Ladies and gentlemen, good day, and welcome to Kansai Nerolac Q1 FY 2023 earnings conference call hosted by ICICI Securities Limited. 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 the 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 Limited. Thank you, and over to you, Mr. Joshi.
Thanks, Nirav. On behalf of ICICI Securities, we welcome you all to Q1 FY23 results conference call of Kansai Nerolac Paints Limited. From the management side, we have with us today Mr. Anuj Jain, Managing Director, Mr. Prashant Pai, Director Finance, and Mr. Jason Gonsalves, Director Corporate Planning, IT and Materials. Now, I hand over the call to the management for the initial comments on the quarterly performance, and then we will open the floor for question and answers. Thanks, and over to you, sir.
Thank you so much. Good morning and namaskar to everyone. Greetings for a good day. Thanks for joining this call of Kansai Nerolac for Q1 of financial year 2022/2023. As you would have seen, during Q1, we recorded top line growth of 47.1%. Industrial growth is slightly higher than decorative growth. Inflationary trend continued with 7% further inflation what we have seen in Q1. In Q1, we have taken approximately 2% price increase. Just to give you some update, you know, last conference, we spoke about what actions we are doing or taking in industrial and decorative. I'm just taking a privilege to give you update on those points as of now that how we progressed, what actions we have taken, where we are.
In industrial, we said that last year also we had an increase in market share and that trend continues. Our challenge is basically to ensure better margins. Therefore, in addition to the efforts of price and fees, like last year we have taken approximately 18% price increase, what actions we are doing, you know, because that increase was not sufficient to mitigate the inflation because inflation was very high. What are the actions we are taking? We have been extending technologically superior product. Some product we mentioned last time, like monocoats, medium to high solids. In addition, now we have expanded our range of tin-free and energy-efficient products.
These are very high technology product which really helps customer in terms of their CapEx goes down and you know energy efficient, so therefore the consumption of the energy goes down. It is environment friendly, and also it helps in terms of reducing the cost and increasing the productivity of the customer point. We are you know expanding and our salience has gone up in the Q1 because we are trying that how much you know we can shift to these product where there's the advantage and maybe slightly the margin is also better. In performance coatings, where you know again the margins are very very low. We said last time that we are you know increasing our focus towards high technology products where the margins are better.
What we have done in the Q1 is that there's a lot of low-end business, you know, where the margins are not there, hardly margin. We exited approximately 10% of the business, and we shifted our focus to the premium items where we got a and the salience has gone up in the Q1. In coil coatings, again, there have been a lot of margin pressures. We were hopefully selling at a very, very low margin or hardly any margin. There also we said that we'll move towards higher margin technology products and appliance business, you know, because we were only in the sheet business, so we were saying that appliance business. There, in fact, we have left almost 30% of our business which was not profitable.
In appliance and the high technology getting the approvals and our salience in the Q1 has gone up from 3% to almost 10% in coil coatings. In powder coating also, where we have a good market share, we are market leader. But in the premium our market share is less, so we said that we'll increase our salience in the premium. In the Q1, our salience has gone up by 2%. It is not in line with what we have targeted, but still, the trend is upward. This is in case of industrial. In decorative, last time we discussed that, you know, what we are doing. One action was related to a new brand expression, which was Paint+, where we said that we'll be launching differentiated products.
In the Q1, Mica Marble Stretch and Sheen, we expanded. We launched it in the Q4 last year, but we expanded in the market. Now it is available all India. We introduced Nerolac Impressions Kashmir in the Q1, and polyurethane enamel also was introduced. Second point, we said we'll add more and more products every quarter in premium and super premium category. And we'll, you know, increase the, you know, because our market share is better relatively in economy and popular category, but we are weak in premium. We said, within our network, you know, because we have a strength of network and we have a relationship with our network. From our network, you know, we'll attempt to increase our sale.
With the introduction of these new products in last two quarters, our distribution growth for the super premium category is more than 50% in Q1, and salience also has gone up. In terms of communication, we were saying that we'll increase communication through advertising and digital marketing focus. We'll focus on Paint+, which is the differentiation and Japanese technology and jingle, which is very popular. In terms of our share of voice, you know, we'll keep it around 15% approximately, and we'll participate in maybe cricket again. In the Q1, we introduced campaign on Paint+ with Japanese technology and jingle. That has been on air in the Q1, and our share of voice in the Q1 was little higher than 15%.
Another point was augmenting the market development structure to generate leads from sites and influencers. In Q1, we scaled up field team. Most of the time has gone into recruitment, but, you know, we have scaled up. Actually, we have doubled our team and also the support system. We also started digital marketing program for lead generation towards the end of Q1. The other point was that we want to do some good influencer program with acceptance of Pragati app, which we introduced for painters, that offers instant benefit, which is the fastest in the industry. In the Q1, we have seen a high double-digit growth in the increase in the participation of painter, but we still have a gap in terms of getting share of wallet from the painter, but participation has increased.
We also wanted to start tracking secondary sale from the dealer counter. We started, but we'll have to bring it to a meaningful conclusion. In distribution, we had increased our team to open the direct distribution, dedicated team for opening the distribution and some new distribution models. In Q1, our distribution growth is again in double digits, high double digits. We have put 50 preferred counters. These are like a kind of experience stores, but with the existing dealers. Fifty counters are in place. We were weak in institutional business, project business, and last two, three years, this business was growing at the faster rate. We said that we'll focus on institutional business by increasing the reach.
We expanded our reach in the metros and tier o ne towns and expanded our team there. In the Q1, we doubled our business in the project institutional business. The next part was the new business, which includes the construction chemical business, mainly in our case, because adhesives we do through Nerofix, which is our subsidiary, it's a joint venture and subsidiary. We said that, you know, we want to achieve a salience of greater than 5%. Industry salience is higher, but since, you know, we started late, we said, you know, first milestone is that we should achieve 5%. In the Q1, we have touched the salience of 5%. Obviously our first attempt was not to create any differentiation here.
Since we started late, you know, let us match the range of the market and see that, you know, how much we can sell to our existing counters. As of now, approximately 30% of our existing counters have started selling our construction chemical. Obviously we have to go forward, but as of now, this is the status. In these new businesses, it may be very difficult to compare, you know, with the other companies or the industry because, you know, a lot of new business are getting added. For example, in construction chemical, there is a business called membrane business, you know, which is also quite a good business.
We have not got into this business because, when we started this, we evaluated entire range, and we found that the margins are very low, and we did not find it very futuristic products, so we did not get into it. There are admixtures, you know, which is also a part of construction chemicals. In our industry, many companies have started admixtures also. As of now, we have not got into it because our first task was that, you know, the range which is related to the retail, our first target is that how do we get our existing counters to, you know, sell our construction chemicals? That was the focus.
We can say that today, whatever range is available in the market, you know, because every quarter the products are being added, our matching range is around 70%, and we don't have any plan to go to 100%. We'll remain in 70%-80%. When it comes to adhesives, it's a part of our JV, you know, which is Nerofix. In the Q1 there, the growth was more than 100%. In our standalone result, it will not be reflecting. You know, so that's the status on the new businesses. We have a complete range of economic products for Soldier and Nerolac, and there were certain gaps in the product range which we have completed. Water-based range is, you know, completed.
There are certain products in the, you know, economic category in Nanos, where the margins are very low and therefore, as of now, we have decided not to get into it. When we have completed our range of water-based, we have found that there is some cannibalization happening because when you introduce economic range of product, partly, you know, they eat the sales of the, you know, the higher range of product and therefore there is some drop in ASP. We also said that we'll venture into services with five days painting proposition. In the Q1, we started under the name of NxtGen Painting Services. In six cities we have launched with the proposition of five days and dust-free. This was launched in six cities. As of now, just a start, and going forward, we'll expand to other cities.
We have a plan to expand it to the other cities also. This is the update on, you know, what I said during the last conference. What else we did in Q1? You know, I'll try to cover from first to last page. We focused a lot on the employee engagement. The culture of collaboration, a lot of activities have been done. We introduced in our company Life at Nerolac. You know, we are when people take pressure, they also enjoy the work and a lot of collaboration activities we are doing. Take care of the wellbeing, you know, because last two, three years, the situation has been tough, COVID situation, and people have gone through a lot of mental agony.
We have focused on the well-being, you know, introduced some well-being apps and initiatives, you know, we have done. This year, we have given some extra increase to the entire set of employees to combat inflation, some extra increase we've given. We also worked on developing the digital training plan for all managers. You know, earlier we used to do it on the selective basis, but to upskill and reskill, we have decided to go for all managers. We worked on the talent identification because as the industry situation is changing, you know, some kind of new talent is required. We relooked at the entire exercise of talent definition, identification.
We went through the assessment of the talent to the outside agencies, and we made our action plan for next, you know, few years. We also focus on innovation in the Q1, and we, you know, had our innovation day, and a lot of ideas have been generated in the area of product, business model, services. We have selected, you know, double digit, quite a good ideas, you know, which we are going to take ahead for the implementation in the coming time. We also spent, you know, a lot of time in terms of meeting. Personally, I spent time in terms of meeting customers in industrial, automotive, performance coatings and decorative market, just to understand that how the changes are happening.
We spent time with the vendors on one-to-one meetings, and I was privileged to meet many of you on one-to-one basis in Q1. I think we had more than 20 meetings with the business partners and other folks. In terms of this ESG, our company has done very well in last two years. When it comes to the carbon emission, you know, we were looking at Scope 1 and Scope 2, but we have initiated the exercise of doing the inventorization of the Scope 3 and putting the science-based target for carbon emission and also framing TCFD framework for us. Because in our parent company, Japan, it is mandatory. In India, it is not mandatory. You know, from the self-regulation point of view, this framework also we worked upon.
In line with our plan, we have finalized our three-year strategy for decorative and industrial. That is also completed. The exhibition plan is made. In line of that, we re-looked at our capacity plan and the requirement, and accordingly the actions are initiated. These are few other things which we did in Q1. There are few things which are not working in our favor as of now. One is putty, where there have been no price hikes in last one and a half year. Recently, there was one price hike. There were high discounts in the market. Margins are very low. We still continued our restricted approach in putty. Our local versus upcountry means the, you know, tier one metro, tier one versus tier two, tier three, tier four.
Our contribution of sale is more from the lower tier towns, and if you compare with the industry, from metro and tier one, our salience is low. The market growth is higher in metro and tier one. Just for example, even if we take the matching growth, you know, we have a disadvantage of lower growth because our salience is lower. Similarly, in our business mix, the project, you know, which is growing at a rapid rate. As I said that Q1 at least, you know, we are able to match the market growth a little better. Again, our salience is just single digit, lower single digit, while for the market is double digit and maybe little higher double digit.
Even if we, you know, for example, if I am 5% grow by 100%, I'll get 5%. If the market is 12% grow by 100%, they'll get 12%. That salience difference is also there. In the new businesses, salience, you know, that even if your growth is okay, but salience difference would be there, and that will continue for some time. This is something which now we feel it is not working in our favor. Internally, whatever actions we have taken, I think, I realize that what we need to improve at our end is the speed to scale up, you know, because some of the things which we have done, as of now the indicators are in our right direction.
We need to improve in terms of speed to scale up and also sustaining momentum of some of the launches, innovations, you know, what we are doing. This is internally what we feel that we need to scale it up. In terms of, you know, profit, financials, you all have seen the result. You know, the profit after tax was up by 37%. This is the initial commentary from my side. Thanks a lot for your patience in hearing. Now I invite the question.
Thank you very much. We'll now begin the question and answer session. Anyone who wishes 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 questions assemble. Participants, you may press star and one to ask a question. The first question is from the line of Dhruv from Edelweiss. Please go ahead.
Hello, sir.
Dhruv, you're on mute.
Hello. Hello. Can you hear me?
Yes. Yes.
Yeah. Just couple of questions. One is on the revenue mix. Can you take us through the mix which we have seen historically between industrial and decorative? And within industrial, what has been the mix of auto and non-auto? And what is the current mix, and where do you see three years ahead, given the growth uptick you see in the auto sector, basically? That's my first question.
Okay. Mix is generally like, you know, we have been saying around 55%-45%. 55% for decorative and 45% for auto. Within that, it is about 70%-30%, auto and non-auto. Going forward three years, you know, obviously our plan is. Today the opportunity is there in both the markets, in decorative and industrial. Though the intention is that it goes in favor of decorative, the salience should continue to go up, it depends on how the market behaves in next three years' time. Because since we are strong in industrial part also, if there's opportunity available, we would not like to lose out on that.
Thanks. Second is, can you take us through the market share in both the segments?
See, market share is very difficult, you know, because generally what happens is that it depends on how many companies you consider. In decorative, you know, if we take only the listed companies, you know, the market share is around 9%-10%. In automotive, we have a market share in excess of 50%. For the non-auto, it's very difficult because there are so many companies and there are so many segments. Segment by segment, you know, you have to look at, so therefore it is very difficult to get into the market share.
No, that end does. Thanks. This is all.
Thank you.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Yeah. Hi, Anuj, Prashant.
Hi.
Good morning. Thanks for the opportunity.
Good morning.
Two questions. Did you spell out what is the volume growth in the decorative segment in the beginning? I mean, I missed that number.
No, I didn't spell out. Overall volume growth was high double-digit.
When you say 18%, you have taken price increases, so it should be in the range of about 20-odd to 22%?
Yeah, more than 20% you can say.
Okay. That's really helpful. Second, you mentioned that you have taken 2% price increase, and you mentioned that the inflation is in the highs of 8% in the Q1.
7%. Yeah.
That's correct?
Yeah, 7% inflation in the Q1, and we have taken 2% price increase.
My question is that, since all data points suggest that, the crude is going to be slowing down and there are a lot of benefits which is going to come, just wanted to understand how are you running the supply chain? Is that, right now we are using these high price inventory and that's why you've taken 2%, or do you think you will have to take some more price increase, for the product in the decorative?
This price ease is something very recent phenomenon towards the end of quarter. Generally, there is a lag, you know, because one that change in the crude should reflect in the derivatives, and thereafter obviously we carry some inventory, so there is a lag period. Having said that, when we are looking at the inflation, we are looking at in totality. Last year there was high inflation. Q1 also there was inflation. Especially in industrial, whatever price increase we have taken last year, it was, you know, less in comparison to the inflation.
Obviously more price increase would be required. In decorative, again, you know, there may be some possibility of further price increase, small price increase. Then probably next two-three months when the picture would be clear, then we'll be able to see whether further is required or not required. There is a possibility of further price increase as of now.
Okay. Wonderful. On the industrial and auto, have you experienced any price increases we have got?
When I said, last year we have taken in industrial about 18%. When I say 2% price increase Q1, that is total. It includes industrial, decorative.
Okay.
Price increase is relatively higher in industrial.
Okay. That's helpful. My last question that you did allude saying lot of initiative you have taken. Just for the sake of monitoring, what are the top two or three things? Because I'm sure you have done the strategy for next three years. What are the top two, three things you would like to achieve in the next two, three years?
If you are talking about the initiatives, you are talking about the initiatives or what?
Yeah, initiatives.
I think I spelled out. You know, one is that business part, because in business there are three things, paint, putty, and new businesses. Obviously our first attempt is to see that in paint, you know, that we are matching or better than the market growth, and for that the initiative in terms of product, communication and influencer. That's the first, you know, priority. Putty will be waiting, you know, whenever the right time, you know, how we can increase the discount and match up the growth. New businesses, as I said, that, you know, we'll be launching the product, but we are not looking at 100%. The first priority is to get to the market and over the market in Paint based on the initiatives of product, communication and influencer.
Does this have the implication that you have any target that, say a certain percentage of the new product should contribute to your revenue?
Yes. Yes. For the new product, for the participation increase in painters, the extraction from the painters, those targets we have, and we are monitoring on month-over-month basis.
Okay. That's really helpful. Thank you, Anuj.
Thank you.
All the best.
Thank you so much.
Thank you. The next question is from the line of Mihir Shah from Nomura. Please go ahead.
Hi, sir. Good morning. Thank you for taking my question, and congrats on a good set of numbers. Mr. Jain, I just wanted to check with you, on the quarter, was there any restocking at the dealer end? As Q4, we have seen relatively lower sales, so the dealers would have ideally have to stock up in the Q1. Any kind of one-off or restocking that is there in the numbers in the Q1 sales?
No. What happens that when they stock less in the last quarter, generally this, the pickup happen in the first month of the quarter, which is April. During the quarter it gets stabilized.
Okay. We are like normalized sales. The run rate is normalized to these levels is what can be assumed.
Yes.
Got it. Secondly, I wanted to check, you mentioned, you know, the mix had improved. The volume growth should be much higher than 20%-30% in my view, right? I mean, you know, and what is the steady-state mix impact that we should consider?
Steady state mix. You know, in our mix, as I said earlier also that what we are looking at this premium, super premium category. What we are watching is that they are innovative. The growth in the market is better. Today also after the inflation, we are seeing that in the premium category as of now, market is still doing good. Maybe the impact is there on the consumers in the middle category or lower category. Super premium category where our sales in relation to the market is lower, that is what we are targeting with the introduction of all these products. Because whatever products I spoke about, they are into the premium or super premium category.
I was actually referring to the difference between the volume and the value mix. Historically, you know, the difference has been earlier it used to be like 5%. In recent years, it was like 7%, 8%, 9%. The difference between the volume number and the value number is a mix impact that I was referring to. Given that this quarter had a, you know, a better mix, the mix impact would be lower. If you've grown your value by 47% and you have a pricing of 18%, 19% or 20%, then your volume growth has to be far higher in my view. That's what I was referring to.
I don't know. What happens is that, as I said that internally what we do, we look at paint separately, new business separately. If you see the last year, the price increase in decorative was about 21%. Partial impact has come in the last year itself. Typically, if you see 16%- 17% change should be there. The value and volume, the gap should be around 16%-18% if you see it from the only price point of view. If you're getting a higher growth than that, then it's a change because of mix.
I'll take this offline then. On margins, I wanted to see, you know, margins also due to a better mix it would have, we've seen, you know, much better than expected margin this quarter. Can one expect, you know, margins to bottom out, as you know, you alluded to some certain structural changes in the portfolio. This kind of a mix that we have seen in this quarter may or may not be. I mean, can it be the similar mix going forward? Or you think that there is a possibility of margins to kind of go down in the next quarter or so, just because we've seen a better mix this time around?
Typically for the paint industry in the second quarter, which is July to September, the mix is different, you know, because in this period more of a enamel, primer, distemper, lower-end product sales happen. Generally we find that the mix for decorative especially in the second quarter is inferior to the Q1, and then third quarter it becomes better. Some of the changes what I spoke about in the industrial, that will continue to work.
Got it. Great. Thank you so much for this, and all the very best, sir.
Thank you so much.
Thank you. Participants, you may press star and one to ask the question. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hello.
Hello.
Yeah. Hi, sir. I just had three questions. First, on the decorative side, are you concerned that this quarter probably saw one-time benefit from pent-up demand due to Omicron? With inflation, with the factories increasing globally, is there a possibility that growth should start to slow down? Is that a concern that you would be worried about?
No, I'm not very sure about the pent-up demand, you know, because you can say that in the Q1 the growth is higher because last year May base was very low. Because last year May, there was a COVID impact, the base was very low. Now because it is normal market, so it is normalized. To that extent, obviously the growth of the Q1 is higher because of the low base. Now from this quarter onward, you know, it's a normal market growth. Generally we have seen that paint industry has been growing in the range of double digit or maybe, you know, bigger single digit growth volume. I think that trend, we feel that should continue.
Only additional factor this tie could be, you know, because last two years the Diwali was there in the month of November. This time Diwali is in the month of October. So generally paint industry get benefit if there's a longer Diwali period, pre-Diwali period. This time it is little shorter, so we have to see the impact of that.
Okay. Okay, sir. Okay. The second part, sir, was I just wanted to kind of, you know, revisit that answer that you said on the pricing. You know, if I look at current input cost levels, would you say that the incremental price hike, not just in decorative but also in industrial, will be, you know, relatively low, the amount required will be much lower than what has already been taken, as in the bulk of the price hikes are now behind us?
In industrial we feel that we need more price increase. You know, because last year inflation was there, and I think we got maybe just 40%-50% of that, 50% of the price increase, you know, of the inflation. Some more prices is definitely required, you know, for us to better our margin.
Okay, sir. Okay. Sir, lastly, you know, you did allude towards a focus on more premium, more technology-based products, not just in decorative but also in our industrial portfolio. Does that have any impact on the royalty rate that we pay?
No impact.
The royalty is essentially paid only on the products that are directly taken only in the industrial side, right, sir? I just wanted to clarify that part.
Only on automotive, on selected products.
Perfect, sir. That's all from my side. Thank you very much, sir. Thank you.
Thank you. Next question is from the line of Aditya Ahluwalia from Invesco. Please go ahead.
Yeah. Hi. Thank you for the opportunity.
Thank you.
My first question is on A&P spends. From a longer term perspective, do you think that we have been a little cautious and we have not spent enough, and that is one of the reasons why our performance in the past has been a little bit below peers? Secondly, what is the outlook on the A&P spends going ahead?
Yeah, we do agree that last few years that we reduced our expenditure and we got impacted because of that. Now we have taken a conscious call that we'll be increasing our marketing expenditure.
As a percentage of sales, is there anything that we're seeing, you're calling out?
I don't want to say, I know, share the figure, but as I said that, you know, if you see last two-three years when we reduced our marketing expenditure, our share of voice in terms of visibility has gone down substantially, significantly. Now we are saying maybe around, you know, 14%-15% share of voice at least we'll be maintaining even if the market intensity change, which mean that if marketing intensity goes up because, you know, when the new competition is there, so we'll, you know, you'll maintain. If the market intensity goes up, this figure also will go up.
Right. The margins have come off despite this lower A&P. I think because of the industrial and auto segment. You think that even with the higher A&P, the recovery, as you mentioned in the previous question, there should be continuous improvement in margins going forward?
Yeah, because, you know, as we discuss about this premium, super premium, the Paint+ products, and that's why the focus is more there, you know, that because when we are going to increase our A&P expenditure and there are certain other initiatives required, so we have to focus on the better mix so that we are able to balance it out.
Thank you. Thank you. Just one last one. You said 55, 45, the mix between decorators and auto and industrials?
Yes. Yes.
It should be more like 65/35 now, right? Given that auto has been declining and
No, no. 55, 30. 55 and 45, closer to that.
55 and 45. Okay. Thank you very much.
Thank you. Next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Thanks for the opportunity. Just want to understand that in the context of, say as you mentioned that we exited some of the low margin businesses in, on the industrial side. At the same time, we are witnessing, say, some slowdown in the input prices also. These two inputs logically says that there should be a sequential margin improvement on the industrial side. Since we exited some of the business, how should we see some balance between the growth in the industrial side and the margins going ahead? Any run rate range or any qualitative color you would like to share on that aspect?
Two parts. One, that growth obviously in industrial automotive side, there is a momentum in the growth. The production growth is looking up. Two-wheelers, where the last year production growth of two-wheeler manufacturers were negative. Now it is into the positive area, but it's still not back to the pre-COVID level. With the good monsoon, there may be a possibility that after September there may be a further pickup of two-wheeler. We do see a good momentum to continue for the automotive demand. For margins, as we discussed earlier also, because margins have gone so low and obviously therefore there's an inherent requirement to increase the margin for which, you know, one is the pricing, the other some of the initiatives which I mentioned. You know, those initiatives are taken to get it to a, you know, reasonable level.
Margins to be improved, as a strategy, you know, what is happening in the market, you know, some of the investments are also required. As we keep working on, you know, our margin improvement and then see that, you know, when it become more viable to do more initiative. It'll be a mix and match of both the things.
When you exited the businesses, some of the businesses that won't have impact on the growth or earnings growth since they were not profitable.
We are being a little conscious on that, you know, in terms of growth. If you are saying top line growth, obviously when we exit some business there will be some impact, but the focus is shifted from that low profitable product to the better profitable product. Over a period of time we intend to compensate that. That is what we are doing.
Okay. Sir, congratulations on good results, and thanks a lot. All the best for the future. Thank you.
Thank you for the compliment.
Thank you. Next question is from the line of Arun Subramanian from Ampersand Capital. Please go ahead.
Yeah. Hi, sir. Congratulations once again for a good, probably in Q1. One thing just wanted to get clarification from you is that you said you are more present in smaller towns than in tier one, and that has kind of affected your market share trend in recent times. Can you just give us a more granular sense of how is your split? And secondly, what exactly you are looking forward to in terms of the change in next couple of years?
Just to give you some rough example, like, you know, if you see local towns versus upcountry towns. When I say local town, wherever we have the depot office, they are mostly the A-class towns. You know, our business would be little less than 40% from the local towns and more than 60% from the upcountry towns. While in terms of market split, it would be 50/50 or maybe more tilted towards the local towns. To that extent, we have a disadvantage. All these big towns, some of the things what I mentioned in terms of surveys, you know, other initiatives, project, you know, because project business is growing more in these local towns or bigger towns. Some of these initiatives over a period of time should help us.
Understood. The company that you are launching your product about premium side, so that typically should be used up in bigger towns. So is your product strategy aligned to what you are looking at?
Yes, it is aligned, because there are two things. One, premium, super premium category, but, you know, some of the differentiated products or features what we are launching, we are trying to see that, you know, pricing is relatively affordable. I'm just saying that if the same feature is available, so that's a democratization of the product, that is the same feature is available in the market at INR 100, whether you can make it available at INR 90. That's the technology, you know, working which we are doing without impacting the margin. How do you formulate the product where that feature can be offered? Some of these products goes very well in the urban markets or, say, local market. Some of these products are also quite aligned, you know, with the requirement of the upcountry market.
Understood. Now we can see that your strategy as far as industrial is pretty clear and you are doing pretty okay out there except for this pricing volatility. Whereas in last couple of years, because of whatever reason, you have been little bit reactive in the decorative space and which probably has resulted in market share loss. Can we say that now that phase is behind us and you will be doing much better in terms of your decorative?
I want to comment like this, that yes, you know, we lost and we had our action plan and, you know, strategy, some of the things what I mentioned also. Let me accept it that market has become competitive. You know, in the paint, earlier paint was simple, you know, because it was only paint. Now there are so many elements. There's a putty which was not there in the past, which is a lot of new businesses. Comparison going forward will become very difficult. Internally, what we are doing is that, you know, our core business is paint. Now, in the waterproofing, in the construction chemical, whatever products which are becoming a part of the integral part of the paint, those products we are launching. Internally, we are quite focused on the paint and see that, you know, we make progress.
Some of the point what I mentioned, given you know, inputs over the Q1, there is a progress, you know, upward progress we are making. Suppose tomorrow there are, you know, other new products are coming up, which may not be planning. I'm saying other new product in new businesses which may not be planning. Then comparison, you know, with the industry peers will become very difficult.
Do you have advantage or disadvantage of having a Japanese parent in this particular aspect which you are talking about?
We have big advantage because when you talk about the technology and the process, I think you know that they add so much of value to us and they are very supportive. You know, we are definitely doing all these things in consultation with that. We are very happy, you know, that with their input.
Even in adjacent product?
Yes, yes. Yes.
Okay.
Because, you know, as our parent Kansai Paint, they also have a lot of subsidiaries in many markets. We have advantage in terms of getting access to that, what kind of product, even in these adjacent categories, you know, that what kind of trends. Those are, you know, inputs are there. Through the Kansai Paint Japan, also there's, you know, subsidiaries. We are able to get the access to the know-how, technology, product trends, marketing trends.
Understood. Thanks a lot, sir, and all the best.
Thank you.
Thank you. Next question is from the line of Ajay Thakur from Anand Rathi. Please go ahead.
Hi, sir. I had few questions. First was, can you just elaborate on your distribution reach in the decorative paint segment? What would be your distribution reach? How much distribution touchpoints you would have added, say, in the last quarter, and last year, maybe?
Last year our reach was around 27,000-28,000 total dealers when we ended the year. Generally, the growth in the last two-three years has been. Last year probably it was around 7%-8%. In the COVID year the growth was very less. In Q1, the distribution has increased in the double digits, a little higher double digits. There's an improvement there.
Okay. You gonna continue with the same pace of distribution addition, like, around 7%-8% or around 10%? Or you think, you know, you face much more headroom to grow given the fact that leader is present more like, you know, in 1 lakh+ kind of houses.
We have a good opportunity available, good headroom. As of now the numbers have gone up and some of the activities, you know. Because typically what happens is that you have to create demand and confidence in the trade. As it goes up then your, you know, numbers of the distribution. That's like outcome. All the activities, the product influencer activities, what I spoke about, as we get success in that, I think our momentum in terms of increasing our reach, will go up. Should go up.
Okay. Secondly was wanting to check on the competition front. Can you just give us some brief color on how the competition is actually shaping given the fact that we have, you know, new players coming in? Also, you know, where is this competition, you know, more kind of concentrated? Is it some kind of a geographical, you know, region where we are seeing more competition from these players? Or is it like, you know, they are broad-based across India that we are seeing that new, you know, new player where the competition actually has erupted?
The companies who have already entered in last two-three years, they've already, you know, have had now having a presence across the country. Some of the companies who have entered in last few years. Specifically if you talk about Grasim Industries who's going to enter in next one-two years, I think their plan, whatever there is available in the public domain, they are also planning to be all India player. It may start with some specific market and over a period of time, I think they'll become all India player.
Okay. Lastly on the industry growth, in the paint segment, and colors for this quarter, how it would be, given that we have very high number actually coming from most of the players. Any sense or color on that front could help.
Sorry, I didn't understand the question. Industry growth you're saying?
I was talking about industry growth in terms of the paint segment for both industrial paints and the decorative paint segment.
For Q1 you're saying?
Yes, for Q1.
No, because, you know, some, you know, many of the companies are yet to come out with the results. As of now, we'd not like to comment on that. Only once the results are out, then probably we'll have a better understanding.
Okay. Right. Thanks, sir.
Thank you.
Thank you. Next question is from the line of Ankit Sethi from ICICI Securities. Please go ahead.
Hi, sir.
Hello.
Thanks for the opportunity. My first question is on the project business. This was not a focus for some of the players earlier, say four-five years back, but now even the market leader and you have been seeing strong traction in it. Can you discuss the changes in terms of attractiveness of that business for you to focus more on it?
You know, in the past, we were not very focused, you know, because how many directions we want to, you know, go and how do you spread your, you know, wings. I think today the growth in certain market and the project business because it's, you know, penetrating in more and more cities, the number of cities are getting expanded. Virtually, I can say there's no choice. It is important to remain in this particular business. The discount in this business is higher and therefore the margins are lower. The only thing is that this business is more of emulsions and putty, probably in November, December is not much there. To that an extent some, you know, some mix advantage, but overall the margins are lower in the project business.
Okay, got it. Second, on a broad basis, what would be the margin difference between your deco and industrial segment? The bridging, you know, between the two will be more price led, which you were alluding, you know, some time before or will be done through more of new launches in the industrial segment?
Prashant, you want to answer this question?
The difference at EBITDA level is in the range of, it's 7%-8% more than that, actually difference with decorative industrial. The improvement in margins will happen from introduction of new products and technologies, technologically superior products.
Also the price increase.
Price increase.
The difference is quite large now in decorative and industrial. These are few of the actions, you know, which will probably see that whatever amount can be bridged, 100% it cannot be bridged.
Understood. Lastly, if you can highlight the capacity utilization for the two segments and what would be your CapEx requirements? That's it. Thank you.
64%-65% was the capacity utilization in Q1. We announced, you know, some capacity expansion just to support the growth objectives what we have.
How should we model the CapEx for the next two years?
Prashant?
Right now, you must have seen we have actually, you know, approved two projects, both in decorative. For industrial and automotive, we have capacity for next two, three years. As and when required, we'll definitely expand because we have got infrastructure for brownfield expansion, both for industrial, production. That is not a concern at all. As far as decorative is concerned, the commissioning is not as big or large as industrial, so we'll be able to scale up at any point of time. There's no problem on capacity.
These two new projects what we have announced, which will happen over a period of next 25-30 months. That's investment of how much, Prashant Pai?
INR 290 crores.
INR 290 crores. INR 290 crores plus your regular CapEx for the year.
Okay, fine. Got it, sir. Thank you so much. Thanks a lot.
Thank you.
Thank you. Next question is from the line of Paras Pandya from IIFL. Please go ahead.
Hi, sir. Congrats on a good set of numbers.
Thank you.
Just trying to understand your margins. This quarter has been a significant jump from 7% in Q4 to about 13% in Q1, and large part of it is because of the operating leverage of the higher QOQ sales. There is also some amount of improvement in gross margin, but our gross margins are still significantly below historic average. Just looking into the future for a few quarters, how do we sort of build in the margins assuming that the input costs stay where they are? You already got some benefit from premiumization. You already taken price increases. Maybe a little more will come in the auto segment. Shall we say that this 13% margin will now stabilize in the range of about 14%-15% unless the input costs fall further? Is that a fair assessment?
Overall year basis and quarter basis, there is a difference, you know, because every quarter there's a change in the business mix and the product mix, as I just mentioned little while back that in the coming quarter of the paint industry, the mix is supposed to be inferior because it is more towards November, December. That also will affect. Also as I said that, you know, some of the activities what we are working upon, this will help in the margin improvement. But we do have some of the points which are pending in our strategy where, as I said, in some of the areas where we are still restricting, because as of now, when you want to get a profitable growth, you have to balance it out.
As we improve margin in certain areas and we find that our capacity to spend on those areas goes up, so that also would happen. It will be a mix and match of that. Difficult to give you answer. Yeah, last year also we said that our margins are already the lower side. I think we have improved. We'll continue to improve, but improvement and investment will go hand in hand to see that, you know, we are able to balance between the top line and the bottom line.
As you mentioned, there is a seasonality because of product mix being different. If I basically look at this point of product mix difference between quarter-to-quarter, Q1 margins versus the full year margins, they would be higher or lower in a normal year?
Actually, I don't want to talk about that. As I said that I think we have improved, we will improve, but then there are certain, you know, expenditure investment also would be required. I leave it to your guess, but maybe, you know, closer to this.
Sir, I'm not asking for guidance for this year or next year. I'm just saying in the past, historically speaking, the product mix impact has been sort of highest in which quarter in terms of which quarter has the best product mix and which quarter has the worst product mix? That's all I want to know.
The product mix is better in Q1 and Q3.
Okay. Understood, sir. That's all from me. Thanks and all the best.
Thank you.
Thank you. The next question is from the line of Archit Joshi from B&K Securities. Please go ahead.
Thank you, sir, and congrats on a good set of numbers. Sir, my question is related to the industrial paints segment. You had mentioned in the presentation last quarter that KNPL is a key player in the electric vehicle segment. You've also mentioned that you have strategized a clear plan in terms of having a strategy built around the paint's division that you have on the industrial side. Can you elaborate a bit more on what the strategy is and how we will be able to leverage our parent's products in the EV side? Any broad color on that would be helpful. Thank you.
By and large, you know, what we said is like, now since there is a trend of electric vehicles, as of now the percentage is very low, but over a period of time, you know, this percentage will increase. The product, the system, what is required is available with us. Most of the customers who are you know, because in the electric vehicles now, there are existing players who are, you know, in the traditional, two-wheeler business where they have their paint shop, but new players are getting their painting outside. Those are like ancillaries, you know, and they are also our customers. Our customer base is good. The product is readily available. As and when the scale-up happens, you know, that we are there, we are available with our service, with our product like that.
This is related to EV, if your question is only specific to electric vehicles.
Sir, not just EV, but if you can elaborate a bit more and on what we actually are strategizing with respect to growing on the industrial side, if you can.
Yeah. Industrial, you know, because our this automotive market share is high, and in fact, you know, we have a very strong market share in Japanese players. Today there is a good growth happening in the Indian players also, the PV manufacturers. You know, there we are growing aggressive. We are working on the technology, you know, that, like, you know, there was a question earlier, the help from our parents. There are a lot of technology advantage, you know, which we have in this industry, which is like for example, in 2008 we introduced three-coat, one-bake. Now, you know, for the baking also there is a particular temperature.
We are working on keep reducing the temperature so that the energy consumption keeps going down at the customer end. That helps in terms of cost, that helps in terms of environment, that also help in terms of increasing the productivity. All those areas we are working to keep our moat or competitive advantage in the automotive. The second part is auto refinish, you know, where our market share is very low, less than 5%. The size of the market is good. There, you know, the margins are better. We are working to see that, you know, how do we increase our salience of auto refinish because that will also help us increase the margin in the auto.
The non-industrial area, as I said, that our focus is completely shifting, not completely, but you know, largely shifting from the low-end to the high-end. Therefore, we have created our structure and getting into the approvals and, you know, fortunately we are getting good approvals. These are the, you know, actions for so that, you know, that we are able to make our good place in the areas which are growing and which are profitably growing.
Understood, sir. Thanks. Next question.
Thank you.
All the best.
Thank you.
Thank you. Next question is from the line of Sanjay Kumar from iThought PMS. Please go ahead.
Hi, sir. Thanks for the opportunity and congratulations on a good set of numbers.
Thank you.
First question on the A&P spends. You know, a few years ago, we increased our A&P spends, say in FY 2018, 2019, saying that first you increase the mind share and then you convert the mind share to market share, which we weren't able to do in FY 2021, 2022. Now that you want to grow, you will increase your A&P spends again. What would be the strategy going forward in dealer network? Because the largest player, I think they have doubled or at least they've increased their retail touchpoints. That may not exactly be dealers, but they've increased it by 50%. Next two years, say we increase our A&P spends, and by then, Grasim would have entered the market in decorative. What would be our strategy going forward in distribution and specifically the dealer network?
In those years when we increased our marketing expenditure, our focus was more in terms of enhancing the mind share, and we got advantage. I think three years we gained market share in that period. When you are saying that converting, you know, the mind share to the market share, that opportunity happens from the dealers and the influencers. I think most of the activities, what we are talking about, the marketing activities, the influencer activities in that particular direction. One side you have to maintain your salience. That's why we are not talking very aggressive in terms of share of voice. You know, maintain share of voice so that, you know, you are able to maintain your mind share, which is strong number two as of now.
Concentrate on the activities that basically convert the mind share to the business, to the market share. That is first part. When you talk about the new competition, I think it's you know, because and generally what happens in this market, ultimately for good business, you have to create a good distribution and you have to create a good demand for which it is important that you have you know, should have a brand which we have, and then you have to create the distribution and support the distribution with the painter. That's a like, hard activity which you know, people will have to do.
I think we have advantage there that even if, you know, any new company comes in, I think they have to do this activity to build the distribution and to build the context with the influencer, and it takes its own time. By that particular time, how much work we are doing, how do we expand, I think, you know, that would be more, we will be more focused on that how do we speed up all these things and, you know, get the advantage.
No, my concern was on the growth rate. Say, Asian Paints is growing at 20-25% CAGR in the retail touch point, but we are guiding for 7% or early double digits. I see the divergence. Is that something to be worried about or we will change that going forward?
You know, it's like, that's what I'm saying, that earlier on, probably in the earlier years it was very simple because paint versus paint. Now it is not paint. There are so many things which are getting added. There are so many businesses. You know, I don't think. Because ultimately we have to work and, you know, see that, you know, how our home is rather than, you know, that just changing. There will be many products which probably fits into their strategy, but does not fit into our strategy. As I said earlier, that, you know, focus remain on the paint and the integral part of it. That is what we. Over a period of time, if there are some other products that the market is created.
Because typically in any industry it happens that if there are new categories coming in, so leader takes the initiative and they create the market. If that market is decorative, maybe one can decide whether you want to participate. At this stage, I think it is focus for us to see that in the paint area, which has been our core business, and wherever, whatever weaknesses we have had in the past, we come out of it. That is our focus area.
Okay, sir. Thank you. Second on capital allocation. You said that our utilization is at 65% and we are putting up CapEx in decorative, which will take 24-30 months. That's also the time Grasim Industries will take to come to the market. There will be a lot of supply coming in the decorative space. Wouldn't it make sense for us to get aggressive in industrial space and put up new CapEx there rather than decoratives where there is a lot of competition coming in? Just wanted your thoughts on that.
Industrial in that, you know, we have already created a capacity in Sayakha, and there is, you know, a lot of scope for brownfield expansion is there. As and when, you know, whatever demand we are able to foresee, I think we are covered in terms of the capacity. We are fully covered up because that's our one core area and we're fully covered up. In last two years, we've created a dedicated capacity for non-industrial, non-automotive applications also. We are fully covered up there. This capacity what we are adding is mainly in the water-based, you know, because water-based, generally the market growth also is double digits in last three years, four years, and that will continue.
Even if you see the normal growth rate, obviously we do this calculation when you want to expand your capacity, that what is the normal growth rate, what can go plus minus. You know, based on that calculation, we feel that the capacity is required. As I said that, you know, we are committed to our this decorative business also based on whatever, initiatives we are taking. As the time demands, probably, you know, whatever changes are required to be, you know, done in that. Therefore, to support that, this capacity expansion is required.
Okay. Given the competition in decoratives, are we seeing higher aggression from, say, players who are in industrial like AkzoNobel or Berger Paints getting aggressive in industrial space or?
Difficult to comment upon. Maybe possible, but I think industrial is a core business. Some of the things that I spoke about, I think we are also planning to go, you can say aggressive, you know, because there are opportunities in the non-automotive area where I said that it is segment by segment. The only thing is that, yes, we want to remain focused on the profitable segment rather than the lower profitable segment. Because in the decorative market, when the competition intensity goes up, there may be a possibility that the margin structure may change. At that time, you know, that if we are able to build our business in the industrial, in the better profitable segment, I think we'll be able to balance it out.
Okay, sir. That's it from me. Thanks a lot.
Thanks. Thank you.
Thank you very much. Ladies and gentlemen, the next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Hi. Thanks for the opportunity. Am I audible?
Hi. Thank you.
Hi. Am I audible? Hello?
Yes.
Okay. Hi. Thank you. My first question is, you know, Kansai Paint, in their presentation, you know, in the month of May, have given a guidance of 18% growth for the India business revenue growth. If I were to look at this quarter's performance and based on, you know, assume certain growth for the rest of the year, it seems that you should be able to grow 20% plus in revenue terms. Can you please help us understand, you know, what goes into the guidance and forecast of the parent when they guide for the India business?
Prashant, do you want to answer this question?
See, generally we don't give any guidance going forward. We don't make any forward-looking statements. You are a better person to judge how the industry is moving, right? You know the growth is happening. We believe the growth going forward growth is good, but we'll not make any statement of any percentage increase or something. We will move in line or slightly better than the paint industry. That's what I can say.
No, no. My question was when Kansai Paint in their presentations gives a guidance for India business, is that the sort of target that the board sets for you? Is that the guidance that you give to the parent and when they disclose to their investors? Because I think there is a disconnect, right? If the parent is giving a guidance for India business, then there should be some disclosure by the India entity also for India-based investors. Or at least some explanation whether that is constant currency guidance or whether there is, you know, Japanese currency guidance.
Basically what happens, we have this system of having midterm plans, three-year midterm plan, which we internally you know have with Kansai Paint in Japan. Those numbers have been given to them, basis which they have given the guidance. You know that was done some time back where after that some price increase also happened post that. Which were not. If your question is that, you know what goes behind that, this is like internally we have a system of midterm plan.
Mm-hmm.
From there they take those things.
That's helpful. Is it local currency or is it in Japanese currency? Do they make currency adjustment or it will be local currency growth?
It gets adjusted in the Japanese currency.
There is another element of currency assumptions that are done by them, based on the numbers they receive from you. Okay.
Yeah.
That is helpful.
You have asked a very different question.
Sorry. I asked a very?
Very different question.
Okay. Understood. All right. Second question is, in last year, most of the year, industrial, at least, base quarter industrial was very weak and the mix was ballpark 60/40 or maybe 61/39. This time if it is 55/45. The basic sort of calculation tells me that decorative business growth would be somewhere in the range of 35% YOY, and industrial would have grown at 60% YOY in this quarter. Is that understanding correct?
No, no. Basically 55/45 was the mix even the last year. 1%, 2% here or there, then we've maintained that 55/45, and that's the mix for the last year. The growth of, like total growth is around 47%, industrial is slightly higher. Decorative also is more than 40%.
Understood. Helpful. My final question is on margins. In FY 2020, in the first half before pandemic, your overall EBITDA margin was in the range of 17%-18%. Right now this quarter we are at 13%. Based on your earlier comment that the gap between decorative and industrial is about 800 basis points, some of the back of the envelope calculations suggest that your decorative business EBITDA margin would not be more than 300 basis points lower than where you were, you know, in a normalized RM environment six years back. Is that understanding correct, that bulk of the margin improvement from here on, you know, is contingent on recovery in industrial coatings, and industrial coatings could be probably 800-900 basis points lower at, in terms of EBITDA margin versus what you are doing in FY 2020. Is that the right math and understanding, ballpark?
I'll not comment on the mathematics that you used, you know, but understanding is correct, that maybe in the decorative margin recovery to the level of pre-COVID level is good and industrial there is a gap. In the future the recovery is dependent on the industrial. That understanding, you are right.
Reasonable to assume that decorative margins, your performance may be better, if not comparable, than the peers, and that this is partly because you've leveraged A&P more, and given there was more room also to leverage that. When I look at your FY 2022 A&P spends are 3.6% of sales versus 5% in FY 2020. I'm assuming that your decorative per gross EBITDA margin performance will be better than the peers, right? Better than industry.
Close enough. Yes, it's there are two things. One is this, the other is the mix. Our mix, we believe our mix is better. Yes. You are close to.
Understood.
You're right, I don't know. Yes, somewhere you are right.
That is very helpful. Thank you so much.
Thank you.
That's it from my side.
Thank you. Next question is from the line of Kunal Shah, from ICICI Securities. Please go ahead.
Thanks for the opportunity, Jain. Sir, just want to understand that in context of our guidance of growing, say paint business, at least in line or faster than the industry growth and same for the new businesses, and investing in distribution or communication and influencers. In that context, how should we see a profitability? Because on the other side, the expectation is that the RM prices are softening. To boost the growth, I mean, in the balance between growth and margin, which, say falling RM prices should we improve on a trend basis, improving margin from here? This is barring the, say, seasonality Q-on-Q movements. I'm saying that as a trend line, should we see improvement in the margins or as we are investing in a future growth, we should see some softening in the margins?
I think this question I tried to answer earlier also. What we are working upon is that how do we make our margins better in the areas where the margins are lower. Wherever the inflation is there, you know, how do we take more price increases.
Mm-hmm.
You know, we are conscious of our strategy and therefore you know that when margins are improved, some of the investments, you know, will happen. We are going to balance it out and, you know, please make the assessment that, you know, margin in that direction. But I think if we don't further invest in the business, then the margins will be better. But if we continue to the investment, then it may remain in the same area or plus minus few.
Okay.
I hope I've answered your question. Thank you.
Yeah, sure. Noted. Thanks a lot. Thank you. Thanks again.
Thank you very much. I now hand the conference over to Mr. Aniruddha for closing comments.
Yeah, thanks.
Anirudh, sorry, but there's a bit of disturbance coming from your line.
Yeah. Thanks. Thanks, Nirav. On behalf of ICICI Securities, we thank the entire management team of Kansai Nerolac Paints for the wonderful discussion. Now I hand over the call to the management for the closing comments. Thanks and over to you, sir.
Thank you. Thank you everyone for attending this call, and I was very happy to discuss the matter with you. Always your questions are most welcome, and they give us some good insights. Thank you so much. I want to comment again, you know, on Kansai in Japan. You know, we are getting a very good support and help from them. We are working with the good collaboration and, in terms of the technology, the new product trend, the strategy, a lot of work is happening together, and I hope that we see a better and brighter future. Thank you all of you for attending this call.
Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.