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Edited Transcript of PIDILITIND.NSE earnings conference call or presentation 14-Nov-19 10:30am GMT

Q2 2020 Pidilite Industries Ltd Earnings Call

Mumbai Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Pidilite Industries Ltd earnings conference call or presentation Thursday, November 14, 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

* Anand Kumar Shah

Axis Capital Limited, Research Division - SVP of Consumer

* Arnab Mitra

Crédit Suisse AG, Research Division - Research Analyst

* Arun Baid

BOB Capital Markets Limited, Research Division - Research Analyst

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Keyur Pandya

ICICI Prudential Life Insurance Company Limited - Equity Research Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Prateek Maheshwari

AMBIT Capital Private Limited, Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Pidilite Industries Q2 FY '20 Earnings Conference Call, hosted by AMBIT Capital. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Prateek Maheshwari from AMBIT Capital. Thank you, and over to you, Mr. Maheshwari.

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Prateek Maheshwari, AMBIT Capital Private Limited, Research Division - Associate [2]

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Thank you, Karuna. Good afternoon, everyone. On the behalf of AMBIT Capital, I would like to welcome you to the Pidilite Industries 2Q FY '20 Earnings Call.

From the management, we have with us Mr. Apurva Parekh. We'll start with the initial comments on the results and later, we'll open the lines for Q&A. Thank you, and over to you, sir.

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

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Thank you, Prateek. Good afternoon, everyone. This quarter has seen moderation of top line growth as a result of the challenging market conditions, liquidity crunch as well as prolonged monsoon and attendant disruption. While gross margins have improved substantially due to softer input costs, higher advertising and sales promotion costs due to phasing in this quarter saw EBITDA at the same level as last year.

For the first half, consolidated net sales grew at 7%, while EBITDA has grown at 8% and profit after tax, excluding exceptional items, by 36%.

While we expect demand conditions to improve in the New Year, we remain focused on driving volume growth, enabled by investments in brand building, capability and growth in small towns and rural India.

I will begin with a summary of the financial performance for the quarter and half year ended September 2019 for stand-alone business. Net sales grew by 4% over the same quarter last year, with underlying sales volume and mix growth of 1%. This was driven by 13% growth in sales volume and mix of Industrial Products and decline of 1% in sales volume and mix of Consumer & Bazaar products.

Net sales for the half year grew by 7% over the same period. Gross margin improved by 4% over the same quarter last year and by 2% over the preceding quarter. The current spot price of our major raw material that is Vinyl Acetate Monomer, is around $890 as compared to quarter 2 consumption cost of around $901.

EBITDA before nonoperating income grew by 1% over the same quarter last year on account of higher A&SP spend due to phasing in this quarter.

EBITDA growth, excluding A&SP spend in both quarters, would be around 11%. EBITDA for half year grew by 9%. Profit after tax grew by 33% over the same quarter last year. Profit after tax grew by 49%, excluding exceptional items and dividend income from subsidiaries and effect of tax thereon in previous corresponding quarter.

Effective tax rate for the quarter has reduced from 33% to 7.5% due to reduction in corporate tax rate and remeasurement of deferred tax liability.

During the quarter, the company has decided to sell plant and machinery included in capital work in process pertaining to Synthetic Elastomer project and accordingly disclosed the same as asset held for sale and its fair value of INR 38 crores after providing for impairment loss of INR 22 crores as disclosed in exceptional items.

Now I will move to a summary of the financial performance on consolidated business. Consolidated net sales grew by 3%. EBITDA before nonoperating income marginally declined by 0.6%. Profit after tax grew by 41%, and excluding the exceptional item grew by 49%, mainly on account of reduction in tax rates by the government.

Now I will talk briefly about the subsidiaries. The domestic subsidiary performance, particularly Nina Percept and CIPY, continue to face a challenging market conditions in wake of economic slowdown in real estate, auto and engineering industry, resulting in adverse demand and liquidity conditions.

This was further accentuated by prolonged monsoon in many regions. EBITDA growth in ICA is on account of improved margins due to scaled up local manufacturing and ForEx gains.

In case of international subsidiaries, subsidiaries in Bangladesh, Sri Lanka and Thailand have reported good sales growth. EBITDA growth in Bangladesh subsidiary is lower than sales growth due to investment in new manufacturing facilities.

Sargent Art, a division of Pidilite, and Pulvitec Brazil reported sales and EBITDA growth for consecutive quarters, mainly due to growth in key products and customers.

The subsidiaries in Egypt reported decline in sales growth for the quarter due to competitive pressures and market conditions.

We can now open up for the questions. Thank you.

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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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My first question is on the Consumer & Bazaar volume growth domestic. So last 3 quarters, we have seen a significant slowdown. So Q4 was 4% and Q1, 6%, then minus 1%. So my question is, from Q1 to Q2, why is there a marked deterioration? Because we have not seen the same level of deterioration in lot of the other consumer staple companies. So from plus 6%, you are down to minus 1% within a quarter. And do you see this kind of a slowdown continuing in Q3 also?

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

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Yes, I think we should not read too much into quarter-to-quarter. Also, last year, we had impact of some price increases. Last year -- so due to price increase -- last year, we had couple of price increases. So to that, to some extent, it distorts the growth rate from quarter-to-quarter. Going forward over the next 2 quarters, it's very difficult to predict how next 1 or 2 quarter looks like. But we believe that from next year, the growth conditions should clearly improve, but it's difficult to predict for next 1 or 2 quarters.

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

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And sir, industry also would have seen similar dip. So is there any market share issue here?

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

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No. The industrial growth has very different dynamics because in our Industrial Product for some of the products, almost half the sale is outside of India. Lot of this growth is driven by our pigment business where we are gaining both in Indian market and export market, partially due to some business moving from China and also due to our focus on high-performance pigments. So a lot of growth is of our 1 particular business out of our overall industrial business.

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

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Sir, actually, my question was on Consumer & Bazaar only. So if your growth is minus 1%, would your peers or would your competitors also would have seen similar kind of a slowdown?

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

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Well, at least we believe that the market would have seen a similar slowdown in our core sectors, yes, we do believe that. That is why...

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

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We are still seeing lot of the results in these spaces being fairly good. So which sector is impacting the maximum in terms of slowdown? Is it furniture, is it footwear or is it something?

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

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See we are seeing slowdown in construction-related activities, interior decor. Liquidity crunch impacts both the dealers and the consumer as well as construction-related activities, which have been impacted. And also for some of our services business, which also service auto and engineering industry, that have also been impacted. But largely, the 2 biggest factors which are impacted for us are construction-related activity and interior decor-related activities.

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

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So Dr.Fixit would have seen a much bigger delta, right, in terms of growth?

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

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Yes, Dr.Fixit has seen a significant delta because it is very largely dependent on construction and repair activities.

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

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Right, sir. My second question is on the phasing, which you mentioned in terms of ad spend. So could you elaborate that?

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

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Yes. So what has happened during this quarter -- just what is the exact -- during this quarter, our advertising and sales promotion spend is about 4.8% of sales. This is because we had 2 very significant new advertising campaign. One is a Fevicol sofa campaign and one is a new Fevikwik campaign, so both for making the film and releasing them. So our spend went up to as high as 4.8% as compared to our normalized annual spend of about 3.8% to 4%.

Now last year, the opposite had happened. Last year in this particular quarter, our spend was around 2.5%, in fact, 2.4%, so which was less than normal, when the full year spend was about 3.6%.

So as you see last year compared to full year spend of 3.6%, we were at 2.4%. And this year at our expected spend of 3.8% or so, in this quarter, we were at 4.8%. So this is a significant delta of almost more than 200 basis point in A&SP expenditure, mainly largely due to timing impact, and these are the ads which we released based on the timing, and it is not something which we exactly face quarter-to-quarter.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [14]

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But sir, full year, we should bring the 3.8% to 4% only for the full year?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [15]

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Something like that, yes. Yes.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [16]

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Sir, last question on elastomer. This has been an issue for multiple years. So now, finally, it seems closure is happening. So my question is by when completion will happen? And is it a scrap sale because, obviously, the number INR 38 crores seems to be 1/10th of the value which you had acquired?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [17]

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No. See -- no it is not 1/10th of the value. That was a total investment that we have done, which included dismantling of the asset, moving the asset over and erection and buying the land and other things. So total expenditure included also our investment in land, building the full plant and machinery, intellectual property, et cetera.

Now what has happened, as you know, over the last 3, 4 years, most of the value of this has already been written off. Only value which was remaining, one is land and building, which is already put to use for export of some of our other products, adhesives and some of the other products. The remaining value is the plant and machinery, which was the remaining value was the fair market value was only about INR 60 crores. Now we have decided we want to sell this plant and machinery in the best possible manner whatever is -- and that our people are working on finding the best value for it. But at this point of time, we did a fresh valuation of this and we were advised to take an impairment of INR 22 crores.

So just to summarize, bulk of the value has been written off over the last 2 to 3 years, and the remaining value, we will sell it based on the current fair market value, which is expected to be INR 60 crores. And hence, we took an impairment of INR 22 crores. The exact value of what we realized out of remaining INR 38 crores, we will know in next couple of quarters.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [18]

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So next couple of quarters, the sale will happen. And after that, basically, based on deal closures, the money will come.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [19]

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Right. But essentially, no further activity or investment has happened on this project in the last many years, but the land that we acquired for it is already put to use by initiating export of our adhesives from that place, and land and building has been put to use for that purpose.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [20]

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And the factory will go away, right? It will not -- again, it will be a scrap sale kind of...

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [21]

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No, it's not. No, it's not all going to be scrap sale because some of the plant and machinery may be even useful in some other plants of Pidilite or for some other industry. So some of that will be used by others in their manufacturing because this is plant and equipment, which can also be -- some of that can also be used to manufacture other products.

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Operator [22]

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

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [23]

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Apurva, my first question was on the growth that you highlighted that we should not look at it from a quarter-to-quarter basis. So I wanted to understand one thing from you that do you -- in this slowdown that we've seen this quarter, is there a substantial component of trade pipeline also? Or is -- would you say that the growth is kind of mirroring the offtakes in the market? And also within -- between 1Q and 2Q, though, we should not look at the exact numbers. Is there a sequential slowdown that you sense, which has further happened in the 2Q compared to the 1Q?

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

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See, I would say, there is a little bit of channel inventory correction because the liquidity crunch impacts everybody in the trade. So some level of inventory would have reduced of the dealers and distributors in some cases. However, there is a reduction in offtake as well, and there is a reduction in usage. One of the key reason also has been prolonged monsoon, which has impacted some of the activities and also due to the liquid market conditions, the slowdown in construction and real estate activity. So there is both an impact on offtake and consumption as well as some channel correction. Difficult to calculate the 2, but there is a definite impact on both the offtake and consumption during the quarter.

Now sequentially, when you ask from first quarter to second quarter the numbers, you have seen that the volume growth has reduced compared to the first quarter, and that we see across most of our major product groups.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [25]

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Okay. And the second question was that on the Nina Percept and CIPY businesses there, given that the real estate market is quite tight and there is liquidity issues, would you continue to remain a little cautious here? And therefore, there the growth recovery could take more time than the Consumer & Bazaar business of your stand-alone?

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

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Yes, yes. We are being cautious here. So we are being extremely cautious, while order book is better than what our revenue is reflecting, we are careful in terms of execution. And we don't want to take undue credit risk. We are doing that.

And also in case of Nina and Percept, particularly, we are focusing on a change in customer mix. Earlier we had a significant customer mix of real estate, which is now being diversified more towards other segments like industry, commercial and those kind of other segments.

So we want to improve our customer mix and be a little cautious during this period. But eventually, once the things improve, then all these activities would help us drive better growth.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [27]

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Right. And my last question was that the VAM prices, as you said, it seems to be now stabilizing. So are the full benefits of the lower VAM now reflecting in the gross profit of the quarter, and therefore, would it be fair to say that you will probably sustain these levels unless the commodity substantially moves from here?

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

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So change is minor. It's about $900 is the consumption value in the quarter and the current price is like $890, so more or less the same. It depends on how the VAM prices move. As you know, they can change a lot from month-to-month and quarter-to-quarter. So depending on the VAM situation and also if any pricing action that we need to take. But historically, when the VAM prices have been at this level, our gross margins are good.

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Operator [29]

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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 [30]

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Just wanted to understand, while there has been a near-term impact that we have seen, why are we guiding towards the recovery next year? Is this because we are continuing to see this weakness?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [31]

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So Avi, it is more that it's very difficult to predict things in near future. And so we don't want to say that when we have come off a quarter like this, we -- it is very difficult to say that the next quarter will suddenly look around. We like to be cautiously optimistic. So we believe that when there is a slowdown in economy, it does take a couple of quarters to really recover. So from that aspect, we are saying more in the New Year, but there is no definitive way for us to know that. So this is just a...

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [32]

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Is it fiscal or new CY you mean?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [33]

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We mean -- by New Year, we mean the new fiscal year. But again, Avi, please take it with an understanding, it is not something that we can accurately predict. The recovery can happen a quarter earlier or a quarter later. This is just a gut feeling based on the first 2 quarter results that we have got, we would rather be cautiously optimistic. We're hoping that the recovery will happen earlier.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [34]

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Okay. Fair enough. The second, but just a clarification, Apurva, is, if I recollect, you can correct me. We took the first increase in 2Q, the price increase. We started in 2Q in the last year, 2Q FY '19. So the price increases will anniversarize in the next quarter, right? Is that a fair understanding or no? Have we taken more price increases over the quarters, which is why we'll still have some realization-based benefits?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [35]

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No, no. The last year, we had done one more increase in December. If that is what you are asking?

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [36]

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Yes, yes.

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

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This is the second increase. Yes, there was one more increase in December.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [38]

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So there was one. So bigger one was in the September quarter or it was in December only? Sorry, I was just trying to understand that part only.

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

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No. Both increases were around the same. So bigger and smaller because we have a wide product mix. But I would say, both increases were of around the same magnitude.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [40]

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Okay, okay. And lastly, sir, in this ad spends what you highlighted, whatever is, this was largely, sir, marketing based is what I understand. Would that be a correct understanding? Or was there also a promotional element in this as well?

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

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No. it's largely advertising. If you -- you may have seen, we had 2 big advertising commercial. One was the 60-year ad of Fevicol called Fevicol sofa, which has been greatly liked and would help us significantly strengthen the brand over medium to long term, continue to maintain the strength of Fevicol. And the second was on Fevikwik where we launched a new campaign, "Phenko Nahi, Jodo", which has also found a very good resonance amongst consumer urging them not to throw things and to bond it in a very interesting manner. So we had launched these 2 new advertising. So there was a significant ad spend when 2 large campaigns happened in 1 quarter as compared to much lower than average spend in the same quarter last year.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [42]

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And sir, if I may. Just -- if you could give me a sense on given how the VAM industry is doing because we were earlier highlighting that there was some capacity-related additions and how is that kind of now panning out, sir?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [43]

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See, VAM is a very global commodity. So there could be sometimes temporary demand and supply, but the supply always keeps on coming to keep pace with demand.

So whenever we have demand supply gap, there are temporary. Right now, there is no demand supply gap because, overall, globally, the growth has been low across the countries. So currently, there is abundant available of -- availability of VAM and also the raw materials which go into making VAM, which are acetic acid and ethylene. So currently, because of good availability, the raw material prices are soft. Now going forward, what will happen is difficult to say. Sometimes, there is a temporary outage. It's a 1 or 2 plant because of some situation, that can also have an impact.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [44]

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Okay. But, sir, as of now for -- if things had been normal, I know that's a big assumption, but it looks like VAM is likely to remain benign. And this margin that we see is reflecting because it's close to the current level.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [45]

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As of right now, the VAM situation is favorable. But it's difficult to predict what will happen in coming months. But as of right now, it looks favorable.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [46]

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Okay. And lastly, sir, this tax rate, could you share -- I mean how should we -- out of this, the 7.5%, how much of -- what would be the number that would be related to prior year current tax and the deferred tax asset change or provisioning change that has happened?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [47]

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So currently, the deferred tax liability reversal was INR 28 crores in this quarter.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [48]

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INR 28 crores. And sir, what would be the current tax reversal for the first quarter?

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

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See going forward...

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Unidentified Company Representative, [50]

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INR 65 crores.

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

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INR 65 crores was the reversal. And I think more relevant is, going forward, the tax rate will be 25%.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [52]

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Would be 25%.

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

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If that what -- if you're trying to determine, then going forward, the tax rate will be 25%.

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Operator [54]

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The next question is from the line of Keyur Pandya from ICICI.

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Keyur Pandya, ICICI Prudential Life Insurance Company Limited - Equity Research Analyst [55]

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Sir, my question is that with the slowdown that we have seen in Consumer & Bazaar, so some would be because of the macro factors, some would be seasonal. So should we see some improvement just because of the season improving, I mean, just rain subsiding? That is first. And second, would you attribute any of this slowdown to competitive intensity in the Consumer & Bazaar segment?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [56]

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So I think, as you said, seasonality monsoon, yes this time, monsoon has had a greater impact than normal because rains in many parts of the country have been extended and that does impact the activities of lot of products where our -- a lot of activities where our products are used. So that should clearly benefit us in this quarter. Other seasonal impacts are related to earlier and later Diwali, but that has a much lesser impact on our business than say, for example, paint companies. So this is the reply to the seasonal activity.

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Keyur Pandya, ICICI Prudential Life Insurance Company Limited - Equity Research Analyst [57]

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And sir, any of this slowdown you would attribute to competitive intensity or how that landscape is right now? You can throw something light on it.

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

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As far as our core business of adhesive and sealant goes, we do not believe that there has been a significant change in competitive intensity. So we don't believe it is there in case of adhesives and sealants.

In case of waterproofing products, yes, there has been increased competition, as we've discussed over the last couple of years from paint companies, some cement companies, but our position continues to be strong. But there has been increased competitive activities from several large and mid-sized players. But we would attribute that impact on our growth has been more due to market conditions than on competition as far as waterproofing products go.

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Operator [59]

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(Operator Instructions) The next question is from the line of Anand Shah from Axis Capital.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [60]

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Just a few questions. Firstly, on -- can you throw any color on the month-on-month how the quarter progressed versus like July, August, September or so, especially in Consumer & Bazaar? And in October, also, we have seen very high monsoons in terms of -- to be above normal for a lot of reasons. So would the extended monsoon impact also continue partly in Q3?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [61]

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Anand, I would not like to comment on the quarter, which is under progress, which is October, November. And in October, while the rain was there in the beginning, there is a more than enough quarter left. So October to December, I would not like to comment, that would not be fair. But -- and also during the last quarter, month-by-month, I'm not sure in terms of what your question is, did we see greater slowdown or less slowdown?

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [62]

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Yes. I mean do you see some improvement or some deterioration, let's say, July, August...

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [63]

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I would not differentiate much between any of the 3 months. More or less, the situation was similar. Our internal growth rates could be different month-on-month, but we saw a similar sort of situation during the quarter.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [64]

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Okay. Secondly, we have seen this improvement happening in the international business or if your growth rates have picked up across most regions. So are you seeing this trend sort of sustaining?

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

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So we definitely believe that the good sales growth should continue in the countries like Bangladesh and Sri Lanka, where we have made investment. Bangladesh, as you know, we have set up a second manufacturing plant. In Sri Lanka, also, we finished doing a plant last year. So these 2 countries, our initiative and efforts appear to be giving us a steady and consistent sales growth.

As far as Brazil goes also, as we have been saying over last few quarters that our focus has been to improve efficiency and the operations of the business, and several initiatives have been taken. And also Brazil overall seems to be a bit more stable than what it was several years ago and hence, Brazil also, we have seen better numbers. So overall, our export business appears to be moving in the right direction, with significant focus SAARC countries are delivering very good growth. And we expect good growth to continue in that region.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [66]

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Okay. Perfect. And just lastly, I mean, you're, obviously, seeing a lot of gross margin tailwind coming forward and perhaps it will likely sustain in the next few quarters. So is there any delta you can have either in terms of focusing more on trade promotions or price cuts and passing some of these benefits are all pushing volume growth? Or is the macro so weak there that these initiatives won't help?

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

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So to some extent, we have taken this macro. I think, if you remember, in the first quarter also, we had said we have taken some early pricing actions. So when the raw material prices had fallen, we had taken some pricing actions and wherever required, we are giving a little bit higher schemes or discount. But we are doing it in a manner reflecting that doing too much of it will not benefit us. If there is an impact on offtake and consumption, it is going to affect our sales. So just to give some scheme to load up the channel, we generally avoid doing that.

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Operator [68]

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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 [69]

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I have a few questions. The first question, you highlighted there was some inventory correction, which has happened. Would you be able to help us what kind of inventory reduction we have seen maybe in urban and rural towns?

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

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No, Shirish, I think when the question was asked, my point, what I answered was, there is definitely an impact in terms of offtake and consumption and there could be some correction in channel inventory. It's difficult for us to estimate how much it is because dealer inventory, we do not have any accurate number to say what is the dealer inventory and how much of that is corrected. So that's purely a feeling that we have is that there is some channel correction, but the greater impact clearly has been due to reduction in offtake or consumption.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [71]

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Yes. I agree that point, but from the primary distribution point, your distributors could have reflected in terms of the impact.

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

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No. Our distributor inventory does not reduce it because our distributor work on a replenishment system. So we have a standard software and they just replenish and maintain their norms.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [73]

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All right. So that is good enough. Would you be able to then tell me what is the peak VAM prices we have procured in last 1 year?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [74]

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Peak in last 1 year, maybe $1,200, $1,300. Just 1 second, I'll check. I would say, it's about $1,200, $1,300?

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Unidentified Company Representative, [75]

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$1,410.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [76]

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$1,410. That was in quarter third.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [77]

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And from that, you're saying its current price is $890.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [78]

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$890, yes.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [79]

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And generally, what kind of VAM inventory we hold at this point of time?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [80]

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Maybe around 45 days.

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

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45 days.

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

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Roughly, 45 days, yes. And also, but, Shirish, you must keep in mind that this is a dollar-linked item. So rupee going up and down also has an impact. It's not just the VAM price.

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

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Okay. The other thing which I was watching, Consumer & Bazaar product which we have seen a slowdown in recent quarter and which forms a larger part of the business. So would you be able to -- I mean sometime before you were guiding us that rural is growing and we have a distribution expansion. So could you please tell what kind of distribution we will have for Consumer & Bazaar products? And what can be the growth can be expected for the next 2 to 3 years?

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

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See our small town business is still growing at much faster than urban towns. The growth rate in smaller town, even in a quarter like this in value terms are in double digits. So small town rural area or small town India is growing at a faster pace for us. In terms of distribution, in terms of numbers, a steady growth in distribution we are doing every year. More focus is on ensuring proper regularity of coverage and to do market development activities to increase consumption. Otherwise, stepwise, we have moved -- earlier, we move to cover all towns up to 20,000. We are expanding to ensure that we have proper coverage in all tehsil towns. So that is the way we are penetrating every year. We add probably about 1,500 to 2,000 villages or towns every year.

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

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Okay. So you would say your village coverage is roughly between 20,000 and 30,000?

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

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I would say, yes. It would be with both direct -- not wholesale, but direct and indirect coverage through our super distributor and other means, yes.

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

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And obviously, these towns will have further penetration through the wholesale, say, sub-10,000 and less population.

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

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Yes.

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

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So what could be the wholesale sales for us because I'm sure wholesale is also reeling under the pressure of liquidity and other issues?

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

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I don't have an actual number on what is the contribution of wholesale to our total sale, but I would not think because in some products, it is higher. But overall, as a company, I would not think it's more than 20%, 25%.

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

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Yes, but this will be largely for the large products like Fevikwik and Fevicol?

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

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It would be for our consumer products, yes.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [93]

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Okay. And the last question on international bit. I mean we have seen very volatile performance. And I think some or the other, we are trying to address but then what is the most severely affected region? I guess, Nina and Egypt and this place, but do you think the recovery will happen? And what I'm expecting the answer is that, basically, which is the most severely affected business and which you don't think will come up in the next 2 to 3 quarters?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [94]

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So your question is not on international, your question in on subsidiaries because Nina and Percept are domestic companies.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [95]

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So I think international subsidiaries.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [96]

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So Nina and Percept is not international. They are domestic subsidiary. In international, most of our subsidiaries have reported good growth during the first quarter. Most of our subsidiaries have grown by double digit. Only subsidiaries, which possibly have not done well is subsidiary in Egypt. Otherwise, most subsidiaries have grown at double digits. They have -- most of them have grown well in the first -- I mean, in the second quarter and in the first half.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [97]

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So you assume -- you are very confident in the second half, the similar growth rates would continue?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [98]

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No, no. We don't say -- I think -- I would not like to say we are confident or anything like that. You are seeing that trend. We make steady progress. We are growing well, and we hope to continue to do well. But we would not like to comment anything by saying we are very confident or anything of that nature.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [99]

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Yes. What I'm trying to explain, like construction growth and macro issues which are pertaining to India, have similar issues, which we have seen from the commentary from other companies also in the Middle East and other parts. So I know you would have grown and done better in first half, saying the double-digit growth, which has come in. But is the macro factors which are supporting this kind of growth? That's what is my question.

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

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See macro factors are better in some countries than in other countries. And also that our penetration and our market share in some of these countries is lower than in India. So we have a lot of opportunity for geographical expansion, depth and width. So -- especially countries like Bangladesh and Sri Lanka where we have a strong position, but still, there is a much greater opportunity to gain market share and to expand our presence in those countries, to introduce new products in those countries. So to that impact -- to that extent, this local conditions have a smaller impact than in India.

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Operator [101]

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(Operator Instructions) The next question is from the line of [Kiran Naik] from Mody Fincap.

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Unidentified Analyst, [102]

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Hello? Can you listen?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [103]

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Please go ahead.

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Unidentified Analyst, [104]

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Yes, yes. Can you tell me, sir, by March '20, how much will be the revenue growth in percentage wise compared to March '19?

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

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We cannot give you a growth projection. No -- see, we, as a company, do not give a growth projection or outlook.

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Unidentified Analyst, [106]

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Okay, okay. And what will be the EBITDA margin for March '20?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [107]

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Again, the answer is the same. We would not like to give out the projection. As a company policy, we do not give an outlook or a projection.

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Operator [108]

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The next question is from the line of Arun Baid from BOB Capital Markets.

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Arun Baid, BOB Capital Markets Limited, Research Division - Research Analyst [109]

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Sir, can you just tell us what was the A&P spend in the first half of this year compared to last year?

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [110]

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Yes, just 1 second. So our first half spend was 4.5% of sales, just 1 second. The first half of this year, our A&SP spend was 4.5% of sale. And last year in the same period, our spend was about 3% of sales. But more impact was in second quarter, where last year, the spend was 2.4% of sale, and this year, it was 4.8% of sale.

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Operator [111]

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(Operator Instructions) Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to the management for their closing remarks. Over to you, sir.

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Apurva Narendrakumar Parekh, Pidilite Industries Limited - Whole-Time Director [112]

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Thank you all for joining the call and your questions. Have a good evening.

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Operator [113]

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Thank you very much, members of the management. Ladies and gentlemen, on behalf of AMBIT Capital, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.