Real Normalcy Will Probably Come Back In The Second Half Of 2021: Pidilite’s Bharat Puri
Construction site of a housing block in Sector 105 of Noida, in Uttar Pradesh. (Photographer: Sanjit Das/Bloomberg)

Real Normalcy Will Probably Come Back In The Second Half Of 2021: Pidilite’s Bharat Puri

The Indian economy has bounced back quicker than expected and it’s not on account of pent-up or festival demand, said Bharat Puri, managing director of Pidilite Industries Ltd.

Continuing with the trend witnessed by the company in the July-September quarter, rural areas, small and medium-sized towns, with a population of up to 20 lakh, have recovered and are growing the fastest. Bigger towns and metros have witnessed a comeback in the last two months, albeit at a slower speed, Puri said.

A market leader in adhesives, industrial and construction chemicals and art material, with renowned brands such as Fevicol, M-seal, Dr. Fixit and others, Pidilite continues to see a faster recovery in sales to individual consumers and contractors, what it calls the Consumer and Bazaar category that contributes 80% of revenue. Like in Q2, the big industrial customers such as commercial real estate are still postponing projects, Puri said.

“What we’re finding is the larger projects, organised real estate for example, in the bigger cities and bigger projects — these are still being postponed. A lot of them have come back to the planning table. A large part of the demand is individual home, individual consumer derived.”

In the first half of the fiscal year 2020-21, the company’s net sales were down by a third over the previous year, and profit fared worse. It’s not yet clear how much of that will be recouped in the second half as news of a mutant strain of Covid-19 and new curfews cast a shadow on the recovery.

“The last three months have been good because consumers have got confidence and it is in control in most parts of the country. These new strains, these new curfews—what impacts most businesses is the lack of mobility. Once you have a fear, home improvement is something that is eminently postpone-able.”

“I do believe that real normalcy will probably come back in the second half of next year.”

Meanwhile, input costs have started to rise for the company that draws key raw materials from crude-derivatives. Benign input costs, lower advertising spends and belt-tightening helped Pidilite clock a record Ebitda margin of 27.3% in Q2, far ahead of the guided band of 21-24%. Puri now expects “substantial commodity inflation” in the next six months on account of a faster-than-expected recovery in the Chinese economy and global supply disruptions on account of maintenance shutdowns and port logjams. But, input prices will likely stabilise thereafter, he forecasts.

“I think managing supply chains and managing commodity costs is going to be critical in the next six months. I don’t see it as a long-term trend because it’s not that demand is suddenly going to go up by X%. It is just that people had not anticipated that demand is going to bounce back quickly and the Chinese economy is going to grow so healthily.”

Yet, Pidilite expects to absorb those higher costs and defend or expand market share. That indicates that the Ebitda margin may revert close to the guided band in a quarter or so.

“I would rather keep my price premiums at a 10-15% level because more than that actually let's open the back door for lots of people to come in, and focus on greater volumes rather than looking at these margins, which are in a sense unprecedented.”

While he wouldn’t quantify the market share gains this year, Puri said the company is growing faster than the market. Over the past five years, the average sales growth for Pidilite has been 8% or so versus 13% over the decade. The expectation is new ‘growth’ and ‘pioneer’ categories such as waterproofing and maintenance chemicals will soon push the company back to double-digit sales growth. While the company has 11 new manufacturing facilities under construction, that depends on a recovery in GDP growth. “As the economy grows, consumer goods tend to lead. We grow at one-and-a-half to two times GDP growth and that’s what we’re waiting to happen.”

Watch the full interview with Bharat Puri here...

Edited excerpts.

Lessons Learnt In The Pandemic Year

When you look back at the year, what has been the biggest learning that has changed the way you view the business or strategy or any of those medium to long term issues?

I think that’s a great question. This is one of those years where all of your scenario planning and forward planning none of it is actually come to fruition because what we've seen is and a lot of times we are guilty of using the word ‘unprecedented’ loosely but in these times I think it is correctly used.

I think there are two things that this pandemic has taught us as organisation leaders. The first is, all the hard work that you do when times are good actually pays back in times like this and therefore, building an adaptable, resilient organisation, getting culture right, a lot of these are softer items where people ask does this really impact this quarter or the next quarter’s numbers. When you look back at a year like this and you say listen all the good hard hours that were put in in really building an organisation, this is the time it completely pays back because this is the time people put up their hand, they own the organisation, they go the extra mile. I can give you so many examples from Pidilite where young people have gone to contractors—one of my teams actually did a deal with Paytm and converted all of the loyalty points to money because in March and April poor contractors, obviously they're not going out of home there's no money, so it almost became like a bank account to them. These were all initiatives done by the field people. Another set of teams has actually gone forward and now across our whole universe we have insured not only just our dealers, also our contractors and their workers free of cost, saying listen, don't worry if any of your people, god forbid something happens, here is free insurance for you. These are all initiatives that don't come from the corner offices. These are all initiatives that come from people who've rolled up their sleeves, understand the voices from the street. I think the first thing is really building a resilient organization.

The second thing is the ability to move with speed and the ability to therefore let people at various levels decide to do things quickly. The fact that again when you're a trusted brand which has an all-India presence, and your supply chain, being able to manage that in times when everything is closed again requires a very different level of adeptness and a different level of agility. Therefore, this was one time where we are flying this big jumbo jet visually, the controls are not working so you're flying it visually. Again, this is a time where the ability of organizations to quickly pivot and to quickly change (is tested.

These are the two things, resilience and change, which 2020 has taught us.

Has it any way fundamentally altered the way you look at key business elements, for instance how supply chains are designed and things like that?

Absolutely yes. In fact early on in the crisis we realised them. One has been that, I use the words very carefully, one has been fortunate to have gone through crises like this in the past and you know that in these crises it's important to handle the day to day but it's also equally important to keep strengthening ourselves as an organisation.

So, what we did was we actually formed two teams—an ‘Act Now’ team and a ‘Plan Now’ team.

The ‘Act Now’ team act kept the wheels of the organisation running --safety, security, how are our people, our factories running, are our warehouses open, are our sales people in touch with their customers.

(To the)‘Plan Now’ team we were saying - listen, this is going to cause fundamental change in the market and as an organisation we need to be the fastest to adapt to that change. For example decentralized supply chains, the China plus one and therefore making sure that both from a raw material and a customer perspective, are you changing? Digitization, and digitization is not only just about working from home. Digitization from the point of view of e-commerce. In the first five months of this year we did more on e-commerce than we've done in all of the last year and we're just starting. So, whether it's digitization, re-equipping your supply chains, we have a ‘Plan Now’ team that was looking at all of that.

Therefore, as you look forward frankly yes, while the pendulum has swung a long way, it will come back, but it will never come back to the original. It would be foolish for any of us to think hopefully vaccines happen, life comes back to normal and we can all go back to being what we were. I think the world will fundamentally change and the digitized, connected world, the worker who can now work from home, all of these are realities that all of us have to recognise.

You say the world will probably never come back to what it was pre-Covid. What does that mean for businesses like yours? On the face of it you might say we will increase or accelerate our presence in terms of online sales. That's understandable - but what about deeper changes to organisational structure or supply chains or the way you look at financials or the way you allocate capital?

While yes there is this overall theme of the digital consumer, the digital worker and the digital organisation... I think whether it is now adapting your supply chains to the new normal -- making sure that for example, if you had one single big factory and god forbid it was in a containment zone, you are in trouble -- I mean this teaches you for the future (that) if you are reliant on a set of suppliers from a country, that’s a problem. So therefore, the whole recruitment of the supply chain per se becomes a massive exercise.

The whole thing around your own costs, this is also a given. When you press the pause button, you suddenly realise that a lot of your costs, frankly, need to be relooked at in the true zero-base sense. Because you've done away with a lot of costs actually out of default, out of the circumstances, you realise a lot of them you may not need them again.

So, the whole business of structuring and equipping your organisation is going to be different as you go forward. Most importantly, talking to customers. My teams have been actually doing meets with carpenters, contractors now on Microsoft Teams. If somebody told me this a year back, I'd say listen guys do they even have smartphones? It's wonderful. I've actually seen some of these and it's a changing world and all of us who are hoping to keep pace with the change are going to be the winners of tomorrow.

Consumption Recovery?

Speaking of customers...from scared consumers to pent up demand to doubling of household savings...we've been through phases of trying to anticipate what the consumer will do next. And, what will be the medium to long term change in consumption in this country. How do you read the big changes?

It's fascinating to see, and again it's been difficult to predict which is why you have to in a sense fly the plane visually. I think there was two or three big changes that are happening.

One is, rural and small-town India re-emerging as a big driver of growth. If you remember, before the pandemic a lot of us consumer goods guys were saying rural is actually suffering and rural that normally was 1.5 times urban is actually becoming point 0.7 or 0.6 times urban. These last six or eight months actually rural and small-town India has been a very strong driver of growth. So, it's very clear that it is the smaller towns and rural areas that have been lesser impacted. There's also been some reverse migration. Even now as you look at it, while progressively you're getting better, and the metros they have come back in a sense in the last two months, but now if you look at it from a growth perspective -- it's actually inverted. It's the rural which is the best growing, it's small-town India which is the next. It is medium town India—towns upto 20 lakh (population), which is the next set of growth and it's the big cities that have been the last to come back to growth.

If you look at businesses, wherever consumers use their hands, wherever it is a do-it-yourself (DIY), it has come back the quickest. Whether it is shopping via e-commerce or a category called hobby colours and painting at home. That (latter) has gone through the roof because suddenly when you're sitting at home and one of the best stress busters is to sit with your children and all of you do a painting together. Then your wife is going to tell you about all the broken objects that you haven't fixed and therefore the Fevikwik business has been doing very well. So, obviously, a whole set of changes based on consumer behaviour, the consumer’s attitude towards health, hygiene and cleanliness has changed dramatically. I think all of us will have to recognise that. The consumers’ ability now to buy 30% of all staples online; consumers who bought staples for the first time on e-commerce say that they would like to buy again. Now, staples and e-commerce is not something you would think is going to be naturally intuitive. So, I think we're in for changing times. I think we have changing consumers.

I still think consumer goods correlate best to GDP growth. So, as we look back and look at a little more in the future, finally the biggest driver of growth for consumer goods companies is GDP growth. As the economy grows consumer goods tend to lead. We grow at one and a half to two times GDP growth and that's what we're waiting to happen.

Is the consumer in a mood to spend? Has the consumer gotten very cautious according to you? Has the consumer’s balance sheet gotten so stretched that actually they've deferred spending for maybe a year or two? Can you give us any kind of micro read on that?

I think we've been discussing a lot. What we're seeing is the consumer is still hesitant on the big projects, on the big stuff. Things that he can't postpone, or you say hey listen now it's safe to do this -- like home repair or home renovation. One of the first of our businesses that bounced back was waterproofing. If you have a leakage at home or you have a damp wall, then that's not something you want to live with. Especially when you're spending so much time at home. What we're finding is the larger projects, organised real estate for example in the bigger cities and bigger projects -- these are still being postponed. A lot of them have come back to the planning table. A large part of the demand is individual home, individual consumer derived.

For us, one of the big drivers of sales always has also been commercial real estate as well as organised real estate. I think those are still to come back and those are still in a sense lagging.

Return To Growth On FY20 Base?

At the end of the first half of the fiscal net sales were down by about a third year on year profit fairing a bit worse than that. You think you can recoup most of that in the second half of the financial year? The bigger question is by when does a company like yours return to trend growth, and by that I mean on absolute figures. Because we will start seeing double digit growth maybe Q4 itself because of the base effect - yet that would be mean nothing because you'll still be coming back only to an FY20 kind of level.

I think if you look at the economy currently, the extent the of bounce back has actually been surprising. It's bounced back quicker than most of us thought it would and if I look at the trend, even from September to December, earlier there was this hypothesis is it pent up demand, is it festival, Diwali demand? But what we're seeing is demand has remained fairly consistent -- following the broad secular pattern that I told you about with smaller towns, rural being better but metros and bigger towns now are also coming back, albeit at a slower speed.

Having said that, it gets very difficult to look forward because in the last week, we now have this new mutant strain, whatever it may mean. I think as consumer goods people, if the pandemic is under control, the consumer has confidence. If the consumer has confidence the consumer dips into their purse/pocket and pays. I think this is going to be one of those times where you're going to look at every period as a set of four weeks or eight weeks and keep planning for that.

You’re absolutely right, in fact starting February-March, therefore the next quarter, the next two quarters will look very good from a growth-to-growth perspective. In fact as we were doing our planning for the next year we've actually decided to disregard that and use 2019-2020 as a base and say listen let's work from there. If you've declined 60% and now you grow at 70% you're only patting yourselves on the back for nothing.

To my mind, I think the key question is when does the pandemic come under control, is it via vaccines? The last three months have been good because consumers have got confidence and it is in control in most parts of the country. These new strains, these new curfews—what impacts most businesses is the lack of mobility. Once you have a fear, home improvement is something that is eminently postpone-able. Therefore, this is something that probably by March-April you will get a much better read. Because by then you're over this winter hump, hopefully there are a set of vaccines operating and the future looks much brighter.

I do believe that real normalcy will probably come back in the second half of next year.

Hypothetically, if the performance of the third quarter continues into the fourth, do you think you'll be able to recoup much of what you lost in the first six months of FY21?

I think we will recoup a large part, maybe not all, but we will recoup a fair bit. You have to remember, what we do in nine months is what we did in 12 last time. So, we will not recoup all of it but we will recoup a large part of it because you're seeing demand is healthy and what happens in times of uncertainty is consumers turn back to what they trust. So, the larger and more trusted brands tend to gain more in a crisis situation. We're already seeing that, willy-nilly, we are gaining market share without any aggressive actions. This is just by virtue of being present and by virtue of being trusted.

Rising Costs

The commodity price cycle has turned since we spoke to you after the second quarter. What does that mean for input costs? Also, a lot of companies like yours were able to considerably reduce operational costs -- are most of the gains from something like that fully claimed. Do we see the curve on costs now swing back upwards over the course of the next few quarters?

I think that in the next six months you are going to see substantial commodity inflation. This is because of two reasons. One is globally, a lot of people under-anticipated or did not understand how quickly things would bounce back. Given the bounce back in the Chinese economy we are already seeing for some of our principal raw materials, because China's consumption has increased, global prices have gone up. There have also been shortages; a lot of plants that needed maintenance have taken that and there have been various issues. I actually think the next six months are going to see commodity inflation but because this is not strictly demand based, on a longer term basis I think things will stabilise, in three to six months. But, I do think that in the next three months, extending to probably six you will see both raw and packing material prices actually have an upward trend because there are shortages now and we live in a global economy. These are all global price increases and we're already seeing for example the pressures of that currently. Also given the issues around like ports and the import-export imbalance and therefore the clogging of ports, etc. I think managing supply chains and managing commodity costs is going to be critical in the next six months. I don't see it as a long-term trend because it's not that demand is suddenly going to go up by X%. It is just that people had not anticipated that demand is going to bounce back quickly and the Chinese economy is going to grow so healthily.

If you had to balance out some of the increases in input costs is there scope anywhere else in your business to curtail costs any further or have you squeezed the best out in the first six months of this fiscal? You're going to have to pass on increased input costs to the consumer or absorb it?

The last six months very frankly have been very unnatural because we've been very fortunate on commodity costs also. They’ve been at all-time lows and we've always guided the market that at Pidilite, we like to keep our margin between 20% and 24%. In the last quarter, we’d actually gone up to 27-28% and we've said that listen, our longer-term objective is to remain a 20-24% and invest the larger amount back into growth if we have it. Otherwise, we will price it only 60 or 70% of inflation. So, we may see a moderation in the percentage margin. Hopefully, what we're going to push then is for the absolute numbers because what you're also looking at it this period is for growth to come back. I would rather keep my price premiums at a 10-15% level, because more than that actually let's open the back door for lots of people to come in, and focus on greater volumes rather than looking at these margins which are in a sense, unprecedented.

So you're agreeable to absorbing some of the cost pressures and holding prices so that you can actually further expand on market share. And allow for your margins to come back to your guided band of 21-24 as quickly as Q3 and Q4?

Not Q3 but it will start happening. It is a trend because you buy now and the raw material will get consumed in Q4. If you buy in Q4 it will be consumed in Q1. So, it will be a trend. As global supply chains crank back into action, let's see how long these price increases last. It would also be unfair for us to assume that this is a longer-term trend.

You spoke of market share gains. Like you said, larger companies, better-known, national brands have managed to pick up demand faster. Also, over the last several quarters you’ve been expanding into into smaller villages. On account of these, what have your market share gains have been like this year?

There is no doubt about the fact that we are gaining market share. It very difficult right now to quantify because you don't have a feel as people's numbers start coming, a lot of the regional players, the less organised players—you will see a longer period of time before we can see the impact.

Really, there are two things that are happening. One is your broader reach via having a supply chain. Pidilite has over 40 manufacturing units across the country. Therefore, you're able to adjust and make sure that your availability is deep, and it is always there. The second is people saying that listen, if I'm spending my money right now, let me go to a trusted brand—whether it's Fevicol or Dr. Fixit. I think it's very difficult to say if we’ll gain 2% or 3% market share but definitely you will gain market share and probably you will know better in the next three to six months. It's clear that you're growing faster than the market.

You're hoping that revenue contribution of ‘growth’ and ‘pioneer’ categories will increase from roughly 30% right now to 50% in the next five years. In a normalised world, does that mean accelerated top line growth? Your trend sales CAGR has been around 8% for the last five years.

Yes, it has been between 8-10% depending on the base but yes, the whole objective in a sense, transforming our portfolio over a period of time is to accelerate the top line.

So, you would go from 8% to what?

I keep telling my teams that listen, our targets have to be internal and we must be (at) double digit volume growth. For an organisation like ours, at our size, if we’re growing in double digit volumes, then you're truly making an impact. So that's what we'd like to come back to.

Double digit could be anything from 10 to 16, 18 to 20?

The days of 18-20, I think are far away. As long as it is double digit volume growth, I'd be happy.

You have about nine new facilities that are currently work in progress. At any point in the last six months did you reconsider any of this capital expansion plan?

See, we obviously kept a close watch and wait in some of these. We said let's wait and watch but as the situation became clearer, we’re strong believers in the India story and India is home market and, in a sense, we are getting ready for the next wave of growth. So, as we speak now, we have close to 11 new facilities coming up.

There are some facilities in the core categories and there are a substantial number of them in the new growth and pioneer categories because a lot of these facilities are integrated. On a broad basis, three of the facilities would be core categories, six would be in new categories and two would be international.

Are there sectors in your business that have not yet shown any signs of recovery?

Everything has in a sense has improved trend-wise but the sectors that have taken the longest to come back are the organised real estate, the large projects. Footwear and leather for some reason, we supply a lot of adhesives for the footwear industry, the B2B businesses have tended to be a little slower. In B2B, it's leather, footwear, organised real estate, the large government projects are now coming back. So that's the area that has been the slowest.

What's the view from outside India? You are present in the Americas, Africa Middle East...

Fascinatingly, this has been in many ways a surprising year globally, because if you looked at Brazil's numbers, you would think that Brazil is going to suffer more than India. Actually, this year, our Brazilian business will have its best year ever. Forget the impact of Covid. On pre-Covid numbers, they are having very healthy growth. I look at the U.S. arts and stationery business, again, this is benefiting from the in-home trends, etc. In fact, international has been a bright spot. The Bangladeshes of the world almost mirrored India and came back like India did. Places like the Middle East and Africa, for example, you would think Africa would be the worst impacted by the pandemic. Actually, Africa has not had any substantial impact and Africa continues to motor along and is looking good.

Does that prompt you to recalibrate at all your deep focus on the home market and your peripheral focus on international markets?

In our case, we're very clear. We will first get the model right in the Indian market and there's enough scope and potential to do that. Once we get it right, we will reapply to all markets that are similar to India. Therefore, in effect to all emerging markets -- which is why the SAARC countries, which is why the emerging Middle East, which is why Africa. Because we believe these are the places where we can just re-apply the Pidilite model. We're not interested in the Europes and the U.Ses because we're not interested to compete with a different model. We know how to win in these markets and we're going to focus here and frankly, this is four-fifths of the world.

Anything eminent besides some of the collateral impacts of the Araldite acquisition?

No, as we speak, we're building a new plant in Kenya which has just started off. We're looking at other locations in Africa.

Organic growth or inorganic growth?

Both, we are looking at both organic and inorganic. Inorganic in a lot of these countries tends to be difficult. But organically if I look at my Africa growth rates, these would be high double digits over a five-year period.

You are maybe putting a little bit more emphasis on the international growth piece at the end of this year than you had anticipated earlier on?

I would say we were more encouraged by international, yes but again we look at it as three to five years and international, we know is going to be a driver. If I look at all of my international sales, it is close to 15% of my sales. It's not so small anymore but yes, it is something that we know has great growth possibilities.

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