You had a strong performance in Q1 on a low base. How much of this growth would be sustainable?
That is a good question and also a difficult question, simply because if you look at the last quarter had pretty much about 45 days of closure, pretty much all of May, and about 75% of the country was closed in May. For the first 15 days of June between 40% and 50% of the country was closed. If you actually look at it in that perspective and then look at demand conditions, they have been robust.
We have also seen them continue into July. So, overall we remain cautiously optimistic that demand will recover. Of course, this is subject to the famous third wave. Hopefully that does not come. Or if it does, it is of a much lesser intensity. Going forward from a demand perspective, we are cautiously optimistic.
You have spoken about a strong recovery in July and June, but how is it compared to last year? Are we seeing a V-shaped recovery?
It is definitely a V-shaped recovery; it is a quick recovery. In fact it is bouncing back fairly quickly and that is nice to see. But again, it is too early to say. Let us wait for another two-three months before we declare it as a trend. Hopefully if we do not have any setback, any closures, the second quarter and then the second half portends to be fairly good from a demand perspective.
Given that this wave has hit the rural space much more than the urban, how is the demand in the rural space?
Actually, the surprise – and it is a good surprise – demand in small and rural towns has bounced back quickly despite there being lesser closures last year and many more closures this year. We are still seeing robust demand conditions there. In fact, we are not seeing a decline over last year in rural and small town.
We, of course, as an organisation from last year itself had focussed a fair bit. We have increased our infrastructure substantially in rural and small town India, whether it be the number of our people, the number of our sub-stockiests, the numbers of dealers that we service and obviously the number of towns and villages that we cover. We have increased that exponentially and all of that is now beginning to pay off.
Consumer and bazaar have managed to grow quite well year-on-year, but sequentially we are seeing some weakness. What would be the growth outlook for these segments?
Consumer and bazaar will always grow a little faster as long as the economy grows. We have always said that in Pidilite, we have a very simple correlation to the economy. We divide our business into core growth and pioneer categories; core tends to grow 1.5 to 2 times GDP, and growth in pioneer categories at 2 to 5 times GDP. As the economy bounces back, GDP bounces back. I think the demand outlook for these categories is fairly robust. All of this is of course dependent upon GDP growth and no closures.
With the continued inflation in raw material cost and margins being under pressure sequentially, do you think gross margins have bottomed out? Are you seeing a recovery or flat margins?
Definitely, as far as margins are concerned. Margins have been under pressure. We have seen unprecedented rise in raw material prices; our principal raw material VAM, which is vinyl acetate monomer. Last year our average price was 900 dollars a ton, the current price this year in the first quarter was 2,000 dollars a ton.
Having said that, we are seeing some softening of the price in the spot markets. In August it is down to about 1,500 dollars a ton. Having said that our belief is quarter one and quarter two will see margin pressure because in quarter two you will consume what you have bought in quarter one. Quarter three and then quarter four we will see softening again.
Therefore, better gross margins is our estimate. We are keeping a close watch. We have priced at 75% of inflation. We did not believe that this is a long-term trend and therefore we need to price in the full inflation which has subsequently been proven. We are seeing the softening. In our belief the first half will be under pressure from a margin perspective. We expect that to return in the second half.
