Ladies and gentlemen, good day and welcome to Kansai Nerolac Paints 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 the conference call, please signal an operator by pressing star and zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.
Yeah, thanks, Diksha. On behalf of ICICI Securities, we welcome you all to Kansai Nerolac Paints Limited Q4 FY 2021-22 results conference call. 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. This is first call of Mr. Anuj Jain after he becoming Managing Director, and we are glad to host him for his first call as Managing Director. Heartiest congratulations to you, sir, and over to you. Thank you.
Thank you. Thank you so much for your precious minutes. Thanks. Good morning, everyone. Namaskar. Thanks for joining this call, which is for quarter four of financial year 2021-22. You all have seen the result, but I'll give some commentary, and then we'll come to the question and answers. During quarter four, we recorded a top line growth of 4.2%, and for the year the growth was 24.7% top line. If you look at only for the quarter, decorative value growth was almost flat and volume growth was negative. During the year, we had some loss of market share in decorative, and we gained market share in industrial segment.
Decorative, where we had a loss of share, we feel that reduction in marketing and promotion expenditure over the last two years has affected our market share. In terms of other highlights of the quarter, it continued to witness inflationary pressures along with the volatility in crude and exchange rates. Overall inflation, you all are aware every quarter we are talking about it, but it still remain high and unprecedented rate, you know, during the year.
Now in the situation as we spoke about for the quarter four and for the, you know, annual, where we had a problem related to our margins in industrial, where the inflation is relatively higher than if you compare with the, say decorative and also like in decorative, the more price increase is taken, while industrial despite the price increase, we are not able to mitigate the inflation. I think clearly we have two tasks in our hand. One in terms of industrial that, what do we do? Our focus in industrial, you know, because we have a good strength there and, whatever scenario was there, still we are able to increase our market share. We want to still continue to increase market share in-
Hello?
Hello.
Hello.
Yes.
Sorry to interrupt. The line for Mr. Nimit was unmuted. You may go ahead, sir, now.
Okay. I was saying that clearly we have two tasks in hand. You know, one that in industrial, which is, you know, our strength area, we have a good market share. We are on the increasing trend. We'd like to continue our focus, you know, in the industrial to see that, you know, how much better we can achieve. I think the major problem, you know, which we talk about that how do we get margins in industrial. One obvious effort is getting the price increase, which last year also we have taken a good price increase, but it's still not able to mitigate the inflation. One that we continue to ask for more price increase. Other than that, what can we do so that, you know, we are able to better our margins?
One action what we are doing in automotive, you know, extending technologically superior products such as, Monocoat, Medium Solid, you know, which we have started introducing to more number of customers because there we can get little better margins. In the other, non-auto part, which is performance coating business, we are increasing our focus towards high technology, premium range of products. We are again relatively the margins are better. The low-end items where the margins are severely impacted, there we'll play low and soft. In coil coatings, which we introduced few years back, and there again the margins are tremendously under pressure. We have been able to build now, products with the better technology.
Appliance segment, we were not present, but we got the approvals, and we started supplying in the appliance segment where the contributions are better. Even in powder coatings, where we are market leader and we have a good share in the popular segment and economy segment, but our share is relatively lower in the premium segment and the functional coating. That's another area of focus, where we have you know come up with some new product in the functional coatings, and we are increasing our focus in the premium range. These are some of the steps which we have taken in industrial, and we'll be pursuing this step to see to what extent we can better our margins.
Coming to decorative, we spoke in one of the conferences, I think, two quarters back about our new strategy and, you know, what exactly we are doing. I'd like to give you some brief about that, and we started rolling it out. We have rolled out in the last few months. One is this, new brand expression, which is about Nerolac Paint+. Now, the Paint+ is all about differentiated products which are available in the market at a differentiated price point. These are the products with additional functional benefits. One of the product, which we started last year was Beauty Gold Washable. But now recently we have added, Mica Marble Stretch & Sheen. We are on air with the campaign of Mica Marble Stretch & Sheen.
We have launched last month Impressions Kashmir, the PU Enamel, high-end exterior is in pipeline and high-end water coating. These are some of the products which we are launching. You know, a lot of new products are coming out in the market. Our focus would remain to add more products in the premium and the super premium categories. Some of the products which I mentioned belong to this category. Having said that, Paint+ and the differentiated products we need to communicate to the market consumers, you know, that we have these differentiated products. We are increasing our communication through advertising and digital marketing. The communication will be focused on Paint+, which is a differentiated expression. Japanese technology, you know, because we are different in that regard.
The jingle, you know, which is very attached or, you know.
Unique to Nerolac. These are some of the areas, you know, which give us the differentiation from the competition, so we'll focus on that. For the communication, as I said, that reduction in marketing expenditure has impacted us. You know, we'll keep a share of voice which is equal or better than our market share, at least. You know, the threshold share of voice would remain. Whatever the market intensity, you know, changes according to our share of voice, you know, that we are targeting a share of voice, it will remain. The next step is that augmenting the market development structure to generate leads from sites and influencers.
You know, because one of our analysis is that in the market, from the dealers when we check, you know, they are ready to increase the sales in order to increase the demand. One part of the demand is related to consumers. The other is that market development by generating more leads, you know, which increase the business with the influencers also. To that extent, we have created the team and expanding it rapidly in the market to create the, you know, demand. We have had our influencer program, but we started getting aggressive on that with the acceptance of the digital Pragati app. Pragati is the name of our app, which we introduced, and it took some time, you know, for the adoption of digital.
I think, now, we are at the maturity stage, closer to the maturity stage. It offers the instant benefits and, the disbursement is fastest in the industry, is what we have been able to establish in last few months, and we try to leverage and encash on this advantage. With this, on track, in fact, we have started tracking the secondary sales from the dealer counters now, which we were not doing in the past, so that we know that when we sell how much is liquidated, and therefore it gives us advantage in terms of how much further we can sell.
In that sense, you know, related to this Paint Plus and the communication and the market development, with all these activities, now we want to see that, you know, how much better we can increase our reach in terms of distribution. Therefore, you know, we started placing some dedicated team to open the direct distribution and new distribution models, which I think in one of the conference I spoke about, that we are launching preferred model and some distributor models. That also we have started. Next part of our planning is, you know, institutional business. The project business we were weak, and today, you know, there are about 50 towns where the project business is quite good and growing faster than the retail. That contributed almost 70-80% of the total market.
We are expanding our reach. We have expanded our reach, and we are reaching to all these towns where the institutional business is good, with the right team available, sales and technical team available, to approach this segment. In terms of new businesses, Construction Chemical, Wood, and Putty & Adhesives, where we were the late entrant, but you know that whatever work we have done last one and a half year, now we have been able to catch up and our range is complete in Construction Chemical. Wood also, you know, we had tied up with Micro. You know that we have gone for the different arrangement which we started rolling out from the month of March and April.
Now we are fully set, and we believe that, you know, our growth would be definitely in line or better, and we are targeting a sales of more than 5% through these, you know, new businesses. In economy category, where in fact we had in the past introduced Soldier brand, but then in the entire industry there are a lot of new products have been introduced in the economy range, and in the main brand. We also have completed our complete range as a part of the economy. In economy now we have the range under Nerolac, and we have a range under Soldier. That basically, we, you know, we are able to leverage to see that what shift is happening from unorganized to organized, we are able to encash on that.
The advantage here would be that there is a range under Nerolac, there's a range under Soldier. Soldier, you know, that we are targeting absolutely additional distribution or different distribution and that, you know, can give us the advantage. We'll continue to take price increase wherever required to mitigate inflation. To that extent, in the solvent base, after the crude oil prices have gone up, there is a more requirement of price increase, which we have announced in the month of April on the price increase on the solvent base. We initiated the price increase in the market. One more thing to add in decorative is that we have ventured into services with five-day painting proposition.
Services have been existing in the industry for many years, but I think it's somewhere we started around 2000, but that time we estimated that services will contribute, you know, good to the overall business in 10 years' time. Maybe that time it has not picked up. In the current situation or the changing behaviors related to a pandemic, we do see that, you know, in the future, this business will pick up. We had made our preparation and piloted and launched the services, and we'll be expanding, this, you know, going forward. Coming to the other point, our focus on ESG would remain.
In fact, we have done a lot of activities and, you know, we have been acknowledged by a lot of bodies that, you know, we are doing a good work on the ESG, which we would like to continue our focus upon. There are initiatives in terms of how do we enhance our service levels, you know, which we have taken specifically for the weaker market. That also work will continue. Coming to the financials, as I said, the growth is 4.2%, you know, for the quarter or for the corresponding quarter of the previous year. For the year it is 24.7%. When we look at EBITDA, it is down by 59.9% in the quarter four.
For the year, the EBITDA will be growth of 23.3%. During the recent board meeting, board has recommended a final dividend of 100%, which makes the total to 225, against 525 of last year, but that included 200 as a special dividend which we have given in the last year. This is from my side, and now I welcome all of you for the questions you have in your mind.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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. We take the first question from the line of Vivek Singh from IDBI Capital. Please go ahead.
Yeah, thank you very much. My first question is on gross margin and raw material inflation which is out there into the system. Sir, how much of price hike you think we must take going forward to offset the inflation? Maybe in this quarter, the quantum of price hike that we have already taken, if you can give some guidance or understanding around that.
Yeah, thank you. If I look at, say, two parts of the business, in decorative last year we have taken approximately 21% price increase. With that increase, mostly if you look at water-based emulsions and water-based products, more or less it is covered, maybe another 1 or 2%, you know, will suffice. The problem is in the solvent, you know, because the crude oil, the price has gone up substantially. There's a lot of inflation in the solvent-based products. There, you know, we need a higher price increase. You know, we have taken already a price increase of, in the range of, say, 3% for the solvent-based items.
We may need to do more, but we'll have to wait and watch, you know, because in today's situation, very difficult to forecast that where the crude prices would settle. You know, if it settles, you know, say, about $110 or $105 or $195, the various scenarios, so I think we have to wait and see that how do we, you know, tweak our pricing, you know, related to this this trend. In the industrial category, where the solvent contribution, obviously the industrial category is mostly dependent on solvent. In last year we have taken in the range of around 18%, but inflation is very high, so definitely we need a more price increase. Having said that, it may not be possible to get the entire price increase.
We have started approaching our customers once again because the automotive industry also was got impacted. As of now we are trying to see that, you know, how do we create win-win and what, towards that extent we are able to take. We hope that in next one or two quarters situation ease out a little bit. Difficult to talk the numbers in case of industrial, but that will be the area.
Actually, where I was coming from is, currently our gross margin is rock bottom. I mean, if we look at over last nine, 10 odd years. Despite the significant amount of price hike which we have already taken in FY 2022, and what we intend to take also. What kind of margin, you know, we should be building in our estimates with regards to a steady state, kind of, a margin? I understand that, raw material situation is very volatile as well as in auto also there is a large degree of uncertainty. But if you can give us some understanding with regard to what, despite the price hike, you know, what should be, an expected level of gross margin at business level?
Also, if you can give understanding of what percentage of our revenue is currently from the auto business?
As I said, you know, I'll not quote the number, but as you rightly said that our margins are already on the lower side. To that extent, one can expect better, definitely in decorative. Industrial, one has to wait and watch. Maybe that industrial, if we assume in the short term, which is say one or two quarters, there may be more pressure, maybe decorative will be able to compensate that. Since we are in the lower range, you know, it is expected to be better. Decorative and industrial breakup is, Prashant, how much? 57%.
Yeah. For 55%, 45%.
55% is decorative and 45% is industrial.
Thank you very much, sir. Just one last question. On, sir, on waterproofing side of the business, you wish to make any commentary with regard to how, I mean, what we are doing incrementally and how, we want to drive growth into this category?
Yeah. We have created this as a separate business segment, and complete range we have available. We have a range available in the retail segment now. We have a range available in the project segment now. There are some special categories also which we are planning to introduce now. This is created as a separate business unit. We have created a team in the market. In retail we got a good traction. That's why I said that in these new businesses, construction chemical and wood finishes, we are all set now. We expect that our growth would be equal or better to the market. We are expecting around more than 5% sales to come from these businesses.
In how much time, more than 5%?
I'm saying that, you know, year time.
Okay, sir. Thank you very much.
Thank you so much. We take the next question from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah, thanks. My first question is on your comment that you initiated price hike in April. Wanted to understand this. Normally, in consumption, market leader generally takes the first price hike. In the last, say, 1.5 Years when paint industry has seen multiple hikes, how many times you would have been the first player to take hike and industry has taken almost 22% hike. Is there any net hike which is different from this number, so has rebates, incentives increased, so net hike will be lower without taking mix into consideration?
Your first question, I don't exactly remember, but I think about three times we have initiated the price increase in advance, and this time also the solvent we have initiated price increase. This is first part. The second part, as you said, is scheme. Scheme in the industry, if you see the reports of all the companies last two, three years, continuously their schemes have gone up. Our schemes have not gone up to that extent, but for the entire industry the schemes have gone up. Overall price increase in decorative was around 21%, but when you look at the scheme it would be 1% here or there, so only that could be a difference. Otherwise the price increase was 21%.
The schemes have gone up, and around 2-3 times we have initiated the price increase before.
Just one follow-up there. You mentioned you have initiated price hikes two, three times and your schemes have gone up much lesser than some of the competitors. Doesn't that impact market share? I know it impacts, but why would you do that given you are currently number three player and you recognize that the market share is a challenge. Why still do that?
I agree, that is what I commented upon. It does impact, you know, but, as I said that our mix of the business to that extent we are uniquely placed, you know, that where our 45% of this business is coming from the industrial. It was a kind of balancing approach, which we did. As I said in my comment, we do acknowledge, agree that, you know, this impacts the price increase and therefore we need to, bring some changes. Having said that, you know, as I said that, you know, when we look at, say, April when we initiated, you know, because the solvent prices are going up and someone has to initiate the price increase in the market.
There are sometimes situations where you know that it's a matter of time, whether it's today or tomorrow, the price increase is going to come, so why not increase the prices? Suppose if the industry does not increase the prices, then you have to probably come back with your rebating or either you have to compensate with the other items which are like water-based items which are more profitable or you have to compensate it with the rebating. That understanding is there and you know that is what we are looking at as of now. When the inflation is so high and you are clear that price increase is going to happen, then you can always take the decision to initiate it before.
Sure. My second question is on the EV part of the customer base. You have a very strong relationship in most of the auto segments, because of the Japanese parentage, et cetera. Now EVs, we are seeing a lot of startups entering. How you are ensuring that your alliance market share in different parts of auto paints, that remains protected here. Do you see a big risk here from a 5-7 years perspective?
No. Actually all these, you know, startups who are coming, most of these people are planning to paint it, you know, through the ancillaries. Most of the ancillaries that whom they are, they are connected with, they are our customers. We are quite strongly placed, maybe, you know, one or two new startups, where, you know, it is not there. There also we have got the entry. We are quite as good as I would say that in the normal two-wheeler or three-wheeler, we are equally placed in the EV also.
Okay. Last quick question on the non-crude oil raw material, which is, say, around 60%, what would be your sense on supply demand equation FY 2023? Any outlook on pricing you can share. I understand these are very difficult things to comment, but on the supply demand, are things now turning more favorable?
I would request Jason Gonsalves to answer this question.
On supply and demand, I think things are still not favorable. There is a lot of turmoil in the supply markets. At least for the coming one or two quarters, you know, this situation will continue. After that, we would have to wait and watch.
Okay, thanks. That's all from my side.
Thank you.
Thank you so much. We take the next question from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.
Yeah. Hi, sir. Am I audible?
Yes.
Yeah. My question is basically that in the decorative side also, I think we have lost some 100 bps plus kind of a market share. What has led to the loss of market share over there and what steps we are taking to regain the lost market share? That is question number one. And secondly, if you can share with us what is the breakup of volume growth for the company in this quarter on the decorative as well as on the industrial side?
Decorative market share loss depends on, you know, because generally what happens is that there are four, five listed companies. Whether you take based on that or you can, you know, take all the companies. I think your guess is okay, we have lost share, I think in last two years. In my commentary, if you have heard, you know, that is what I mentioned. The steps I would repeat, you know, in a summarized manner. One is that, you know, this new brand expression of Paint+, which get extended to the differentiated products. We are launching a lot of new products which are different in their proposition and the price point, and we'll be adding more products. Increasing our communication through advertising and digital marketing.
Our focus will be on the Paint+ differentiated products, Japanese technology, which is very unique to us, and jingle, which is again very unique to us. Our share of voice will maintain a threshold share of voice. We will not reduce it. We are augmenting this activity with the marketing development structure. It's a complete team structure, which is basically to generate leads from sites and the influencer. Our influencer program, we have gone very aggressive with the fastest disbursement in the industry. We have started tracking secondary sales. In distribution, we have, you know, now have dedicated team to open more distribution and the new distribution model. The project institutional business where we were weak, we expanded our reach to almost 50-60 towns, which contribute quite large to the institutional business.
In the economy range also where the shift happening from the unorganized to the organized, there we have completed our range in Enamel and Soldier base. These are by and large, and also we have ventured into the service proposition with the differentiated services of five days there. These are some of the actions, you know, which we have taken, and we are now focusing on the execution of these actions to see that, you know, how do we arrest the decline in this market share.
Okay, sir. On the same line, do you see, to execute this strategy, any, you can say, uptick in the ad spend in the coming, say, quarters?
Yes.
The ad spend will go up from the normal levels?
Yes.
Okay. Secondly, sir, if we look at our balance sheet, there is a sharp increase in the inventory. Is it the finished goods inventory or predominantly due to raw material?
Prashant
Yeah.
Yeah, it's primarily because, you know, you saw the inflation which has happened during the year is pretty high. That has been built up. You know, automatically inventory has gone up. The volume-wise, there's no major increase in the inventories, primarily built up by inflation. Mainly it is because of the inflation which is very high, and that is reflecting in the inventory.
Okay. Volume growth, and if you can share the breakup that how was it, say, between auto-
Currently, we don't share on the industrial part, you know, but in decorative, as I said, the value growth is flat and volume growth is negative around 7%-8%.
Okay. Thanks a lot, sir.
Thank you so much.
That volume growth, just to clarify that, minus figure was for the quarter I was talking about, only for the quarter four.
Yeah, yeah.
Thank you. We take the next question from the line of Amit Purohit from Elara Capital. Please go ahead.
Yeah, sir. Thank you for the opportunity. So just on your strategy of gaining, regaining market shares from here on, what would be the easier thing to do, I mean, for you to gain market share? Would the schemes kind of help you to gain a faster market share? Or do you think that a significant increase on above the line will also be required? I just want to understand. We used to spend close to about 6% a few years back. Are we coming back to that kind of a scenario, or do you think that largely it will be spends on schemes?
Second question is more on the data point in terms of your touchpoints currently and how much we have added in the last one year in terms of dealer touchpoints.
To get your first question, in terms of, see, it's a both kind of combination. I know because when it comes to the schemes in the market, we need to be competitive. You know, we have a relative. For example, you know, depending on my brand strength, if there is an X percentage being spent, you know, that what should be my spend just to maintain the ROI, you know, for the customers and the dealer. I think, you know, that is directly, you know, correlated to what market is spending. You know, for the longer period or medium term to longer period, we believe that the growth, sustainable growth come from the marketing activities.
When you're giving a past reference, that time obviously we had gone very aggressive and, you know, we have been able to increase our mind share and which we are still able. Our mind share is still good. You know, we are still having a good mind share. Our now objective is just to keep it, you know, maintain it. Probably in the last two years, our share of voice has come down far lower than what market share we have. It may not be that aggression what you have seen in the past, related to our marketing or especially the communication or visibility. Definitely we are targeting a particular share of voice which we'll be maintaining.
Tomorrow the competition intensity goes up, so my target would be share of voice, and to that extent, you know, it may increase the marketing budget.
Sure. Thanks. My second, on that touchpoints, sorry, if you can highlight what is the total touchpoints in terms of dealer network and in addition?
Approximately 26,000-27,000, and generally the rate of growth is around 8%-10% we have added in a year.
This will all have tinting machines or?
No. 80%-85% of that would have a tinting machine.
Okay. Thank you so much. Thanks.
Thank you. We take the next question from the line of Shrenik Bachhawat from LIC Mutual Fund. Please go ahead.
Hi, sir. Thanks for the opportunity. Just one question mainly. Could you throw your views on the outlook on the auto segment and what is the price hike situation in the auto segment?
What is that? What is the second question?
Price exception situation in the auto segment. How much is pending? How much, you know?
Outlook is passenger vehicle outlook is good because you know last year also the demand was there but supply chain shortages were there because of this chips. But gradually I think there is an improvement. As quarter by quarter the auto industry is expecting in the passenger vehicle it will be good and pent-up demand is there. I think that outlook is good. In two-wheeler last year because of the rural it was under stress and production growth was negative. Maybe for one or two quarters it may still continue. Based on whatever we are seeing the agri numbers the you know the way it has gone up and also you know depending on the monsoon which is expected to be normal.
I think, you know, maybe post-monsoon, the rural demand may pick up. If we consider that, then in comparison to last year, even the two-wheeler, we are expecting a positive growth. In price hikes, last year we have taken good price hike, you know, because in the stress situation, if you get, say, 18% price increase, which is good, but it is not good in the sense that it has not been able to mitigate the inflation. We have started approaching because there we cannot take straightaway the price increase. We have to go and discuss customer by customer, which we are doing that, and we understand it is difficult. We'll be able to get something. How much? It depends, you know, that we have just started focusing on that.
We'll have to see that how much we are getting from the industrial customers.
Sir, at current prices, how much price hike is required?
Prashant, do you want to answer this question?
See, it's a very difficult thing to answer because the things are not stable yet, right? How much to get, well, you know, the crude oil is always very, very volatile today. It means going up and down. We have to wait for at least a quarter to understand what is the exact number which will be required. Going again and again to the OEMs is very difficult. We have to wait and watch.
Basically now, as of now, we don't want to comment on the situation because this is very, very volatile. It keeps changing. Actually we don't want to talk on that number.
Basically, about the industry I want to understand, newer players are emerging in the industry, smaller players are getting aggressive, newer building material players like Astral are getting into the paints industry. What is your view on that for the next four, five years? How is the industry shaping up? What is your view on that?
Good part is that, you know, in the paint still the penetration is between 50-55%. In the last 10 years, 15 years also, we have seen that, when the players have become aggressive in terms of communication, advertising, you know, more number of products, the penetration has started going up. The pace of, you know, penetration going up has increased last 5, 10 years. When the new competition comes in, there will be a multiple players and good players. We expect that overall awareness exercise will go up, and that will enhance the industry growth. That's one part. To that extent, there may be a possibility that some of these players participate in the growth part of the industry. That's one good part.
Otherwise, you know that when the fragmentation happen and number of players goes up, obviously the competition goes up. Therefore, more innovations will happen in terms of the product or communication. Obviously the competition intensity would be higher, no doubt about it. Whether industry would be able to retain, this is true for the entire industry, whether they would be able to retain, the industry margins which used to be there in the past, which has already come down now, but I'm just saying whether they will be able to go back to that. Let's see. In that situation, that will be a question mark.
Sir, could you throw some light on our innovation when product launches for the next one year, and how is it compared to the other large players?
Some of the products I mentioned, like, you know, Beauty Gold Washable, which is like, this is a washable product which is very different product and, it is the price point is also different. Recently we have introduced Mica Marble Stretch & Sheen, again, a very differentiated, product, at a differentiated price point. We are in the process that these are the products which are being introduced, Impressions Kashmir, which is a very pure product, which has no smell, you know, very, very safe product. Then there is a polyurethane enamel, which has, almost ten different benefits. There is a high-end exterior which we are launching, you know, which has, which can keep the coating intact, and it has a self-cleaning properties. There are some more products which are there in the pipeline.
Every product which we are introducing, there is a proposition which is different in the market, or it is a, maybe a proposition which is available at the premium end, but we are making it available at the popular end, that price point.
Thank you so much.
Thank you.
Thank you. We take the next question from the line of Akshita T from SBI General Insurance Company Limited. Please go ahead.
Hello. Thanks for taking my question. I wanted to understand that in your opening remarks you mentioned that you're coming up with differentiated products at different pricing points, which are probably not available in the market. Could you please throw some light on, I'm sure you also maintain an index kind of a thing that tells you how better are these products performing compared to the other products that you have, and what kind of contribution do they have to the overall portfolio? What growth prospects are you seeing? I mean, it's too early, like you've just started, but any sense on how it is also going to be going forward?
Okay. The products what we have introduced, which I mentioned, Beauty Gold Washable, Mica Marble Stretch & Sheen, Impressions Kashmir, they all are different in terms of their feature. These are feature-led product in terms of their proposition. Pricing also, we are ensuring that if some of the features are available in the market at a premium end, then can we make it available to the popular end? Because, see, the way the prices have gone up in last one and a half year, there may be a possibility in certain market you may see some downgrading, you know. To that extent, we are trying to make it available at a price which is more affordable. That's the first part. Most of these products are being introduced in the premium category.
In the premium we have two segment, like premium and super premium. Generally the contribution, value contribution in the market for this premium, super premium could be in the range of 40%, just approximate figure. Our share has been very low, so our contribution would be quite low. Market is 40%, we will be far lower. We see that as opportunity because we have a different distribution. Within that distribution, our premium category, share is low. Advantage is that, you know, if we concentrate with these products, even on the existing distribution, we should be able to increase our revenues.
Okay, thanks. Given the downtrading that's been happening in the paint segment also, and given that we are not very strong in the economy segment, even in the premium, we are not the leaders. The industrial doesn't seem to come back anytime soon, at least for the next 2 quarters. Oil does not seem to settle down anywhere below 90, is what the consensus is. Is it fair to presume that the next 2-3 quarters will still remain at the levels at which we've seen this current quarter? Because there clearly seems nothing positive happening at the current stance.
My take on this is that when you say premium, popular economy, I think we are strong in popular and economy, and we are quite good. What you need to do in popular economy is basically it's an input game, that we have a good distribution, we have an inherent demand, you know, which is there in the market. Latent demand is there. If there's aggression happening in the industry, you know, you give the inputs and you are able to generate the sale. What is not so easy is the premium category. The premium category needs a lot of marketing effort. When we are talking about our actions, marketing, I think that all will be for this premium category of products.
Rest of the part is like earlier also the question was asked whether you will be putting in money in the marketing of the scheme. When it comes to the economy and popular range, I think it is more of a scheme, but when it comes to the premium category, it is more of marketing. Positive, I can say that, you know, whatever price increase has been taken last year, because in the last year the weighted impact was very low. So that price increase, you'll see a reflection in the coming quarters. Coming to the growth part, I think, we are still, you know, optimistic that volume growth would still be, maybe single, you know, higher digit growth or closer to, you know, 10%. That's also a positive part.
Even in the industrial, in terms of growth, I think overall if you combine all the segment, it may still be closer to the double-digit growth. To that extent, the growth seems to be fine. The last year increase, which has not reflected in the last quarters, I think, you know, that advantage would come in the coming year. With whatever actions, initiatives we are taking, how much advantage we are able to get of that would be a added advantage.
Okay. One last question. We kind of missed the opportunity of the economy segment for nearly six years because, you know, we were kind of focusing on the auto segment, which was kind of in a bull run. We've tried to kind of fill in the portfolio gap for the last two years. Even in the opening remarks, I still hear that we're still focusing on the premium product segment by adding new products. Given the penetration that is still less than, which is more going to be a demand-led, where you will have more of economy-led products being sold, wanted to understand why are we not focusing on that category? We nearly missed the opportunity for six years now, and even today we don't seem to be doing much on that segment.
I think, in the comments I mentioned one more thing, that we have a complete range of economy products in Soldier and Nerolac both now. It's like, you know, I think we have not missed in the last five, six years, but we missed it in last two years because of, as I, you know, spoke about that obviously there's the inflation pressure, the margin pressure, what makes. I think last two years our aggression in the economy segment was not much. Now we have a complete range of the product. We have introduced more number of the product. With the combination of Nerolac and Soldier, now we are poised. Now it's, as I said, in the economy category, you need a distribution, which we have. Now, how much aggression we want to show it is up to us.
The only thing what I'm saying is that maybe in the two years we have lost, and now we are clear that with this range of the products available, at least, you know, whatever growth is coming in the market, that, you know, we'll be able to get. Premium what we are trying to build because there our market share is less. In the economy our market share is not so less. For the sustainability for the future, you know, for next few years, it is important. We start building it now, you know, which will help us in the coming time. While you know that for the short run, we will still be dependent on the economy and the popular range of the products.
All right. That's it from my end. Thank you.
Thank you.
Thank you. We take the next question from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, sir. Just wanted to clarify the investments that you require for the decorative segment initiatives. Would this entail near-term pressure on decorative margins? Because you said marketing cost budgets will go up, and hence would you wait till we have stability in industrial margins before you kind of embark on this journey?
No, actually, because you know the as we discussed earlier also that margins are already in the lower range. Going forward, you know, because whatever price increase has been taken in the last year, and more or less, you know, the emulsion product, their price increases has mitigated the inflation. That advantage will come. Marketing expenditure will go up, but our take is that in this current situation, we can afford to do it. You know, so this is the right time to go for that.
Industrial will take a couple of quarters to bottom out, but decorative might see some, you know, impact near term as we initiate investments in marketing. Is that the right way to see this, sir?
See, as we said, in the short term there will be some pain, but I think on the long-term basis, it's going to be fine.
Perfect, sir. Got it. On that bit, just the long-term bit, sir, any guidance on the likely margins in the medium term once inflation normalizes? Basically, you know, a sense on what is the normalized margin in our view.
See, we'll not give any guidance on the margins because that's not right right now, because, situation is very fluid. If you look at our past performance, right, see such sort of inflation as we have witnessed in last maybe one and a half years, this never happened earlier. Going forward, one can surely look at some, you know, improvement in the margins going forward on a long-term basis. If it's the past year performance, if you see, our EBITDA total basis, that is Deco Industrial was in the range of 14%-15%. Let us see whether we can achieve that or how fast we can do it. It all depends on the normalization of the situation.
No. Got it. That would be the range that we can kind of pursue, but the timeline might be uncertain. That's the right way to look at it.
Yeah.
Okay, sir. Perfect. That's all from my side. Thank you very much.
Thank you.
Thank you so much. We take the next question from the line of Shirish Pardeshi from Centrum Broking. Go ahead.
Yeah. Hi, good afternoon, Anuj, and happy congratulations.
Thank you so much.
Hi, Prashant. Thanks for the opportunity. Sir, I have two question. When I refer your digital technology slide, you mentioned that Dealer Saathi app and Influencer Pragati app. Question here is that what exactly we are trying to do here? Is that the database or is the influencer, is actually pushing the product and, then complementing the dealer sales? The sub-part second question is that, to your 27,000 dealers, what you mentioned, how many people you have already got under this app?
Jason, you?
So-
Yeah.
On the Pragati app, basically our whole endeavor was to you know map the journey of the influencer and make it a direct connection you know between the company and the influencer. Earlier influencers would go through the dealer route. This is a way of directly engaging with the influencer. Also, like Mr. Jain mentioned in the opening comments, that through this we are also able to now understand the secondary sales. Now, when it comes to the dealer app, it is basically opening another channel with the dealer, which is basically you know a digital channel with the dealer. We have given the facility for the dealers to also place the orders directly on the company.
We hope, you know, that the same trend that we are seeing in other industries where, you know, the channel starts putting the orders via the digital medium, that will gain traction. Also to ensure that the dealer doesn't have to depend, you know, on the company personnel for, you know, regular inputs that he requires to run his business on a day-to-day basis. All those inputs are given on the dealer app.
In addition, when you're saying how many dealers, I think as of now we have covered more than 40% of the dealers.
Yes, 40% of dealers are-
Now we are, you know, ramping it fast so that, you know, we are targeting how do we do more than 80%. Actually, dealers can get any information, whether it's related to his accounts, product, anything, you know, that is available with him. Even with the painter, as we said, that, you know, it is also linked to the incentives that we have started directly to the painter. Earlier, you know, we used to do it through the dealer, and therefore there was a time lag. To tell you very frankly, that if I compare with the past, when we used to settle the incentive in 30, 40 days time, now we are settling in one minute time. So that's the kind of, you know, thing with what we have reached.
Any quantitative numbers, Anuj, you would like to substantiate that, like what percentage of business we target to get it through this app, say, next one, two years?
In terms of reach, you are saying?
Yeah.
In terms of reach, dealers we are targeting more than 80% dealers should be there on the app. Painters, I'll not tell the number, but we have a database, you know, that. Out of that database, you know that, 80%-90% painters we are planning. We are doing a lot of activities for our adoption and every quarter we are seeing. I can say that in the last one or two quarters we made quite a good progress. By June end, at least, you know, in every business we have a threshold that if these number of painters are available in your app, at least your program can run successfully. I think we'll be quite closer to that by June end.
Okay. My second question is on the market share. You did mention that we have lost the share. Particularly what I was looking for some quantitative comment. Is there any particular region we have lost more and that's why the average market share is standing at 12%?
Actually, you know, sales contribution is quite high from north, and that's the region where we had a loss of share.
The third and last question. When I see the inventory which has gone up, Prashant did offer some comments. Then when I do the channel, even channel inventory has gone up. To my understanding, if that is true, if you can comment some qualitative remarks saying that what was the channel inventory when the things were normalized? Obviously with the inflation, the inventory has gone up in the trade. I think if you can offer some comment on that.
Channel inventory has gone up in, say, third quarter, where a lot of price increases happened in September, October. Channel inventory has gone up tremendously high. I think now it is rationalized, now it has, you know, come down. I think the regular channel inventory as of now.
For us, it would be in the range of about 20-25 days, which would have come down from 40 days.
Maybe around 30 days.
Okay. Okay. That's really helpful. Thank you, and all the best to you and the team.
Thank you so much. We take the next question from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, sir. You mentioned that in decoratives, the volume decline was about 7%. Given that there is an 18%-20% price growth in this segment, the value should have been close to 10% positive instead of being flat. What explains this difference?
In the fourth quarter, the premium growth was very, very low, in fact, quite negative. Mostly the sale has come from the ancillaries product like putty, primers, low-end emulsions. That's why you can say that the mix has deteriorated.
What is the underlying reason for premium really slowing down faster than the low-cost emulsions?
Sorry.
What is the reason that premium products have not done as well as the low-cost emulsions? Is it down trading or, I mean, is there some other explanation?
There are two parts. One, that in the third quarter when the price increases happened, it was, you know, substantially high on the premium products, and therefore, dealer stocking went up very, very high for the premium products, and that took time to come down. Also, as you said, you know, downgrading, that is also happening. Both the things have affected the sale of premium in the quarter four.
Do you think that this fact that the primary sales for premium products has really been affected very, very badly this quarter, is that one of the reasons why your margins are lower?
Possible. It's a mix of these things, you know, because as we said, okay, in decorating maybe you can say mix and then industrial, you know, where the inflation was further higher. Also third reason that, you know, our contribution of the solvent products relatively more.
See, in the fourth quarter, generally, my industrial sales percentage is higher. If you see, look at the mix. Normally it is about 55%-45%. You know, then in the fourth quarter, generally the industrial percentage goes higher. That's the reason because industrial contribution is lower that has affected our margin in the fourth quarter.
Margins are lower in industrial and when your sales of the industrial business is higher, that also is reflecting there.
Understood.
Thanks.
Thank you. We take the next question from the line of Tejas Shah from Spark Capital. Please go ahead.
Hi. Thanks for the opportunity and congrats to Mr. Jain on the new role. My first question pertains to slightly longer term. If we see last three years or five years CAGR, would it be a fair assumption that our decorative growth would have been higher than our industrial paints growth?
Last five years, yes. Yes.
Sir, if we see our commentary on our mix, which has been kind of static at 55% for decorative and 45% for industrial, and it has been static for last many, many years now. I mathematically, it actually defeats the equation that we are seeing because we have been kind of at 55%-45% for last many years, if I see my notes five years back, six years back. I don't understand why that number is not changing materially in favor of decorative yet.
I think, you know, five years back, numbers used to be 50, 52%. When we say 55, obviously plus minus 1% here or there. If you see last one year or 1.5 years, then the growth is similar. On the average basis, I think the last 5 years I would say that it has gone in, you know, favor of decorative to the extent of 3%.
Sure. Sir, in past we have always maintained that at the EBITDA level, both the segment actually contribute almost equal margin because of no marketing overheads in the industrial side. Considering the pricing pressure that we have seen in the recent past, would it be fair assumption that at EBITDA share level, at the base that we are sitting today on, the share of decorative paints will be way higher at EBITDA level than the industrial paints?
Yes, you're right.
Okay. Sir, just expanding on that, and then just referring to Percy's question also, if we do the math on the industrial side of the equation, taking 55, 45 as base, and that means that this 45% of the business had actually a very decent 15% kind of growth in the quarter to generate 6% of overall growth. Is that math correct? Because it means that industrial actually did very well compared to decorative in this quarter.
In the quarter four, you are saying?
Yes, sir.
Yes, quarter four I said that total growth is 4.2% and decorative is flat, so the balance growth has come from industrial.
Okay. Sir, last question. Employee cost had a decent jump in the quarter. Considering the performance, I'm assuming variable pay won't be that high. Any one-offs there in the quarter?
Yeah, this is one-off in the quarter. There are some provisions, but it's a one-off outlier.
Sir, would you like to call out the number on the one-offs?
Yes, sir. See, if you read the notes to the financial results, there is one provision for retiring benefits to the directors which has been made, and that is about INR 24.22 crore, which has come in this quarter. That's the reason that manpower cost is higher.
Okay. Sir, is it for directors or is it for one director?
For retired ones.
Okay, that's all from my side, and all the best. Thanks.
Thank you. We take the next question from the line of Abneesh Roy from Edelweiss. Please go ahead.
Sir, a few follow-up questions. First is, you saw good growth in putty, and my sense is most of the paint players are also seeing that. How many more years of very good market share gain for the industry, paint industry you see, versus cement industry in putty? Because last 3-4 years, paint industry has taken massive market share. Could you comment on the industry level, what's your thought process on putty growth, next 3-4 years, or next 2 years, or next 1 year?
I think, see, overall putty growth is in line with the industry growth. For the paint industry, the growth is higher, as you're rightly saying that, you know, maybe they are able to take the share from the cement, you know, companies. Still their share is quite high. It depends on, you know, what level of aggression you want to play. I think, you know, for next two, three years, I'm not saying the similar kind of growth what you have seen in last two year, but definitely higher than the market growth you can still get from putty.
Why is the market share growth happening for paint players? Is it because of cross-incentivizing because you have much more product portfolio versus a cement company? Is that the main reason? Or pricing, there is more aggression? Because these are very wafer-thin margins. So I don't think you can do much on the pricing bit, right?
Actually the distribution is common. Basically people who are selling paint, they are also selling putties. Now, you know, putties are definitely a price-sensitive product. Ultimately, whatever aggression you have seen, you know, we have not been that aggressive, but whatever aggression you have seen in paint is basically from the pricing aggression. When you are getting share, you are getting on the price.
Sure. Second question is on the advertising. You did mention that you would like to be more aggressive given so many new launches. My question is on the paint industry again, on advertising volumes. In FMCG, what we are seeing, FMCG volumes are down sharply, almost 20% down, because of the gross margin pressure. In FMCG, the EBITDA margin pressure has been fairly controlled in most of the cases. For the paint industry, are you also seeing on an overall basis that paint volumes will be down?
No, we are not seeing down. In fact, we are seeing that even at volume level, there would be, you know, higher single-digit growth is what we are seeing in the volumes.
Okay. Last, quick bit. In the distribution, market leader is trying to do something new on the wholesale bit. What would be your thought process that, yes, direct reach, direct dealer, dealership is there in paints for every player. Now on the wholesale, is that a good strategy? Could there be some issues because of that?
Wholesale always create a disturbance, pricing disturbance in the market and the process, you know, bring down the margins and therefore some dissatisfaction. There are two part of wholesale. One, to reach to the market where direct distribution is not available. Our approach is that wherever we are not able to reach directly, there, you know, how do we reach out through the wholesaler and distributor. Otherwise, you know, creating a wholesaler and distributor data, it, pricing, you know, stability issue in the marketplace.
Is that a big problem? Because market leader will be present in almost all the key regions. Still, if they're doing it, does that create a problem for you because you are a smaller player?
Two ways we can take it. You know, one is that, okay, in that process, when there is a pricing volatility in the market, so there is a dissatisfaction and therefore it's opportunity, you know, whether you would like to encash upon because their reach is higher. You know, wholesale and distribution always create a pricing disturbance in the market. That is rather of a problem. In the short run, obviously, it is, you know, you get the more increase in terms of reaching touchpoints or outlets. For the other players, sometimes there is an opportunity, you know, because people, the margins of the dealers are very, very low here. In fact, that's why, you know, when the companies are able to offer good margins or better margins, you know, some amount of dealers are ready to shift. That is one opportunity available.
Second, in fact, you know, for us the answer is that, you know, because of weaker player, there are so many market where we don't have the reach, and maybe these are very smaller market where we cannot reach directly. Therefore, as a part of our distribution plan, we also have a plan of wholesaler distributor, but only for those market where our reach is poor.
Okay, thanks. That's all from my side. Thank you.
Thank you. Thank you.
Thank you so much. I would now like to hand the conference over to the management for closing comments.
Thank you so much for all your questions, and it was very nice to interact with you. We definitely value whatever insights come from you and, you know, the points what you give to us. That's it from our side. Thank you so much, and wish you all the very best for the good times, you know. In these past years, we have been seeing so many uncertainties. Let's hope together we are able to come out from this world of uncertainties and get into a more certain world. All the very best to each one of you. Thank you so much.
Thank you. On behalf of ICICI Securities, that concludes.