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Kansai Nerolac Paints Ltd
Kansai Nerolac Paints Ltd
NSE:KANSAINER
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Ladies and gentlemen, good day, and welcome to Kansai Nerolac Q1 FY '23 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] 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, Mr. Joshi.
Yes. Thanks, Nirav. On behalf of ICICI Securities, we welcome you all to Q1 FY '23 results conference call of Kansai Nerolac Paints Limited. From the management side, we have with us today Mr. Anuj Jain, Managing Director; Mr. Prashant Pai, Director Finance; and Mr. Jason Gonsalves, Director, Corporate Planning, IT and Materials. Now I hand over the call to the management for the initial comments on the quarterly performance, and then we will open the floor for question and answers. Thanks, and over to you, sir.
Thank you so much. Good morning and [Foreign Language] to everyone. Greetings for a good day. Thanks for joining this call of Kansai Nerolac for quarter 1 of financial year '22-'23. As you would have seen, during the first quarter, we recorded top line growth of 47.1%. Industrial growth is slightly higher than decorative growth. Inflationary trend continued with 7% further inflation what we have seen in quarter 1. And in quarter 1, we have taken approximately 2% price increase. Just to give you some update, last conference we spoke about what actions we are doing or taking in Industrial and Decorative. So I'm just taking a privilege to give you update on those points as of now like how we progressed, what actions we have taken, where we are. So in Industrial, we said that last year also, we had an increase in market share and that trend continues. And our challenge is basically to ensure better margins. And therefore, in addition to the efforts of price on fees, like last year, we have taken approximately 18% price increase. What actions we are doing, because that increase was not sufficient to mitigate the inflation because inflation was very high. So what other actions we are taking. So we have been extending technologically superior products. Some products we mentioned last time like Monocoat, medium to high solids. And in addition, now we have expanded our range of tin-free and energy-efficient products. These are very high technology products, which really helps customers in terms of their CapEx goes down and energy efficient. So therefore, the consumption of the energy goes down. So it is environment friendly and also it helps in terms of reducing the cost and increasing the productivity at the customer front. And so we are expanding and our salience has gone up in the quarter 1 because we are trying that how much we can shift to these products where there's advantage and maybe slightly the margin is also better. In Performance Coatings, we are the -- again, the margins are very, very low. And we said last time that we are increasing our focus towards high-technology products where the margins are better. What we have done in the first quarter is that in low-end business where the margins are not there, hardly margins. So we exited, approximately 10% of the business we exited. And we shifted our focus to the premium item [indiscernible]. In Coil Coatings, again, there have been a lot of margin pressures, and we were actually selling at a very, very low margin, hardly any margin. So there also, we said that we'll move towards higher-margin technology products and appliance business because we were only in the sheet business. So we were saying that appliance business. So there, in fact, we have left almost 30% of our business, which was not profitable. And in appliance and the high [indiscernible] getting the approvals. And our salience in the first quarter has gone up from 3% to almost 10% in Coil Coatings. In Powder Coating also, where we have a good market share, we are a market leader. But in the premium, our market share is less. So we said that we'll increase our salience in the premium. So in the first quarter, our salience has gone up by 2%. It is not in line with what we have targeted but still the trend is upward. So this is in case of Industrial. In Decorative, last time we discussed that what we are doing. So action was related to a new brand expression, which was PAINT+, where we said that we'll be launching differentiated products. So in the first quarter, Mica Marble Stretch & Sheen, we expanded to be launched it in the fourth quarter of last year, but we expanded in the market. Now it is available all India. We introduced Impressions Kashmir in the first quarter and Polyurethane Enamel also was introduced. Second point, we said we'll add more and more products every quarter in premium and superpremium category. And we'll increase the -- because our market share is better relatively in economy and popular category, but we are weak in premium. So we said within our network because we have a strength of network and we have a relationship with our network. So from our network, we'll attempt to increase our sales. So with the introduction of these new products in the last 2 quarters, our distribution growth for the superpremium category is more than 50% in the quarter 1, and salience also has gone up. In terms of communication, we were saying that we'll increase communication through advertising and digital marketing focus. And we'll focus on PAINT+, which is the differentiation and Japanese technology and jingle, which is very popular. And in terms of our share of voice, we'll keep it around 15% approximately, and we'll participate and maybe tip it again. So in the first quarter, we introduced campaign on PAINT+ with Japanese technology and jingle, so that has been on air in the first quarter. And our share of voice in the first quarter was a little higher than 15%.
Another point was augmenting the market development structure to generate leads from sites and influencers. So in first quarter, we scaled up field team. Most of the time has gone into recruitment, but we have scaled up actually, we have doubled our team and also the support system.
And we also started digital marketing program for leads in generation towards the end of quarter 1. The other point was that we want to do some good influencer program with acceptance of Pragati app, which we introduced for painters that offers instant benefit, which is the fastest in the industry. So in the first quarter, we have seen a higher double-digit growth in the increase in the participation of painters, but we still have a gap in terms of getting share of wallet from the painter. But participation has increased. We also wanted to start tracking secondary sales from the dealer counter. We started, but we'll have to bring it to a meaningful conclusion. In distribution, we had increased our team to open the direct distribution, dedicated team for opening the distribution and some new distribution models. So in first quarter, our distribution growth is again in double digit, high double digits. And we have put 50 preferred counters. So these are like our kind of experienced tools, but with the existing dealers. So 50 counters are in place. We were weak in institutional business, project business, and last 2, 3 years, this business was growing at a faster rate. So we said that we'll focus on institutional business by increasing the reach. So we expanded our reach in the metros and Tier 1 towns and expanded our team there. And in the quarter 1, we doubled our business in the project institutional business. The next part was the new business, which includes construction chemical, woods mainly in our case. Because adhesives, we do through Nerofix, which is our subsidiary, it's a joint venture and subsidiary. And we said that we want to achieve a salience of greater than 5%. Industry sales is higher, but sales we started late, we said first line showing that we should achieve 5%. In the quarter 1, we have touched the salience of 5%. And obviously, our first attempt was not to create any differentiation here. But since we started late, let us match the range of the market and see that how much we can sell to our existing counters. So as of now, approximately 30% of our existing counters have started selling our construction chemicals. So obviously, we have to go forward. But as of now, this is the status. In these new businesses, it may be very difficult to compare with the other companies of the industry because a lot of new businesses are getting added. For example, in construction chemicals, there is a business called membrane business, which is also quite a good business. But we have not got into this business because when we started this, we evaluated entire range, and we found that the margins are very low. And we did not find it very futuristic products, so we did not get into it. There are admixtures, which is also a part of construction chemicals. In our industry, many companies have started admixtures also. As of now, we have not got into it. Because our first thoughts were that the range which is related to retail, our first target is that how do we get our existing counters to sell our construction chemicals, that will be focused. So we can say that today, whatever range is available in the market because every quarter the products are being added. Our matching range is around 70%, and we don't have any plan to go to 100%. We'll remain in 70% to 80%. When it comes to adhesives, it's a part of our JV, which is Nerofix. And in the first quarter, there the growth was more than 100%. But in our stand-alone result, it will not be reflecting. And so that's the status on the new businesses. We have a complete range of economy products for Soldier and Nerolac, and there were certain gaps in the product range which we are completed. Water base range is completed. There are certain products in the economy category enamels, where the margins are very low. And therefore, as of now, we have decided not to get into it. But when we have completed our range of water base, we have found that there is some cannibalization happening, because when you introduce the economy range of products, partly they reduce the sale of the higher range of products. And therefore, there is some drop in ASP. We also said that we'll venture into services with 5 days pending proposition. In the quarter 1, we started under the name of next-generation printing services in 6 cities we have launched with the proposition of 5 days and dust-free. This was launched in 6 cities as of now, just a start. And going forward, then we expand to other cities. We have a plan to expand into the other cities also. So this is the update on what I said during the last conference. What else we did in the quarter 1, I'll try to go from 1st of April. We focused a lot on the employee engagement. The culture of collaboration, a lot of activities have been done. We introduced in our company Life at Nerolac, where -- when people take pressure, they also enjoy the work. And a lot of collaboration activities we are doing. Take care of the well-being. For the last 2, 3 years, the situation has been tough, COVID situation and people have gone through sort of mental agony. So we are focused on developing -- introduced a well-being app and initiatives we have done. This year, we have given some extra increase to all set of employees to combat inflation [indiscernible]. And we also worked on developing the digital training plan for all managers. We used to do it on a selective basis. But to upskill and re-skill, we have decided to go for all managers. Also, we worked on the talent identification because as the industry situation is changing, some kind of new talent is required. So we relooked at the entire exercise of talent definition, identification. We went through the assessment of the talent to the outside agencies, and we made our action plan for next few years. We also focus on innovation in the quarter 1 and we had our Innovation Day, and a lot of ideas have been related in the area of product business model, services. And we have selected double-digit quite good ideas, which we are going to take ahead for the implementation in the coming time. We also spent a lot of time in terms of meeting -- personally, I spent time in meeting customers in industrial, automotive, performance coatings and the decorative market, just to understand that how the changes are happening. Also, we spend time with the vendors for one-to-one meeting, and I was privileged to meet many of you on one-to-one basis in the quarter 1. I think we had more than 20 meetings with the investors and analysts personnel. In terms of this ESG, our company has done very well in the last 2 years. But when it comes to the carbon emission, we were looking at Scope 1 and Scope 2. But we have initiated the exercise of taking -- doing the inventorization of the Scope 3 and putting the science-based targets for carbon emission and also obtaining TCFD framework for us. Because in -- our parent company, Japan, it is mandatory. In India, it is not mandatory. But from the self-regulation point of view, this framework was also we worked upon.
In line with our plan, we have finalized our 3-year strategy for Decorative and Industrial, that we also completed. The execution plan is made. And in line of that, we relooked at our capacity plan and the requirement, and accordingly actions are initiated. So these are a few other things which we did in quarter 1. There are a few things which are not working in our favor as of now. So one is putty, where there have been no pricing increases in last 1, 1.5 years. Recently, there was one price increase. There were higher discounts in the market. Margins are very low. So we still continued our restricted approach in putty. Local versus upcountry means the Tier 1, metro, Tier 1 versus Tier 2, Tier 3, Tier 4. So our contribution of sale is more from the lower-tier towns. And if you compare with the industry from metro and Tier 1, our salience is low. But the market growth is higher in metro and Tier 1. So just for example, even if we take the matching growth, we have a disadvantage of lower growth because our sailings is lower. Similarly, in our business mix, the project, which is growing at a rapid rate. So as I said, the first quarter, at least, we are able to match the market, it was a little better. But again, our salience is just single digit, lower single digit. Well, for the market, as it is double digit and maybe a little higher double digit. So even if we -- for example, if I'm 5%, grow by 100%, I will get 5%. If the market is 12%, grow by 100%, we'll get 12%. So that salience difference is also there. And also in the new businesses salience, that even if your growth is okay, but salience difference would be there and that will continue for some time. So this is something which we feel it is not working in our favor. And internally, whatever actions we have taken, I think I realize that what we need to improve at our end is speed to scale up, because some of the things which we have done as of now, the indicators are in the right direction. So we need to improve in terms of speed to scale up, and also sustaining momentum of some of the launches, innovations, what we are doing. This is internally what we feel that we need to spill it up. In terms of profit financials, you all have seen the result. The profit after tax was up by 37%. So this is the initial commentary from my side. Thanks a lot for your patience and hearing. And now I invite the questions.
[Operator Instructions] The first question is from [ Dhruv ] from Edelweiss.
Can you hear me?
Yes.
Just a couple of questions. One is on the revenue mix. Can you take us through the mix which we have seen historically between industrial and decorative? And within industrial, what has been the mix of auto and non-auto? And what is the current mix? And where do you see 3 years ahead given the growth uptick you see in the auto sector, basically? That's my first question.
Okay. So mix is generally like we have been saying around 55-45. 55 for decorative and 45 for auto. And within that, it is about 70-30 auto and non-auto. And going forward 3 years, obviously, our plan is -- but today, the opportunity is there in both the markets is decorative and industrial. So though the intention is that it goes in favor of decorative, the salience should continue to go up. But it depends at how markets behave in the next 3 years' time because since we are strong in industrial part also, if there's opportunity available, we would not like to lose up on that.
And second is can you take us through the market share in both these segments?
See, market share is very difficult because generally what happens is that it depends at how many companies you consider. But in decorative, if we take only the listed companies, the market share is around 9% to 10%. And in automotive, we have a market share in excess of 50%. For the non-auto, it's very difficult because there are so many companies and there are so many segments. The segment-wise segment, we have to look at. So therefore, there, it is very difficult to get into the market share.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
Just 2 questions. Did you spell out what is the volume growth in the Decorative segment in the beginning? I mean I missed that number.
No, I didn't spell out. Overall, volume growth was higher double digit.
So when you say 18%, you have taken price increases. So it should be in the range of about 20-odd to 22%?
Yes, more than 20%, you can say.
Okay. That's really helpful. Second, you mentioned that you have taken 2% price increase. And you mentioned that the inflation is in the highs of 8% in the quarter 1. That's correct?
Yes, 7% inflation in the quarter 1, and we have taken 2% price increase.
So my question is that since the all data points suggest that the crude is going to be slowing down, and there are a lot of benefits, which is going to come. So I just wanted to understand how are you running the supply chain? Is that -- right now, we are using these high price inventory and that's why you've taken 2%? Or do you think you will have to take some more price increase for the product in the Decorative?
The prices is something very recent phenomenon towards the end of quarter. And generally, there is a lag because one that change in the crude should reflect in the derivatives. And thereafter, obviously, we carry some inventory. So there is a lag period. Having said that, when we are looking at the inflation, we are looking at in totality. So last year, there was high inflation. First quarter also, there is inflation. And especially in Industrial, whatever price increase we have taken last year, it was less in comparison to the inflation. Obviously, more price increase would be required. In Decorative, again, there may be some possibility of further price increase, a small price increase. And then probably next 2, 3 months when the picture would be clear, then we'll be able to see whether further is required or not required, but there is a possibility of further price increase right now.
Okay. Understood. On the Industrial and Auto, have you experienced any price increases we have got?
So when I said -- see, last year, we have taken, in Industrial, about 18%. And when I say 2% price increase quarter 1, that is total. It includes Industrial, Decorative. And price increase is relatively higher in the Industrial.
Okay. Okay. That's helpful. My last question is that you did allude in a lot of initiatives we have taken. But just for the sake of monitoring, what are the top 2 or 3 things? Because I'm sure you have done the strategy for the next 3 years. What are the top 2, 3 things you would like to achieve in the next 2, 3 years?
So if you're talking about the initiatives -- you're talking about the initiatives or...
Initiatives.
I think I spelled out. One is that business part because in business, there are 3 things: paint, putty and new businesses. So obviously, our first certainty is to see that in paint that we are matching or better than the market growth, and for that, the initiatives in terms of product, communication and influencer. So that's the first priority. And putty, we will be waiting, whenever the right time, how we can increase the discount and match up the growth. And new businesses, as I said, that we'll be launching the product, but we are not looking at 100%. So the first priority is to get to the market and over the market in paint based on the initiatives of product, communication and influencers.
So does this have the implication that you have any target that for the painters for the new product should contribute to your revenue?
Yes. Yes, for the new products, for the participation increase in painters, the extraction from the painter, those targets we have, and we are monitoring on a monthly basis.
The next question is from the line of Mihir from Nomura.
Congrats on a good set of numbers. Mr. Jain, I just wanted to check with you on the quarter, was there any restocking at the dealer end? As 4Q, we have seen relatively lower sales, so the dealers would have ideally have to stock up in the first quarter. So any kind of one-off or restocking that is there in the numbers in the first quarter sales?
No. So what happens that when they stock less in the last quarter, generally the pickup happened in the first month of the quarter, which is April. But during the quarter, it gets stabilized.
Okay. So we are like normalized sales. So the run rate is normalized to these levels is what can be assumed?
Yes.
Got it. Sir, secondly, I wanted to check. You mentioned the mix has improved. So the volume growth should be much higher than 20%, 30% in my view, right? I mean -- and what is the steady-state mix impact that we should consider?
Steady-state mix. So in our mix, as I said earlier also that what we are looking at this superpremium category. And what we are watching is that there because the growth in the market is better, today also after the inflation, we are seeing that in the premium category, as of now, market is still doing good. And maybe the impact is there on the consumers in the middle category or lower category. So superpremium category, where our salience in relation to the market is lower, that is what we are targeting with the introduction of all these products. Because whatever products I spoke about, they're into the premium or superpremium category.
Yes. No. So I was actually referring to the difference between the volume and the value mix. Historically, the difference has been -- earlier it is to be like 5%. In the recent years, it was like 7%, 8%, 9%. So the difference between the volume number and the value number is the mix impact that I was referring to. Given that this quarter had a better mix, the mix impact would be lower. So if you've grown your value by 47 and you have a pricing of 18%, 19% or 20%, then your volume growth has to be far higher in my view. That's what I was referring to.
I don't know. See, what happens is that, as I said, that internally, what we do, we look at paint separately, new business separately. So if you see the last year, the price increase in Decorative was about, say, 21% -- 20%, 21%. And partly impact has come in the, say, last year itself. So typically, if you see 16%, 17%, a change should be there. And so the value and volume, the gap should be around 16% to 18% if you keep from the only price point of view. And if you're getting a higher growth than that, then it's a change because of mix.
Okay. I'll take this offline then. And on margins, I wanted to see margins also due to a better mix, it would have -- we've seen much better than expected margin this quarter. So can one expect margins to bottom out. As you know, you alluded to some certain structural changes in the portfolio. So this kind of a mix that we have seen in this quarter may, may not be -- I mean can it be the similar mix going forward? Or you think that there is a possibility of margins to kind of go down in the next quarter or so just because we've seen a better mix this time around?
So typically, for the paint industry in the second quarter, which is July to September, the mix is different because in this period, more of enamel, primer, distemper, lower-end product sales happen. So generally, we find that the mix for decorative, especially, in the second quarter in inferior to the first quarter. And in third quarter, it becomes better. But some of the changes what I spoke about in the industrial, that would continue to work.
[Operator Instructions] The next question is from the line of Avi Mehta from Macquarie.
Sir, I just had 3 questions. First, on the decorative side. Are you concerned that this quarter probably saw a onetime benefit from pent-up demand due to Omicron? And with inflation, with the fact that we've seen globally, is there a possibility that growth should start to slow down? Is that a concern that you would be worried about?
No, I'm not really sure about the pent-up demand. Because you can say that in the first quarter, the growth is higher because last year, May, base was very low. So last year, May, there was a COVID impact, the base was very low. And now because it is a normal market, so it is normalized. So to that extent, obviously, the growth of the first quarter is higher because of the low base. Now from this quarter onwards, it's a normal market growth. So generally, we have seen the paint industry has been growing in the range of double digit or maybe a bigger single-digit growth volume. So I think that trend, we feel that should continue. Only additional factor this time could be, because last 2 years, the Diwali was there in the month of November, this time Diwali in the month of October, so generally paint industry get benefit if there's a longer Diwali period, pre-Diwali period. This time, it is a little shorter. So we have to see the impact of that.
Okay. Okay, sir. Okay. And the second part, sir, was I just wanted to kind of revisit that answer that you said on the pricing. When you -- if I look at current input cost levels, would you say that the incremental price hike, not just in a Decorative but also in Industrial, will be relatively low, the amount required will be much lower than what has already been taken as in the bulk of the price hikes are now behind us?
See, in Industrial, we feel that we need more price increase. So because last year, inflation was there and I think we got maybe just 40%, 50% of that -- 50% of the price increase of the inflation. So some more price increase is definitely required for us to better our market.
Okay, sir. Okay. And sir, lastly, you did allude towards a focus on more premium, more technology-based products, not just in Decorative but also in our Industrial portfolio. Does that have any impact on the royalty rate that we pay?
No, no. No impact.
So the royalty is essentially paid only on the products that are directly taken from -- only in the Industrial side, right, sir, I just wanted to clarify that part?
It's only on Automotive on selected products.
Next question is from the line of Aditya Ahluwalia from Invesco.
My first question is on A&P spends. And from a longer-term perspective, do you think that we have been a little cautious and we have not spent enough and that is one of the reasons why our performance in the past has been a little bit below peers? And secondly, what is the outlook on the A&P spends going ahead?
So yes, we do agree that last few years that we reduced that expenditure, and we got impacted because of that. And now we have taken a conscious call that we'll be increasing our marketing expenditure.
So as a percentage of sales, is there anything that we're saying, we're calling out?
So I don't want to share the figure. But as I said, that if you see last 2, 3 years, when we reduce our marketing expenditure, our share of voice in terms of visibility has gone down substantially, significantly. Now we are saying maybe around 14%, 15% share of voice, at least we'll be maintaining even with the market intensity change. Which means that if marketing intensity goes up because when the new competition is there, you'll maintain. So if the market intensity goes up, this figure also will go up.
Right. But the margins have come off despite this lower A&P, I think because of the Industrial and Auto segment. So you think that even with the higher A&P, the recovery, as we mentioned in the previous question, should there -- there should be a continuous improvement in margins going forward?
Yes, because as we discussed about the premium, superpremium, the PAINT+ products, and that's why the focus is more there. That because then we are going to increase our A&P expenditure and there are certain [indiscernible] required, so we have to focus on the better mix so that we are able to balance it out.
And just one last one, sir, 55-45, the mix between Decorative and Auto and Industrial?
Yes. Yes.
It should be more like 65-35 now, right, given that Auto has been declining and...
No, no, no -- 55-45, closer to that.
55 and 45. Okay, okay.
Next question is from the line of Keyur from ICICI Prudential.
Just want to understand that in the context of -- as you mentioned, that we exited some of the low-margin businesses on the industrial side. At the same time, we are witnessing, say, some slowdown in the input prices also. So these 2 inputs logically says that there should be a sequential margin improvement on the industrial side. And since we exited some of the business. So how should we see a balance between the growth in the industrial side and the margins going ahead? Any run rate, range or any qualitative that you would like to share on the aspect?
So 2 parts. One that growth, obviously, in industrial and automotive side, there is a momentum in the growth. The production growth is looking up. Two-wheelers, we have the last year production growth of 2-wheeler manufacturers were negative. Now it is into the positive area, but it's still not back to the pre-COVID level. But with a good monsoon, there may be a possibility that after September, there may be a further pickup of 2-wheeler, but we do see a good momentum to continue for the automotive demand. For margins, as we discussed earlier, also vehicle margins have gone so low and obviously, therefore, there's an intent requirement to increase the margin for which, one is the pricing, the other some of the initiatives, which I mentioned. Those initiatives are taken to get it to a reasonable level. Margins to be improved. But as a strategy, what is happening in the market, some of the investments are also required. So as we keep working on our margin improvement and then see that when it become more viable to do more initiative, certainly a mix and match of both the things.
Okay. But when you exited the businesses, some of the businesses, that won't have an impact on the growth -- earnings growth, since they were not profitable.
So we are being a little conscious on that in terms of -- if you're saying top line growth, obviously, when you exit some business, there will be some impact. But the focus has shifted from that low profitable product to the better profitable product. Over a period of time, we intend to compensate that. So that is what we are doing.
Next question is from the line of Arun Subrahmanyam from Ampersand Capital.
Congratulations once again for a good recovery in quarter 1. One thing I just wanted to get clarification from you is that you stated you are [indiscernible] smaller towns and in Tier 1, and that has kind of affected your market share in different times. So can you just give us a more granular sense of how is your split? And secondly, what exactly you are looking forward to in terms of the [indiscernible] in the next couple of years?
Just to give you some rough example if you see local towns versus upcountry town. When I say look at town, wherever we have the [ depot office ] there, mostly the A-class towns, our business would be a little less than 40% from the local towns and more than 60% from the upcountry towns. While in terms of market split, it would be 50-50 or maybe more tilted towards the local towns. So to that extent, we have a disadvantage. And all these big towns, some of these things what I mentioned in terms of surveys, other initiative project because project business is doing more in the local towns [indiscernible]. Some of these initiatives over a period of time should help us.
Understood. And in the launching your product, more premium side, so that typically should be used in bigger towns. So is your product strategy aligned to what you are looking at?
Yes, it is aligned, because there are 2 things. One, that premium, superpremium category. But some of the differentiated products, the features that we are launching, we are trying to see that pricing is relatively affordable. I'm just saying that if the same feature is available. So that's a democratization of the product. That is the same feature is available at in the market at INR 100, whether you can make it available at INR 90. And that's the technology working, which we are doing without impacting the margin. But how do you format the product, where the future can be. So some of these products goes very well in the urban markets or, say, local markets, but some of these products are also quite aligned with the requirement of the upcountry market.
Understood. So I can see that your strategy as far as industrial is pretty clear and you're doing okay out there, except for this pricing volatility. Whereas in last couple of years, because of whatever reason, you have been a little bit reactive in the decorative space and which probably has resulted in market share loss. So can we say that now that phase is behind us, and you will be doing much better in terms of your decorative?
So I want to comment like this that, yes, we lost and we had our action plan and strategy, some of the things that I mentioned also. But let me accept it that market has become competitive. And in the paint -- earlier paint was simple, it was only paint. Now there are so many elements. There is putty, which was not there in the past, which is -- a lot of new businesses. So comparison going forward will become very difficult. Internally, what we are doing is that our core business is paint.
Now in the waterproofing, in the construction chemical, whatever products, which are becoming a part of the -- integral part of the paint, those products we are launching. So internally, we are quite focused on the paint and see that we make progress. And some of the points what I mentioned, given our inputs over the Q1, there is a progress -- upward progress we are making. But suppose tomorrow, there are other new products are coming up, which may not be planning, I'm saying other new products in the new businesses, which may not be planning. So then comparison with the industry peers will become very difficult.
And do you have the advantage or disadvantage of having a Japanese parent in this particular aspect, which you were talking about?
We have a big advantage. Because when you talk about the technology and the process, I think that they add so much of value to us, and they are very supportive. So we are definitely doing all these things in consultation with them. And we are very happy that -- with their input.
Even in adjusting product?
Yes, yes, yes. Because as our parent, Kansai Paint, they also have a lot of subsidiaries in many markets. So we have advantage in terms of getting access to that what kind of product, even in the adjacent categories, that what kind of trends, so those inputs are there. And through the Kansai Paint Japan, also their subsidiaries, we are able to get the access to the know-how, technology, product, trends, marketing trends.
Next question is from the line of Ajay Thakur from Anand Rathi.
I had a few questions. First was, can you just elaborate on your distribution reach in the decorative paint segment? What would be your distribution reach? And how much distribution touch points you would have added, say, in the last quarter and last year, maybe?
Last year, our reach was around 27,000 to 28,000 total dealers when we ended the year. And generally, the growth in last 2, 3 years has been -- last year, probably it was around 7%, 8%. In the COVID year, the growth was very less. And in the quarter 1, the distribution has increased in the double digit, a little higher double digit. So there's an improvement there.
Okay. And you can continue with the same pace of distribution addition like around 7% to 8% or around 10-odd percent? Or you think you face much more headroom to grow given the fact that leader is present more like in 1 lakh-plus kind of outlook?
We have a good opportunity available for headroom. As of now, the numbers have gone up and some of the activities -- typically, what happens is that you have to create demand and confidence in the trade. And as it goes up, then your numbers of the distribution. So that's like outcome. So all the activities, the product, influencer activities, what I spoke about, as we get success in that, I think our momentum in terms of increasing our reach will go up. Should go up.
Okay. Secondly was wanting to check on the competition front. Can you just give us some brief color on the -- how the competition is actually shaping given the fact that we have new players coming in? Also, where are this competition more kind of concentrated? Is it somewhat of a geographical regions where we are seeing more competition from these players? Or is it like they are broad-based across India that we are seeing that no new player where the competition actually has erupted?
Companies who have already entered in the last 2, 3 years, they've already have had -- now having a presence across the country, the companies who have entered in the last few years. And specifically, if you talk about Grasim, who is going to enter in the next 1, 2 years, I think their plan, whatever there, is available in the public domain. They are also planning to be all-India player. But it may start with some specific markets. And over a period of time, I think they'll become an all-India player.
Okay. And lastly, on the industry growth in the paint segment, any color for this quarter? How it would be given that we have very high numbers actually than most of the peers? So any sense or color on that 1 could help.
Sorry, I didn't understand the question. Industrial growth, you are saying?
I'm talking about industrial growth in terms of the paint segment for both industrial paints and the decorative paint segment?
Quarter 1, you're saying?
Yes, for Q1.
Because many of the companies are yet to come out with the results. So as of now, we'd not like to comment on that. Only once the results are out, then probably we'll have a better understanding.
Next question is from the line of [indiscernible] from ICICI Securities.
My first question is on the project business. This was not a focus for some of the players earlier, say, 4 to 5 years back. But now even the market leader and you have been seeing strong traction in it. Can you discuss the changes in terms of attractiveness of that business for you to focus more on it?
So in the past, we were not very focused because how many directions you want to go and how do expect your - the wins. But I think today, the growth in certain market and the project business because it's penetrating in more and more cities. The number of cities are getting expanded. So virtually, I can say there's no choice, it is important to remain in this particular business. The discount in this business is higher, and therefore, the margins are lower. The only thing is that this business is more of emulsions and putty, probably enamel, distemper is not much there. So to that extent, some mixed advantage. But overall, the margins are lower in the project business.
Okay. Got it. Second, on a broad basis, what would be the margin difference between your Deco and Industrial segment? And the bridging between the 2 will be more price-led, which you were alluding some time before? Or will it be done through more of new launches in the Industrial segment?
Prashant, do you want to answer this question?
So the difference at EBITDA level is in the range of 7% to 8%, more than that -- Decorative or Industrial. And the improvement in margins will happen introduction of new products and technology -- technologically superior products.
And also the price increase.
And also the price increase.
The difference is quite large now in Decorative and Industrial. And so these are a few of the actions which will probably see that whatever amount can be bridged. 100% cannot be bridged.
Understood. And lastly, if you can highlight the capacity utilization for the 2 segments, and what would be your CapEx requirements? That's it.
64%, 65% was the capacity utilization in the quarter 1. And we announced some capacity expansion just to support the growth objectives that we have.
How should we model the CapEx for the next 2 years?
Prashant?
So right now, you must have seen we actually approved 2 projects, both in Decorative. For Industrial and Automotive, we have capacity for the next 2, 3 years. So as and when required, we'll definitely expand, because we have got infrastructure for brownfield expansion both for Industrial production. So there's not a concern at all. And as far as Decorative is concerned, the commissioning is not as big or large as Industrial, so we will be able to scale up at any point of time. So there's no problem on CapEx.
These 2 new projects what we have announced, will happen over a period of next 25 to 30 months. And that's the investment of how much, Prashant?
INR 290 crores.
INR 290 crores. INR 290 crores plus your regular CapEx for the year.
Next question is from the line of Percy Panthaki from IIFL.
Congrats on a good set of numbers. Just trying to understand your margins. So this quarter has been a significant jump from 7% in Q4 to about 13% in Q1. And large part of it is because of the operating leverage of the higher Q-o-Q sales. There is also some amount of improvement in gross margin, but our gross margins are still significantly below historic average. So just looking into the future for a few quarters, how do we sort of build in the margins, assuming that the input costs stay where they are, you already got some benefit from premiumization; you've already taken price increases, maybe a little more will come in the auto segment. So shall we say that this 13% margin will now stabilize in the range of about 14% to 15%, unless the input costs fall further? Is that a fair assessment?
Overall, year basis -- on a quarter basis, there is a difference because every quarter, there is a change in the business mix and the product mix. As I just mentioned a little while back, that in the coming quarters for the paint industry, the mix is supposed to be inferior, related more towards enamel, distemper. So that also will affect. And also, as I said, that some of the activities that we are working upon, this will help in the margin improvement. But we do have some of the points which are pending in our strategy where, as I said, in some of the areas where we are still restricting. Because as of now, when you want to get a profitable growth, you have to balance it out. So as we improve margins in certain areas and we find that our capacity to spend on those areas goes up, so that also would happen. So it will be a mix and match of that. So difficult to give you answer. But last year, also, we said that our margins are already the lower side. But I think we have improved. We'll continue to improve. But improvement and investment will go hand in hand to see that we are able to balance between the top line and the bottom line.
So as you mentioned, there is a seasonality because of product mix being different. So if I basically look at this point of product mix difference between quarter-to-quarter, Q1 margins versus the full year margins, they would be higher or lower in a normal year?
See, I don't want to talk about that. But as I said that I think we have improved, we'll improve. But then there are certain expenditure investment also would require. So I leave it to your guess, but maybe closer to the...
And I'm not asking for guidance for this year or next year. I'm just saying in the past, historically speaking, the product mix impact has been sort of highest in which quarter in terms of -- which quarter has the best product mix and which quarter has the worst product mix? That's all I want to know.
So the product mix is better in Q1 and Q3.
The next question is from the line of Archit Joshi from B&K Securities.
Congrats on a good set of numbers. Sir, my question is related to the industrial paint segment. You mentioned in the presentation last quarter that the KNPL is a key player in the electric vehicle segment. And you've also mentioned that we have strategized the 3-year plan in terms of having a strategy built around the paints division that you have on the industrial side. So can you elaborate a bit more on what the strategy is and how we will be able to leverage our parent products in the EV side? So any broad color on that would be helpful.
By and large, what we said is like now since there is a trend of electrical vehicles. As of now, the percentage is very low. But over a period of time, this percentage will increase. So the product, the system, what is required is available with us. And most of the customers who are -- because in the electrical vehicles now, there are existing players who are in the traditional 2-wheeler business where they have their paint shop. But new players are getting it painting outside. So those are like ancillaries and they are also our customers. So our customer base is good. The product is readily available. So as and when this scale-up happens, that we are there, we are available with our service, with our products like that. So this is related to EV if your question is only specific to electrical vehicles.
Sir, not just EVs, but if you can elaborate a bit more on what we actually are strategizing with respect to growing on the industrial side, if you can.
So industrial because our -- this automotive market share is high. And they are, in fact, we have a very strong market share in Japanese players. And today there is a good growth happening in the Indian players also, the PV manufacturers. So there, we are going aggressive. And we are working on the technology, that like there was a question earlier, the help from our parent. So there are a lot of technology advantage, which we have in this industry, which is like, for example, in 2008, we introduced 3 Coat 1 Bake. Now for the baking also, there is a particular temperature. Now we are working on keep reducing the temperature so that the energy consumption keeps going down at the customer end, that helps in terms of cost, that helps in terms of environment, that also helps in terms of increasing the productivity. So all those areas we are working to keep our [ motor ] competitive advantage in the automotive. The second part is auto refinish, where our market has been very low, less than 5%. And the size of the market is good. And there, the margins are better. So we are working to see that how do we increase our salience of auto refinish because that will also help us into the margin in the auto. And the nonindustrial areas, as I said, that our focus is completely shifting -- not completely, but largely shifting from the low-end to the high-end. And therefore, we have created our structure and getting into the approvals. And fortunately, we are getting good approvals. So these are the actions -- so that we are able to make our good place in the areas which are growing and which are profitably growing.
Next question is from the line of Sanjay Kumar from ithoughtpms.
Congratulations on a good set of numbers. First question on the A&P spend. A few years ago, we increased our A&P spend, say, in FY '18, '19 , saying that, first, you increase the mind share and then you convert the mind share to market share, which we weren't able to do in FY '21-'22. Now that I want to know if you will increase your A&P spend again, what would be the strategy going forward in dealer network? Because the largest player, I think they have doubled or at least increased their retail touch points, but they're not exactly the dealers, but they've increased it by 50%. And next 2 years, say, we increased our A&P spends. And by then, Grasim would have went to the market in decorative. So what would be our strategy going forward in distribution and specifically the dealer network?
So in those years when we increase our marketing expenditure, our focus was more in terms of enhancing the mind share and we got advantage. I think 3 years, we gained market share in that period. And when you are saying that converting the mind share to the market share, that opportunity happens from the dealers and the influencers. So I think most of the activities, what we are talking about, the marketing activities, influencer activities, in that particular direction. The one side, you have to maintain your salience. That's why we are not talking very aggressive in terms of share of voice. Maintain share of voice, so that you are able to maintain your mind share, which is strong #2 as of now, and concentrate on the activities that basically convert the mind share to the business, to the market share. That is first part. When you talk about the new competition, I think it's because -- and generally, what happens in this market, ultimately, for good business, you have to create a good distribution and you have to create a good demand, for which important is that you should have a brand, which we have. And then you have to create the distribution and support the distribution with the painter, and that's like hard activities which people would like to do. So I think we have advantage there that we are -- so even if any new company comes in, I think they have to do this activity, to build the distribution and to build the contact with the influencers. It takes it own time. So by that particular time, how much work we are doing, how do we expand, I think that would be more -- we will be more focused on that, that how do we speed up all these things and get the advantage.
My concern was on the growth rates, say, the Asian time is growing at 20%, 25% CAGR in the retail touch point, but we are guiding for 7%, 8% or early double digits. So I see that [indiscernible] worried about or we'll change that going forward?
But it's like -- as what I'm saying that earlier probably in the earlier years, it was very simple because paint versus paint. Now it is not paint. There's so many things which are getting added. There are so many businesses. So I don't think, ultimately, we have to work and see that how our home is rather than this chasing. So there will be many products which probably fits into their strategy, but it does not fit into our strategy. So as I said earlier, that focus remain on the paint and the integral part of the paint. So that is what we [indiscernible] over a period of time -- there are some other products if the market is created. Because typically, any industry [indiscernible] if there are new categories coming in, it will certainly [indiscernible] market, and if the market is lucrative, maybe one can decide whether you want to participate. But at this stage, I think it is focus for us to see that in the paint area, which has been our core business. And wherever -- whatever weakness we have had in the past, we come out of it. That is our focus area.
Okay, sir. And second on capital allocation. So you said that [indiscernible] is at 55%, and we are putting up CapEx in Decorative and it will take 24 to 30 months. That's also the time Grasim will take to come to the market. So there will be a lot of supply coming in the decorative space. So wouldn't it make sense for us to get aggressive in industrial space and put up new CapEx there rather than decorative, where there is a lot of competition coming in? I just wanted your thoughts on that.
Industrial, in fact, we have already created a capacity in [indiscernible], and there is a lot of scope for brownfield expansion is there. And as and when whatever demand we are able to foresee, I think we are covered in terms of the capacity. We are fully covered up because that's one core area we are fully covered up. In the last 2 years, we've created a dedicated capacity for non-industrial, nonautomotive [indiscernible] also. So we are fully covered up there. And this capacity, what we are adding is mainly in the water base. Because water base, generally the market growth also is in double digits in last 3 years, 4 years, and that will continue. So even if you see the normal growth rates, obviously, we do this calculation when you want to expand your capacity, that what is the normal growth rate, what can go plus/minus. And then based on that calculation, we feel that the capacity is required. And as I said, that we are committed to have this decorative business also based on whatever initiatives we are taking. And as the time demands probably whatever changes are required to be done in that. And therefore, to support that, this capacity expense is required.
Okay. And given the competition in decorative, are we seeing higher acquisition from, say, players who are in industrial, like Akzo or Berger, very aggressive in industrial space or...
Difficult to comment upon. Maybe possible. But I think Industrial is our core business. And some of the things that I spoke about, I think we are also planning to go, you can say aggressive. Because there are opportunities in the nonautomotive area where I said that this segment by segment, the only thing is that, yes, we want to remain focused on the profitable segment rather than the lower profitable segment. Because in the decorative market, when the competition intensity goes up, there may be a possibility that the margin structure may change. And that time, we know that if we are able to build our business in the industrial, in the better profitable segment, I think we'll be able to balance it out.
The next question is from the line of Jaykumar Doshi from Kotak.
Am I audible? Hello?
Yes.
Okay. My first question is Kansai Japan in their presentation in the month of May has given a guidance of 18% growth for the India business, revenue growth. And if I were to look at this quarter's performance and based on -- assume certain growth for the rest of the year, it seems that you should be able to grow 20% plus in revenue terms. So can you please help us understand what goes into the guidance and forecast of the parent when we guide for the India business?
Prashant,, do you want to answer the question?
See, generally, we don't give any guidance going -- we don't make any forward making statements. So generally, we -- you are a better person to judge how the industry is moving, right? And the growth is happening. We believe the growth -- going forward, growth is good. But we'll not make any statement of any percentage increase or something. So we will move in line or slightly better than the paint industry, that's what I can say.
No, no, my question was, Kansai Japan in their presentation gives a guidance for India business. Is that the sort of target that the Board sets for you? Is that the guidance that you give to the parent and they disclose it to their investors? Because I think there is a disconnect, right? If the parent is giving the guidance for India business, then there should be some disclosure by the India entity also for India-based investors, or at least some explanation whether that is constant currency guidance or whether that is Japanese currency guidance.
So basically, what happens, we have the system of having midterm plans, 3-year midterm plan, which we internally have with Kansai Paint Japan. And those numbers have been given to them, based on which they have given the guidance. But that was done some time back. After that, some price increase also happened post that. So which was not...
So if your question is that what goes behind that, just like internally we have a system of midterm plan. And from there, they take those things.
That's helpful. But is it local currency? Or is it in Japanese currency? Do they make currency adjustment or it will be local currency growth?
Adjusted in the Japanese currency.
Okay. So there is another element of currency assumptions that are done by them based on the numbers that we see from this.
That was -- that you have asked a different question.
Sorry, I asked a very?
Very different question.
Okay. understood. All right. Second question is, in the last year most of the industrial, [ at least base coating ] industrial was very weak, and the mix was ballpark 60-40 or maybe 60s and 40s on top of 39. Understand if it is 55-45. So the basic sort of calculation tells me that Decorative business growth would be somewhere in the range of 35% Y-o-Y and Industrial would have grown at 60% Y-o-Y in this quarter. Is that understanding correct?
No, no. So basically, 55-45 was the mix even the last year, 1%, 2% here or there, then we will maintain that 55-45, and that's the mix for the last year. And the growth of -- like total growth is around 47%, Industrial is slightly higher. Decorative also is more than 40%.
Understood. Helpful. My final question is on margins. In FY '20 in the first half before pandemic, your overall EBITDA margin was in the range of 17%, 18%. And right now with this quarter, we are at 13%. Based on your earlier comments that the gap between Decorative and Industrial is about 800 basis points, some of the bulk of the envelope calculation suggests that your Decorative business EBITDA margin would not be more than 300 basis points lower than where you were in a normalized [ RM ] environment can get that. So is that understanding correct that bulk of the margin improvement from here on that is contingent on recovery in Industrial Coatings? And Industrial Coatings could be probably 800, 900 basis points lower in terms of EBITDA margin versus what you were doing in FY '20. Is that the right math and understanding, ballpark?
So I'll not comment on the mathematics that you use, but understanding is correct. That maybe in the Decorative margin, recovery to the level of pre-COVID level is good. And Industrial, there is a gap. So in the future, the recovery is dependent on the Industrial. That understanding, you are right.
And reasonable to assume that the Decorative margins, your performance may be better, if not comparable, than the peers? And this is partly because you've leveraged A&P lever more given there was more room also to leverage that. And when I look at your FY '22 A&P, spends are 3.6% of sales versus 5% in FY '20. So I'm assuming that your Decorative gross -- EBITDA margin performance will be better than the peers, right, better than industry?
Or closer. But yes, it's better on 2 things. One is this. The other is the mix. Our mix -- we believe our mix is better. So, yes. You are close to -- right, I don't know, but yes, somewhere you are right.
Next question is from the line of Keyur from ICICI Prudential.
Sir, just wanted to understand that in context of our guidance of growing paint business at least in line or faster than the industry growth, and the same for the new businesses, and investing in distribution or communication and influencers. So in that context, how should we see a profitability? Because on the other side, the expectation is that the iron prices are softening. So to boost the growth -- so I mean, in the balance between growth and margin, with the falling iron prices, should we improve, on a trend basis, improving margins from here? And this is barring the, say, seasonality Q-on-Q movements. So I'm saying that as a trend line, should we improve in the margins as we are investing in future growth, we should see some softness in the margin?
I think this question I tried to answer earlier also. So what we are working upon is that how do we make our margins better in the areas where the margins are lower. Whenever the inflation is there, how do you take more price increase. And also, we are conscious of our strategy, and therefore, that when margins are improved, some of the investments will happen. So we are going to balance it out and please make the assessment that margins in that direction. But I think if we don't invest in the business, further invest in the business, then the margins would be better. But if we continue to the investment, then it may remain in the same area plus/minus a few. I hope I've answered your question.
I now hand the conference over to Mr. Aniruddha Joshi for closing comments.
Yes. Thanks, Nirav. On behalf of ICICI Securities, we thank the entire management team of Kansai Nerolac Paints for the wonderful discussion. And now I hand over the call to the management for the closing comments. Thanks and over to you, sir.
Thank you. Thank you, everyone, for attending this call, and it was very happy to discuss the matter with you. And always, your questions are most welcome, and they give us some good insights. So thank you for so much. And I want to comment again on Kansai Paint Japan, we are getting a very good support and help from them. We are working with a good collaboration. And in terms of the technology, the new product trend, the strategy, a lot of work is happening together. And I hope that we see a better and brighter future. Thank you, all of you for attending this call.
Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.