Ladies and gentlemen, good day, and welcome to the Kansai Nerolac Q3 FY 2023 conference call hosted by ICICI Securities. As a reminder, all participant lines will be in a listen-only mode, and there'll be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi. Thank you, and over to you.
Yeah. Thanks, Mike. On behalf of ICICI Securities, we welcome you all to Q3 FY 2023 results conference call of Kansai Nerolac Paints. We have with us senior management represented by Mr. Anuj Jain, Managing Director, Mr. Prashant Pai, Director Finance, and Mr. Jason Gonsalves, Director Corporate Planning, IT and Materials. Before I hand over the call to the management, we remain enthused by the strong recovery in auto sector and the related paint recovery also. We believe that segment is likely to grow very well in coming quarters. Now, I hand over the call to the management and then we will open the floor for question and answer session. Thanks, and over to you, sir.
Thank you, Aniruddha. Good morning all of you. Namaskar. First of all, let me wish you and your families a happy New Year. Thanks for joining this call of Kansai Nerolac for quarter three of financial year 2022, 2023. For this quarter, as you must have seen, we recorded a top line growth of 1.4% over the same quarter of the last year. EBITDA de-growth of 10.2%. Last year, you know, other operating income included some non-recurring income. If you exclude that, the net revenue is up by 4%. EBITDA is up by 14%. PAT is up by 13.5%.
If you look at the nine month period, the growth is 20.7% over the corresponding period of the previous quarter. EBITDA growth is around 13.7%. During third quarter, the growth is led by automotive. Within automotive also the growth was higher from passenger vehicle and commercial vehicles. The two-wheeler growth remained muted.
Decorative, the growth is slightly negative. Raw material prices, though softening, still being carefully monitored given the volatility in crude and Forex coupled with geopolitical changes. Pricing in decorative so far is 3% YTD level. In fact, it was taken earlier itself in quarter one and quarter two. We have taken some additional price increase in industrial and overall price increase in industrial is in the range of 8%-9%.
If you look at gross margin in comparison to quarter two, they've improved by 170 basis points. Mainly it is on account of, one, the product mix, where in fact, one of the initiative what we have taken is, shifting towards premium in all our businesses, especially in the non-auto, industrial and the decorative. It is partly on account of product mix and the price increase of industrial, partly on account of that, and partly on account of, raw material prices. We are still carrying high price inventory because in industrial, the supply chain challenges are still continuing. The geopolitical situations are still not stabilized. You know, one of our strength area competitive edge is the service, and therefore, to continue with that kind of service level, we are still keeping a high price inventory.
Therefore, the effect of raw material prices, even in the coming quarter, will come gradually. Just to give you some colors related to our industrial business. In auto, as I said that, we have got the price increase and almost all key customers we have been able to conclude the price increase. We continue our path of extending technologically superior product. Some examples I gave earlier also, Monocoat, Medium Solid to more customers. That path we are continuing. Some more initiatives what we have taken during the quarter is that we have started seam sealer and underbody sealant. It's a new market. Basically our attempt is to increase the TAM in the automotive business.
It's additional market which, you know, that which we are entering and the technology in-house, and we already got approval from the leading automaker. The faster coating we were exploring earlier, the commercial supply of faster coating just started. Alloy wheel, again, a new technology, the new products, and we have started making ingots into key manufacturers.
There are some new additional business areas which we are also exploring, and as I said that our attempt is basically to increase the TAM in auto business. Coming to non-auto, which is performance coatings business. As we have said earlier also, our focus is towards high technology products, the premiumization. Basically related to that, some of the business which is a very low profit business, we have been exiting.
The salience, you know, in the premium item is going up quarter on quarter basis. For this premiumization, we are actively working to get approvals across key infrastructure segments. You know, because the market is expecting, we are also expecting a good growth in the infrastructure. Even in the recent budget, a lot of focus is there from the government side on the infrastructure.
We are bullish on the infrastructure segment, and therefore we are aggressively working in terms of getting the approvals, and number of approvals have increased even in the last quarter. Some example of these approvals are like Bullet Train, Vande Bharat, Mumbai Coastal project, and in construction chemical, construction equipment and air conditioner segment also we got some of the new names.
In coil coatings, where we started the business three, four years back, but we were there in the basic product category, now we are ready with the higher margin technology products and started getting into the appliance segment. We also got some approval from the appliances, and here also our premium segment contribution has gone up significantly. Some of the basic categories where the profitability was very low, that we have exited. This is in the industrial area. Coming to the decorative, if you can recall that, you know, in the last meeting we said that what has happened in the third quarter, we had a visibility of that because last year Diwali was in the month of November. This time Diwali was early.
Generally, we have seen the last two, three years, the rains get extended, monsoon get extended. Also because last year in this quarter there was a very heavy price increase, probably we have never seen in the past such kind of price increase. Therefore, typically in this situation, dealers go for a higher stocking, therefore we did not expect a growth in decorative. You know, we continue on our strategy. One was Paint+, which I spoke in last two, three quarters also. In the Paint+, our idea was to basically come up with the differentiated product or democratize the product. So in the key categories, you know, like waterproofing, wood paints, whatever products we had, a part of pipeline, most of these products are now launched in the market.
To that extent our Paint+ range, what we had visualized, you know, that is completed. In fact, in the last quarter we introduced one more product, which is Everlast 12, which is basically a self-cleaning paint. After every rain, you know that the paint looks good, more beautiful. We also started the next generation range of products. This is basically for, you know, selective network. This range has a better whites. The white is non-yellowing, and in terms of quality is far, far better, and these products also have a better coverage. By and large, our Paint+ range is in place now. As I said, this is a part of our strategy to differentiate and democratize the product offering in the market.
We have got a good response to quality, proposition and pricing, and salience has gone up. We are now in a position to ramp up our distribution and salience of these products. The next part, which we have been working for past for last few quarters, was in the area of influencer, because the role of influencer is very, very important in paints. These influencers include painter, contractors, architect and interior decorators. Our strategy is to focus on key painters and architects and interior decorators and demonstrate advantage of Paint+ products to them. The infrastructure in terms of feet on street and call center progressed and will be completely in place by, say, next quarter. The number of connected and active users are going up gradually when we look at all these influencers.
Our digital adoption is progressing well, and number of downloads have also increased, substantially. Our reach to influencer, which used to be there in the past through the distribution, has become direct now. We have started sharing, generating business leads and sharing business with these influencers. The next part of our plan is the distribution, where the first part what we are looking at is the same-store growth. Focus is basically to increase the counter share and the initiative related to that NextGen Shoppe, which earlier I spoke about, that is getting stabilized now. Now we have already crossed more than 50 and now we are looking at more numbers in the going forward.
The NxtGen service counters, you know, as I spoke about that we started the NxtGen service and therefore this, you know, related to this service, we are attaching it with the counter, so that, you know, they can supply and service the demand. The exclusive range of product for the distribution and some customized activities. As of now, the distribution expansion is in double digit. This is only a direct reach. Indirect is different. As of now, we don't track the indirect reach. We have now started tracking secondary to primary conversion of sale. In the last quarter, in fact, more than 40% now we are in a position to track that whatever material we are billing to the market, how much is getting converted to a secondary sale.
Going forward, it will help us in terms of ensuring that how we keep increasing and therefore how do we get the advantage in primary sale also. We have also initiated actions. Not initiated, actually it is already actioned, for faster replenishment of stocks in the market and last mile delivery. Because in last one year, two years, the number of SKUs have grown in decorative market, and while many of our dealers still have the same kind of warehouse facility, therefore the service is becoming very important. We have introduced some premium services to ensure that, you know, the requirement is taken care of. You know that our market share is single digit and, you know, that also gives us the opportunity. There are certain weak towns.
You know, as a company, we have a good market share in tier two, tier three, tier four, but tier one towns, you know, that we are not so strong. Because when you are not strong, then obviously the distribution support also is weaker. In these weaker towns, you know, that we started working with the strategy of Project, the services and wood finishes. You know, because in all these businesses you can get access directly to the influencers and the consumers, so basically the users. Project is one area where we have expanded. Earlier we were there in 33 towns. Now we expanded our reach to 48 towns, and accordingly we expanded the team.
The pipeline of warm sites is being built gradually. Within the project, you know, because the margins are lower than the retail, but we are focusing on the quality of business, so that, you know, the margins are also not affected. Next-gen services with the proposition of five-day dust free, which is a differentiated proposition if we compare with the industry. This is now expanded to 100 towns which are greater than 5 lakh population. Till last quarter we expanded to 50, now we expanded to 100. Consumer acceptance of timed service is on rise. That is, you know, the learning what we are getting from the market. Digital campaign to generate these kind of leads, you know, has given us a good advantage.
As of now, 27,000 sites we have serviced. Basically with this, these initiatives now we are able to understand this business pretty well, and service team and structure accordingly we have expanded and which is also getting supported with architect and interior decorators contact program. The third part of this week town is a wood finish applicator. Again, it is a user-based business. Project NxtGen service and wood finish applicator where we can reach out directly to the user is our plan to increase our business in the weaker towns. In waterproofing and wood, salience is now close to around 77%, and they are started doing well. Quarter-on-quarter, we are seeing the progress in these businesses.
For brand related, as we have been seeing in the past, our share of voice, you know, we are maintaining at 15%. We have also started our communication in the regional markets. Digital ecosystem to ensure complete information available and seamless coordination across stakeholder is progressing as per our plan. Our digital performance marketing drive also we have increased and more than doubled our organic reach via social media. Some of these points related to decorative, which we have started, in this particular year, and we have been piloting and we have been testing. We have finished that stage of testing and piloting, and our understanding is complete. Now onward, we go for the scale up on some of these activities.
Few other updates, related to this, you know, as a part of our IT backup, the far DR implementation is complete. We have been working on the capability building for the people and online program is gaining traction, and we are imparting lot of training to our team so that skill enhancement can happen. We have started conducting management development centers for our key managers. We have done some strategic workshops for top people, you know, top managers with some of the innovative sessions and coming with the ideas, you know, that can answer some of the problems related to the customer, and we can come up with a better product and the better processes to, you know, give better solution to the customer. Our capacity utilization is around 60%.
YTD level, it is more than 60%. Capacity addition, in fact, I think last quarter we have announced the expansion, which is in the mainly the water-based decorative because the growth market is water-based. In terms of water-based, the capacity expansion what we announced is about 42% of the water-based. For the industrial, we have a sufficient capacity.
Whatever, this growth market is seeing, we are in a position to cater the demand of the market. So these are some of the other points, you know, related to thing. Obviously, as we said earlier, we have also issued the RSUs to senior and middle management employees. This is the brief from my side on the result and some of the points where we have been working upon, and we'll be happy to take the questions now.
Thank you. We will now begin the question answer session. Participants who wish to ask a question may press star and one on your touchtone telephone. Participants who wish to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. We have the first question asked from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, sir.
Hi.
Thank you very much for the opportunity. I wanted to kind of just understand this, you know, on the decorative side more from a near-term lens. While the initiative's, you know, very clear and, I'm hoping kind of, hope it kind of works the way you are looking for, you know, there are signs of weakness in urban discretionary. Does that not concern you from a near-term sense on the demand trades in the decorative side? Would love to hear your thoughts on that side.
We, the trend does not indicate that, you know, because, if we see quarter on quarter basis Q1, Q2, Q3, the urban growth has been, you know, it has been doing well. I think the stress was there in the rural, but we have seen improvement, you know, on every quarter basis. If that trend continues probably from the next quarter, we may see some uptick from the rural demand also. As of now, there's no indication like that. In the coming quarter near term, we are seeing a better demand.
You mean near-term as in January, is what you mean by that, sir?
Yeah. I mean, one or two quarters, yeah.
Okay. Okay, sir. Sir, the second bit was essentially on the margin side. You know, if you could give us a sense what, you know, it seems like margins have bottomed out. If you could kind of comment on that, whether that is the understanding is correct, and what levels do you see in the steady state over here?
It's like, you know, as I said that, this quarter the margin expansion, gross margin expansion was around 160, 170 basis points, which is based on the product mix, the price increase in industrial and also the declining trend in the raw material prices. We hope that this declining trend in the raw material prices, though we remain little cautious, you know, because geopolitical situation or what is happening in China, you know, we like to wait and watch. Largely the possibility is that this trend may continue and some advantage of price increase what we have taken also would come, you know, in the coming quarters.
The only thing what we have to keep in mind is that, generally in the fourth quarter our business mix is very different. It goes quite in favor of industrial business and therefore because of the change in the business mix, you know, because the profitability is lower in the industrial business, we see some impact of that. Otherwise, you know that at the segment level, if you see, I think, the margins will improve based on the factors what we spoke about.
Sir, this should flow through to EBITDA also, right? Logically. barring, as you rightly said, there is a fourth quarter impact because of mix, but otherwise the trend is towards on a segmental level, EBITDA margin improving from here on.
Yes. Usually the gross margin improvement reflects in the EBITDA. The only thing is that, you know, that we are making some investment in the marketing on the people front. To that extent, there may be some difference.
Sir, steady state, what would you expect the EBITDA margin trajectory or levels to be? sir, when do you expect the steady state?
See, as Anuj has mentioned, the raw materials are showing a declining trend, so maybe another one or two quarters it will. Because we have a high-cost inventory in place, so that has to get liquid. Hopefully, in the Q1 of next year, definitely this will be liquidated. Post that, I think we should get the margin improvement also. Minimum, one or two quarters has to happen before we, you know, liquidate all the inventory and the new inventory starts flowing in.
Okay. Perfect, sir. Any level, sir, that you would want to indicate or no, sir? nothing that you have.
Very difficult to make a, you know, give a statement on that because the way competition is also moving, we have to react to competition also. Accordingly, we'll wait and see how the margins change in the coming two quarters and accordingly we'll, you know, we can comment after that.
Perfect, sir. Just one last, if I may. You know, you recently did a sale of land which kind of has resulted almost INR 600 crores kind of flow through. Could you give us any idea of what is the thought on this cash that is generated? That's all from my side. Thank you.
We are just looking at, you know, supporting the growth initiatives in the company.
Okay, sir. That's all from my side. Thank you very much.
Thank you. We have the next question on the line of Archana Menon from Morgan Stanley. Please go ahead.
Hi. Thank you so much for the opportunity.
Hi.
My first question is on the decorative segment, following up from the earlier participant's question. Now, with all the initiatives on improving the market share, should we think of your decorative segment growth in line with the industry growth for FY 2024, given that most of your peers are talking about a double-digit volume growth? Is that what you would be also expecting?
Internally, yes, you know, that is what we are working upon. Just to put some color on that. Today, you know, that making a comparison is not absolutely fair, you know, because so many segments people have entered in the paint industry. It's not that everyone is there in every segment. To that extent, the comparison has become, you know, difficult, you know.
Because we generally look at, you know, where exactly we are working, which segment, which markets we are working. Having said that, yes, from whichever market we are working in, how do we increase the growth from there? You know, that is what our endeavor is. Definitely we feel confident that going forward we'll be doing better in decorative.
Okay. Got it. Sir, on the industrial side, the comment that you made about exiting a few non-profitable businesses, where do you think you are in that journey? Is most of it done or is, should we be expecting that to continue for the next six months?
Most of it is already done. In fact, this we started from Q1. By and large, you know that we are through with that.
Okay. Going ahead, we expect a growth on the current run rate. All the growth initiatives-
Yeah. In fact, this initiative will be through. Going forward in the coming years, you know, we'll see it better.
Okay. Sir, my last question on the margin bit. you know, what do you think is the differential right now between the industrial and the decorative business? As industrial keeps picking up, how much could that gap really narrow to?
Well, generally we don't give that breakup, you know, but industrial margins have been very, very low. It was a very single digit, you know, low. I think as a part of our plan, we made progress on that with the price increase and high technology products. Our idea is that, you know, how do we reach out to maybe a double digit?
We are still a little far from that, but how do we reach out to that? To that extent, we are working on this new technology or, you know, the optimization of the formulations and some other initiatives. Otherwise the difference in this industry will always remain. Even in the non-auto, as we said, that we are looking at the premiumization. Margins will definitely improve, but it will still not be closer to decorative.
Okay. last quarter, you had mentioned a difference of around 500 basis points. would that be similar even for this quarter?
I don't know whether we have mentioned anything on this particular part, but it could be a little more than that. The gap has bridged because in industrial, because of the price increase, we have made some progress. At one point of time, when we started the year, the gap was huge. In fact, you know, the margins are very, very low, single digit low. Obviously they are making progress quarter-on-quarter basis.
Okay. Thank you so much. That's all from my side.
Thank you.
Thank you. We have the next question on the line of Tejas Shah from Spark Capital. Please go ahead.
Hi, sir. Thanks for the opportunity, sir. Couple of questions from my side. Sir, looking at the initiatives that you spoke about on the various aspects of the business, on the intervention that we have made, be it product pricing, influencers, and also distribution, should we assume that going forward we'll be disproportionately focusing more on non-rural market versus rural?
You're saying focusing on non-rural versus rural, right?
Yeah, yeah.
No, it is not like that. Basically, you know that as I said, that we are strong in-- Relatively, we are stronger in tier two, tier three, tier four, which include rural. That's the market, you know, that we are, we have a relatively a better share. Our efforts there will continue in terms of some of the initiatives which I spoke about. You know, there are certain market where our market share is very low. Like this one question keep coming when the new entrants are coming in the market. Actually, for those market, we are also like a new entrant.
The only thing is that when you are weaker in certain towns, maybe the traditional conventional approach of getting the distribution does not work. That's why we are working differently there, that how do we reach out directly to the users. The initiative in terms of growth would continue for the rural and non-rural both.
Sure. Sir, in terms of under-indexation for asking market share, would you like to share some insights on any regional initiatives, let's say, where you are highly under indexed and you are working to correct the same as well parallelly?
We are like, you know, our strong markets are north, followed by east, and south and west, these are like weaker markets for us, especially south, which is, you know, very large market in our country. There we are under indexed, and there we would like to improve our situation.
Yeah, sure. Sir, you spoke about softening RMM environment going ahead. Looking at the competition, current competitive environment and what will emerge here by next year, would you be able and I'm asking it for industry level also, if you can have, share some insight there as well? Do you think that industry will be able to retain some of the price hikes that we have taken or it will get reinvested, be it in form of better consumption consumer promotion or influencer promotion or even dealer trade promotion as well? Just if you can share whether we have that kind of pricing power?
From an industry point of view, because the margins are still not back to what it used to be and, you know, margins have, you know that it's coming down. I think, you know, this kind of situation will continue and, you know, the industry would be able to sustain the pricing. As I said that when the prices were increased, there was a doubt in the mind that how much impact we'll see in the demand. If you see last one year also, maybe there has been a kind of inconsistency in terms of quarter to quarter. For the YTD level, I think the growth has been maintained. To that extent, we believe that, you know, the industry should be able to sustain, you know, the current pricing levels.
This industry, even in the past, if you see, if we are able to see that we are going back to the original margin level what companies, the industry would like to operate upon, then obviously the industry has taken the initiative in the past to pass on that pricing benefit to the consumer, provided we feel that it will give a flip to the growth. Whatever growth is being expected, if the growth is going to be higher on that, then the industry may decide at the appropriate time. At least for next, you know, the few quarters, what visibility we have, I don't see that possibility.
Sure. Sir, versus just to follow up on that, versus past cycle, this time there is one more element to consider is changing competitive landscape. Now that only time will tell how serious that turns out to be. Looking at how competition is expected to turn out or the competitive intensity is expected to pick up, do you think that industry will attempt to retain the benefit hypothetically assuming that raw material corrects materially from here? Do you think that you'll prefer to pass it on to retain or gain market share for future?
It's difficult to answer this question because as of now, we don't know that what kind of approach this new competition will come in. Hypothetically, if you say that they will give more discount, whether it is sustainable, you know. I'm sure that all of you would question them also that, you know, that, you know, we have seen that this is like a industry where a lot of people have tried in the past. Whatever success is, we have seen that if somebody is trying to get to the mass scale, that come with a very deep pocket. Whether it is sustainable, that's a big question mark. Whether they will take that approach.
Because any player who comes into this market and they want to be a strong player in the longer run, would have to work more in terms of establishing the network, the influencer, the marketing, rather of, you know, playing the discounting game. It all depends on the competition. It's difficult to read that whether somebody will take a discounting game. We probably see more in the area of building the brand, which will take, you know, a period, you know, some good amount of period. If that happens, then it may not be much, you know, threat to the industry.
That's all from my side, sir, all the best.
Thank you.
Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question on the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. I have a couple of questions.
Amnish, sorry to interrupt you, but would you kindly go off the speaker phone, as your audio is not very loud and clear.
Yeah. Is it fine now?
It's much better. Come closer to the microphone, however.
Yeah, yeah. Okay. My first question is, I don't know if I have missed it. What has been your volume and price realization in decorative and industrial in 3Q?
We didn't talk about the volume, but as we said that the growth, if we exclude that non-recurring, it is about 4.1%. Auto growth is good and decorative, you know, growth is slightly negative. There is a difference, you know, that volume growth is, there's a difference of 3%-4% within decorative volume and value.
Okay. It means your decorative realizations are up by 4%.
Sorry, what did you say?
Does it mean that decorative realizations were higher by 3%-4%?
Yeah. The realization is higher than the volume growth. Yes, yes.
Okay.
That is basically on account of product mix and one of the area which we have discussed earlier also, Putty is a degrowing category.
Yeah, yeah. Okay. Looking at the fact that now the raw material prices have more or less softened, if we look at, say, slightly longer term, say 4Q and beyond into that, say into the FY 2024, will we be having positive realizations in decorative paints?
Yes. Yes. The trend what we are looking at and, also some of the initiative what we spoke about, yes. The only thing you have to keep in mind is going forward, as we have been very selective in terms of Putty, you know, because of the margin situation and all those things, and it's a commodity product. At some point of time, if the comfort level comes in, because today what we are trying to do in the Putty is just trying to hold our existing dealers, you know, because, the customers. Some point of time, if that leverage is given, we may try to utilize it.
Okay. My second question is that, for example, in this quarter, if you look at, say, all the decorative players, the numbers have not been that great, and we have been taking several initiatives. If you look at, say, past 12- months kind of a scenario, so what could be our market share and have we gained or lost market share in the decorative segment?
I just spoke about it. Obviously we have not gained market share. You know, today what is happening is that there are so many segments. Paint is not a paint. Earlier also I spoke about Putty, project business, new businesses. You know, becomes very difficult to comment upon, you know, because the different players have entered into different kind of categories. It is not a simple comparison. Having said that, you know, you are seeing the result. Our growth is still, overall basis still lagging the market growth. I think if we see the trend, I think it's being bridged.
Okay. Okay. Sir, my final question is that now we have done this land sale for our land in Thane, what could be the taxation impact in that?
It is a long-term capital gains tax, you know, which is 20.2%. That's the only thing which will be there. Because the book value is less, very marginal. That would be a capital gains.
Okay. Sir, any plans to, you can say, sell our land in Lower Parel where our office is? What could be the area of that land?
No plan as of now.
Okay. Area of that land parcel, if you can share?
It's about, around 4 acres. Around 4 acres.
Four acres. Okay, sir. Thanks a lot.
Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question on the line of Percy Panthaki from IIFL. Please go ahead.
Hi sir. This is a follow-up from one of your earlier answers, where you said that in some of the towns you yourself are a new entrant and the traditional ways of sort of penetrating those markets is difficult and you're trying out newer ways of going in there. Can you elaborate a little bit on that point?
What I said is that our market share is actually weak in Tier One towns. Obviously in the weaker towns today, when you go and you want to build your position from the existing distribution, it becomes difficult because the responsibility rate is not so strong. Ultimately it is because our brand is strong. One of the question which one of the person was asking related to a new competition also, I think this market has time and time again shown that people are reluctant to shift from the strong brands. That's why, you know, that strength we also have. If we go out directly to the users, the users are ready to accept. If you remain completely dependent on the current distribution system, then in the weaker towns you may not get the response.
Few things with what I spoke about is like project business. Because the project is an emerging business, the growth rate is higher than the retail growth in those Tier 1 towns. The second is the service part, you know, where through the digital performance marketing you can reach out directly to the consumer and generate the business and route it through your applicators.
The third part is the wood finishes, where we have entered in the premium category with the Eco brand. There also we have a quite a good premium range of products, and that is also user-based. Basically the change in the approach is that the route to market approach is going directly to the user, kind of create a direct demand and then service that demand. These are some of the things, and maybe few more things we are going to explore in the future.
This servicing of the demand will be done through a traditional model only or is there some other innovative model that you're looking at?
We are exploring some model which I'll not like to talk at this stage. What happens is that it's not that we have a zero distribution in this town, we have a limited distribution. You know, when you create the business demand, you can route that business through your limited distribution also. Basically the same store growth goes up. This is what we are trying to do. When you start getting good response in the market, then you have a possibility or opportunity to increase your distribution also.
Okay. This, targeting the end users directly, that is only through digital or are you looking at some other ways also of doing that?
It's more of a Phygital. We have placed a large number of team in the marketplace, so it's a Phygital.
How do you reach out to end consumer directly? Do you like, do door-to-door marketing or what do you do exactly?
No, it is not door-to-door marketing. Basically what happens is that one is through the digital marketing you generate the lead. The other is that you get the references from your distribution or from the influencers who have become a part of our palette. You get the references from there, and there you reach out to the consumers. It's not door-to-door, but based on the references you reach out to the consumers.
Understood. Yeah. That's all from me. Thanks and all the best.
Thank you.
Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next from the line of S. Bachawat from LIC Asset Management. Please go ahead.
Hi, sir. Thanks for the opportunity.
Thanks.
My question is relating to the.
Bachawat, if you'll come closer to the microphone. Your voice is a bit low on the call.
Hello. Is it clear now?
Yes, it's much better. Thank you.
Yeah. My question is, relating to the allocations for, railways in this budget was very impressive. What will be the implications of that on our business, if any?
It's a part of our performance coating business. There the infrastructure and the part of the infrastructure is also railways. Typically in India, the railways market, earlier the coating what they were using was very low quality of coatings. Now, with this new project coming, like Vande Bharat, the Bullet, the coatings are also being used are very durable and high performance coating. We definitely see the good impact of that going forward.
Is it possible to quantify in any way?
No, difficult to quantify, but I can only say like performance coating business size is as good as probably auto business. In the automotive, what happened is it's cyclic. In the, you know, probably this infrastructure or performance coating business, maybe the country will be able to see a more consistent growth.
Sure. Thank you.
Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. Participants who wish to ask a question may press star and one on your touchtone telephone.
Yeah. Hi, sir. Aniruddha here. I have a couple of questions. One, can you indicate the performance of the waterproofing and the allied businesses, how it is shaping up? When they are going to do the distribution expansion, whether the only paints will be initially distributed or the entire bouquet of products will be distributed at one go? That is question number one. Secondly, how is the performance of the international subsidiaries? How do you see the performance for these companies also shaping up in FY 2024? Yeah. Thanks.
Yeah. Aniruddha, in waterproofing has now become an integral part of paint, so it goes together. Within the waterproofing also there are many segments. If I just talk about the waterproofing segment, which is like a liquid paint, a liquid product that goes hand in hand with the paint product. There are some other, you know, businesses like admixture, the sealants, where the market is little different. Therefore, to handle that, we are placing the different infrastructures or different teams. Otherwise mostly contribution comes from the waterproofing, and that goes hand in hand. Our range for the retail is complete. In fact, now we have introduced some product in the project business also, and we have been able to stabilize and we are getting a good growth from waterproofing.
Also the wood finishes, you know, the things have been stabilized and we are getting a good traction from wood finish also. Coming to the international, in Sri Lanka, despite, you know, the country had a problem, but we feel that, you know, maybe in the coming quarters it may get stabilized. But as of now, actually, we have been able to increase our market share in Sri Lanka. In Bangladesh, the growth has been decent, double-digit growth. Only Nepal last quarter, there was a significant substantial degrowth because of some kind of instability. As we see now, probably things are getting stabilized, and we don't see that this kind of negative growth which has happened in third quarter, it will continue.
Okay. Thank you, sir. Thank you. This is helpful.
Thank you. We have the next question on the line of Keyur from ICICI Prudential Life Insurance. Please go ahead.
Thank you. Sir, just want to understand on the industrial side, you mentioned that passenger vehicles and commercial vehicles did well versus two-wheelers. I think, in this kind of business, we have some kind of visibility from the clients. If you can throw some light on how the visibility has been given from the client for next one or two quarters or whichever way the cycle works. If you can just throw some light on the near-term visibility on automobile, as well as industrial, other industrial paints. Thank you.
Whatever we keep hearing, through the media or from the clients, they are optimistic as of now for the coming quarters, in terms of automotive. The challenge in fact, you know, in between they felt that this chip shortages are able to control, but of late again, there are certain problems and therefore they still have a backlog. For the coming quarter, I think they remain optimistic in terms of good growth in the passenger vehicles and commercial vehicles and also in the tractor segment. The two-wheeler segment, which has not been doing so well, what we are hearing is, kind of, some optimism. Not necessarily that it will come in the next quarter, but in the coming quarters, I think, it is also expected to do better.
Also with this, current budget, I think the focus of the government, what we have seen on the CapEx and consumption both and the, some of the rural initiatives. Once that momentum picks up, you know, they feel that the growth is going to be better in the coming quarters or the, you know, coming year. That is what we are hearing. For this, non-auto business, infrastructure business, is the going is good. There also there is optimism in the air, that the business will be doing well in the coming quarters. Thank you. I'll get back in with you.
All the best.
Thank you.
Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question from the line of Archana Menon from Morgan Stanley. Please go ahead.
Thank you, sir, for the follow-up. Two questions. Firstly, on the deco side, you mentioned increasing share within your existing paint counters. What are the measures that you are doing there, and is there a need to increase the dealer commission to drive that growth? The second question is, what is your current employee attrition rate and how does it compare versus the past?
Same-store growth, as I mentioned, you know that it's not only discount because ultimately what is important is the margin. One initiative is the NxtGen shopping, which is like you can say touch and feel experience center what we are creating at the shop. So far already we have crossed more than 40, 50 numbers. The service business what we have started. We are creating a NxtGen service counters where, you know, all this lead business what you are generating can be passed on to this counter. The business sharing or the business lead is more important because when you give the business, automatically the profitability goes up. Also, there is a range of product which are exclusively meant for these people.
When you have a large distribution in the market, you know, sometimes there's a competition and therefore the margins get affected. That's another thing. Also depending on market, you know, because every market has become very different, there are certain, you know, customized activities, what we are looking at. This is the initiative related to a same-store growth. Attrition level is in the range of 15%-20%. We don't have any figure of the other industry players at what is the attrition level. Obviously last one or two years we have seen little uptick in the attrition level. Some of the internal initiatives we have taken and, you know, we are trying to see that we keep it at the reasonable level.
Got it. Thank you.
Thank you.
Thank you. We have the next question on the line of Hitesh Taunk from ICICI Direct. Please go ahead.
Thanks for the opportunity. My question is about our CapEx plan. You said about our water-based capacity you are going to spend 42%. Can you please highlight what is our current capacity, overall capacity? What is the CapEx plan for FY 2024?
Our capacity is approximately 50,000 KL per month. That's the capacity. CapEx, in fact, INR 290 crore is what we announced earlier, which will be spent over a period of next nine to 10 quarters.
Great. Okay. Sir, my next question is on a distribution point of view. What are our current distribution networks, total count and how much distributions are, you know, covered under covered for the with the tinting machine and how much growth are we planning for the next one year, please?
Distribution, generally we speak it by, you know, year end, but approximately in the range of 28,000-30,000. 80% is covered through the machine penetration. Going forward obviously we are looking at increasing our pace of, you know, expanding the distribution.
Okay, sir. That's all from my side. Thank you.
Thank you.
Thank you. We have the next question on the line of Harsh Shah from InCred Capital. Please go ahead.
Yeah. Hi. Sir, just wanted to understand more on the decorative gross margin bit. One, at one time we're talking about not focusing more on the low margin products like putties and then we are also talking about increasing our focus on projects which I would assume that would be a low margin business, right? Can, how do we look at the gross margin bit going ahead for our deco business?
Project business, see if you look at some of the tier one towns, in some markets it contribute 20%, 30%, 40% also. To that an extent it cannot be avoided. Second is, as I mentioned, that we are focusing on the quality. What happens is there are two approaches in a project. You can sell any product and therefore whatever product your price is low, you can sell it. There is a basket approach that you are selling a range of the products. One product your margin could be lower, the other product your margin could be higher. We are looking at a different approach. Just to comment on the margins of the project also, maybe at the gross margin level the margins could be lower.
The project sale, if we convert it to the EBITDA level, then the difference would not be that much, you know. In the retail you'll have to do a lot of activities, a lot of promotion, which is not required in the project business. Within the project also, in fact our focus is in the premium product category. That quality of focus we are, you know, keeping in mind so that it does not affect the margin. Related to Putty, it's more a commodity and competitive game where you cannot completely leave it also. When we say we are not focusing much, our idea is that we are not focusing on the growth of that. We still have to sustain and maintain our existing dealer. That is what we are trying to do.
If the prices goes down and it becomes little more, because the industry has accepted now that the Putty is going to continue, will continue to remain the low profit thing. If you get some advantage in terms of pricing, then you may like to pass it on to the market and see that if that can improve your growth by some points.
Okay. Okay. Secondly, sir, just to clarify, we said that our decorative volume declined marginally this quarter and we had a 3%-4% mix benefit, right?
value growth is slightly negative, and between value to volume there's a difference of 3%-4%.
Okay. In that case even our industrial growth would be in mid-single digits.
In auto it would be higher. As I said, in auto it was driven by passenger vehicle and not the two-wheeler. The two-wheeler growth was low. Auto passenger vehicle growth was high. In the performance coating business, again the growth was muted.
Oh, okay. Got it. Thank Thank you so much.
Thank you.
Thank you. As we have no further questions, I would now like to hand it over to the management for closing comments.
Thank you all for all of your questions, and I hope we are able to answer, you know, the questions. Wish you all once again the very happy New Year, and let's hope that this year does far better than for last year for each one of you. Thank you so much for attending this call and we'll catch up with you in the next quarter. Thank you.
Thank you very much. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.