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Good morning, ladies and gentlemen. I'm Felicia, moderator of Prince Pipes Q2 FY '23 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note, this conference is recorded.
I would now like to hand over the floor to Mr. Aasim Bharde from DAM Capital. Thank you, and over to you, sir.
Thanks, Felicia, and good morning to all. On behalf of DAM Capital Advisors, I welcome you to the Prince Pipes and Fittings Q2 FY '23 Earnings Call. From the management side, we have with us Mr. Parag Chheda, Joint Managing Director; Mr. Nihar Chheda, Vice President, Strategy; Mr. Shyam Sharda, CFO; and Mr. Anand Gupta, Deputy CFO.
I would now like to hand over the call to Mr. Parag Chheda for his opening comments.
Yes. Thank you, Aasim. Thank you all for joining us for our quarter 2 and H1 FY '23 earnings call. The presentation and the press release have been issued to the stock exchanges and uploaded on our website. I will begin the call by giving you a macro view of the industry, and then diving into company level performance and the strategy going forward. The first half of FY '23 has been a challenging period for the industry and from April till date, PVC resin prices have dropped by about INR 62 per kg. The sharpest fall was in the month of July, a steep fall of INR 20 per kg in one single month. This steep fall has led to an unprecedented inventory loss for us and the industry at large, which severely impacted quarter 2 performance. I'd like to share here that what we are witnessing is a one-off development which happens once in a few decades, and we are navigating it with earnest resilience. The nonstop fall in PVC prices led to a sustained destocking amongst our channel partners adversely impacting quarter 2 volumes.
On an overall basis, our volume growth in H1 has been healthy with a 14% year-on-year growth. And I'm glad to share that the PVC -- that the CPVC segment has delivered a 25% plus year-on-year growth. We continue to maintain our focus on cross-selling and optimize our product mix, which has been serving our customers well and will also aid average realizations. The fall in the PVC prices has a silver lining as attractive prices will lead to demand, rebounding strongly in H2 of FY '23. On an annualized basis, we will continue to expand market share and our volume growth trajectory remains intact.
Let me take a moment to give you an overview of the macro demand environment. The overall industry sentiments are bond across our service sectors. India's housing sector has seen a sharp revival in demand and supply on the back of positive consumer sentiments and has got up to its pre-pandemic levels this fiscal. Based on market reports, housing sales in July and August '22 have surpassed the housing sales level of January 2020, reflecting that the India's housing sales figures have now started to cross the pre-pandemic levels. This augurs well for us and we see this trend being stable and will continue based on key factors like confidence in future earnings coupled with the pandemic-induced importance of home ownership for safety and security that have accelerated property sales in the top metros.
Also, the agri sector continues to witness significant transformations. Several states are overhauling their food and farming strategies. And this transition is part of India's central government plans to create a self-sufficient India. With a good monsoon and attractive pipe prices, we are well equipped to tap any notable uptick of demand with our range of agriculture and borewell products and will leverage and opportunities that will -- that this sector has to offer.
Our lateral expansion into the Bathware segment continues to progress as we build a lean and credible team and finalize implementation of the business plan. I would like to assure you that our approach will be solid and prudent. We will keep sharing more milestones as we get through closer to our launch, which are planned in the fourth quarter. Let me share some salient steps, which we continue to take despite severe industry headwinds. The emphasis on building a strong brand remains as we maintain focus on our long-term vision of superior growth. Despite quarterly performance, our advertising and promotion initiatives continue to remain on track, and we spend INR 14 crore or 2.2% of overall revenues in quarter 2. Further, we remain on the path of fiscal prudence and remain long-term debt-free.
We have seen a notable improvement in debtor days from 60 days in March '22 to 48 days in September '22. Moreover, inventory days improved from 85 days in March to 65 days in September '22. At Prince, sustainable growth is the heart of our organization's progress. I'm glad to share that recently, our Jaipur plant achieved IGBC Platinum rated Green Building certification by the Indian Green Building Council. This reiterates our commitment to ESG as one of our core pillars of achieving operational excellence.
We recently also signed a limited liability partnership agreement with Cleanwin Energy Eight LLP. This wind power project will help us achieve our renewable energy aspirations in our Kolhapur plant. On completion of this project, we would have attained credible renewable energy for all our plants.
To conclude, I would like to restate that as we move into the second half of the fiscal, we expect the current prices regime to create a healthy demand environment for us which we will -- which are very well placed to capitalize on. Despite the challenges in the first half for us and the industry, we remain extremely positive on the business prospects and see attractive growth in all the 3 segments of Plumbing, SWR and Agri. As opportunities are created and Indian economy continues to grow, Prince Pipes remains active, agile and growth-hungry to ramp up activities, expand network and strengthen the market penetration.
I once again thank you, everyone, for your time and mind share today. I now hand it over to Mr. Anand Gupta, our Deputy CFO, to take you through our key financial highlights.
Thank you, Parag-bhai, and good morning, friends. I'll be taking you through the Q2 and H1 FY '23 financials. In this quarter, our volume stood at 38,458 metric ton as compared to 42,845 metric ton. In H1 FY '23, volumes grew by 14% to 69,707 metric ton. Revenue from operation for the quarter was at INR 636 crores. EBITDA was minus INR 11 crores in Q2 FY '23 and INR 33 crores in H1 FY '23.
Profit after tax was minus INR 24 crores in Q2 FY '23 and minus INR 8 crores in H1 FY '23. Further, our finance costs for the quarter reduced by 15% year-on-year to INR 3.2 crores. And commenting on the working capital for the quarter, our overall working capital stood at 68 days for September end. It is important to note that despite a tough environment, we have seen a notable improvement in debtor days from 60 to 48 in September '22 as compared to March '22. And inventory days have also improved from 85 days in March to 65 days in September 2022.
With this, we would like to open the floor for questions. Thank you.
[Operator Instructions] The first question comes from Achal from JM Financial.
My first question was with respect to the -- would it be possible to quantify for the second quarter and the first half, what is the extent of inventory loss? And do you see inventory loss continuing even in the third quarter?
Thank you, Achal. Inventory loss for September quarter would be in the range of INR 80 crores to INR 90 crores. For the June quarter would be around INR 30 crores to INR 35 crores, which we had declared after the June quarter results. So I think for the first half of this fiscal inventory loss would be in the range of INR 100 crores to INR 120 crores.
To answer your next question, we have seen correction in PVC prices as expected in the month of October and this week in November as well. So the inventory losses would continue in the December quarter. However, the extent of the inventory loss would not be as significant in the December quarter as it is in the September quarter. So the overall operational margin should start recovering from third quarter, but it will normalize in the March quarter. So that is how we see this today. And I would just like to highlight that PVC industry or the piping industry, while our margins are sensitive to raw material prices, we don't see this kind of a volatility every 4, 5 years.
This kind of a volatility is extremely unprecedented and maybe happens once every 15, 20 years because normally, the price of PVC itself would be around INR 70, whereas as we highlighted, the decrease has been around INR 60. So the reduction in PVC prices has been almost as much as the base price of the commodity itself. So we are not susceptible to such volatility usually because this has been that kind of a year. But to answer your question, yes, the inventory loses would extend into December quarter, but it would not be as significant as it was in the September quarter. And from March quarter, margins should start to normalize.
Got it. For the second quarter, is it possible to call out what has been growth or decline in the Plumbing and the Agri segment?
I would -- I don't have the segmental growth ready with me. But what's important is if you look at the polymer-wise growth, CPVC has seen -- the first half of this year compared to last first half has been a 25% plus volume growth, which is really encouraging to see.
And going forward, to answer your question about Plumbing and Agri, I think plumbing demand continues to be healthy because of a strong real estate market. It's just that it's maybe not that reflected in our volumes today because of de-stocking that we are seeing in the channel. But once the prices stabilize and start to increase, I think the true plumbing demand will be reflected in our volumes.
And I think as far as Agri is concerned, I think most of you would be aware that the past 2 seasons of Agri have been essentially muted because of the high price of PVC. And now at this price of PVC, it becomes extremely conducive for growth. And we are bullish on Agri demand picking up. We have seen some green shoots of demand. It's still early days. But it would make sense that Agri should deliver good volumes in the second half of this financial year. And Plumbing will continue to do well.
Got it. If I may ask a few more questions. One is with respect to -- is it fair to say that the price elasticity related to plumbing because plumbing was relatively priced in industry demand. Is that a fair assumption?
Achal, your voice is breaking, but what I could understand, I would try to answer, but yes, plumbing is more of a branded players game, a more consolidated market where brand does play a role, whether it is with a plumber, a contractor, a retailer or in the project where it's a builder or the consultant. So the plumbing and drainage, which is a building material part of our portfolio, which is around 60%, 65% of our overall business is more price inelastic relative to agri business, which is much more unorganized, much more fragmented business, where there is a higher level of sensitivity towards price, so...
Right. My question was in terms of the price elasticity with respect to -- since the PVC prices have come off, that will help more in the agri business because that demand tends to be more price elastic compared to plumbing?
Correct. Correct. Plumbing is not as price sensitive. Plumbing is more of a brand play and not as price sensitive. Price is important, but not as important as it is in agri. So for plumbing, I think -- demand, I think even today is fairly healthy, but it will start getting reflected in our volume once the prices normalize because there is de-stocking in the channel today.
Got it. If we were to adjust the inventory loss what you mentioned, we get to a gross margins of somewhere around 26% per kg in terms of -- it's about 43, 44 per kg, is that a sustainable margin we should look at?
So I think while we do track per ton and percentage and I do understand why per ton is important, but there are -- as you are aware, Achal, there are many, many factors, many moving parts, not only in terms of PVC prices but also in terms of volume growth and the kind of impact it has on operating leverage. So we've always maintained that sort of 12% to 15% EBITDA is something which is sustainable on a long term, in a normal state basis and I would stick to that right now.
[Operator Instructions] Next question comes from Sneha Talreja from Edelweiss.
Just questions from my end. Now that the PVC...
I'm sorry to interrupt you, ma'am.
Yes, am I audible?
Yes, ma'am. Please go ahead.
My first question is now that PVC prices are almost near the bottom or it looks like they're bottoming out, has the channel started picking up inventory? And what is the kind of sense that you're getting with respect to volume growth? I know Q2 was uncertain, and you said maybe after H1, you'll be able to give some guidance. But what does the volume trajectory now looks like? That's the first question.
Sure. Thank you, Sneha. So as you are aware, we have seen a correction in this week itself in the PVC prices, INR 3 per kg. So I don't think restocking has started yet. I think the channel continues to work on low inventory. I think this correction was expected and I -- maybe there could be one more correction, but we are very close to a bottom out. So I do anticipate restocking to begin sometime either in December or January.
Sure. Understood. Secondly, I wanted to understand your realization. Last time, we did not see material impact on your realization given that prices started falling at the end and there was some benefit to CPVC. While there is benefit to CPVC which is there, the drop is only 7% in your average realization versus 24% drop in PVC prices, just wanted to drill down on that. Of course, CPVC is there, but what is the other reason why realization are not falling exactly in line with PVC?
And secondly, to do we have PVC, CPVC prices have also started falling. Have you seen any sort of a decline in CPVC or are they still constant?
So I'll answer both the questions, Sneha. So one is in PVC, what's important to understand is that the correction is happening at different points of the quarter, right? So while the total correction in PVC prices you see from beginning of the quarter to the end of the quarter, it would be not a right assessment because the prices are falling at different points of the quarter and hence being passed through at different times in the quarter.
And second, I think is that CPVC segment continues to outpace PVC segment in terms of growth and in terms of contribution to our overall business. Hence, the realizations will continue to improve on account of CPVC. Assuming if PVC is stable, then the realization should improve given that CPVC contribution will continue to improve over the medium term for our organization. Sorry, Sneha, what was the second part of your question?
I was asking if CPVC prices are still stable or have they now started seeing some decline because PVC prices have fallen a lot?
No, I think CPVC prices have not seen any correction. CPVC prices continue to be stable. While PVC is a commodity market driven by the forces of demand and supply in an open market, I think CPVC is very different where both the supply is also very consolidated. And even on the demand side, the top 4 processors essentially control 70% of the market. So the CPVC prices continue to be stable.
Sure. Just last one in case I can just go ahead. Are your inventory levels now rationalized? Or are we still holding a lot of high-cost inventory? And if yes, by when do you feel that it will normalize because I see that there's a constant fall also [indiscernible] the PVC prices?
Inventory levels, if you see at the end of the quarter were around 65 days, which is a regular inventory level for us. Hence, the inventory loss in December quarter will be there, but it will not be as significant as September quarter. It will be more in line with industry.
Next question comes from Shrenik Bachhawat from LIC Mutual Fund.
So my first question is basically, if you see the adjusted numbers, the gross margin percentage which is around 23% has fallen by 450 bps Y-o-Y versus as we highlighted that CPVC volumes have grown 27% year-on-year. So I don't understand if the product mix has improved, why has the gross -- adjusted gross margins fallen on a year-on-year basis?
So one of the major reasons for the gross margin decline has been the inventory loss and a significant reduction in PVC prices. Added to that, in a market where there is destocking happening, one needs to give additional incentives for the channel to ensure that at least there is fixed cost recovery. So that was a onetime impact in the September quarter, which I don't see happening in every quarter.
Sure. Could you explain how much percentage of our PVC resin requirement is imported in the last 6-7 months?
Yes. Around 40% of our PVC consumption is local and 60% is imported, which is in line with India. If you see as a country, around 55% of India's PVC consumption is imported. So it's more or less in line with that. It changes from quarter-to-quarter, but this is the average.
Okay. So if I'm not wrong, the larger pipe players buy the full requirement from Reliance, so as a matter of choice, we import 60% of requirement or we are forced to?
Every player has their own strategy. But even if you look at some of our peers, they also have a 50%, 50% sort of breakup. So every player would have a different strategy. Of course, as a country since we are import-dependent, there is natural import dependency which is going to be there for any large player, especially a large player, which is growing the way we have over the past 5 to 6 years.
Sure. And could you help us on ground, what are the large distributors telling us? Are they looking to stock aggressively for the upcoming agri season? Or like what is the sentiments on ground?
Yes. That's a good question, Shrenik. So like I said, and as you are aware, there has been a correction of INR 3 per unit yesterday, in fact. So I don't think there is going to be a restocking immediately. However, we as an organization are bullish on demand in the second half of this year. We have a good amount of finished good inventory.
And we are -- what the good part is that today, we have additional capacity in form of the 2 units at Jaipur and Telangana to take advantage of any uptrend in demand.
One thing is certain that demand will improve from hereon in Agri and overall as an industry across segments. It's tough to pinpoint whether that would happen in November, December or January, but it is going to happen because it's an extremely growth conducive environment. So as an organization, what we can do is at least put up the capacities which we have already done over the past few years. And now we are building the right finished good inventory to take care of any uptrend in demand so that we are able to service that in the right way.
Next question comes from Rajesh Ravi from HDFC Securities.
A few questions. First on the demand. This quarter, we have seen a volume decline. And you're seeing that second half, you're looking at demand to rebound. So are you hopeful of delivering demand -- volume uptick in second half? And is that -- where is that -- which segment would be driving that growth for you?
Yes. Thank you for your question. And yes, we are bullish on demand going forward simply because of the reasons that I stated earlier that real estate will continue to do well, and that will get reflected in our numbers as soon as the channel starts to keep regular inventory, which is only a matter of time. And Agri will also -- which is around 33% of our business will -- should do well, given that prices are now extremely affordable and Agri is a very price-sensitive market.
In the past 2 years, we have seen a very strong postponement of demand in Agri. So I do foresee good demand in the second half of the year. And as an organization to just prepare for it, like I said earlier, put up [indiscernible] have the right to the inventory management and more importantly focus on the long-term objectives of the organization, which is brand building and network expansion and adding newer products to our portfolio. Prices -- these cycles do exist, and we are not immune to these cycles.
But I think as an organization, it's very important that we stick to our fundamentals, keep investing in the brand, keep expanding the business network, and not get panicked or distracted by any of the changes in the commodities basis. So we will continue to be strict, but we will also continue to stick to our long-term fundamentals as an organization.
Okay. Sir, in terms of the inventory losses for H1, around INR 120 crore. If I look at it per ton per kg, this is almost INR 17. So do you imply that this inventory losses would not have been there due to the EBITDA per crazy number, which is for 1H around INR 5, would have been north of INR 20?
Correct that the H1 inventory loss is INR 220 crores, so that's...
And when you said that December we will have inventory losses, obviously, Q2 number is only high in terms of the loss. But even Q1 number is not an easy number. So are we looking at something between Q1 and Q2 in Q3 even when you are paid on your inventory?
I think it's -- I would not like to speculate on what the inventory loss is. It would -- because this is not something which is controllable for us as an organization or as management. We are not immune to any price decrease. What I can say now is that at least now the inventory levels have normalized. So the inventory gain or inventory loss from hereon will be more in line with the industry.
Of course, every organization would have a different pattern of inventory, but now it would be more aligned with the industry since our inventory levels have rationalized. So yes, I think we need to focus on what is controllable for us. And we will continue to focus on that, continue to invest in the brand, continue to add newer products and continue to expand the distribution network.
And sir, when you -- when the resin prices have fallen 25% quarter-on-quarter, but you along with other players have delivered 14% sort of realization decline quarter-on-quarter, is it fair to say that the cost invasion fall has not been fully passed on at the same speed and that is where some of the -- it has given you some cushion at the top line in terms of the inventory?
So we are a pass-through industry. Any increase or decrease is passed on immediately with full effect or close to full effect, I would say. I think I answered this question earlier in the call, but just to highlight, so there are 2 factors. One is product mix. So CPVC continues to grow at a faster pace than PVC, which will help the realizations.
And the second is that the price reductions happened at different points of the quarter. It's not that the 25% or whatever the center drop was happened on the first quarter. So that tend to have an impact and more importantly, product mix is improving and that should help realization, profitability in the long term for the organization.
Because I was looking at the 3-month average prices of resin. And there, the fall is around 25%. But -- and given you and other product mix, what we would understand is the CPVC would be 20% of your revenues, 10-odd percent, closer 2 plus/minus in terms of the volume mix. So they may not -- even if the CPVC realization would be stable, they may not make a big dent on the overall realization numbers. Correct me if my understanding is right.
So the CPVC contribution would be slightly higher than 20%. It would be maybe 22% to 24% now. That has helped us. And secondly, we had taken price increases in CPVC as well. So the CPVC realization also has improved, so these are some of the factors, including the rest of our portfolio, in PPR as well, we have taken some price increases. So that will impact the realization.
Next question comes from [indiscernible] from ASK Investments.
What volume growth are we expecting for the next year?
For FY '24?
Yes, and rest of H1.
So H1 of next financial year?
No, no. The remaining half of the year and FY '24, what volume growth would we expect?
So like I said, the H2 prices have corrected significantly. Agri demand should do well from here on. And agri is around 1/3 of our business. And 2/3 of our business, which is building material, plumbing and drainage will continue to do well as real estate continues to do well. And once the channel starts keeping regular levels of inventory, that will get reflected in our performance as well. So we are bullish, and we remain bullish since this current environment is very conducive to growth, with the tailwinds of a strong real estate and an affordable PVC price.
And more importantly, additional capacity that we now have at the Jaipur and Telangana plant, we would be able to take advantage of the uptrend in demand, which maybe was not possible in the past 3, 4 years before we had these 2 greenfield projects. So I think we are very well positioned to take advantage of any uptick in demand from here on. So I think on an annual basis, double-digit growth is achievable.
Next question comes from Udit Gajiwala from YES Securities.
Like you mentioned multiple times that agri demand is likely to be strong, and it is a price-sensitive market. So with the falling PVC prices, do we see down-trading kind of thing happening or unorganized coming back to gain market share?
That's a good question. So as we saw in the past couple of years, unorganized player had moved out of the industry because of volatility in raw material prices and just an overall consolidation that we are seeing in the industry. So yes, I think unorganized players will be more competitive in this sort of a market.
What I will say is that volatility, whether it's upward or downward is not good for smaller players. Larger players like ourselves can absorb such kind of an inventory loss because we have a strong balance sheet. We have good amount of cash on the books and are long-term debt free. But these kind of shocks are not something that smaller players can absorb. So any kind of volatility, whether upward or downward, is generally bad for smaller players.
However, now there is better availability of PVC. So some of the unorganized players that had lost out will come back into the market. It would be wrong for me to say that they will not come back into the market. So that could be a profitability with this current price trend, but it will not happen in immediate manner and this will be mostly restricted to the Agriculture segment, which is more fragmented. For rest of our product range of plumbing and building materials, it is more of a brand play and branded players will continue to gain.
Understood, sir. Sir, just a follow-up to that. In your opening remarks, you mentioned that company will continue to gain market share. So is it attributable that we'll be gaining more of a market share into the plumbing segment? And if so, then, given that it is more of a formalized industry, so how do we -- what will be the major reasons for that outperformance, like there are other peers also which are strong?
Absolutely. So I think one is -- before I get to market share, one, I think industry itself will grow. So there will be enough market and enough volume and enough demand across sectors for all players, be it the bigger players or the smaller players. And you are right that any kind of market share growth is never easy. It's not something we are entitled to. But if you see the past 5-, 6-year trend, we have consistently been one of the fastest-growing players in the industry because of the kind of focus we've had on brand building, be it the FlowGuard Plus tie-up, which is helping us grow in CPVC, expanding our distribution footprint and also having a very strong focus on getting newer products and expanding our product range.
Till now, in the past 1 or 2 years, we have identified new products within the piping division as a key focus area, getting more research and innovation within the organization and getting more technologically-driven products to the Indian market. So hopefully, that will -- that is in the works currently, and we would like to expand our product portfolio within the Piping segment going forward. So network expansion, brand building, investments in new products will help us drive market share in the long term.
Sure, sure. And just last question if I may squeeze, it largely on CPVC. So you mentioned that we have a 25% volume growth. Could you mention that what will be the value term growth? And also it is 20%, 22% of our current top line of the business. So what will it be in the next 2, 3 years?
So what the question was you need -- sorry, could you repeat the question?
Largely, sir, the CPVC contribution, like you mentioned, is 20%, 22%. So what will be our target to take it in say next 2, 3 years of a total business?
So I don't want to -- I don't like to speculate on contribution percentage because the rest of our portfolio will continue to grow. And we are going to be growing in PVC. We're going to be aggressively growing in PVC as well. However, the growth -- the fastest-growing segment for us will continue to be CPVC as it has been over the past couple of years. And that trend will continue, but I don't want to put a number on the contribution because PVC, we are equally aggressive, and that's where our brand has inherent, more advantage. So CPVC contribution will continue to increase but hard to quantify.
Thank you, next question comes from Akhil Parekh from Centrum Broking.
My first question is on the PVC prices. We have seen price cuts in month of October as well as month of November. What makes us believe that the prices won't fall below say INR 80 per kg, which are probably the prevailing prices at this point of time?
Yes. I think the prices are closer to, I would say, INR 75 per kg currently as we speak if I'm not wrong. So that's where we are currently. And just to give you an insight, since you asked the question, already this is a very low price regime, given the feedstock prices are high and crude continues to remain high. So while there's no direct correlation to crude, the derivatives of crude, which are EDC, VCM, et cetera, continue to not correct at the same fast pace.
So today, PVC has come to this level because caustic prices -- caustic soda prices are very, very high in Europe. And caustic soda is a byproduct of PVC manufacturing. So today, PVC raw material manufacturers are able to subsidize their PVC rates with the high caustic prices that they are getting in Europe. So this is going to be a temporary phenomenon. Once caustic starts to correct, manufacturers will be forced to take production cuts, which will then start to improve the PVC prices.
However, that I still believe is secondary. What is primary is demand. End of the day, PVC is a demand supply-driven commodity. So while production cuts, that's all, we're not a subject matter expert on that, but what we can say is that at these PVC prices, demand should really improve in India, which should improve the PVC prices or at least stabilize the PVC prices going forward.
But do we see a change in the dumping from China at this point of the time because one of the key reasons for the decline has been the increased dumping of PVC from China. And there have been talks that some of the industry players are in talks with the government. Any update on that?
So I think there was some announcement. I think with any kind of these duties or antidumping investigations, it's very hard to speculate how long it would take or how much of an impact it will have, but there was some announcement. But currently, as we speak, I think there is not much dumping happening from China. It is more to do with the rest of Asia and other parts of the country. China is not relevant in today's India's PVC market.
Okay. As of now you're saying, because the commentary that we were hearing from some of the other management in a couple of quarters...
As of now.
As of now. Okay.
As of now, this has changed. So in the past, maybe for a good part of the Q1 and early Q2, yes, China did impact the Indian PVC prices. But today, as we speak, the rest of the globe, be it Europe, North America, Latin America, rest of Asia is also not having a very good global demand. So overall, there is a pressure. It's not from China specifically as we speak today.
Got it. My second and last question is on the price differential between CPVC and PVC. PVC, if my understanding is correct, should be around roughly INR 80 per kg and CPVC should be north of INR 200 per kg. So has the differential between these 2 resins have led to a switching of, from CPVC to PVC by the customers?
What is important to understand here is that we have always maintained over the past many quarters even when this gap has come down significantly is that PVC is a very versatile polymer and can be used across applications like agri, drainage, cold-water plumbing, whereas CPVC is a very niche application of only hot and cold-water plumbing. So I don't -- for any structural change to happen and cross cannibalization within polymers to happen, I think it takes a longer time for these kind of gaps to widen or narrow to impact the actual demand. So I don't foresee any significant impact of this. To some extent, it could happen from the hot and cold water plumbing to the cold-water plumbing as well in some of the metro markets, but I don't think it will be very substantial.
Next question comes from Sujit Jain from ASK Investments.
When you talk about CPVC contribution 22% to 24% in your mix, this would be value contribution, right?
Correct.
Volume would be little less than that close to about 15%, 16%?
I don't have the exact number, but 13% to 15%.
Right. And CPVC 25% Y-o-Y growth, that is in volumes?
Yes, H1 to H1.
Right. When you look at the industry growth rate pre-COVID year ending FY '19, 5-year growth, the volume growth was 6%. When we speak with various industry players, we get a sense that it could be in double digit. What gives the confidence to the industry that it would be in double digits? The period was particularly impacted, this pre-COVID the period of 5 years which I'm referring to.
Yes. No, that's a good question. And I do understand where they're coming from. So that's how I see it, right? The 5 years pre-COVID, we did see an industry growth of maybe 6%, 7%. However, the larger players maybe grew at, I think, around 9% to 11%, if I'm not wrong, a slightly higher growth rate because industry continues to consolidate. However, real estate was not doing as well, and everyone knows the kind of challenging time real estate has seen ever since maybe 2013, '14.
Going forward, over the next 5 years, I think industry will continue to consolidate and larger players will continue to outpace smaller players as the market becomes more and more brand conscious and as larger players like ourselves continue to invest heavily in the brand. However, this time, we will have the tailwind of a strong real estate. So consolidation compounded with strong real estate should lead to higher growth rate for the larger players as well as PVC prices becoming very, very low and agri continuing to grow from hereon because the past 2 seasons of agri have been very muted. So now we will see some pent-up demand and we will see some sustainable demand as well in agri. So because of these 3, 4 factors put together, I do believe a high single-digit, low double-digit growth over the next 3 years is achievable.
And like I said earlier on the call, specific to Prince, apart from all the things on the front end and on the market. On the back today, we are having the additional capacity at Jaipur and Telangana plants, and also being debt-free and a strong balance sheet, we are able to be agile with our CapEx. When we see any further uptrend in demand, we would also be able to debottleneck the Jaipur and Telangana facility. So both on manufacturing and the balance sheet side, any uptrend in demand we would be able to capture aggressively.
Should we say that industry can grow at 8% to 10% and other players 10% to 12% in volumes for medium term?
Yes, I think that is -- a lot of things have to go right for that, as I said. So it's -- I don't really like playing the number game, but I understand where you're coming from and it is likely.
Yes. And on the distribution side, our current distribution, what is the growth that you're expecting there? Manufacturing, you've explained.
Yes. So distribution today, we have more than 1,500 channel partners, and like we've consistently stated, number of distributors is not something we focus on because yield per distributor can be right from INR 50 lakh per annum to more than INR 50 crores per annum. So we will continue to aggressively expand the network. But in weak markets where we don't have a presence today, we need to fill those sort of white spaces in the distribution, there's an exercise we did around 2, 3 years ago is to identify these white spaces, it's easier said than done to fill these white spaces. But that exercise has started, that identification has started, and we have moved in the right direction. And over the next 1 to 2 years, we would like to structurally improve our reach and distribution network. And apart from distribution network also do well in the projects, the B2B market which can be a good volume driver and a brand-builder for us in the next 2 to 3 years.
And one last question on OP per ton that may not be the right metric you focus on OP percentage as you've explained. But could it get back to those rare levels of very high OP per ton or now it could normalize at around INR 20?
Yes. I think in the past, if you see the gross margin per ton or the EBITDA margin -- EBITDA per ton, it was higher in the past 2 years because of inventory gains. And we've always tried to declare whatever the inventory gain or loss is in a very transparent manner to understand what the inherent operating margin is. So obviously, any losses one time and yearly evens out in a normal year.
So if we remove that, I don't think the past couple of years, of course, the EBITDA per ton was very, very high because of those inventory gains. So that will obviously be phased out. Having said that, there are more sustainable levers for driving the margin, which has helped us in the past. One important one being product mix and faster in the building material space. Second being pricing power as the brand prints becomes stronger in the markets and in the channel. Pricing power is something that we have enjoyed over the past 2, 3 years, and we will continue to play that as and when we get the opportunity and the market supports us.
And the third and the most important for us is operating leverage. I think if we are talking about good growth and good environment for growth, I think there is -- in our industry, the more you sell, the more profitable you are because most -- so these are the more long-term and sustainable drivers for operating margin going forward. So that's more of a direction on our side.
And quickly one last question. You would have taken the inventory mark-to-market. How does this work? Do you take the entire inventory and put it to test for mark-to-market, both finished goods and raw material? So this inventory loss would include realized as well as mark-to-market? And within that mark-to-market is the entire inventory mark-to-market, including finished goods?
So Sujit, what we do is the valuation of inventory is done as per the Ind AS governance, the way it is defined that how the inventory has to be defined, we do as per the guidelines. And it defines that whatever the case may be at the cost or NRV, whichever is lower, if the NRV parameters are set out, we take as per the guidance set out in the Ind AS.
So I'm presuming that RM put to test, but maybe not the finished goods?
Correct. Correct.
So this inventory loss is both realized like-for-like as well as raw materials put to test for inventory loss calculation?
Not necessarily, Sujit, because, as I said, the finished goods is not put to test and, to some extent, if the parameters are met, means if the margins have exhausted and differences wider from the current spot price, then you have to do the NRV valuation. And the situation is not that -- the situation of the valuation has not reached to that situation. So there must be some carrying of higher inventory costs from the spot price.
No, sorry, I didn't get that right. You're saying RNS...
So what I'm trying to say -- yes, both are put to test, but raw material is something where the valuation may be slightly on the higher side because the NRV testing parameters might not fulfill the criteria, which is set out for actually evaluating at NRV.
[Operator Instructions] Next question comes from Nikhil Agarwal from VT Capital.
Sir, I wanted to understand like what percentage of your capacity is used for CPVC production?
So thank you for your question. I think we -- the production capacity is not segmental because there is a one-way fungibility. On PVC capacity, you cannot manufacture CPVC. But on CPVC capacity, you can manufacture PVC pipes as well. However, we have enough room for growth over the next 1 to 2 years. We have a formal capacity in PVC as well, where we are able to take advantage of any uptrend in demand.
Okay. Great. And sir, like in agriculture, you cannot use CPVC pipes, right? Or is it possible?
No, correct. PVC -- CPVC is only used for a niche application or hot and cold water plumbing.
Okay. And sir, the other polymers, HDPE, PPR, are these, like can these be substituted for -- hello?
Go ahead.
Yes, sir, HDPE and PPR pipes, can these be used in place of PVC or CPVC pipes in plumbing or agriculture. Is it possible or do they have other uses as a whole?
So PPR is again a niche application of hot and cold water plumbing and industrial. So there is no -- it cannot replace PVC. HDPE to some extent, can replace PVC in infrastructure projects of water supply, large pipelines. But again, at this kind of PVC price, I don't see HDPE being able to compete with PVC.
And what about CPVC? Can agri...
Look, CPVC is -- sorry, go ahead.
Yes. I mean, HDPE and PPR can they be used instead of CPVC?
No. HDPE cannot be used for hot and cold water plumbing. PPR and CPVC do have a similar application of hot and cold water plumbing as well as industrial. However, PPR is a very niche market because the jointing method of PPR is very different than CPVC. So CPVC will always be a mass -- widely used product, whereas PPR is only niche product used only in certain buckets.
Okay. Okay. Got it, sir. And sir, just one last question, if I may. Sir, you guided for a double-digit volume growth in FY '23. And if we like plug-in a 10% figure, so that basically implies 20% volume growth in H2 over H1 FY '23. So are you confident of getting to that or like...
So I think, firstly, H1 and H2 are not comparable because in our business, H2 is always a stronger part of the year. And like I said, I would -- while I understand where you're coming from, I think as a management, we don't focus on the number game, I understand numbers are important, but that's more of a result. What we need to focus on is the process of putting up capacity, expanding distribution, getting newer products and continuing to invest in the brand within such challenging times. So I see if the growth is there in the market, if we are able to generate the demand, we have the capacity, and we will aggressively capture that demand. So I think we would more focus on the how rather than the what.
Thank you, next question comes from Sandesh from Haitong Securities.
Just couple of questions from me. Sir, our debtor days in FY '20 was around 38 days, and we were targeting it to take it down to 30 days. But right now, it is whirring around 47, 48 days. So it is high because of weak demand environment. And whether -- do we still believe that our debtor days can move back to around 30 days once the demand recovers in future? And what is the channel financing amount outstanding at the end of September '22?
So I'll start with the target for debtor days and then Anand will add the channel finance amount. So in terms of debtor days as a management and for our CXOs, a top priority is to improve the receivables days. So as an organization, that is something that we acknowledge, appreciate and that is something that has to see a structural improvement. Like you said, we cannot choke the channel. It has to be a balance between being market-sensitive and having prudence as far as receivables is concerned.
So over the long term, over the next 2 to 3 years, yes, the debtor days needs to move closer to 30 to 35 days, and that is something which is achievable in the long term. As the brand becomes stronger, as the network expands, the receivables needs to reduce and will reduce over the long term.
On our outstanding of channel finance, it ranges between INR 54 crores to INR 55 crores, but you have to also see that it has -- now the channel finance portfolio has a mix of recourse on us, partial recourse on us and no recourse on us. So based on that, we have to see the holistic picture of how channel finance portfolio looks like. But from the balance outstanding perspective, it is around INR 54 crores to INR 55 crores as of now.
Okay. Anand, just one question. Sir, what is our CapEx plan for FY '23 and FY '24? And what would be a sustainable gross margin guidance for annualized basis going ahead?
So we see that only maintenance CapEx and replacement CapEx are in pipeline and some CapEx which will improve our efficiency in terms of power are being considered for FY '23. And it will be in the range of INR 100 crores to INR 120 crores kind of for a year as a whole. For FY '24, it will be too early right now to give you any numbers. But going forward, we'll guide you as and when we'll be ready to do that.
What was your second part of the question?
What would be a sustainable gross margin going ahead on an annualized basis?
So as you are aware, we, on an operating basis, operating margin, I think 12% to 15% margin is something that we have always guided on knowing that there are enough and more levers for improving the margin, be it product mix, pricing power, operating leverage and also lastly, decentralization of the manufacturing footprint, which will help us reduce freight costs in the long term since you know our industry is very freight-sensitive. So these are the 3 or 4 drivers for margins, and we will continue to work on that going forward.
Inventory gain and losses are part and parcel of this business. Of course, it's been very high inventory gain and loss in the past couple of years. But on a normal year for this industry, inventory gain or loss usually evens out on an annual basis and what counts is the more long-term drivers of margin that I've just highlighted. So hope that answers your question.
Thank you. That will be the last question for the day. Now I hand over the floor to management for closing comments.
Thank you to all the participants for joining our call today. Thank you.
Thank you, sir. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and for using Door Sabha's conference call service. You may disconnect your lines now. Thank you, and have a pleasant day.