Berger Paints India Limited (509480) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Results Conference Call of Berger Paints, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashit Desai of Emkay Global. Thank you, and over to you, sir.

Yes. Thanks, Margarite. Good evening, everyone. I would like to welcome the management of Berger Paints and thank them for giving us this opportunity. From the management, we have with us today Mr. Srijit Dasgupta, Director, Finance and CFO; and Mr. Sujyoti Mukherjee, Vice President, Finance and Accounts. I'll now hand over the call to the management for opening remarks. Over to you, Srijit.

Thanks, Ashit. A very good evening to you, ladies and gentlemen. And a warm welcome to our Q2 FY '21 earnings call of Berger Paints India. As usual, I'll start with a few comments on the quarter's performance, both stand-alone and consolidated. Very quickly, a snapshot of the growth numbers for the quarter. So BPIL stand-alone, total income from operations, 7.4%; PBDIT 35.8%; PBIT 41.3%; PBT 41.9%; and PAT is, of course, lower for obvious reasons at 10.5%. The BPIL consolidated Q2 numbers look like this in terms of growth: total income from operations, 9%; PBDIT, 34.3%; and PBIT, 38.7%; PBT at 41%; and PAT at 13.6%. Just a few comments on the quarter's performance from an operations point of view. I'll stay away from comments on the economy and the effect of that on the industry. I think that, that's already debated at some length in the industry. So stand-alone operations looked a little better in Q2. Essentially, raw material costs continued to be benign during the quarter. The crude oil-based raw materials continued to show decline in prices, and this was, of course, only partially offset by the effect of a depreciating rupee on imports, of course; and the cumulative effect of price decreases in deco in September 2019 and December 2019. The quarter numbers were also helped by some raw material cost reduction initiatives, both on the formulation front and the procurement front. So that helped us well and we likely to see the effect of this continuing into Q3 and Q4. Costs were largely under control, and the expense reduction initiatives that were taken in the first quarter were sustained into the second, even with volumes and top line recovering significantly. Advertisement and sales promotions were restored in terms of spends almost to the previous quarter levels, but a little short. So we were lower in advertising and sales promotion expenses than in Q2 FY '20, but much improved in terms of the spend level. The PAT numbers were not comparable with the previous quarter's figures since the company had chosen to exercise the option of the lower tax rate of 25.17% in Q2 FY '20, which resulted in the unusually low tax charge for Q2, the reason being the cumulative effect of the reduction on Q1 and Q2 hit the Q2 FY '20 numbers. Working capital ratios were at previous year's level and actually show an improvement in number of days if expressed in terms of Q2 top lines, reason being, of course, that Q1 was largely affected by the washout in April. A little bit about our consolidated performance. Improved performances from [ SBSCL ], which is the erstwhile Saboo Coatings unit and BJN-Nepal. BJN-Nepal, however, was still short of Q2 FY '20 numbers, though the prospects for Q3 FY '21 look much better. There were also improved performances from the JVs, the 2 significant ones, Berger Becker and BNPAC, BNPAC being the JV with Nippon Paints. So improved performances from them as well. And of course, the remarks regarding tax, which were made for stand-alone numbers, also apply to the consolidated numbers. The performance of this quarter gives us reason, therefore, to be reasonably optimistic about sustained recovery in the paint industry and of normal growth going forward into Q3 and Q4. I now invite questions from the participants in the call. Over to you.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Congrats on a good performance. My first question is on Nippon Paints. So this JV was formed essentially for a specific purpose. Now before this JV and currently, how do you measure the performance? Last 3, 4 months, of course, both 4-wheeler cars and 2-wheelers have seen a dramatic recovery. So over the entire time period, my question is not just on the 3, 4 months, have you seen real gains, either new clients getting added or within existing clients more market share you have added?

Yes, very clearly, Abneesh, and thank you for the question. Yes, of course, the first quarter was a bit of a depressing scenario as could be understood in the remarks that we made earlier. But I think from Q2 onwards, we are seeing a distinct improvement. There's actually a significant growth over last year. There are cost reduction initiatives, both in terms of formulations as well as import substitution, which is happening. And the recovery is on track, meaning recovery from the effects of the slowdown as well as the COVID-related impact. So I think we are optimistic that we are on track to do much better. Your question regarding new customers or new markets, yes, without giving too many details, yes, we've made significant gains in some of the major OEs.

And you're not quantifying the market share gain over the past few years?

No. It's still a very small number compared to the overall size, but I think we are happy that we're making gains in terms of acquiring new businesses. Growths in the last couple of months have been quite good.

Second question, employee cost. I understand last 6 months, every company has cut employee costs. So in your case, in Q2 also, I see that continuing in the stand-alone business. So is this now at the fag end and second half maybe it'll be back to the base numbers?

Not really. I think we will see some sustained reductions which are possible and should be continued. The attempt is to be a little more, let's say, careful in the employee cost numbers. And therefore, we do expect some bit of a permanent reduction happening going forward.

And sir, last question, India stand-alone business has come back to top line growth. BJN-Nepal, what are the specific issues -- you've said, quarter-on-quarter good improvement, but what are the specific issues here? When do you see growth coming in terms of top line here?

If all goes well, we should see a reasonable growth in Q3, meaning our Q3, that's Q2 of the Nepal financial year, if all goes well and no further disruption happens because of COVID. As you might know, the impact of COVID was a little delayed in Nepal and, therefore, they suffered really a lot in terms of lockdowns and disruption to business. But as we speak, things are better, and we should close Q3, hopefully, with a reasonable growth we are expecting. We are optimistic about it.

But one follow-up here, that would be also Diwali effect, right? Because Nepal also, same Diwali effect will be there. This time Q3 is seeing full benefit? Last time it was split between Q2 and Q3. So is it full recovery? And was the lockdown very severe in...

We're expecting some impact of the locked-up demand, which may unfold. And hopefully, that will also sustain the numbers.

The next question is from the line of Percy Panthaki from IIFL.

My first question is, if I just try to derive the subsidiary sales growth using the consolidated numbers minus the stand-alone numbers, the Y-o-Y sales growth in the subsidiaries comes to about 22%, which is fairly high. So some color on which particular subsidiary? Because you said Nepal and U.S.'s Y-o-Y still a decline. So for the overall subsidiaries to be 22% plus, something must have grown much higher than 22%. So can you give some color on that?

One is the fact that inclusion of the STP, which we acquired in November of 2019, that obviously is a net plus on the top line for consolidated.

Right, right.

And so that's really the main reason. And of course, our other operations like Poland, these have grown less than India, but still reasonably. So these are the 2 big ones. BJN-Nepal has definitely improved over Q1, a little short of last year, but -- so that the net-net appears or comes out like this.

Sir, secondly, we have seen in all the paint companies that there is a gap between the volume and the value growth. I'm talking about the India business right now. So can you give some idea how much is the gap between your volume growth and value growth for the India business? And what would be the drivers among that? How much is mix? How much is actual discounting? And how much is MRP cuts, et cetera? If not the exact numbers, some flavor on that?

Yes. I won't give you a breakup, but I'll try and help you with some of the factors which influence the difference and the gap. If we were to look at our Deco business, which really what drives our top line as well as I think that's probably the biggest contributor to this gap, there's an element of price decrease, which is really the combination of the cumulative price decreases in September and December as well as some additional price discounts that were given. And the rest of it -- but the bulk of it is, of course, made up by mix and the fact that we have sold lower ASP products and, of course, everybody else has as well. So the combination of these 3 factors have influenced the gap that you see.

And that gap for other players is about 600 to 800 basis points, 600, 700 basis points, would it be the same for you as well?

Give or take 100 basis points.

Got you, sir. And last question is on the demand front. This quarter, all the paint companies have seen a very good revival. And next quarter anyway, there is a shift in the festive season, so the numbers will be good on a Y-o-Y basis. But what is your sense in terms of -- I mean, this quarter, Q2, would you say that there is some pent-up demand which is sort of posting good numbers? Or this is all fresh incremental work which has started and the numbers are sort of indicative of demand going into the future?

I think a little bit of both. We are hoping that it's sustainable demand going into the future. As you know and, I think, we're all perhaps aware that the metros are still yet to catch up to last year level. So when that happens, I think the overall numbers will get shored up a little more. So -- and we are hopeful that, that will happen in Q3.

[Operator Instructions] The next question is from the line of Tejash Shah from Spark Capital.

Sir, can you give some qualitative comment on sequential momentum of the recovery? Basically, are we witnessing -- still witnessing month-on-month recovery every month? Or there was an element of pent-up demand in between, which is settling down now?

No, I think you must have heard my comments earlier. I think a bit of both. We are seeing definitely an improvement with every month that passes. I can't obviously share numbers for October. But I think we have reason to believe that demand is improving.

Sir, second, there's a lot of buzz, and we are picking up from other sectors also that finally, after a long break, there's some real estate, residential real estate recovery in urban centers like Mumbai, Calcutta and metros. So are you picking up any such signs in your numbers or too early for that demand to show up in our numbers?

Too early, Tejash. So let's wait for another month before we can really comment.

Okay. Sir, you spoke about -- in the beginning about GM benefit largely because of alteration in RM sources and some formulation. So are these changes tactical in nature or permanent resets going ahead and it will show up -- this benefit will carry along in FY '22 also?

Just to clarify, Tejash, the biggest gain was from the drop in crude prices. And of course, that is a bit of an up and down story, but we don't think it will go back to the levels of a year or a couple of years ago. So that's one. But in terms of formulation changes, yes, those are permanent effects, which will sustain into Q3 and Q4 and going forward. And some of the other discounts are perhaps a combination of both permanent discounts as well as some quantity discounts in the COVID period. So some of it will perhaps roll back if demand improves and there are shortages in supply, it's happening for 1 or 2 raw materials, as you might be aware, but very little to impact the overall number. So a combination of all that, hopefully, still means that this gross margin would be sustained.

Sure. That's very helpful. Sir, on waterproofing, you have appointed a national celebrity as a brand ambassador, and you launched it during IPL. Even the market leader in paints was also trying to get under this space has not actually gone this aggressive or, I would say, they have not been so much front-footed on this. So what is the size of opportunity? Because the construction chemical is a very big market, and waterproofing is also -- has 2 parts, the remedial and the fresh part. So what is our game plan in the initial stage? Are we targeting the whole construction chemical or we'll be restricting to waterproofing? And within that, we'll be leveraging our existing network or we'll have to create a new network altogether for this?

I think I mentioned in the earlier quarter earnings call that this does have a huge potential, largely untapped by the paint companies and the paint company is actually best placed to exploit this. I think I mentioned this last time. And therefore, we needed to bring a product that would be easily understood by the consumer and give some, let's say, scientific approach to choosing waterproofing solutions. So even though waterproofing is a subset of construction chemicals as a group, we think that this has tremendous potential. And therefore, we are looking at higher growth for this segment as compared to the rest of the paint products in deco. Yes, we are hopeful that waterproofing will become in a couple of years' time a significant part of our Deco business.

And sir, last one on capacity expansion plan. So if I recall correctly, when we were expanding our capacity into Hindupur, one of the reason of going down south was to actually going closer to the market we wanted to service. And now the mixed capacity expansion is coming in Lucknow. Is there a trend that we are -- we should see here? Or is it just a usual capacity expansion and not as strategic as Hindupur was?

No, it will be significant. As you might know, UP and the neighboring states are a significant market for decorative paints, certainly. So it made sense for us to locate our new plant in UP and, hopefully, aided by the tax benefits that we hope to get there. But of course, the primary reason is the location for proximity to market. So that's been the reason. And we were largely unrepresented in that part of the country in terms of a large factory, and that's going to happen now.

The next question is from the line of Shirish Pardeshi from Centrum Broking.

So 2 questions, quick. I think we have seen a market [ data ] saying that there is a resilient demand in rural. At least the high-frequency data point is also suggesting the rural is growing well. In your experience, what's changing in rural? Is that the distribution is driving this growth or really something else is working? So in your experience, what's working?

Nothing new, Shirish. I think it's a combination of distribution, the fact that rural economy, monsoon included, is reasonably good, definitely faring better than the metros for sure. And the fact that there is opening up of the network, opening up of infrastructure, banking, networking, connectivity, roads, the whole combination of all of that is perhaps pointing towards faster development there and with that, of course, comes paint.

So one follow-up there. If urban demand in quarter 2 has also seen a lot of disruption and things are not so normal, so what would be the sales urban versus rural in terms of if urban is ex rural, how much it would have grown?

Shirish, we don't give these breakups with absolute numbers. But again, I keep repeating in every earnings call that the real growth is actually coming from what we call the Tier 2 and Tier 3 towns for us. The Tier 1, of course, includes the 7 or 8 metros. So the growth is actually coming from Tier 2 and Tier 3 currently. But that also gives us hope to expect that with the recovery of the metros, this will help firm up the numbers going forward.

Okay. My last question is on the demand cycle. And you mentioned that -- I mean I'm not getting specific number in the month of October. But just directionally, you have harped on the latent demand. So is the demand -- is really moving in the metros or still metros has not picked up and you will be still seeing a heightened demand in rural?

Little bit premature. I can't discuss October numbers in such detail, Shirish, I'm sorry about that. But I think as -- I'll repeat that October continues to be -- or the prospects of Q3 continue to be very good.

So if industry is saying that the metros' contribution is about 30%, 35%, in your case, it would be different or it will be less?

Pretty much mirroring. It may be a little lower than 1 or 2 other players, but we will probably be at a slightly lower end of the spectrum in terms of presence in metros. But definitely, the growth numbers have impacted all the players perhaps equally. So we've all been affected by the growth in metros.

[Operator Instructions] The next question is from the line of Avi Mehta from Macquarie.

I just had one question on the competitive intensity. We understand there has been entry or increased presence by a player in the economy emulsion side. Has that kind of impacted discounting levels or is that not material enough? If you could share your sense?

Not very material, Avi. So I can't say more than that. We don't discuss specific strategies in terms of our competitors. But not very significant.

Not very significant. And...