Prince Pipes & Fittings Ltd

My notes of Aug 11, 2023 concall

• Q1FY24 faced operational challenges due to an ERP upgrade.
• Disruptions impacted volumes and product mix, particularly in pipe fittings.
• Unfavorable product mix and pipe fitting ratios led to significantly lower margins.
• Expectations of normalization in pipe fitting ratios in the upcoming quarter.
• Positive outlook due to affordable polymer prices and healthy economic activity in India.
• Focus on branded products, particularly in the Bathware segment.
• Expansion of in-house manufacturing for water tanks.
• Acquisition of land for the eighth manufacturing facility in Bihar to cater to the Eastern market.

Revenue:

• Q1FY24 revenue: Rs. 554 crores.
• Sales volume increased by 19% YoY to 37,155 metric tonnes.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):

• Q1FY24 EBITDA: Rs. 45 crores, compared to Rs. 44 crores in Q1FY23.
• EBITDA margin for Q1FY24: 8.1%.

Profit After Tax (PAT):

• PAT for Q1FY24: Rs. 20 crores, a 25% YoY improvement compared to Rs. 16 crores in Q1FY23.

Working Capital:

• Net working capital days as of June ’23: 59 days, compared to 57 days in March ’23.
• Debtor days increased to 64 days in June ’23 from 56 days in March ’23, acknowledging the need for better control.

Inventory:

• Inventory days as of June ’23: 73 days, up from 57 days in March ’23 and 78 days in June ’22.
• Company maintains optimal finished goods inventory to meet demand.

Polymer Price Stability:

• Expectations of stable polymer prices for the next few months.

Channel Finance Program:

• Steady progress in the channel finance program.
• Increased credit limits of channel partners from Rs. 70 crores to Rs. 105 crores.
• Number of channel partners engaged in the program increased from 76 to 132.

Net Cash Position:

• Maintained a net cash position of Rs. 164 crores as of June ’23.

Volume Outlook and Growth Guidance:

• July volumes have been encouraging.
• Optimism about sustained demand, with real estate performing well and affordable polymer prices.
• Expectation of high double-digit growth over a 3- to 5-year period.
• Confidence in the pipe segment’s growth despite entry into water tanks and Bathware.

Competitive Intensity and Pricing:

• Increased capacity additions in the industry, but supply is not expected to outpace demand.
• No need for predatory pricing, and growth is expected to be sustainable and profitable.

CPVC Segment:

• Correction in CPVC prices across the industry, with room for further correction.
• Local capacities in India expected to make CPVC more affordable, promoting long-term growth.

Plumbing Business:

• Plumbing growth has been double-digit for Prince Pipes in recent years, largely driven by building material.
• Focus on building material and setting up capacities for plumbing and SWR segments.

Capex Plans and Capacity Expansion Overview:

• FY ’24 Capex allocated primarily for debottlenecking.
• Capex estimate for FY ’24: Rs. 90-100 crores focused on existing plants.
• Excludes Bihar project land acquisition and East expansion.
• Covers debottlenecking, maintenance, and potential capacity additions (e.g., water tanks or HDPE) in some facilities.
• Phase 1 expansion target: 35,000 to 40,000 MT, commencing in March ’25.
• Phase 2 expansion details to be determined later.
• Current capacity: 323,000 MT.
• Additional brownfield expansion planned with Rs. 100 crores investment.
• Bihar plant set to begin commercial production in March ’25, adding around 40,000 MT in Phase 1.
• De-bottlenecking of existing plants to contribute 20-30,000 MT by FY ’24.
• Potential for further capacity expansions due to new piping applications, but specifics for FY ’25 are uncertain.

Brownfield Capacity Addition:

• Consideration of debottlenecking for capacity enhancement.
• Feasibility identified at several plants.
• Feasible plants: Jaipur, Telangana, Haridwar, and Agra.
• Some plants (Athal, Kolhapur, Chennai) have limited expansion potential.
• Estimated lead time for brownfield capacity: 3 to 4 months.

Debt and Cash:

• Net cash position of Rs. 164 crores as of June ’23.
• Gross cash equivalents approximately Rs. 195 crores.
• Working capital utilization of Rs. 40 crores.

Capacity Utilization:

• Company-level utilization has been steady at around 50% to 55% of installed capacity.
• In Q1, utilization was slightly lower due to disruptions.
• Telangana plant has seen good utilization since its setup in late ’21, estimated at around 35% to 40%.

Realization:

• Realization per ton in the quarter decreased sharply due to unfavorable pipe fitting ratios and product mix.
• Expectations of improvement in realization from the current levels.
• Pricing power has improved over the years due to branding efforts, and product mix has also improved.

Sourcing Mix for PVC:

• Sourcing mix for PVC is currently 60% import and 40% domestic.

Bathware Strategy:

• Bathware is seen as a front-of-the-wall product where brand equity is crucial.
• Investment focus on digital, visual merchandising, brand visibility, and technology.
• Investment in the right people and branding.
• Focus on building a strong distribution network across urban, semi-urban, and rural areas.
• Initially, a combination of retail and project sales with a long-term focus on retail and distribution.
• Leveraging existing relationships with real estate developers for Bathware sales.
• Initial investment in 1Q for the launch event: Approximately Rs.2 crores (one-time).
• Annual investment: Rs.5 crores to Rs.6 crores in manpower and Rs.10 crores to Rs.12 crores in brand building for the Bathware vertical.
• Expansion into faucets manufacturing within 18 months.
• Prepared for initial Bathware investment, with an expectation of it becoming non-dilutive to core profitability after 6 to 8 quarters.
• Long-term vision for Bathware is to achieve better operating margins compared to the short-term investment.
• Targeting the mass premium segment in the Bathware market.
• Aims to address the largest chunk of the market, which is just below Jaguar in terms of premium positioning.
• Will have collections across different price points (premium, mid, economical) but with a primary focus on the mass premium segment.

Participation in Infrastructure Segment:

• Participating in the infrastructure sector, but not aggressively.
• Focusing on improving debtor days to manage receivables.
• Steady growth in DWC and HDPE segments.
• HDPE capacity expansion is planned at the Jaipur facility.
• Bihar will start manufacturing HDPE from the first day of commercial production.
• DWC (Double Wall Corrugated) pipes have seen strong volume growth in the infrastructure segment.
• Infrastructure currently contributes approximately 3% to 5% of total revenue.

Margins Expectations:

• Medium-term margin estimate: 13% to 14%.
• Aspirational for better margins.
• Factors for improvement: product mix, CPVC contribution, operating leverage, and volume growth.

East and North East Expansion:

• Long-term vision for an integrated complex.
• Planned products include PVC, CPVC, DWC, HDPE, water tanks, and fittings.
• Potential for becoming one of the largest facilities within 3 years.
• Current sales in the East region approximately 15% to 20%.
• Expected freight savings and improved quality with local production.

Value-Added Products:

• Value-added products currently include CPVC, PPR systems, and PVC fittings.
• Historical contribution percentages:
  • Pipe fittings: 30% to 35% of revenue.
  • CPVC: 20% to 25% of revenue.
  • PPR: Approximately 4% to 5% of revenue.

One-Off Expenses:

• ERP-related expenses are considered intangible and have been absorbed into the gross block.
• Operating expenses related to ERP implementation are not significant.
• The only one-off expense in the quarter is related to Bathware launches, amounting to approximately Rs.2 crores.

Inventory Loss:

• There was an inventory loss of approximately Rs.10 crores in Q1.
• The impact of PVC price movements on inventory gains in the second quarter is uncertain.

Fittings Segment Margins:

• Fittings segment margins are expected to normalize from the next quarter.
• The guidance of 13% to 14% margin range is inclusive of all expenses, including those related to Bathware.
• In Q1, the company’s margin was affected because of an unfavorable product mix.
• The margin of fittings, an essential product, is significantly higher (1.5x to 2x) than that of pipes.
• Margin should be evaluated on a blended basis for pipe fittings, considering its contribution to revenue.
• In Q1, the contribution of fittings to revenue was lower (around 25%) compared to the usual (32% to 33%).
• Operating margin is expected to return to 12% to 14% over the next 9 months.

Participation in Jal Jeevan Projects:

• The company actively participates in Jal Jeevan Mission projects through contractors.
• Participation will continue as long as the receivable cycle remains disciplined.
• Over the next 2 to 3 years, the demand from Jal Jeevan Mission projects is expected to support industry growth.

Advertising Spend Breakdown:

• Piping Vertical:
  • Ad spend during the quarter: Rs. 12 crores.
  • Typically invest 2% of revenue into branding.
• Bathware Business:
  • Estimated ad spend for Bathware: Rs. 10 crores to Rs. 12 crores.
  • Percentage of revenue not specified due to the establishment phase.

Chief Technical Officer (CTO) or Technical Head Absent

• The company does not have a Chief Technical Officer (CTO) position.
• Similarly, there is no designated technical head within the organization.