Gentlemen, good day and welcome to the Kansai Nerolac Q1 FY 2022 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 touch-tone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.
Thanks, Karuna. On behalf of ICICI Securities, we welcome you all to Q1 FY 2022 results conference call of Kansai Nerolac Paints Limited. We have with us senior management represented by Mr. Anuj Jain, Executive Director, Mr. Prashant Pai, Director of Finance, and Mr. Jason Gonsalves, Director, Corporate Planning, IT and Materials. As everybody knows that the paint sector has revived very fast from COVID wave 1, and even after COVID wave two, there is a strong growth visible in June month onwards. However, the input prices continue to remain impacted, but we see Kansai have been able to report strong numbers, aggressively leading by the industrial and automotive recovery too, as well as strong performance in decorative paints. We continue to remain positive on Kansai, and we have an add rating on the stock.
I hand over the call to the management for their initial comments, and then we will open the floor for question and answers. Thanks. Over to you, sir.
Thank you, Aniruddha. Thank you, Namit. Good morning, everyone. It is nice to connect with all of you. Hearty welcome to this Kansai Nerolac investor call for Q1 of FY 2021/2022. I'll give some brief about the quarter one, and then we'll open the forum for the questions. During first quarter, we recorded a top-line growth of 117.6%. All businesses divisions did well. Industrial growth was higher on account of low base. Decorative specific, the value growth was ahead of volume growth. We improved our product mix. Demand was this time better in urban towns, so if we compare with the last year, last year the demand was better in the upcountry market. This time it was better in the local town. Some of the key highlights for the Q1 for decorative is that, as I said, emulsions we did well. The product mix improved.
We increased the number of tinting machine counters because emulsion sale is dependent on the penetration of machine counters. There are multiple new products which we started launching last year. We kept on expanding this to new and new geographies. Therefore our contribution from the new products have increased. Most of these new products are in the emulsions and the new businesses like construction chemicals and the premium wood finishes. The Beauty Gold Washable, which is one of our little different offering to the market that has a proposition of antibacterial and washable with consumer proposition of Safvi and Sevvi, which is in line with our approach of PAINT+, offering PAINT+ to the market, was accepted very well. We are getting a good traction and trending in this product.
In new businesses, where we were a little late in terms of introducing construction chemicals, premium wood finishes, but we got a good traction. I think our range of products we completed in the last quarter and the remaining geographies also we expanded in the first quarter. These businesses have picked up and trending well in our portfolio. In terms of price increases, we took three price increases. One was in the last week of March and then two during the quarter. Three price increases we have taken so far in decorative. Our focus continued to be on paint, emulsions and distribution, new products and new segment like construction chemical and premium wood for decorative. Coming to industrial, the overall growth was good, higher on account of low base, but still there are challenges.
As passenger vehicle is facing some shortages of semiconductor chips, therefore the production is still not going to the ideal level. Two wheelers demand was sluggish, mainly the demands were lower from the rural sector. Commercial vehicle and tractor demand was better. Our area of focus in industrial is new business niche segments like coil coating, functional powder, high-performance coating, we are increasing our traction here in all these new businesses or niche segments. Even in the existing accounts, we continue to put focus on increasing our share wherever it is possible. Also the approach related to seeking price increases because the inflation has been high, is higher. Coming to subsidiaries, if you look at local subsidiaries, Marpol, which is powder coating, Perma, which is construction chemical, Nerofix, which is adhesive, all these businesses recorded high growth in quarter one.
In international, Bangladesh did well, but Nepal and Sri Lanka was relatively impacted the most because the lockdown was for a longer period in Nepal and Sri Lanka. While in Bangladesh, till June it was going fine, and only in the last week of June, there was a lockdown which was announced in Bangladesh. Some of the other highlights, as the inflationary trend continues, our focus is continued on cost reductions, formulation management, and judicious overhead management. That's one area where our entire team is working pretty hard to see that how can we improve on that.
The customer visits, which we started sometime around January, February. Then again, because of this lockdown, there was some gap. It has restarted now. The entire team and the management has started going to the market. While we are going, we are still following all the precautions and guidelines in our factory offices and whenever we are visiting the markets. Recently, there was a rating on ESG by CRISIL. They have rated the Indian companies on ESG. There are a total of 225 companies. We are rated in the top quartile. In the overall companies also, which include banking, IT, manufacturing, all kind of sectors, we are rated in the top quartile. Even in the specific paint industry, we are rated in the top quartile.
Coming to financial for the quarter, the net revenue was INR 1,301.2 crores, a growth of 117.6% over the corresponding quarter of the previous year. In terms of EBITDA, the absolute figure was INR 187.1 crores, which is a growth of 132.4% over the same quarter of the previous year. PAT was INR 118.7, a growth of 177% over the same quarter. Even if you look at EBITDA in terms of percentage, we have a little improvement compared with the corresponding quarter of the last year. Looking forward, we feel that the vaccination program, which is underway and hopefully it has picked up some traction on month-on-month basis. We feel that with the vaccination going up, also a forecast for good monsoon, demand should recover. There's always uncertainty related to when we started the first quarter, we never thought that we'd have to face the lockdowns again.
That uncertainty will always remain. From the company side, because there's a high inflation period, we would be aggressive in seeking price increases. Our focus will continue to be on new segment where we have picked up traction, new products which we have expanded and will continue to do that, digitalization, and cost optimization. That's a brief from our side on the Q1, and now we welcome the questions.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may please press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. The first question is from the line of Prachi from Bay Capital. Please go ahead.
Yes. Good morning, sir. Hi, this is Prachi here from Bay Capital. Sir, I just wanted to understand. In the last quarter you had mentioned that you had been negotiating for price increases with OEM and weren't very successful. What has been the case this quarter? Have you been able to take any price increases with the auto OEM segment?
Yeah. We made some progress, some price increase we have been able to get in the first quarter. As we discussed earlier also, there is a little longer lag when it comes to the OEM customers and you make progress customer by customer. Yes, we made some progress in the quarter one.
Is it possible to quantify what sort of price increases you have taken?
Generally we don't quantify that because customer is customer, so we don't quantify that, but we made some progress.
Okay. Got it. My second question was on ad spend. Last year we did see some cut on your ad budget. How are we thinking about the ad spend for this quarter and for the whole year?
Last year, earlier we have been spending quite high, and it was part of our plan that slowly we'll have some reduction of the percentage. Last year was specific because first quarter there was hardly any activities, even in the next quarter.
Yes
There were certain activities which were not possible. Now as the market is opening up, there is an open space to do activities, obviously to some extent the marketing expenditure will go up.
Okay. Do we see them going up to what they were maybe in FY 2019 levels or no?
As I said, that was specific plan for two, three years where we did, specifically related to increase our brand and now our mind share is quite at the good level. That time we were spending more in terms of advertising and communication. Having reached to a particular, the focus would be on some other activities, which is also part of marketing. To that extent it will go up, but it may not go to that level.
Got it. Sir, just one last question. What would have been our capacity utilization for this quarter that is past?
Yes. In June, basically we reached around 60% plus. I mean, the quarter is actually irrelevant because there was no demand in the month of May. I think what we need to look at is how we have exited the quarter, and that is around 60% plus.
60%. All right. Great. Thank you so much. I'll get back in queue with my other questions. Thank you.
Okay.
Thank you. The next question is from the line of Abneesh from Edelweiss, please go ahead.
Yeah, hi sir. This is Abhinesh from Edelweiss.
Hi.
My question is on the chip shortage. Globally, auto companies are seeing big chip shortage. We are already seeing a big impact of that, at least globally and the high end. For your customers, is it a big problem? I have seen the monthly sales data, which has come strong. On the outlook front, chip shortage could impact your B2B sales, OEM sales?
This is what we have been hearing from our customers, that there has been shortages and because of which, even if they have a better demand to produce more, they're not able to do it. In terms of outlook, I think they seems to be on the track in terms of able to manage it, but I guess they know better how much. As of now, it is being reported that because of chip shortages, they have not been able to ramp up their production.
Any more color to that? That's a more general answer. In your kind of volume, is the chip shortage also as big a problem because you do a lot of mass volumes also. In that also, is the chip shortage equally a big problem?
Your question is from a customer's point of view, right?
Yes. That will impact you also.
I understand. As I said, this has been the trend, but I guess, that whatever we get the information from their side, that there is a improvement, how much they will be able to improve, how fast they will be able to improve, because ultimately when they have the demand, so they are much concerned and they're making the arrangement to see that how they cover it up. We'll have to live with it. Ultimately our business is dependent on the customer business. As of now, I can only say that there is a shortages, and this is what is being reported. How long it will continue, for us, it's difficult to comment upon.
Last question. We have seen those news reports on JSW saying, they are planning to get more aggressive and they plan to get market share from across the board, and maybe more from the number three and number four deco players. Any comment you can make on JSW in particular or from the market leader also because price hike has been delayed this time by Asian Paints versus earlier. Is that a concern or do you see that this is just a lag effect and ultimately price hike will happen in terms of the requirement?
What I can only say is that, generally for any industry, the more the merrier, it is always better for the industry. There have been a very limited number of organized players in paints. It's always welcome that a fully new company comes in because one reason that why the paint industry has been growing consistently in double digit for last so many years is the penetration of the paint, the per capita consumption of the paint, it is still about 4 kg in India, which if you compare with other countries, it is 15 kg, 20 kg. Even if you consider rural population, I think it's still, even if you double it is about 8 kg. That's very less.
When more companies are there, the more communication happens, the more awareness happens, and it always helps industry to grow because industry still has a good scope in terms of increasing the penetration. More the merrier, because then the innovation happens, we always know that there's a benefit to the customer. It's a welcome outcome. That is what I can comment upon.
Pricing bit by the market leader?
Sorry.
Pricing aggression by the market leader, taking delayed price hike, taking less price hike than that.
Pricing aggression, I don't think as of now. In fact, the pricing aggression is more there in the lower-end products, you can say, which is putty or some of the other items. There it is. There one of the reason is that during lockdown period, sometime the product mix gets skewed. You don't know that what exactly the market would be demanded. As of now, the pricing aggression is there in the lower-end product. It is not there in the higher-end product.
Okay. Okay, sir. That's all from me. Thank you.
Thank you.
Thank you. The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.
Hi, sir. Thanks for the opportunity. I have a couple of questions.
Thank you.
My first question is, as you stated that the demand rebounded in June. Now we are, I think, already through with the month of July. Has the demand sustained in the month of July and any change in the, whether it is geographical or rural-urban trends you are witnessing in the month of July? That is my first question.
Generally we don't talk about the future, but June demand was there because May demand destruction happened. We are learning from the last year that, last year also the first quarter demand was down, but then later every quarter a part of the pent-up demand got compensated. That's the same trend we are expecting.
Okay. Sir, my second question is that as our gross margins now they have dipped already quite significantly, and there have been some price increases also. What's the quantum of inflation currently, and would it be, you can say, fine to presume that the margins have more or less bottomed out now?
Inflation is high double-digit. If you look at the margins, obviously in the quarter one, we should not compare it with the last year because last year was a very different kind of mix, a very skewed mix. If you compare on the quarter-over-quarter basis, which means that if we compare margins with the last quarter, January to March, a slight improvement or maybe at par with that. Inflation, as I said, is in high double-digit and obviously the action is the price increase, partly we have taken in the first quarter and then we'll continue to seek for more price increases to mitigate that inflation.
Okay. Sir, just finally, 1 bookkeeping questions. In your PPT, you have indicated that 10% of your revenue came from new businesses. Does it refer only to construction chemicals, adhesives and wood coatings, or does it also include new launches on the paint side?
That includes, it's all new products, basically. It include the paint side products also.
Okay. Excluding paints, how much that would be, if you can share, please?
That generally we don't share because the new businesses. The only thing is that we started last year, probably we're a little late to start in the industry, but we are getting a good traction. Till we reach to a critical mass, that we don't talk about those figures as of now.
Okay, sir. Thanks a lot.
Thank you. Reminder to all the participants to ask a question, you may please press star 1 on your touchtone telephone. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, sir. Sir, I just wanted to understand on the industrial side, especially in the auto space. In deco, you have clearly showed the ability to use mix as a lever. Is there any lever in the auto side also, sir, to do the same or it has to be only price increases, sir?
No. Auto, in fact, that is how we are maintaining our position in specifically auto, where we are market leader, is always based on the technological improvements. There, in fact, we always work with our partner, parent Kansai, to see that what technological breakthrough products can be provided to the customer. It's an ongoing thing, and we are making a good progress there. In fact, we are working on a lot of technology products which help consumer to increase their productivity, efficiency, and also maybe in terms of per liter cost it is higher, but overall, it helps in terms of achieving their objectives also. That's a very key thing.
Pricing is mainly we are talking about because when the inflation is there and obviously the process in the OEM is longer, but otherwise our entire focus is on the technology products, which we keep doing and we are doing that.
Sir, any quantum of the increase that we need to kind of get industrial margins back to earlier levels?
Well, obviously it is there, but we don't want to talk about it.
Okay.
As I said that because of this situation, the business situation, we are aggressively seeking for the pricing increases. Obviously everybody understand, we also understand the customer problem that how do they give so much of increase. The situation is very much understandable. It's a kind of mature discussion in terms of that win-win situation, and that is what we do. Alongside, that we work on the cost reduction also. Therefore, how much can we manage is something which is a one-to-one discussion which happens with the customer.
No, I agree, sir. Sir, when we look at, for example, the input cost pass that you highlighted double digit, would it be fair to argue that a double-digit inflation essentially corresponds to a double-digit price increase at the minimum? Is that correct way to look at the thing, or that would not be right, sir?
No, inflation is on the raw material cost, and the raw material cost is some percentage of the revenue.
Yes, sir. I mean, we see the numbers, they are high double digits. Honestly, that is where I was coming from, sir. Is that a simple math suggests that even if I take a rough percentage, it means a double-digit increase is needed. Essentially that's why I was trying to understand how much of the increase are we seeing.
You can make your calculation, but from our side, what we can say is that, as I said, that in industrial it is very difficult to pass on the complete increase. We have to see that depending on the customer to customer that how do you manage and how do you maximize that, and parallelly work on your cost optimization so that you are able to mitigate the inflation.
Okay, sir. Sir, does that entail a change in royalty as well, sir? Because we are using a lot more of our parent's help or royalty rates remain unchanged. How does that work, sir?
No change.
No change, right? I mean, overall percentage of products using royalty will kind of go up. Nothing like that happens. Okay, sir. Okay.
No change. In fact, the percentage is fixed.
Okay, sir. Sir, lastly, for the last few quarters you had done a strong push on digital. I mean, we can see a very healthy kind of pick up as well. Could you share how is that kind of helping us on the cost control side, and how much gains can we kind of assume, say, going forward to sustain, any quantum or any target you could share that'd be helpful. That's all from my side.
Yes, sir. Can I take that question?
Yeah. See, digital initiatives basically are of three kinds. One is trying to aid the convenience of the consumer and maybe to that extent, at some point it may help in gaining revenues. Two is optimizing cost, and 3 is improving productivity. Initiatives which are there, if you look at it more from a market side, like we had introduced app for the dealers, app for the influencers. If you look at these COVID times, it is more actually has been more of an aid to business. Not necessarily at this point of time it is resulting in any extra revenue growth. There are a lot of analytics which are going on at the back end. A lot of, I would say, process automation which is going on the back end, which is helping the company control its cost and improve its productivity.
To that extent, digital is aiding at least the back end as of now. Front end, I think it's a matter of time as the markets open up and as these apps gain more and more traction in the market, we would see positive gains coming from it.
Okay, sir. Any targets around cost saving that we can share? If it is possible to share, I understand some of them these are difficult, but if it is possible to get a sense on how much of that can be sustained or how much margins benefit can come through from that.
Jason.
Avi, if you look at our expenses or as a part of net sales, right? Or the OPEX % net sales, we have been trying our best to be best in the industry, right? Our endeavor is to maintain this trend going forward also. As I said earlier in the last meeting also that every department has been given targets, and they're working to achieve goal of cost reduction.
Okay, sir. That's all from my side. Thank you very much. Thanks a lot.
Thank you.
Thank you. A reminder for participants to ask a question, you may please press star and one. The next question is from the line of Aniruddha Joshi. Please go ahead.
Hello, sir. Just two questions from my side. How do you see the region-wise recovery across, let's say, northeast, southwest? I guess North India is the key region for us. How is the recovery in that region? Also, if you can indicate about the update on the new businesses, the way you explained about International geographies. How is the powder coating, adhesives, and the waterproofing segments doing? Any update on the growth and also the profitability in these businesses? Lastly, how do you see the price hikes going forward? Do you see the industry and as well as Kansai taking price hikes again in this quarter or it will be maybe price after a point after the trade digests the current set of price hikes? Yeah, that's it from my side.
Multiple questions. Okay. In terms of region, I think the recovery is west, north, east, and south in this order. West, north, east, and south in that order. That's the answer to your first question. You asked about, what was the second question? The new businesses, I think.
New businesses.
New businesses, I think I spoke about it. We cannot talk about growth, because these are like when you say new, we just started. Maybe we started last year. The base is very low. Therefore, talking about the growth does not make much of sense as of now. What is important is that, yes, specifically construction chemicals, if you really look at it which is the waterproofing and the other product like sealants and all. We have completed the range. Completed the range means that, construction chemicals has a very large range and you know that we have taken this company, Perma, and Perma has a good range of products. Now, whatever range is possible to place into retail markets, because for the institutional project business, there is a range of products are more than 100.
Whatever is the retail-specific products, those products we have started placing through our network in Nerolac, where we are getting a good traction. In paint, typically it happens that, good percentage of your network is always exclusive network, so they give you a support. That's why I mentioned that once you reach to a critical mass, then only it probably makes sense to talk about the figures. As of now, the traction is good, and since we were late entering into that, it was important for us to place right product at the right strategy in the market so that we start getting traction. We are doing well. In adhesive, again, we have subsidiary, Nerofix, and Nerofix products, some of the products we are trying to sell through Nerolac Wood.
Specifically, we are targeting Northern India as of now because we do not want to get into all India and then able to spread our resources so thin. These are geographical focuses we are doing, so that we are able to do justice with that, and that is what we are doing. That is your second question. Third question, you spoke about the profitability of these new businesses. They are primarily, you can say that similar to paint. Initially, it happens that when you get into the market, maybe you try to become more aggressive. Otherwise, in terms of margin, they are quite similar to paints. I think I covered all your questions.
Pricing, yes.
Sir, lastly on price hikes, how do you see the industry working on the price hikes going forward? Still there is need to raise prices, but how will the industry and Kansai planning ahead? Yeah, that's it from my side. Thank you.
You're right. In fact, price increase. One price increase has also happened recently. There would be more price increases because, obviously the industry waits and sees whether the prices are softening or not softening, but inflation continues to be high and obviously demands more price increases. Accordingly, the industry will be working on that.
Sir, isn't it can be a issuing trade because the trade would be ordering goods on a regular basis, and if there are prices, so then one stock of older prices, one stock of new prices. Will that not be a-
What happens is that if you see, maybe because the price increases have come in parts, so therefore, the absorption has been better. Maybe in the last quarter, because there has been uncertainty of the demand, if the demand is more certain and that we have a festive season, the absorption happen little faster. Obviously, as an industry, always the choice is that you try to stabilize the demand in the market, but in this kind of inflationary period, there's no choice also. I think what is important is see that, how do you stagger it so that the market is also not impacted and you stagger it and you are able to get the price increase also, and then you are able to stabilize the demand. I think that's the approach which the industry has taken.
To that extent, I think, it's reasonably okay to take the price increase.
Okay. Sure, sir. This is helpful. Many thanks.
Thank you. The next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead.
Hi, sir. My first question is more of a housekeeping question. Apologies if you've already given this, I joined a little late. What is the volume growth for this quarter?
I guess you're talking specifically about decorative. As I said earlier that the value growth is ahead of volume growth. This quarter has been different for us because our focus was on the product mix, and this quarter growth was led by emulsions, and therefore our product mix improved. Value growth is ahead of volume growth.
Okay. Secondly, I just wanted to know in terms of your distribution expansion, if you can give some data on your tinting machines currently and how they've expanded over the last year or over the last three months. Any kind of data you can give on this will be useful.
Approximately, we have over 26,000 of dealers, and last year, not much of expansion. Generally, every year there is expansion in the network, but last year was not much of expansion because of this demand up and down continued and the visits to the markets were also because of the safety reasons, the visits to the markets were limited. In terms of machine, we have a penetration of around 75%-80% penetration of the machine. Now this year, from the April, because when April started or from, say, last quarter, the market movements have started, we are seeing expansion in the distribution. In between again, there was a lag because of this May lockdowns. I guess now since the markets are open, I think that story of expansion, the distribution will be followed in this year.
What would be your target, sir, for expansion?
Targets won't always keep higher than what others do, but we keep in mind that we should be able to increase our reach. Internally, our target are always, we look at the universe and then whatever reach we have, and we try to increase the reach. I'll not talk about the numbers, but increasing the reach is the target.
Sure. Lastly, I just wanted to know, see, there is, of course, margin pressure in both decorative as well as industrial. There is cost inflation in both segments, and there is some amount of price increase in both segments. At a overall basis, if you sort of look at the cost inflation versus the price increase in each of the segments, where is the margin pressure more acute for you? Is it in the industrial segment currently after the price increases you have seen this quarter partially? Or is it in the decorative segment?
Pressure is on both, but it is higher in industrial.
Okay, sir. That's all from me. Thanks, and all the best.
Thank you. The next question is on the line of Tejas Shah from Spark Capital. Please go ahead.
Hi. Thanks. I have couple of questions. First question pertains to nature of competitive intensity versus past. Just wanted to get your observation that are you seeing any change in the agility or intervention reflexivity, which we have seen for last many years whenever inflation comes, has been compromised this time or this observation slightly misplaced? We are not seeing the kind of fast intervention that industry used to make, and then my comment is mostly on decorative paints. We are not seeing it this time. Just wanted to know your thoughts on the same.
Can you, again, maybe in a simpler way, if you can just-
Yeah. I'll put it this way that earlier, for example, similar period we had seen in somewhere around 2009, 2010, when industry had taken six price hikes in span of six, seven months. Somehow it appeared from outside that the whole decorative industry behaves similarly in terms of the intensity of the price hike. This time we have seen staggered price hikes, not necessarily everybody's taking at the same time and in the same proportion. Just wanted to understand, is there any change in the nature of competitive intensity?
I think that period is different, because today what is happening is because of COVID and demand up and down, you have to strike a balance between that. As I mentioned that already three price increases have been taken. Company taking their own price increase, different price increase, I think that's a good sign because that way you can say that every company is established in the market, and whatever market share they have, they've been able to establish themselves. To that an extent, they have the pricing power to decide what they want to take. Otherwise, it is just getting staggered, and it's a balance between the demand and the price increase. Otherwise, the approach in terms of approach of the industry remains same, that whatever inflation is there, you have to mitigate that with the efforts of price increase or the cost cuts.
That continues.
Sure. This time it is not that dictated by other players. Just wanted to know, would your price increase be higher than the industry average or the relative price index? Would you have bridged the gap between, let's say, you versus the second guy or the first guy in the industry?
Slightly, here or there, because the pricing means pricing plus discount. They're never same, they're always different, that way from one company to the other company. I think what different you are seeing is that the periods were different. Maybe this time, like we announced the price increase earlier, and then everybody is doing it with their own approach. That's the difference. Otherwise, in terms of pricing, it is never same because the pricing also include discount. It is different from company to company.
Sure. Sir, second question pertains to construction chemical. You said that you have now completed the whole range of product which is required, there's also a very natural efficacy-led gestation period of the business. Usually we have seen in the other launches where players also that they need to wait for two, three monsoons to get that confidence on the efficacy part before they extend warranty. Where are we on that cycle in terms of going that aggressive on warranties and efficacy part?
We are late starter to that an extent that time will have to wait. You are right that business always take two-three years to scale up to that particular level. I think what is important is that some of these products, based on your accelerated test, you can still claim, and that is what we are doing. Yeah, comparatively, it will take some time because in waterproofing, unless you pass two, three monsoons, then you see the performance. Technologically, I think that we have a good access to the technology, there's no problem. In terms of practical experience, we'll have to wait and watch for that period.
Sure. That's all from my side, sir. Thanks and all the best.
Just to add, since you know that our technology also or some of the product which we have taken over from the Perma, the Perma has been there in the market for many, many years. Those products are well-tested, and that way, giving warranty is not a problem.
Sir, this is for both wall and ceiling as well, right? The whole range.
Yeah. Wall, ceiling, roof, horizontal, vertical, all kind of surfaces.
Okay.
Excellent products. In fact, some of the recent products which we introduced, which goes on the horizontal surfaces also. They reduce the temperature by minus 8 degrees, and also in addition to that, they give waterproofing properties. The advantage is that it becomes a full system along with the paint. Probably earlier also, if there's a defect in the paint, the customer used to say, even if the defect is because of the waterproofing which is applied under the paint. Now when it goes as a system, I think it is working well. Hopefully this will help in expanding the market also for construction chemicals.
Very helpful, sir. Thanks, and all the best.
Thank you.
Thank you. The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance. Please go ahead.
Thanks for the opportunity. Sir, in your annual report, you have mentioned about revisiting the approach towards decorative market and restructuring the B2C business into four things like Nerolac paints, soldiering, institution, and new businesses. Can you throw some more light on what you meant by all these things, and what are the interventions in terms of products, distribution or allocating resources?
Traditionally, if you look at it, this was paint, and now there are many segments. There are paint, there are construction chemicals, adhesives, wood premium, putty. Putty in itself is a separate segment, which did not exist in the past in the paint. It is a recent thing. If you look at the history, our expertise is there in the paint. When we talk about relooking at this, ultimately we are looking at different segment which we need to focus upon. The first segment is paint, and then the segment of, say, construction chemicals, adhesives, wood premium, and putty also we consider as a separate segment because it is a very low value, low margin product and different kind of reach, started by not the paint company, non-paint company. These are the four business lines.
Accordingly, what we have done in terms of structure is that we have now business structure, business division for each of these. Paint, construction chemical, adhesives, wood finishes. That is what we have created. Earlier everything was looked together in a same manner. Now it is all business line, and in terms of resources, the separate resources are allocated to paint, construction chemical, adhesives. Each and every business is independent in that form, and being run by the business head, and independently the resources are allocated.
Okay. Understood. Sir, second question, you mentioned that in this quarter, value growth is higher than volume growth. Now, this is because of the way market behaved, or this is a conscious effort and this would be the strategy going ahead, and we should continue to see this trend going ahead also?
This is, as I just spoke about the structure, so paint, and paint does not include putty. That's one.
Okay.
This was a conscious effort, definitely. In terms of paint, the growth was led by emulsion, and that's why the value growth is ahead of that. Followed by these new businesses, construction chemicals, adhesives, which also give you a relatively higher average selling price, ASP. Putty is a little different in the market because market is seeing a good aggression in the putty. It depends, because we feel that currently it's not a right time when you have margin pressure. We have to strike a balance between revenue and the profitability. Putty is something that where one can decide at the appropriate stage that when you want to go aggressive, because it's more of a pricing game. Maybe as of now, we are not very aggressive when it comes to the putty segment in the market.
Okay, understood. Sir, last question. On industrial side, you mentioned that, I mean, inflation, pricing impact is there on both industrial and decorative. Within industrial, can we bifurcate between, say, auto and non-auto, that it is easier to pass on inflation in non-auto versus auto players? In any other way, can we differentiate pricing power within industrials also?
Yes. Definitely. Auto and non-auto. Non-auto include powder coating, general industrial, and high-performance coating. There, the progress traction on the pricing piece is also better because it takes a longer time in terms of automotive. Automotive is a bigger business, but in the other businesses, definitely the pricing power is better. We'll be able to do it sooner than.
Okay, understood.
Sure.
Okay. Sir, last question. On these new categories, where we talk about construction chemicals, adhesives, so how are we trying to tap this opportunity in terms of, as you mentioned, we need different skill set of people as well as probably different distribution and different influencers as well, especially in adhesives. What is our right to win in these two categories and initiatives taken by the company?
One is that strength which we borrowed from, say, Perma, because they were technical expert. As I said, the business structure is there is a dedicated team which is purely focused on the demand generation with the audience. Basically going and showcasing your product, demonstrating your product, getting product approved. All these people are, because construction chemical is little different from paint, where as you rightly said, it's more of a techno commercial kind of thing. The skill set we borrowed from Perma, further than with the help we have created the business structure, there the team is focusing on providing the right kind of training to this dedicated team.
Parallelly, the effort what we are putting is because we also have a demand generation team for the painters in the market, that the painters are being trained for correctly using the waterproofing product. Because for painter also, it's a business extension. Earlier they were doing only paint, and now they know that along with the paint they can do a waterproofing. One side the effort in terms of training the painter to rightly apply the construction chemical, the other side, the techno commercial team of the construction chemical to meet the right audience.
Okay. Understood, sir. Sir, thanks a lot, and all the very best.
Thank you.
Thank you. The next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Yeah. Hi. Thanks for the opportunity.
Hi.
Sorry, I joined a bit late, so if the question was already answered. My first question is, in decorative paints for the April to June 2021 quarter, is revenue higher than April to June 2019, or is it still lower than April to June 2019?
We are generally not tracking on a three year basis, because last year also there were kind of up and downs. On the three year basis we are tracking, and on the three year basis it is positive. CAGR.
Understood. Got it. Second question is, over the past two or three years, ad spends, A&P spends as a % of sales have come out. If I look at your FY 2021 numbers, there's about 40% cut as against maybe 15% cut that we have seen from the market leader. How should we think about A&P spends as a % of sales, going forward in view of a likely increase in intensity as the new entrant enters the market?
I answered this question, but okay. What happens is that in the past, for a few years, we went aggressive in terms of creating the brand mind share. That time also, our approach was that once you are able to reach to that level of mind share, then probably as a percentage, it may start coming down. Last year was abnormal in the sense, because there were 1st quarter, 2nd quarter, there's not much possibility in the market to do the activity, because even if you are doing it may not be much impactful. Therefore, maybe it came down more than what it could have been otherwise. Going forward, obviously, because this goes with the market requirement, market need. As of now, because our mind share is quite good, we are now having a very strong mind share.
The other activities, marketing activities, whatever is required in terms of below the line activation, the painter activities, training, all those things will continue. To that extent, you may see that advertising may go up, but it may not be to that level what we were doing earlier, because that was a specific objective to create mind share.
Understood. That's helpful. Thank you so much.
Thank you. The next question is from the line of Hitesh Asrani from ICICI Direct. Please go ahead.
Thank you, sir. Sir, I just wanted to know one thing. During this disruption period, where the supply chain has been disrupted severely, and we believe we would have gained some market share from the unorganized segments also. I just wanted to know how the unorganized segment have performed during this period. Are we seeing market share gains from that segment, and going forward that segment will still be hard due to this pandemic?
It's very difficult to comment upon that because there's no way to track it. The only thing is, in the disruption period, it happens that maybe some companies are able to manage their logistics and supply chain better than the others. Because within the unorganized sector also, there are good companies, there are reasonably good companies. It will not be right to call them unorganized. Some companies are able to manage, some companies are not able to manage, and ultimately market has a demand plate. If somebody is not able to manage, automatically it happens that that business goes to them. I say that, in the small scale, there are a lot of good companies, regional companies, niche companies who have the strength. They understand the customer better for that particular market, and I don't see any reason why they would lose out.
Even if something is happening, it may be on a temporary basis. Having said that, it is true with any industry that part of small scale always shift to the large scale, and over a period of time, some of the small scale also become themselves the large scale. That's a very natural trend which happens.
Okay. Sir, my next question pertains to our new product segment. Out of this total dealer network, how much dealers covered by these our new products?
Mr. Asrani, sorry to interrupt you. This is the operator. Can you please check your line? There is a lot of disturbance from your line. We cannot hear you.
Seems to be a rain effect.
Yeah. Mr. Asrani, you can continue now.
Sir, I just wanted to know how much dealers out of total dealer network are covered for our new product category.
As of now, the numbers are not very high, but I can say potentially more than 50% can be covered. Potentially. As of now, because it's a new start, then slowly you start. Basically you first cross the first milestone, then second milestone. Potentially, I would say that more than 50% can be covered.
Okay. Okay, sir. Thank you very much for the answer. Thank you.
Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to Mr. Joshi, who will now take over.
Yeah, thanks. Sir, just one, two questions again from my side. One, how do you see the new portfolio shaping as a % of total turnover over a period of, let's say, three year to five year time frame? Do you see all that entire new product portfolio moving beyond 25% of the total sales? Secondly, currently the entire new product business is in investment mode. How do you see it starting contributing to, coming back to a, let's say, normal EBITDA margin level with the rest of the business, in one year, or maybe it will take more time for these investments?
Actually, the contribution would not be that high what you're talking about, because if you look at construction chemicals as a market, I think the size of that market is INR 5,000 crore. If you compare with the paint industry, paint industry is INR 55,000 crore, but if you look at decorative specific, it will be INR 30,000 crore. Again, the size of the construction chemicals market itself is INR 5,000 crore. The adhesives and wood finish, they are very niche business. Even in the wood premium, though the growth rate is faster, but it's a very premium and it's not the entire wood finish is what we are talking about. It's very premium and niche business, still it's very important.
The contribution would not be that high, but as I said, that the size of the industry, the larger business size here in the construction chemicals, where I spelled out what is the market size, and that is what best any company can achieve over a period of time. In terms of EBITDA margin, as I said, these margins are not actually They're good. It is in line with the paint. Initially, it happens for any category that you go little aggressive. Since we have the distribution strength, it is not that you are damaging the margin, typically in the newer business, initially you spend some higher than over a period of time, and you are able to set up your range, you are able to stabilize that. Not much of challenge I see there.
Okay. Sir, one more question. How do you see the B2B customers accounting for the new businesses? There is a fairly large B2B portion in the waterproofing construction chemical industry, even in large industrial adhesives as a business. What are the focus in all these new segments, whether we will go for projects and B2B customers, or it will be more of a B2C business for us?
It's like, when we took over Perma. Perma is basically largely B2B. Okay? That is a business which is established business, and one side, they have the team, which is B2B, they have that customer, which is B2B, and that business focus is given separately. What we are additionally trying to do is basically get into the retail. Retail business was not there, which we are adding, and B2B business was already there in the Perma, which, taking that particular base from there, we are trying to strengthen.
Okay.
Both the sides will be a part of our radar.
Okay. Sure, sir. These were my questions. On behalf of ICICI Securities, we thank all of you for being on the call, Anuj sir, Prashant sir, and Jason sir. We thank you for the call and answering the questions of the investors and analysts. Now I hand over back to you for your closing comments on the performance. Thank you, sir.
Thank you so much for connecting. It was nice talking to you all. Thank you for all the questions. I hope that we have been able to do justice with the answer. The business situation last two years, not business, or all the businesses continue to be uncertain, with this COVID impact and all these things. Hopefully, mankind will come out of it. I hope the situation becomes better and better. All the best from all of us to all of you. Keep yourselves safe, keep taking care of yourselves and your family and your friends. Thank you for joining. All the very best.
Thank you. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.