Hey, welcome to Kansai Nerolac Paints Limited Q2 FY 2023 earnings conference call hosted by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you and over to you, sir.
Yeah, thanks, Seema. On behalf of ICICI Securities, we welcome you all to Q2 FY23 results conference call of Kansai Nerolac Paints Limited. 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 & Materials. Now, I hand over the call to the management for their initial comments, as well as the quarterly performance. Then we will open the floor for question and answer session. Thanks, and over to you, sir.
Thank you, Anirudh. Thanks. Good morning. Namaskar to everyone, and wish you all a very happy Diwali and prosperous New Year, Samvat 2079. Thanks for joining this call of Kansai Nerolac for quarter two of 2022/23. During second quarter, we recorded top line growth of 19.3% and EBITDA, the growth was 19.8%. The top line growth is led by passenger vehicle. Decorative growth is double-digit in terms of value and volume is flat. Raw material prices are gradually cooling off, but at YTD level still the inflation continues and it is about 7%-8% inflation is there. So far, we have taken approximately 3% price increase. Giving you some highlights of industrial, we continue to increase our market share in automotive.
One of the strategies we're working upon is how do we increase or better our margins in automotive. Those initiatives to increase the margin continued. One part is the price increase, which we have taken around 3% price increase on weighted basis in industrial. Some of the customers we have been able to conclude, some customers still the discussion continue. Some other initiative in terms of margin, you know, improvement, which could be some are short-term, medium-term, and also long-term, is the introduction of new technology products in the market. We have been introducing PGM-Free and Low Bake. Obviously, these are some new technology which, you know, the approvals are required from the customers.
In some of the cases, the customers have to make certain changes in their lines, but it has a potential to upgrade the business from the existing systems to these new systems. This is what we are trying to expand. We have also developed one new product and which is successfully, you know, that, introduced also in the market. The government is taking the initiative of blending the petrol with ethanol. As of now, it is the mix of 15%, but the potential is to go to 30% ethanol also. Especially in two-wheelers, you know that if the percentage of ethanol goes up, then the existing coatings, you know, will not be able to take that. We have developed a product which can take the blending of this petrol with ethanol.
That product we are ready with, and whenever the ethanol blending goes up, you know, we are ready to shift to these products. Some of the other initiatives what we have taken in this area, growth initiative is, related to some new markets. One is this decal market, which is on the two-wheeler. The decal generally there is a clear which is used. We were not there in that market. We have developed a good technology product, and, now we'll be able to service the decal market. The other new area in automotive is the PVC sealer and underbody. This is basically goes under the car body. That's also a good size market where we were not there. We have introduced product in that market also.
We are also getting into alloy wheels market, for that also the technology and the products are ready. We have also made some entry in the high-end anti-corrosive coatings for auto fasteners, so zinc-based coatings. This is also a new market for us. These are three to four new areas which in auto we are, you know, expanding. In performance coating, which is a non-auto industrial part, as we discussed last time, that here again the focus is basically to increase the mix, the premium business and, partly we are exiting the business which is very low profitable or, you know, the traditional products where we are not able to get the margin. Some percentage of business we have exited, which we spoke last quarter. Obviously the sales we are increasing of the premium.
Even at H1 level, sales of premium is, you know, that has increased by more than 1% in performance coating. Performance coating business is also dependent on a lot of approvals. For this premium, coatings, we need approvals from, say, infrastructure, the oil & gas sector. Those approvals we have been trying. We have made a list of that, you know, how many approvals we need. We are making progress. 50% of the approvals we have already got. Therefore, to some of these sectors, you know, that we'll be in a position to pitch for the business. To name a few, you know, approvals like we got Mumbai-Ahmedabad bullet train approval, we got Vande Bharat Express approval. Some of the orders have also started flowing.
You know, some of the approvals we have taken in case of refinery also. These are some of the examples. In coil coating, which is again a part of non-auto business, where the margins have been very, very low in the last year, and our approach to shifting to higher margin technology and segments. Appliance segment is better placed in terms of margins, while the roof coatings are not. We have exited lot of non-profitable business and increased our sales into premium or appliance segment around 10%. Also we have got some approval from the leading appliances in the country. In powder coating also, I know we have been a market leader in powder coating, but our focus is to increase our share in premium. There also our salience has increased by about 2%.
We have got some new accounts, which are going to give us some good advantage. This is about industrial. Coming to decorative, one of the part of our decorative strategy is related to a paint plus products with feature-led additional benefits. We spoke about Beauty Gold Washable was the first product, then, Excel Mica Marble Stretch & Sheen. Last quarter, in fact, we introduced Nerolac Impressions Kashmir. These are all part of this paint plus super premium category, where we are, you know, one part of our strategy to increase our salience and share in super premium category. Impressions Kashmir, we have taken up aggressively, and we got a good response from the market. In fact, we did a fast national rollout, and we did a scale-up.
Across the country, we have been able to launch the product in last quarter. This was accepted well by our network. This one product which is, you know, that we have increased the visibility also, and we are getting a good response. In fact, to support this, these paint plus products, we also ran a consumer promotion, Har Ghadi Diwali, during the Diwali period, which is still continuing on the premium products. This was one way to, you know, enhance the interest and the preference in the brand category. We were also looking at, you know, adding more products in the premium and super premium category. You know, because our, as we discussed earlier, that our sale from premium is popular and economy is fine.
If we compare with the market, our salience in premium category, super premium category is low. What we are looking at is that how do we increase our distribution, existing distribution, who are buying my other range of product, but not buying this super premium. There we are looking at expansion of distribution. The salience has increased 50%. In fact, our growth is definitely better in super premium category. Some of the products which we expanded is in the wood finish also in the super premium, in the polyurethane category. Some other niche product we have introduced in last quarter, which is a Termi-protect Epoxy Metal Primer. Also in Soldier, we have introduced True Sheen Emulsion, which is a superior finish at a mass premium price point.
In the Soldier, in fact, we had economy range, but some of these products which we are introducing, which are a different price point and different proposition, and little premiumization in Soldier also. We have started introducing a range of product under Next Gen. This is a next generation range of products, which are basically meant for select distribution, you know, because the competition in the market is quite high. Obviously some good select dealers, retailers that people want to focus on selling a specific range of product. For them, you know, we are launching this next range, next generation range of products. In communication, we said that, you know, we will be increasing our communication through advertising and digital marketing. Our focus is on paint plus Japanese technology and jingle.
Share of voice, we said that we'll be maintaining around 15%, which we are continuing. Even in the last quarter, all our main markets, for instance, we had a share of voice of around 15%. One additional point here is that, you know, return of Ranveer Singh to our campaign. Ranveer Singh has been our brand ambassador last year. In between, we have taken a break. Ranveer Singh is back to our campaign, and we launched the Kashmir campaign with him, Impressions Kashmir, No Paint Ki Badbu. So no smell, which we felt is one of the insight from the consumer that there is a segment of customer who is sensitive to the smell of paint. So this product is highlighting that proposition. We have gone for high visibility.
For Impressions Kashmir, we have participated in Asia Cup, Indian Idol, and some of the other important, you know, programs what we have taken. The other part of our plan is related to influencer program, where we have taken some aggressive approach in terms of digitalization and the app. Obviously, the challenge is that how do we get more and more digital adoption because the entire incentive, all communication, we are shifting to the digital medium. It is important to get the higher digital adoption from the painter fraternity. App downloads have gone up by 65%-70%, you know, if we compare with the last year. Therefore, we are able to reach out to more number of painters.
In terms of our distribution, in select markets, we also have put some dedicated team to open the direct distribution and some new distribution models which we are working upon. We have added about 3,000 new retail outlets at the YTD level so far, you know, in this year. The other part is the project business. In fact, we had a presence in the select markets. There, in fact, we are increasing our presence across key towns. Within the year, we'll ensure that all the emerging towns, you know, we are available where the market potential is different. In new businesses, our salience was around 5%, which I said last time. It is increased by 1% or it is around 6%.
We are introducing gradually, not getting to every product, but settling with the existing products what we have introduced. Then with time, gradually we are introducing more number of products. For economy products, complete range we have launched. In fact, you know, whether it is emulsions or primers, a lot of products have been introduced. In the last quarter at least, we have seen cannibalization and shift towards value for money products, which, you know, to some extent is understandable because there have been almost 23%-25% increase in last two years' time. Therefore, the prices of the, you know, products have gone up.
There has been some shift towards the economy range of products. The other part was, we said, we'll be launching, we have launched the services with five days painting proposition, five days industrial painting proposition. Quarter one we piloted introduced in six cities, and in quarter two we've expanded the services to almost around 50 towns, and we'll continue to spread, you know, that in more towns in the coming quarters. Also linked to our market development structure, where we said that, you know, we are placing a team for the market development who will also be handling the service part. Structure of market development team is put in place. Obviously, the hiring is on. Work is put in place, and more than 500 team members is on ground now.
This team, you know, related to our services so far, we have serviced more than 15,000 sites in those select towns. Obviously in all the sites we are driving product upgradation, the Paint Plus, the new products what we are talking about, and also helping consumer to take the right you know, decision, giving the right solution to the consumer for the problem what he face, you know, when he want to decide about the paint. We are also investing in the digital ecosystem to ensure complete information available and seamless coordination across stakeholder. The work is in progress. Some work is completed and, you know, we are making a progress. We have our timelines to see that this ecosystem is, you know, ready within our particular timeline.
Overall, in decorative we feel that in the quarter two the market growth is driven, volume growth is driven largely by putty and new businesses. Paint volume growth is very, very low. That's our understanding. Few other updates is that we initiated the process of setting near-term science-based targets, Science Based Targets initiative, you know, because that's a process what we need to follow, which we have initiated. As a part of our risk management, risk mitigation, we commenced implementation of IRM. Last time we spoke about our initiative related to the ESG, where we are working on scope three inventorization and TCFD framework. There we have initiated the process for setting near-term science-based targets, as I said, you know, earlier.
One qualitative point which we mentioned that what we are working to improve in the organization is basically to scale up and sustaining momentum, the speed to scale up and sustaining momentum. Under that we are focusing on some long-term value creation through internal initiatives. Some of the initiatives are that, we have taken the approvals, in process of taking approvals for ESOPs, for performance and retention for key employees. You know, the final scheme is still not announced. Shortly we'll be making the announcement of this scheme. We are definitely taking care that it is, majority towards, you know, performance and, you know, linked to the performance. For the key employees it is also retention-based. We are working on the capability building, you know, in the current situation and, the way the platforms are changing.
We have introduced one Percipio digital platform for skill enhancement of our employees, and we are running a structured program to see that how do we make the continuous improvement in the capability building. The other area is brand building. In fact, you know, we have the initiatives. Some of the initiatives are spelled out here, and we'll continue on that. The services and building influencer connect. Also that we have added as a part of this is a last mile service improvement. With the introduction or increase in the number of products, the number of categories are going up and realistically, you know, the prices. Sometimes the dealer is not able to increase his warehouse's space and our SKU inventory actually is going down. We are mindful of the fact that, you know, service needs improvement, so we are working on that.
Overall, our direction remain to increase our profitability in industrial and increase investment in decorative. These are, you know, some of the highlights, related to the quarter. From my side, now I invite the questions.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star then one on their 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 will wait for a moment while the question queue assembles. Thank you. We'll take our first question from the line of Mr. Abneesh Roy from Nuvama Institutional Equities. Please go ahead, sir.
Yeah. Thanks. I have three questions. My first question is on the deco business. You mentioned share of voice is around 15% in what you're targeting. What was it, say, three years back? And how does this help? Because your deco market share is also not very different. It might be a bit lower. Your share of voice is a bit higher. Not a very marked difference. So how does it help in the overall scheme of things in terms of gaining market share when you are introducing so many new premium products also?
Yes, Abneesh. We said target of 15% share of voice. It used to be three to four years back when we were spending good amount in marketing.
It used to be in the range of 15%-20%, and then it came down to, say, 6%-7% level, and now we are seeing around 15%. How it helps is that it helps in terms of maintaining the visibility and when we are introducing the products. You know that how do we communicate introduction of that product? Now the efficiencies at how we are building is that if you see our campaign, there are some common elements like Paint Plus, Japanese technology and jingle. That last two or three campaigns what we have introduced, the product changes, but the format of the campaigns remains same.
Ultimately, there's a continuity and we keep introducing and therefore, you know that when we come out with a new product, it's all the products, you know, we are able to communicate with the right propositions.
One follow-up on this. The drop from 15%-20% to 6%-10% is very stark. Normally, we don't see consumer companies do that. Now you're coming back to 15%. My question is why did it drop to 6%-10%. Is it linked to your overall health of business in the industrial part of business? Can that again recur? For example, would that problem if it comes back, will this 15% rate again come at risk?
This is the impact, you know, we were spending that amount for a few years, and I would say during the COVID time, you know, because generally during the COVID period, you know, initially we lost the season time and other times, obviously this percentage come from there. Then obviously we wanted to see. I think in the last meeting also we said that maybe we have taken some decision, which we felt later on, in hindsight it may not be right. There is some minimum kind of thing which you need to support in terms of advertising. In our business now, we obviously look at these businesses separately, and therefore the decorative requirement is around this percentage, which we'll maintain irrespective of, you know, that what business pressure comes from other categories.
Sure. That's my second question on your Nerofix adhesives. I understand the growth is 40%. Of course, that will be on a small base. Here my question is now when such a large player is going to come in paint in the next four quarters, does it make sense for you to do a non-core business, especially given paint has also tried this. They are still very negative, but I don't think it has met the initial expectation which the market could have or the player itself could have. Could you address this from a one-year, two-year perspective, does it make sense to focus on adhesives also, or it will be more of just riding on your existing distribution, not too much of advertising and sales support?
Yeah. You're right. Not too much on, you know, focus on this particular thing. We are riding on our existing distribution, and this is like a joint venture, you know, which we have a Nerofix, and one part is industrial adhesives, which you know that there is a synergy with our industrial business. In consumer business, just riding on our existing distribution. There's not going to be any specific focus.
Right. Last question on the distribution side, you mentioned, you're trying to transition through distribution model. You also mentioned, YTD, I think you have added around 3,000 retail touch points. Could you elaborate on this? How much of this is able to cater to the core deco?
All are deco only, but 3,000 overall outlets. One point I want to add is that last time also we said one of the business model is how we have given a name to it. It's a next generation premium shopping. Last quarter we finalized almost around 50 stores and all 50 stores we have executed. These stores are up in the market, and in fact we have finalized another 35 stores. This is one of the model and there are a few other which we are working upon.
Could you elaborate on this? Is this more of a perfect store which HUL has? This is more of a branding, point of sale that dealer.
It is. Yeah, it's like an experience store you can say, where there is a branding and also like our proposition in terms of demonstrating the product, that our products are better than the other products. So that's the attempt we are doing. So wherever the you know, customer footfalls are higher, you know, and there we are creating this kind of experience. From these stores, our focus is to increase our premium, you know, say, sale.
Sure. Okay. That concludes my chat. Thank you.
Thank you, Manish.
Thank you very much, sir. We take the next question from the line of Mr. Aditya Bhartia from Investec. Please go ahead, sir.
Hi. Good morning, sir. You mentioned that in Q2, the industry growth was driven by putty and some other low value products. I just want to understand how has Kansai fared on that front, and has there been any divergence for Kansai in this market?
No. In fact, in our case, as I said, in decorative our volume is flattish. In fact the putty is slightly negative. To that extent, excluding putty, there could be small growth. Putty, our approach still remains selective because there is a pricing pressure in the market and the margins are not there. Obviously to satisfy the, you know, our distribution network, we have to keep in certain market and for certain time frame. We are not looking at a high growth in, you know, putty segment. As of now, we are just trying to hold to some extent and selectively basis, you know, that we are participating. That is related to putty.
The new products or the new businesses, obviously it is not comparable with the industry because we have our own approach in terms of what products we are choosing or what range we are choosing. We are not trying to get into everything. Our salience in the new business, as I said, is about 5%, while for industry it may be more than 10%, it could be 12% also. Even if we have the similar growth, the difference will come because of the salience. As of now, we'll say that in the paint, you know, we are narrowing the gap and putty as of now will continue to be selective, till the time we get the right situation and new business gradually will improve.
Okay, super. Secondly, sir, on waterproofing side, how are we faring on the waterproofing and construction chemicals businesses? How large these businesses could be for us as the economy is recovering?
When I talk about this 5%-6% trillion is from new business. One of the business is construction chemical, and that would be a large part of it. We have chosen the product which we sell that goes with our strength or our understanding. At least on those products now we have caught up with the market growth. We are not getting into full range which market has introduced. The market is good. I think this has definitely a potential because after paint only there's market construction chemical and waterproofing. I think the market also is expanding because earlier this was basically if there is a problem, then as a solution it is given. Or even as a preventive solution also. When you are doing a paint, you know, you can apply the waterproofing underneath.
To that extent the market is expanding and this has definitely become an integral part of paint and I think the prospect going forward in the future is good.
For the first quarter actually you had indicated that we now have pretty much a full range of waterproofing solutions. Does it mean that we want to restrict ourselves to certain solutions and we are happy with the kind of range that we are having today? Or does it mean that over a period of time maybe still we are competing into areas where our competitors are there?
We started with, you know, that time I've just said that, you know, the first is that we have a distribution and whatever is, you know, product that distribution is keeping, we have come out with those products. That range we have completed. You know, because since we were late entering, obviously our distribution was also buying from others. Last time I said that 30% of our distribution has started buying from us, now the figure is around 35%. We are just trying to expand within our distribution those range of products which dealers are selling. As we become little mature on the brand, our understanding is completed, we do have a pipeline of the product which are like specialty products.
Understood. That's very helpful, sir. Thank you so much.
Thank you. Thank you.
Thank you very much. We take the next question from the line of Mr. Avi Mehta from Macquarie. Please go ahead, sir.
Yeah, hi, sir. Hi, Anuj. Just three questions. First, you know, the leader has announced a very aggressive CapEx plan, you know, not only to kind of expand capacity but, you know, also for verticalization. Do you see a need to kind of have a similar focus on capacity expansion or do you see this impacting us in decorative or even in the other industrial segment? Would love to hear your views.
It's like, you know, depends, company to company. Little difficult to give answer to that. I can only tell you like, you know, if you look at industrial, which is our, you know, one important area. There the backbone of the, you know, paint is resin and almost more than 90% resins, you know, that we make in-house. In fact, in recent past also we expanded the capacity of resins. Whatever like this automotive market is cyclical, assuming that the market will have a good run for next, you know, few years, I think we are, you know, prepared for that. That's first part. There are certain other areas, you know, where there may be a potential, but as the time goes, you know, we'll evaluate.
In the decorative, again, the largest part is the emulsions. With most of the emulsions we are making in-house. They're also, like, in the recent past in our Amritsar factory we have expanded our capacities. Now, chemical area is a new area, which is I don't think it's our expert area because there are a lot of experts in the market and sometimes it depends on the scale also. This is a completely a different game. You know, there was a time when, you know, some of the companies were getting into chemicals businesses and so we feel that, you know, we may not be the right people to get into these kind of things. Otherwise the emulsion and the resins, there we already have backward integration.
Got it, sir. Got it. Basically no impact on industrial and deco, we'll wait and watch and see how participants will respond. Okay. Sir, the second bit is, you know, just kind of picking up where you had indicated last quarter that in the deco market growth was also led by higher-end and metros last quarter, which is first quarter. The growth was impacted by us. Now with upcountry growth picking up, should we expect the growth rates in the decor market to be broadly similar, or do you think it's too early to call out a market recovery?
Only change from that time to this time is in the quarter two we have seen that tier two, tier three growth is coming closer to the tier one. If we talk about tier four or the rural as per the census, like if you say population less than 20,000 people, there the growth is still very low. Our data says that, you know, that small market or rural market is still under stress.
Okay. That pressure for us may continue for some time. Maybe we need to understand.
We are little hopeful that, you know, maybe because with the monsoon was good, so maybe, you know, post Diwali or fourth quarter it may pick up, you know, because at least we have seen some positive change in tier two, tier three, tier four. It may cascade down to, you know, these smaller markets also, but we have to wait and watch.
Okay. Lastly, sir, on the decorative market itself, are you concerned about the growth? Your comment on the first quarter was of growth rates likely to remain under pressure. Is it that now we are, you know, the inflation is starting to bite and hence growth rates per se in the decor market are likely to moderate on a run rate basis? Do you see that as a concern, sir?
Short term, yes. You know, because if you see last year Diwali was in the month of November. This time Diwali was early, and the rains were continuing till almost 15th of October. Generally what happens is that people paint you know after rains, before Diwali. That period after rain, before Diwali was hardly one week. Actually you need a window of at least 20-30 days, and that window is not available. To that extent business is down. In the month of November, if you remember, recall that last year there was the price increase, the highest of the price increase has happened in the month of November. Therefore, a lot of stocking has happened in the market. Subsequent months, the growth was not very high.
Therefore, you know that the only optimism could be that post-Diwali, people have not painted before Diwali, whether, you know, they'll resume the painting post-Diwali, we'll have to wait and watch. Because of these reasons, the bases, you know, for last year, the third quarter can't be muted. We believe that, you know, like first quarter was good, fourth quarter also could be fine, you know, because of the reasons I said, the subsequent months' growth was the base was not so very high. This quarter the base is high.
Got it, sir. Just to be accepted. Thank you, sir. That's all from my side, and wish you good luck.
Thank you.
Thank you very much. We take the next question from the line of Mr. Shirish Pardeshi from Centrum Broking. Please go ahead, sir.
Yeah. Hi, good afternoon, Anuj, Prashant. Thanks for the opportunity, and Happy Diwali. To start with, you gave an interesting remark that the growth, volume growth was driven by putty. Now, is the similar trend you are seeing in the month of October?
Similar trend you are saying?
I'm saying, Anuj made a comment, saying that the largest growth was driven by putty. Except putty, the decorative volume growth was flat to marginally positive. Is the similar trend? I mean, where I'm coming from, because you did mention that there's a downtrend which is happening for low-end emulsion. Is the volume growth in quarter four or quarter three when we look at, of course, quarter three, understandably, you have a high base. Is that the trend which is structurally seen in the market?
You know, for specifically for October, if you're asking maybe by and large a similar kind of trend, but, you know, for the quarter, difficult to comment. Yes. You know that because the trend is typically Diwali period is like this July to October. Only thing what happens in July, typically people stock, there's items like enamels, distempers and other economy-end kind of things. As the time September come, the premium range gets some kind of attraction, but by and large similar trend.
I just want to little more clear in my mind. You did mention that Diwali has happened in the month of November. Is that the impact we have taken a sharp price increase and that's why people are moving to the lower price points?
Yes. As I said that, you know, there's a price increase. If you look at two-year basis, the price increase is almost 23%-24%. That is visible in the market that people are shifting to the popular or economy range of products. There is a shift happening. To that extent, as I said, cannibalization that some of the popular products, the growth is not so good. But in the economy range or like the product what we've introduced, for example, the primer at a lower price, some of the product like we introduced like Little Master in Beauty. There is a shift in sale from the popular to the economy side.
Okay. Just to clarify, you said that we have taken 3% price increase, weightage. What is the price increase for first half roughly?
That is for first half.
Total is what? 3%.
Yes, yes, 3%. For decorative also 3%, for industrial also 3%.
Okay. My last question, if you can split the growth, your stronger markets versus non-stronger markets. Or maybe, to my understanding, South has done better in quarter two, while the North and Central had a lot of challenges, where the extended monsoon is one of the reasons. Also liquidity is also one of the thing which consumer companies are at least highlighting. So maybe in your thought, in your lens, how do you think and if you can help me, how your stronger markets, non-strong markets, the growth?
Our strong markets are North and East, and weak markets are the South and West. In terms of growth, what we've seen, higher growth from South, followed by North, followed by West, followed by East.
West. East was lowest?
Yes.
Okay. That's really helpful. Thank you, sir, and all the best to you.
Thank you.
Thank you. We take the next question from the line of Mr. Mihir Shah from Nomura. Please go ahead, sir.
Hi, sir. Thank you for taking my question. I have a few questions. Firstly, it seems like your mix did not deteriorate as much as the market leader. You know, given the seasonality and also your rural grid growth did well, can we say it had some impact on margins? Margins were impacted due to the inferior mix, so that is one. Can margins get better sequentially with the better mix going forward?
Generally, you know, in decorative what happens is that if you compare the second quarter, which is a Diwali period, with, say, quarter one, there is always a deterioration of the mix. It happens mainly because the contribution or salience of the items like enamel, distemper, low-end primer goes up. Approximately 2% deterioration we always find, you know, so that change is there. That is one reason. Otherwise within decorative, as we said that our super emulsion salience has gone up, even emulsion salience has gone up. The other part is the change of business mix, because the growth is higher from the industrial. Our salience of industrial has gone up, and there the profitability in comparison to the decorative is, you know, lower, and therefore that also has affected the margins.
Got it. Very clear. Secondly, on the difference between the decorative margins and industrial margin you had highlighted, it was, you know, there was a 78% gap. That gap would have seen some improvement of course, but can you share any indication of how much it has contracted and potentially going forward as well?
Industry margins definitely have improved, you know, based on, as I said, the inflation is to continue. With the price increase what we have seen, that has helped in terms of improving the margins. In decorative one, as I said, the mix change. The other is also we have increased our investment as we spelled out earlier in decorative. That is how it is, the mix back.
Okay. Would the difference be about like 5% or still like 6%-7% or any target that we have, you know, to reduce this gap?
It is bridged. It's definitely bridged. 1%-2% now it is bridged. As we have been saying that, you know, because the decorative investment also is going up, so somewhere or another it is balancing out. Industrial margin definitely have improved.
Got it. Lastly, if you can talk a bit more on your non-auto industrial performance. Past few quarters we have seen a strong pickup in non-auto industrials. Is that sales momentum continuing? If you can share, you know, what is the mix of volume and pricing in that segment? Would it be like 2/3, 1/3 volume pricing or like 50/50?
The non-auto is still there are, like, general industrial, high performance coating, powder coating, coil coating. There in fact our approach is basically to increase the business in the premium and the momentum is definitely continuing.
Okay.
The only thing is that scale gets compromised to some extent, as we said, that some of the non-profitable business, you know, the existing percent that we are increasing the price and sometimes we are not able to hold up that business. We are increasing the business with the premium, but the lower side business is becoming lower. The growth momentum continues.
Got it. Lastly, one more. Keeping any one-off on staff cost, it has shot up, you know, quite dramatically, like 17% this quarter on a YOY basis.
Because, see, we have our increments in the month of July, so that is the reason that has gone up.
Pretty much standard. No one-off basically.
Nothing one-off.
Okay. Thank you very much. All the best, sir. That's all from my side.
Thank you.
Thank you, sir. A reminder to all the participants, anyone who wishes to ask a question may press star and one on their touchtone phone. We take the next question from the line of Mr. Jaykumar Doshi from Kotak. Please go ahead, sir.
Yeah. Hi. Thanks for the opportunity. So three questions. First one is, sorry, I may have missed, what is the YOY growth in value terms for decorative business?
What is that?
YOY growth in value terms for the decorative business, decorative paints.
Decorative growth. Value.
Understood. One thing which I'm unable to understand is when we think about pricing on a YOY basis, pricing is up about 20% or maybe more than 20%. You called out volumes or maybe marginal volume growth excluding paints. In your case, you've not your volume growth is not driven by paints. Why is it that, you know, on a YOY basis, the gap between value and volume is just 10 percentage points while the pricing is up 20%? We understand that some of your peers, there is a significant deterioration in mix on a YOY basis, so we can understand the narrowing of gap. In your case, we would have expected volume, you know, volume value gap to be somewhat similar to pricing.
One of the reason is that there are some economic products what we have introduced, like in premium emulsion, flush, primers. There is a shift from the popular range of product to economic range of product. Therefore the average selling prices of that range has come down significantly.
Understood. Essentially it's down trading.
Yes. Yes. Down trading.
Have you also seen increase in replacement discounts versus last year? You know, one is, you know,
Yes.
Is that also another reason for that or that has been stable?
Yes. During the second quarter, the July to September, there has been definitely the increase in the rebates.
Understood. Now at current spot prices based on, you know, your inventory with RM pricing easing a little bit.
Right.
How should we think about gross margin trends over the next two quarters, that is third quarter and fourth quarter versus the current Q2 gross margins?
I think, you know, obviously this trend of cooling of raw material prices is there, but some volatility now because the rupee is depreciating, so what impact of that will come on the inflation. Situation is not 100% clear, but I think if the same trend continues, we may see some reflection in the quarter four. Quarter three, I may not be very hopeful, but quarter four we may see some reflection on that.
When you say some, is it like 100 basis points, 200 basis points or can it be better? Is there any chance it can get better?
The margins will definitely improve. Again, it depends on, as we said, that our strategy is basically to improve the margins in industrial and invest in decorative. As we improve the margins, you know, we'll be, you know, increasing some of our investments, in decorative.
Final question. Good to see, you know, marketing spends in decorative business increasing quarter. Where, you know, what is the benchmark or what's the ballpark can we spend a percentage of sales that we should model going forward?
Difficult to comment upon that. You know, we need to tell you very frankly, as of now, we need to make some assessment of the figures, and we start doing that. What we do that, what activities we are doing, what is the response, and whether we are able to get the desired response, and therefore some modifications, you know, required to be done. As of now, as I said earlier also, I think we are not going to look at what we have been doing for previous back. Obviously we are increasing, and also as you know that we increase our profit in industrial or increase our mix, you know, because our focus is super premium, so that give us some better mileage. Accordingly then we'll see that some of the areas whether we can invest more.
Understood. Reasonable to assume that it won't be as high as FY 2017, 2018, 2019, but again, higher than FY 2021 as a percentage of sales, all of FY 2022.
Yes. Yes, you are right.
Somewhere in between, right?
All right.
Thank you so much. That's it from my side. Good luck.
Thank you. Thank you.
Thank you very much, sir. We take the next question from the line of Mr. Abhijeet Kundu from Antique Stock Broking. Please go ahead, sir.
Yeah. Hi. Thanks. So, sorry if I have missed this, but you know, wanted to get your understanding on auto volumes have seen a significant recovery. One of your key clients has posted very strong volume growth. How much of that has you know, benefited you in this quarter or should benefit you in the coming quarters? Also what happens is then, when auto you know, recovery happens, then the OEMs also give you a better pricing. I mean, the price hike also happens. You have alluded to that, 3% has been the price hike on overall, in the sale point.
Just, you know, wanted to get an understanding on the, you know, on the sales part coming from the recovery in auto OEMs and also on the profitability part. Could we see, you know, better profitability because of better pass-through of, I mean, price hike and also better volume growth going ahead or the better volume growth is already factored in the current quarter? Just wanted an idea on that.
Yes. In automotive, you know, it is basically passenger vehicles, then your two-wheelers, three-wheelers, and CV and tractors. This growth is led by passenger vehicles. Two-wheeler growth is still muted, though it is better than last year, but it is still. One has to say that passenger vehicles in this year may touch the pre-COVID level. Two-wheeler still would be down if you compare with the pre-COVID level. Tractor demand is also subdued. Primarily it is led by the passenger vehicles. And as you had run, as of now, we feel whatever information is published in the market, we feel it will continue. On the price increase, from some of the customers we have already taken the price increase, and for other customers, we are continuing.
You are right that, you know, when the performance improve and, you know, because when last year the inflation was very high and we have not been able to take full price increase, but situation is better with the customers now, and I feel that, you know, that we'll be able to get more price increase.
Okay. The significant recovery that we have seen in passenger vehicles that is already factored to an extent during the quarter.
Yes.
Just confirming that.
Yes. Yes.
Okay, sir. Thanks.
Thank you.
Thank you very much.
Thank you very much, sir. We take the next question from the line of Mr. Sanjaya Satapathy from Ampersand Capital. Please go ahead, sir.
Yes. Sir, thanks a lot for the opportunity. I just wanted to understand from you that, this industrial segment, how much did it grow on a year-over-year and a sequential basis? Is there something which you can share?
Generally, we segment-wise, you know, growth we don't share, but you know, obviously you can say that production growth of passenger vehicle is higher than, say, 20%. I am talking about the H1. Quarter two, it was, you know, further higher. The growth of passenger vehicle specifically is higher.
Understood. The reason why I was asking is that your overall revenue performance in Q2 compared to Q1 is lesser than the market utilization paints. Despite the fact that you have a bigger contribution of automotive, which has done so well. Where exactly was the drag for you in terms of market share loss?
As we said that we track it on three parts, paint, putty, and new business. This putty is I think earlier also I said that we are keeping it restricted. The market growth is driven by putty and the new businesses. In paint category, our understanding is that the growth is very, very low. To that extent, we have narrowed the gap and closer to it, but putty gap continues and new business is not comparable, you know, because we are making our own choices that which business, how many products to go through. That is not comparable. Comparable is basically paint.
Understood. You are a market leader in industrial and automotive, whereas you are not in decorative, and at this point of time, there is a new entrant which is coming into decorative side. Of course, you are trying to defend your position by increasing branding, the spend there. With this process, are you once again kind of neglecting the industrial side of it?
No way. In fact, you know, industrial, because every business is a separate business unit, you know, thing. I mean, this kind of situation, I think that we'll be increasing our focus on industrial also, because these are separate business units, so if one focus does not affect the other focus. Fortunately, like passenger vehicle, the run is good as of now. The non-auto industrial paint where, you know, market share is not that high, there. In fact, some initiatives in terms of product, technology, premium, the pushing up our approval team, you know. So some of these initiatives we are taking so that we can get more business in that area.
The last thing I just wanted to check with you that on your basis while you are guiding towards significantly subdued performance in December quarter, will there be, I mean, will you continue to kind of see some kind of a margin decline on a year-on-year basis as well? Or, the margin has kind of reached the floor and it will keep on improving from here on.
Margins I think are on the lower side now. If I just broadly say about margin, margins will improve. As I said that we are also in the process of increasing our marketing investments in decorative. I think you have to keep that in mind.
No, my question is that despite all that, has the margin reached the level from where it can only go up, even though it may not really reach the kind of level which you reached in the past?
I think the margins are closer to the lower level only, and from here the margins will improve. Again, I'm repeating the point that margins may improve, but we may increase our investment in decorative, so therefore you may not find any effect.
Understood. Thanks a lot, sir.
Thank you.
Thank you, sir. We take the next question from the line of Mr. Ajay Thakur from Anand Rathi Securities. Please go ahead.
Hi, sir. Thanks for taking my question. I have two questions. First one was obviously on the margin front, which other participants also have been trying to, you know, get a sense on. If I were to look at, you know, the current prices of crude oil and rupee, current rupee, you know, what kind of a gross margin, excluding all the marketing spend, what kind of a gross margin expansion can we look at, say, you know, in Q4 or maybe over the next one year? What kind of improvement can we see on a sequential basis?
Prashant, do you want to answer this question?
At gross level overall, you know, as Anuj mentioned that we are focusing on improving the industrial profitability, we can see at least 2%-3% improvement in gross level, right? That's possible.
That's quite helpful. Thank you, sir. Second question was more on the painter app. We are talking about, you know, innovative channels reaching out to the painters and also to, you know, increase our distribution or, you know, the kinds of off-take from them. Sir, what kind of, you know, similar kind of innovative channel can we reach out to drive growth, which can actually, you know, help us kind of, you know, not being affected by the distribution muscle of the Asian Paints and the leader of the segment. What kind of other innovative channels can we also look at, such as, you know, e-com channels, which can obviously, you know, diversify our growth path and kind of, you know, help us in terms of faster growth?
Any you know, kind of a broad outlook or sense would help.
There are some thoughts about it, but as of now we'll not be able to spell out completely. I can only say that one area is the service area, which is like emerging area now. You know, actually there is some section that some decent part of the business started coming from services, which is dependent on the lead management system that how do you generate the lead and how do you conclude that lead. In the area of e-commerce also there are certain opportunities, but maybe at the right time we'll discuss about it.
Okay. Quite helpful, sir. Thanks for answering my question.
Thank you.
Thank you, sir. We take the next question from the line of Mr. Rishi Modi from Marcellus Investment Managers . Please go ahead, sir.
Hi, sir. Just to you know get some context on numbers. Asian Paints has announced that they're backward integrated into VAM and VAE. How much of your decor paint cost is a VAM component, the enamel cost or the total cost, how much is VAM as a component? Just trying to assess if that backward integration makes any sense for them.
Almost zero, I think.
All right. Is this like a new technology that they are or new type of paints that they want to use this VAM or VAE for? Or like, what is your view on this backward integration?
You know, what happens is like there are some standards of VOC, which are like European standard and American standard, and we are in compliance of those standards. Like for this low VOC, less than 50 grams per liter is the standard. This VAE technology helps in terms of bringing down the VOCs. There are some other technologies also which can help in terms of bringing down the you know VOC. These are some you know some in the areas of sustainability. As I said that you know but whatever compliances are there, we are compliant to that. There are means and ways to achieve further lowering this VOC level.
Okay. All right. On the putty business, right?
standard that we are following is a European standard. Sorry, I missed saying that. American, but it's a European standard.
Okay, got it. On the putty business, right? Just trying to understand this industry a bit better, like how big is this industry size and, do you think like the strategy that's being employed by Asian Paints of lower pricing, is it the way to go or do you think this is not really a commoditized market?
This is like, I don't know how to say the size because there are a lot of non-paint players into this. You can say that, every one liter of emulsion creates 3 kg of putty. If you say market size is INR 30,000 crore and emulsion would be 50%, so INR 20,000 crore and, if you divide it by five. Maybe INR 4,000 crore, INR 5,000 crore, approximately. Just a rough idea I'm just trying to give you. There's a lot of non-branded, unorganized players. This is a commodity product. The average selling price is just about INR 18-INR19 a kg, and it is sold on discounts. Obviously the discounts have gone up in the market and, therefore, you know, it's a commodity product which typically led by discounts.
Right. Like, do you think the backward integration of putting up plants in Saudi Arabia helps or is there any margin extraction or it's just to get lower pricing and pass it on? Like, what do you think is the rationale behind such backward integration in such a commoditized business?
There may be some advantage, you know, because actually the main raw materials in the putty are white cement and RDP powder. The RDP powder also consumes this VAM and the white cement. These are two key raw materials. One of two out of three key raw materials. There could be some advantage in terms of pricing.
Okay. Got it. All right. Thank you. That's all from my end.
Thank you.
Thank you, sir. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.
Thanks everyone for you know posing questions. Your questions always highlight and trigger some of the thought process also. Thanks for making contribution to us. As we spelled out that it's a long-term value creation, the building of the initiative, the business building, what we are embarking upon, not getting diverted with you know the short-term stuff. I think that we have made our way and we are working on it and let's see how it goes you know in the long-term basis. Thanks for attending this call. Wish you again season's greetings for the coming December and Christmas and New Year. Have a good time, and have a healthy and wealthy time. Thank you so much.
Thank you. On behalf of ICICI Securities.