently moved up the value chain and vacated the commodity end of the market in B2B, focusing on profitable volume growth rather than volume for volume's sake.
• Product advantage philosophy: Pidilite's philosophy has always been to offer a demonstrably better product and then overlay brand-building activities on that product advantage.
• Normalization ahead: With current trends, management expects greater demand alongside greater competition, and suspects the situation should return to normalcy.

Puri: "Unlike, a lot of other companies in other sectors who have been going after volume for volumes we do not do that. Our mantra is profitable volume growth not just volume growth."

Subsidiaries & Regulatory

• Domestic subsidiaries: Consumer & Bazaar-oriented subsidiaries continued to deliver industry-leading growth and margins, while the B2B subsidiary reduced losses significantly.
• International subsidiaries: Witnessed good sales growth but EBITDA remained under pressure due to higher input costs.
• Section 194R compliance: The company has educated all channel partners on the implications of the Section 194R amendment on incentives, gifts and perquisites. The impact has been factored into the business model going forward and the amount is not very material. A calibrated approach will be taken depending on the program, with no hard and fast rule on who bears the cost.

Puri: "It definitely impacts us and all leading companies. Companies with leader products gives dealer non cash incentives so that there is no under cutting in the market. Now, we have obviously therefore evolved a set of policies. While taking this into account you know it is something that we do not welcome, but it is something we have to live and we will live with it."

Guidance & Commitments

Key Metrics