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Edited Transcript of PIDILITIND.NSE earnings conference call or presentation 7-Aug-19 10:30am GMT

Q1 2020 Pidilite Industries Ltd Earnings Call

Mumbai Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Pidilite Industries Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Apurva Narendrakumar Parekh

Pidilite Industries Limited - Whole-Time Director

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Conference Call Participants

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* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Amit Purohit

CIMB Research - Analyst

* Arnab Mitra

Crédit Suisse AG, Research Division - Research Analyst

* Ashish Shah;Tara Capital;Analyst

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Gaurav Jogani

Axis Capital Limited - Assistant VP

* Jaykumar Doshi

Kotak Securities (Institutional Equities) - Equity Research Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Tejash Shah

Spark Capital Advisors (India) Private Limited, Research Division - VP of Research

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Presentation

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Gaurav Jogani, Axis Capital Limited - Assistant VP [1]

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Good afternoon, everyone, and I would like to welcome, on behalf of Axis Capital, all of you. We have with us from the management today, Mr. Apurva Parekh.

We'll start with a small introduction about the quarterly results. And after that, we can take the question-and-answers. Thank you, and over to you, sir.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [2]

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Good afternoon, everyone, and thank you for joining the conference call today. Despite in -- despite challenging demand conditions, we have delivered resilient performance, driven by consumer franchise expansion in rural and small towns, earlier pricing actions and moderation in input costs. We remain cautiously optimistic in the medium-term while delivering consistent, profitable, volume-led growth.

The net sales for the quarter grew by 11%, with underlying sales volume and mix growth of 6.3%. This was driven by 6% growth in sales volume and mix of Consumer & Bazaar product and 12% growth in volume and mix of Industrial products. Net sales growth during this quarter was on a base of 21.9% growth in the first quarter of previous year.

Gross margins during the quarter improved by 1.3% over the same quarter last year and by 0.6% over the preceding quarter. The current spot prices of our major raw materials, that is vinyl, acid and monomer, is about $870 as compared to quarter 1 -- 20 -- consumption cost of around $980.

EBITDA before nonoperating income is INR 418 crores and grew by 16.4% over the same quarter last year. EBITDA as a percentage of net sales is 23.7% as compared to 22.6% in the same quarter last year. Profit after tax grew by 7.7%, excluding income from intercompany transfer of intangible assets and effect of tax thereon, in the same period last year, grew by 19.2% over the same quarter last year. Now I will come to the consolidated performance.

Net sales grew by 10.3% over the same quarter last year. EBITDA before nonoperating income grew by 15.7%. Profit after tax grew by 22.2% over the same quarter last year.

Moving on to subsidiaries business. In case of domestic subsidiaries, Nina Percept Pvt Ltd and CIPY reported decline in sales and EBITDA due to market conditions. During the previous year, ICA Pidilite has acquired brands and technical know-how of certain wood finish products from holding company that is Pidilite.

Like-for-like sales growth after excluding these products is 18% over the same quarter last year. EBITDA growth is on account of improved margin due to scale-up of local manufacturing and some Forex gains. In case of international subsidiaries, Bangladesh and Pidilite Lanka have reported good sales growth. EBITDA growth in Bangladesh is lower due to higher manufacturing and SG&A expenses to support future sales growth. Sargent Art, a division of Pidilite USA, reported good growth in sales and EBITDA mainly due to favorable trend and growth of sales to key customers.

The subsidiaries in Thailand and Egypt reported flat sales due to competitive pressures and market conditions. We can now start with questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Abneesh Roy from Edelweiss.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [2]

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Congrats on good set of performance. My first question is on Nina. So in Q4 also, the sales growth was not there, it was a dip. And this quarter, it's a very sharp dip of 17%. So in the same market condition, if Consumer Bazaar (sic) [Consumer & Bazaar] can see good growth, Industrial can see good growth, why should this business suffer and, in fact, decline? You said the market conditions. So apart from the macro slowdown in terms of competitive intensity, if you could highlight -- is there anything which is impacting your numbers there?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [3]

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Abneesh, as you know, Nina Percept is a waterproof services company. They service clients in real estate segment, commercial projects and also into infrastructure. So amongst all sectors, real estate and infrastructures are stress sector, as all of us know. While we continue to have good order book and also new orders, there is a significant stress in this segment. And hence, we have to be cautious in terms of taking up and executing some of the projects.

So market condition for which Nina and Percept is somewhat different than what the overall Pidilite or our industrial business sees. And hence, they are seeing a little bit more challenging market condition, which have impacted the sales growth.

If you go back 1 year during the same quarter, I think the growth of Nina and Percept when they were 2 separate entities, was close to 30%. On that high-growth base, there has been some correction due to this challenging market conditions.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [4]

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Sir, 2 follow-ups on this. So one is in terms of percentage of sales, how much is coming from new buildings? And how much is from the older ones?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [5]

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Almost everything or a substantial amount comes from construction. So construction is one. So there is a real estate, then these commercial projects like manufacturing plants, mall and other things like that, which we can call as commercial construction. And the third segment is infrastructure. But all of it is new in nature. Very, very little would be of the nature of repair, unless if there is a very large project, which requires repair, Nina and Percept focuses on new construction-related activities.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [6]

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Sir, to follow-up on that, if now the slowdown will continue for the coming quarters, is there any change in terms of business plan, in terms of focusing on the older ones?

And second, is there a conscious strategy because liquidity crunch is there. So are you also saying no to some orders because you may not get the payment?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [7]

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Yes, very -- so first of all, to answer your second question, yes, clearly, we are very cautious in terms of financial exposure. And we do say no to projects if we believe that there is a financial risk. That is one. Second, as far as going forward, we are trying to improve our contribution of sales into non-real estate sector. So we want to increase our business into other segments of construction, and have a lesser focus on the real estate. So that is how we plan to change the profile. However, we are not planning to take up repair project. Now just to give you an idea, obviously, the potential in this segment is very good as construction happens in India. There is a temporary period of stress. In that period, we will see our sales impacted. However, the potential in this segment is significant, and we are the leader in this segment. So while we will increase our contribution of sale from non-real estate segment, real estate will also continue to remain important.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [8]

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Sir, my second question is on the Consumer Bazaar volume and mix growth. So on a 20% base, 6% is a good number. So it's, say, 26% growth on 2 years basis. Now if I see most discretionary consumption, there is a big slowdown. So could you elaborate where you are getting this kind of growth? And is there the GST-related market share gains which is panning out? And are we coming to end on that, so there could be a slowdown in terms of the volume growth?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [9]

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No. So you need to see that the far -- last year's 20% growth also had some benefit of GST slowdown in the previous year, right?

So when you -- when we say 20% last year, which was a very good growth, that was also on a lower base of GST-impacted sales in '17, '18, right? So that is just to set the numbers right. Second is that where have we gained? We believe that our market position continues to remain strong in most of the sectors that we operate in. I would not say that there is a very significant impact into transfer of business from GST. But our growth comes from our normal initiatives like distribution into smaller population centers, premiumization of our products, adding new products in each of our segments, focusing on demand growth, including advertising and other things. So basically, it is coming from several different areas.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [10]

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And the last question, Bangladesh, SG&A has increased and margins have come down significantly. Is this because of competitive reasons? Or is it just a -- some festive-related or a new launch, which has happened?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [11]

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There are 2 reason in Bangladesh. One is we are setting up a second manufacturing plant, which is close to getting commissioned. It will be commissioned soon during this quarter. So there are certain expenses that we have had to increase in terms of our staffing and other expenses. It will be charged due to the increased activity, which is likely to happen. And otherwise, SG&A is just a shift from across the quarter, there is no material impact. Our focus there is still -- first is to build a strong top line pay in that country. And our margin profile is very healthy. So quarter-to-quarter, we may have some differences like that, including some higher expenses related to start-up of new plant.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [12]

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And this new plant is on extra capacity? As in your capacity utilization was an issue? Is it a new product category?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [13]

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It is both. But our existing plant, which makes our main products, the capacity has now reached the limit. So we need new capacity for the growth as well as some new products that we are adding.

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Operator [14]

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The next question is from the line of Avi Mehta from IIFL.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [15]

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Just wanted to kind of first understand the sales growth front. I mean if I go back to the fourth quarter conference call, you had indicated that second half growth rates are more an indication of the underlying demand growth. Now volume growth in the first quarter suggest some weakness from this level in the Consumer Bazaar. Just wanted to kind of get your comments on what exactly has driven this weakness? And is it more demand or is it some segment? If you could clarify that?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [16]

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No, I think we believe that the demand conditions has been challenging also in this quarter, so that is the situation as you may have also seen with the results of other companies. So we believe that there is some general slowdown and some challenges in demand. That I would attribute as the main reason.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [17]

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Is this across the segment? Or is it -- resin, waterproofing or any sun -- or any particular subsegment that you would want to call out?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [18]

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A little bit more pronounce in to -- sectors related to construction. I would say that, yes.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [19]

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Okay. So waterproofing, et cetera, is...

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [20]

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Waterproofing and also a lot of our other products are used for interior and construction-related activities. These are also going to that segment. So to that extent, it has had an impact.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [21]

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Okay. Okay. Sir, the second bit, is the underlying demand momentum continue to remain challenging? Or has there been any signs of change from there on?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [22]

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For second quarter, it has only been one month in, I think it will not be fair to comment on the second quarter. We will have to wait and see the full quarter before we may comment on that.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [23]

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And what do you look forward are things that you think can drive pickup? Or have you kind of revisited your yearly expectations? Or no, you believe that you're still on target because of A, B, C? I just wanted to kind of get your thoughts on that?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [24]

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Yes. Our effort is to continue to focus on fundamentals and our own growth initiatives. So we have not spent too much trying -- time trying to evaluate that and then try to reset some internal numbers. We continue to focus on our initiatives, and we believe we have several growth initiatives. So we are working -- we are doing our best on that. Now there are some external factor, which we have no control, so we don't end up spending too much time on that. But we continue to -- for example, we continue to make new advertisement, we continue to introduce new product, we continue to expand our distribution, we continue to focus on international markets. Now these are some other growth initiatives, which we continue to put our efforts on.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [25]

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Okay. Sir, that's fairly helpful. The second bit sir, is your comment about expansion into rural. You highlighted that as one of the drivers or aiders for growth rate. Is it got to do with more in our parlance, direct reach or -- that you're kind of getting into given what we hear about liquidity constraints in the market? Or if you could help explain what exactly is the sense of this expansion? Is it more the quality of distribution? Or is it more number of outlets that you're focusing on?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [26]

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All of it. Basically, as we know, we have been saying this for the last few years is that our focus is on what we call as emerging India, basically the small towns of India and rural area, and we have a whole new distribution model there. All categories or businesses of Pidilite, we take them together to smaller town, having a common distributor, having a common sales team with the effort that we cover as many towns as we can. And within town, we have a much better rate of distribution and also better market development by reaching out to more end user.

So essentially, we have been doing, and we continue to put greater resources into smaller towns and rural areas in terms of both sales and distribution efforts and market development efforts.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [27]

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So but -- this is on the same line, the urban that we used to kind of focus on. It's the same line that you're talking about, right?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [28]

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It is what we used to call as rurban. There is a rurban and there is a small town India. So basically, there is a small town is what we define as anything with population less than 200,000. And then there is a rural area, which is typically what we call as rurban, which is below 50,000. So we have a focused effort in these 2 areas, one is small town and second is rurban, where we continue to put more resources to achieve better growth rates. And it is in line with what we have been doing for last few years.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [29]

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Sir, and lastly, on the VAM price. Clearly, there's a very, very sharp moderation that we are seeing. And just wanted to understand, would it be fair to argue that there is margin benefits that kind of are still there? Or is there anything that I might be missing and kind of taking the simple assumptions?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [30]

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No, I think your assumption is correct that the current spot prices are lower than our average consumption cost of the first quarter. So the raw material prices continue to be benign. And hence, it should help us favorably. At the same time, we did take some pricing actions in the first quarter, as I said in my opening statement, so we did reduce prices of some of the products, which consume VAM. So some of that improvement in margin, we did already pass it on to the customer because the reduction in cost has been fairly sharp.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [31]

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How much was it, sir, on a portfolio level? If you would be able to share? And this was done in the start of the quarter, so 1Q is a fair representation of that?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [32]

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Some of the initiative pricing were taken right from the start of the quarter, means the impact was in all 3 months. In some of the product categories, it was possibly from May.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [33]

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Okay. And just a quantum?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [34]

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The overall price reduction impact may have been about a couple of percentage points on the overall sales.

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Operator [35]

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The next question is from the line of Arnab Mitra from Credit Suisse.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [36]

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Just carrying on the question on the margin front. So even with the price reduction that you've taken, you possibly will have very strong gross margin expansion. So as you look into FY '20, do you think that will slow down into EBITDA? Or there are initiatives where you can potentially invest some part of it in terms of growth-driving activities?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [37]

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So first of all, as we see expansion of gross margin, some of that we will pass it on in terms of pricing action as we have already done in the first quarter. And some of it we may invest in terms of higher spending on advertising and some of the other activities. However, as and when we have had low raw material prices, if you really look at Pidilite over the last many, many years, wherever we are -- we have very low raw material prices, our overall gross margin and EBITDA margin, too, expand. So it will certainly benefit us. But if the reduction is very sharp, some of it will be passed on in terms of both pricing action and increase in certain expenses.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [38]

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All right. And other than VAM, the other key raw materials that you use, the overall RM basket, is there deflation in all the other parts of the RM basket also? Just wanted to get a bit of sense on that.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [39]

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Yes. So there has been a reduction in the number of raw materials. Some raw material have increased also. But broadly, if you see as an index, there has been a reduction compared to Q4, as the overall basket.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [40]

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Okay. And my last question was on staff costs. So on the staff cost side, stand-alone, the growth is higher than the sales growth for the last few quarters. So what is driving that? And does that situation continue where you will see this high-teens kind of staff cost growth in FY '20?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [41]

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Yes, our staff cost increase is -- has been -- is higher. It's just -- I'd like to answer it 2 way. Overall, our staff cost is higher because of the nature of our business. Our business is of the nature where we have many, many smaller businesses, many, many niche businesses, which require their own sales and marketing network. And hence, our staff cost overall is a little bit higher than possibly comparable companies.

Second, the increase has been higher -- is that we are sort of improving both our overall capability as well as starting first some of the growth areas in which we want to invest in coming quarters and years. So some recruitment is done ahead of time. And second is, there is an overall effort to improve the capability within Pidilite, including hiring of a lot of young managers, hiring in all areas like finance, sales and marketing, R&D and other capability improvement initiatives. Having said that, we are also taking a close look at our staff costs. And if we believe there are areas to optimize and improve, we will certainly do that.

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Operator [42]

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(Operator Instructions) The next question is from the line of Jay Doshi from Kotak Securities.

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Jaykumar Doshi, Kotak Securities (Institutional Equities) - Equity Research Analyst [43]

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There is an update on the exchange today that you received an in principal approval from the board for forcing some joint ventures in the business areas of technical motors, proxy growth and mall technologies. Could you give us some idea of what these areas are? And what are the opportunities in these areas? And are you looking at entering into some of these?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [44]

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So Jay, these are some of -- as exactly the release to the stock exchange goes, this is an in principal approval from the board to enter into JVs, but separate companies for the products and technologies, which I mentioned in the release. So as we know, in the construction-related area, there are many, many different types of technologies and product categories, and there are some very good companies who have very good technologies. And we are planning to enter into joint ventures with them to further advance our business.

Like in the past, we have done in our tie up with Pidilite ICA and otherwise, or Jowat, we have been tapping into companies with good product technologies to help further our growth. In terms of the names of the company and further details, we will share as soon as the joint venture agreements are signed. Till that time, we cannot share more agreement, but it's in process. It should happen in few days. And as and when actual agreements are signed, we will share more details.

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Jaykumar Doshi, Kotak Securities (Institutional Equities) - Equity Research Analyst [45]

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And will this be on the B2B side of the business? Or it will be B2C products, or...

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [46]

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Largely in terms of what we call as our Bazaar segment, so it is Bazaar segment. But it will also have some price usage into larger construction as well.

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Operator [47]

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The next question is from the line of Tejash Shah from Spark Capital.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [48]

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Sir, we are picking up from many consumption categories this quarter that the growth momentum was largely front-loaded. So as the quarter progress, there's a deceleration visible. So was it the same in our case? Or was it different?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [49]

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I would not like to comment on the growth on the months within a quarter. I would not like to generally go in that direction, no.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [50]

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Not that way, sir, because the outlook on economy, because of liquidity issue also, changed materially in the second half of the quarter. And hence, a lot of optimism that a lot of companies had in the first half vanished in the second half. So from that perspective, are you seeing serious crunch, liquidity crunch, in the economy or in your channel partners in the second half of the quarter?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [51]

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Really, no. I think commenting exactly on what is happening now and all generally as a company, we would not like to do that. And also saying how was it in the first half of the quarter and second half, we really cannot comment and give a color on this. As we have already said, we find that overall demand condition has been somewhat challenging. But we are cautiously optimistic that things will improve and demand will improve. Other than that, we don't have any comments on that.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [52]

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Sure. Sir, second, a lot of activity has been seen by -- I mean, for a while now, but this quarter, it was visible more by Paints Clear and Construction Chemicals segment. So are you seeing competitive intensity in our segment also increasing because these guys are largely -- they're still largely into raw material side of the business. So just if you can share some observation competitive -- due to competitive intensity in the segment.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [53]

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As we have shared earlier, paint companies have been active in construction chemical for the last few years. What they have focused on is the use of construction chemical by painters. They have a strong presence in paint channel and also with painters. So paint companies have largely focused on developing products, which painters can use as waterproofing, a waterproof coating or a waterproof primer, waterproof patty. So a lot of their focus has been in that area. And in those segments, they have been able to expand market and achieve sales.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [54]

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So what percent of the market will be fresh? And what will be the remedial in nature?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [55]

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See, rough estimate, again, without any sort of published or reliable data, we would think 2/3 of market would be new and 1/3 would be remedial.

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Operator [56]

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The next question is from the line of [Harish Shah] from CGS CIMB.

(Operator Instructions)

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Amit Purohit, CIMB Research - Analyst [57]

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Amit Purohit here. First, just on this Consumer Bazaar segment EBIT margin, you indicated there is an intangible income represented. Can you explain some about this?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [58]

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So this was in the last year. In the first quarter, what we had done is -- Pidilite had a brand of wood finishes called Wudfin, which was Pidilite's brand. Then we entered a joint venture with this company called ICA, we entered a 50-50 joint venture with ICA, and the name of the company is Pidilite ICA, to manufacture and sell premium wood finishes. Once we entered that joint venture, the wood finish brand, Wudfin owned by Pidilite, was then sold to the joint venture. So that was the transfer that we did. The trademark and the related -- the goodwill was transferred to this joint venture to operate from. And hence, last year, we had a onetime gain on the sale of that trademark from Pidilite to Pidilite ICA.

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Amit Purohit, CIMB Research - Analyst [59]

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Okay. Okay, okay. And sir, on the overall pricing cuts that you've done, do you want to highlight any specific categories that you've done? Or is it across the board?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [60]

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We have done the pricing actions in woodworking, adhesives, some of the construction chemical products. So some of our major product categories, we have taken some pricing action in the current quarter due to significant reduction in raw material costs.

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Amit Purohit, CIMB Research - Analyst [61]

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And sir, lastly, on the overall outlook, considering that the demand looks to be this. And are we looking at incentivizing trade more going forward in terms of product versus a pricing action?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [62]

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So see, we are taking some normal initiative that you can. But if the demand scenario is weak, then the trail actions have limited benefit because then the offtake will not happen. So you can have some temporary benefit from some incentivization. But demand -- it all depends on the demand scenario. So we are cautiously optimistic that demand scenario will improve. And that's why we are not doing anything which is out of our ordinary or unusual.

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Operator [63]

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We'll move to the next question. That is from the line of Ashish Shah from Tara Capital.

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Ashish Shah;Tara Capital;Analyst, [64]

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Sir, on other expense, the growth has been slower versus -- the other expense growth has been lower versus the top line growth. So is there any one-off or it is just because of the cost-cutting initiatives?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [65]

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No, it could be some one-off item last year then some cost reduction impact, but I would not look too much into other expenses on a quarter-to-quarter basis. There's always some legal and professional expense or some other onetime assignment or expenses of that nature. It is made up of many number of expenses. So I would not look too much into it.

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Ashish Shah;Tara Capital;Analyst, [66]

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Fair enough. Sir, in -- on EBITDA, this time, we had a very strong EBITDA partially helped by raw material prices and some other -- low other expenses. So going forward, do you expect -- do you think there is further scope for margins to expand? I know, sir, that this quarter, you noted we have -- the raw material prices have gone down further, and we plan to use some of these benefits to lower prices and for growth -- and for growth initiative. But from here on, is there a scope for margins to improve?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [67]

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See, if you look at our historical numbers, our margins, as we have always said, we like to operate in a band of around 22% to 24%. But however, many times when the raw material prices are very low, our margins are higher than 24%. So there is always a possibility that it can be higher than 24%. But it depends -- a number of factors, including the sales growth and overall material cost scenario. So it is always possible as it has happened historically. We have to see.

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Operator [68]

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(Operator Instructions) The next question is from the line of Avi Mehta from IIFL.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [69]

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Sir, first was the Industrial segment. We've been seeing a steady growth rate in the segment for the last few quarters. Does this suggest that our journey of moving -- improving the product mix is more or less done? I mean, we've kind of done the hard work now. All of these are incremental, but most of that impact on sales growth rate is more behind us. Would that be a fair way look at this, sir?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [70]

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No, I would not say that journey is over. The industrial products are always evolving, and you need to continuously ensure that your products and technologies keep on evolving as customer needs change. And also, the competitive scenario can change from product category and segments also from -- over a period of time. So it is something that we watch very closely, and we take various initiatives to continuously upgrade our product mix and customer mix.

Having said that, some of the recent high growth, including this quarter, has come -- our pigment business has done quite well. There is a clear increase in demand. Partially, this could also be for the fact that manufacturing of some of these product categories has reduced in China and there is a greater preference towards India. So there is a certain benefit because of that as well. But we remain consistent in our Industrial business approach, that we are focused towards superior product and customer mix. We want to have a reasonable margins and return on capital. So that is how we operate in this business. But current trend has been favorable.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [71]

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And would you say this is a reasonable number in terms of the margin that you want to be in? Or you would think this is still much inferior. How should I look at that, sir?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [72]

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No, I would not say that I think we have been comfortable with our Industrial product margin. But again, because since we operate in large number of product category within Industrial product, which is like in the industrial adhesive, leather chemicals, textile chemicals, pigment powder, there is a fairly wide range of product, and hence, product mix can play a significant role. But generally, we are comfortable with the margin in and around this range.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [73]

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Okay, sir. Perfect. The second bit sir, some bookkeeping questions. So if you could share the ad spend number for the quarter and likely CapEx for FY '20.

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Unidentified Company Representative, [74]

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Yes, advertising and sales book.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [75]

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So advertising and sales promotion spend for the quarter was around INR 75 crores.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [76]

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INR 75 crores. And, sir, CapEx expectation for FY '20, what should I assume, sir?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [77]

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CapEx would be of about 2% to 3%, around -- you can say around 3%. Now in some year, it could be higher if we commission a new manufacturing plant, but you can say somewhat like 3%.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [78]

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And sorry, one more bit on the tax rate. Sir, you had highlighted 32%, 33%, because some tax exemptions. That is what I should assume for the year as well, right, sir? Tax?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [79]

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Yes.

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Operator [80]

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(Operator Instructions) The next question is from the line of Shirish Pardeshi from Centrum Broking.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [81]

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Congratulations on good numbers. Three questions. One is on VAM. We have seen the significant reduction in the VAM prices. Generally, we tend to have some VAM holding. So would you be able to share what kind of holding we have with a high price? And -- or is the whole holding is at the low price?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [82]

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I don't have the figure of the current VAM holding. The normal inventory, we will have about 1, 2 months of inventory, possibly. But if you look at the rates, the VAM rates were lower in the last quarter, they have somewhat further reduced. So we will have a little bit higher inventory than the latest spot prices, that is for sure. I don't have the exact quantity of VAM being held right now.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [83]

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Okay. I'll take it offline. And the other question I have, if I look at your Industrial and Consumer & Bazaar growth, somewhat you've highlighted, at least that rural and Tier 2, Tier 3, you are trying to expand. So is that the distribution reach has a further scope? And maybe if you can share what is our coverage in terms of touch points.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [84]

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This small town and rural is a very, very large geography and very large population, and it is further growing. So our efforts is to have direct distribution in as many towns as we can, and we have been making steady progress. As far as potential, yes, there is still substantial potential to expand the distribution further, because almost 65% to 70% of Indian population lives in villages with population below 10,000. So that is a very, very substantial population where direct reach is very difficult, and there is a lot of scope for us to grow.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [85]

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So is there a target your sales team has got that you will target certain number of villages less than 10,000?.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [86]

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We have a target, which is every year, to incrementally increase the distribution. So every year, we make steady progress on distribution due to obvious competitive and other reasons. I would not like to spell out the exact number of outlet we are covering, and we plan to do in next year or 2. But what I'm saying is, we are making -- we have been making and we continue to make efforts to expand our direct reach into smaller population centers.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [87]

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So I'm just trying to pick up and extend this. So is there any similarity where you have a common distributor for Consumer & Bazaar and Industrial in the rural town?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [88]

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Yes, in smaller towns, all our distributors are common. Most of them are common. So in smaller town, most of our distributor of Consumer & Bazaar and consumer products are the same.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [89]

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So is it fair to assume that your growth in Consumer & Bazaar will replicate the similar growth into the Industrial and the Construction committees, in the rural?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [90]

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No, no. The distributors are common for Consumer Bazaar, Consumer & Bazaar, that's what I said, so it has nothing to do with Industrial. And having a common distributor does not result into the same growth rate. The growth rate would largely depend on the demand scenario and number of other factors. Distribution is just a means for us to have a common infrastructure to take our products to smaller town. But the demand scenario in Consumer & Bazaar product is not always the same. So it depends on the demand scenario as well.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [91]

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Got it, Apurva. Just last question. On the raw material basket, you said right now, VAM is the largest part, which is under -- which is declining. But is there anything which is inflationary you mentioned, which are the products -- or which are the raw materials that are under inflationary impact?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [92]

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There are some intermediate products that we use for our treatment business there. There has been some increases. There are some polyvinyl alcohol-type of products, which have seen some inflationary impact. So we have a very wide and diverse raw material basket where things like vinyl, acid and monomer, and then acrylics, are in a bit of decline. However, there are some chemicals where there has been some increase as well like, as I said, polyvinyl, alcohol or carbazole or some of the other raw materials, there has been an increase as well. But overall as a basket, our raw material cost has reduced.

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Operator [93]

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(Operator Instructions) The next question is from the line of [Deepak Jain] from JM Financial.

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Unidentified Analyst, [94]

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Would want to know your NPD pipeline and what is the next in innovation basket?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [95]

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Deepak, we cannot share with what is coming. We have new products, which are planned in almost all product categories. And we do work on a continuous basis. But I cannot disclose the new products, which are likely to come.

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Operator [96]

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Deepak, are you done with your question?

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Unidentified Analyst, [97]

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Yes.

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Operator [98]

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(Operator Instructions) The next question is from the line of Ashish Shah from Tara Capital.

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Ashish Shah;Tara Capital;Analyst, [99]

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Sir, one quick question. So if you can throw some light on the inventory at the dealers? Any such thing which is happening on the ground? Or is it everything normal?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [100]

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Well, we started by saying there is challenging demand scenario. So there -- if there is a challenging demand scenario, inventory level with dealers would have gone up a bit. Again, that is not something we can accurately track. It is the inventory at dealer level. We track the inventory at our distributor level, which we do on a replenishment basis, so it remains at the same level. So I do not have a track of the inventory at dealer level. But if the demand scenario -- whenever the demand scenario is challenging, their inventory level would go up a bit.

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Ashish Shah;Tara Capital;Analyst, [101]

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But would there have any impact on our future sales? I mean just thinking out loud.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [102]

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It would be, Ashish, very short term if there is some inventory. First of all, they would not increase their inventory too much. In our case, they order the product; if they don't need it, they don't order it. So essentially, inventory level, increase or decrease, can have some impact, but it is not very significant. It is possible that if their inventory level has gone up, they can reduce their purchase by few days. That could happen.

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Operator [103]

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Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Gaurav Jogani for his closing comments.

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Gaurav Jogani, Axis Capital Limited - Assistant VP [104]

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I just would like to thank, once again, to everyone for joining the call.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [105]

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Thank you, everybody, for joining the call. Thank you. Bye-bye. Have a good day.