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

Ladies and gentlemen, welcome to the Q3 FY '21 results call of Berger Paints India Limited, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ashit Desai of Emkay Global. Thank you, and over to you.

Yes. Thanks, [ Urvija ]. Good evening, everyone. It's a pleasure for us to host the management of Berger Paints after a strong Q3 show. From the management, we have Mr. Srijit Dasgupta, Director, Finance and CFO; and Mr. Sujyoti Mukherjee, VP, Finance and Accounts. I'll now hand over the call to Srijit for opening remarks. Over to you, Srijit.

Thank you, Ashit, and thank you for organizing the call as usual. Good afternoon, ladies and gentlemen. On behalf of Berger Paints India, I'd like to extend a warm welcome to all of you to the Q3 FY '21 earnings call. I would like to begin this session with the usual brief commentary on the quarter performance, both standalone and consolidated. On the stand-alone front, the growth looked like this. Total income from operations went up by 24%. And PBDIT, without the other income, which is nonoperating income, went up by 45.1%. PBIT went up by 49.7%, PBT by 52.9% and PAT by 53.2%. Going to the consolidated front, and I'll comment on each one separately. Going to the consolidated numbers, the growth looked like this. Total income from operations at 24.9%; PBDIT without the other income, 40.1%; PBIT at 44%; PBT at 50.6%, this includes the share of profit and loss of JVs; and PAT 51.2%. Going back to stand-alone numbers and the performance for the quarter, a few brief comments may be in order. There was a healthy gross margin expansion. And by gross margin, we mean sales minus RMC, raw material and container costs. The expansion happened mainly on account of decrease in the prices of solvent-based raw materials. Though I might add that the prices are now rising and likely to create some pressure going forward on margins. However, the company's initiatives during the lockdown period in terms of renegotiating raw material contracts are now clearly bearing fruit. And we saw a significant impact of this in Q3 FY '21. You might recall that in earlier calls, we had mentioned that this initiative was happening. The beneficial effect of this renegotiation is likely to continue through Q4 FY '21. The lockdown period also gave us the opportunity to look at -- take a relook at some formulations. And this also yielded some significant savings. Overheads were largely under control. And we consciously increased the level of advertising, media spends, in particular in Q3 FY '21, to adequately support the opportunity that the unlocking of demand at the end of Q2 provided -- New products and initiatives. I told you about the XP safe training program that was very successful and well received by the market. This enabled painters to offer safe and hygienic painting services. This, to a large extent, helped households and consumers go back to painting their houses with a greater degree of confidence. There was a robust growth in construction chemical products, Berger's waterproofing products. For example, the Home Shield DampShield Elasto version performed very well during the quarter. Q3 FY '21 also saw a recovery in terms of demand in many of the metro cities as opposed to Q2, where they were still recovering and in the process of coming out of lockdown. Metro and Tier 1 towns showed a significant recovery as compared to the earlier 2 quarters. Of course, the growth in Tier 3 and Tier 4 towns were sustained. But the numbers overall look much better because of the improved performance of the larger towns and cities. The automotive sector also recovered during the quarter. That's the good news from the industrial paints front. You know the numbers of production manufacturer or category-wise, passengers vehicles did very well. Commercial vehicles have also improved. Three-wheelers have been lagging behind a bit. But all in all, good news from the automotive front. On the consolidated numbers, a few words perhaps on the subsidiaries. BJN-Nepal, that's the subsidiary in Nepal, showed significant improvement in this quarter after a protracted off-and-on lockdown situation. If you recall, they had multiple lockdowns happening in the valley and elsewhere. And this did affect performance and normal business for the first 2 quarters. Talking about Bolix Poland. The company's operations and its subsidiary in the U.K. showed improved performance in both top line and operating profits. I had mentioned that U.K. was a new venture relatively. And this is now bearing fruit. We were a little bit hamstrung by the lockdown situation in U.K. U.K., as you all know, was very badly affected. But Q3 was good for us. SBL Specialty Coatings Private Limited, this is the erstwhile Saboo Coatings, also showed improved performance with healthy top line and PBDIT growth as did STP, the latest acquisition that Berger had made. This was, of course, in November 2019, the acquisition was made. A little bit of explanation regarding the Russian operation, that's BPOL Russia. We are based in South Russia in Krasnodar. The top line was, of course, affected by the lockdown and consequent impact on markets. Russia has been hit a little harder than other European countries. And this is reflected in the top line as well. There was also a significant mark-to-market loss, which was recognized in the quarter on account of the dollar-denominated loan exposure in the subsidiary. And this affected the overall consolidated profitability. This is reported under expenses. There was a mark-to-market gain taken in Q2 FY '21 on account of the same foreign exchange fluctuation. So there's a bit of up and down which goes on. I think going forward, the ruble has remained relatively steady versus the USD, so hopefully no further shocks. But I thought this needed explanation and therefore the comment on the mark-to-market fluctuation. So just a word here that the BPOL Russia numbers are consolidated. In our Q3 results, their Q3 corresponds to the July to September quarter. And this is consolidated in our Q3 numbers. So we pretty much know how the ruble has behaved going up to December. Maybe even today, it's also fairly stable, a little improved from December. Berger Becker and BNPAC showed improved performances during the quarter. BNPAC, in particular, had a strong top line growth, of course, on the back of increased demand from automotive OEs, passenger vehicles, in particular. So all in all, subsidiaries have all kicked in, barring the mark-to-market loss in Russia. So this is a little bit about the quarter performance. I will now invite questions from the participants. Thank you.

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

Congrats on a very good set of numbers. My first question is you must have heard of the large corporate player in white cement putty announcing INR 500 crores. They want to be a strong #2, which you are currently there. So my question is do you see lower market share long term structurally getting at some risk from this player? Second, from a tinting machine, is it possible to have this innovation wherein you don't put tinting machine in that shop, but you put it at strategic locations within the city? So have you tried -- or any feedback you have whether that works or not?

Thanks, Abneesh, very relevant questions. Yes, we are viewing the recent announcements regarding the entry of this major cement player with great amount of interest. As I recall, they have mentioned also a little bit about backward integration. They've talked about the network of cement dealers. So yes, we are viewing this with a lot of interest. But be assured that we will do everything that is necessary to protect our interest as well, keep our dealers motivated, expand the network as much as we can. Yes, people have come into the industry over the last few years, and this is bound to happen. It is an industry which has seemed to be relatively stable, so I think will attract new investors. Yes, we are preparing our own game plan, of course, to respond to the challenges as and when they happen. We are not unduly concerned about this at the moment. But of course, we will keep a close watch. So regarding the second question, where you said that is there a possibility of reaching the consumer without placing the tinting machines at the dealers' premises. I think one of the recent entrants has tried this model. This seems to be a model which is possible in the West. For example, our operations in Poland, where we also sell a bit of paint now, some shades are factory-manufactured. But there, the distances are small. The demand is also not polarized towards festivals and occasions and managed events. And it is perhaps more easy to kind of service the consumers through a more distant tinting route. Tinting machines at dealers is the preferred route now because of speed and response times. As they have mentioned about an [indiscernible] strategy, we will await this with interest.

Sir, that's very helpful. Just one -- so in terms of the cement players have this advantage versus, say, a new paint player, the existing cement players will have, say, access to 70% of the paint shop. The question is -- those are not direct relationships, those are mostly through wholesale. So my question is, is this a big advantage for cement players versus a new paint player entering India?

It is, for sure. It is certainly an advantage. By how much is what we have to see. There is a clear presence of cement players in hardware stores, for example. And therefore, we will view this with all interest and caution.

Sir, that's very helpful. My last question is you have done exceedingly well. So one part of the question is when you compare with the market leader, on a stand-alone basis, you seem to have grown 2 percentage faster on sales and around 8%, 10% faster on the profit. So any comments? Second, in most of the businesses, you have done well. But economy is recovering. When you see the broader car market or industrial market, any segment where you think you could have done better in this quarter? I'm not saying this from a philosophical point of view. Every company will say, "We would have loved to do better." But more from a relative basis, where did you do better, where you did not do as good as, say, the #1 player there?

Okay. Talking about how we stacked up against the market leader, it's just conjecture on my part really. I don't want to spend too much time on that. But I would tend to believe that the competition, the major competitors' performance was affected by the relatively late recovery of the metro cities, where we are less, let's say, powerful compared to them. So that's possibly one of the explanations. And I'm talking of, say, the Mumbais and the Bangalores and the Ahmedabads and the Hyderabads, et cetera. So that's possibly one explanation. The second comment that I would like to make is we should compare like-for-like. And therefore, our deco business with their stand-alone numbers, essentially it's largely paint, I mean, as you know, in their case. So our deco number is actually not so far away from this in terms of comparisons, certainly better than our stand-alone growth numbers. So I offer that as an explanation. But really, I can't be very precise and clear. I hope this is helpful. Regarding where we could have done better, perhaps we were a little disappointed by the protective coatings numbers. We would -- we look forward to definitely a better performance going forward. There have been announcements made in the finance bill. And the finance minister has made some very, very encouraging comments regarding infrastructure investment. So that gives us hope that we will do also better in protective coatings.

So more of a macro issue?

Yes. I don't think we can complain that we've done badly in any particular segment.

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

Congrats on a good set of numbers. Sir, the demand recovery in paint segment has been sharpest among all the consumption categories that we cover or we track. Now would you still attribute this to pent-up demand or there's a now visible uptick in organic demand cycle, especially after the buzz of real estate cycle recovery is spreading around?

I think a bit of both, Tejash, meaning there must have been some element of pent-up demand certainly in the metro and Tier 1 cities in Q3. So I think it's a mixture of that. And as you say, a little bit of demand coming back and the pre-COVID situation kind of springing back. So a little bit of real estate, a little bit of optimism and, let's say, encouragement in the markets, which is also happening. But clearly, a little bit of pent-up demand in the larger towns and cities as well.

But -- and then let's say, Tier 2, Tier 3, where the impact of COVID was not that large, at least from a demand perspective, are you seeing demand momentum sustaining there as well in 3Q?

Yes, we are.

Okay. Sir, second, on competitive landscape, I mean, you gave a very detailed answer on demand impact of the cement. Perhaps it's early to gauge that right away. But considering the talent pool of the industry is limited, it has been oligopoly for long, are you facing any early pressure in terms of retaining talent or getting new talent to support your growth ambitions, so there's another dimension to the whole competitive perspective?

Sure, it will always be there, Tejash. This is a question that's been asked many times. But we have a constant program of taking fresh talent from the best places that we can afford. And rest assured that we won't let up on this front at all.

And sir, lastly, as an industry or as a sector, we have always taken pride in the kind of moat or the kind of entry barriers that the incumbents have created or enjoyed for long. And even foreign competitors were not able to break that. Now with the flux of domestic competition, which has come up in the last sort of 5, 6 years and now the latest announcement, how do you see the competitive landscape from -- just from incumbents' entry barrier perspective, a; and b, do you think that a lot of these barriers can be overcome by spending more capital rather than time in the industry?

I think one has to react to the challenges as and when they happen, Tejash. And for sure, every established player in the industry today is spending time thinking up strategies to put in place, not so much as a reaction but as a continuous improvement process. So every effort on backward integration, on improving the -- or widening the network and reach, all of that is happening. And I don't think Berger is an exception. Everybody in the industry will not sit and take it lying down or kind of remain static. So that -- those initiatives will continue and perhaps escalate. And nothing prevents us from implementing strategies which we think would be helpful in sustaining our growth numbers and our place in the industry. So clearly, that is that.

Last one on this, do you see a possibility of consolidation happening in the industry because it does not happen for a long now among the incumbents?

I can't really comment on this one, but unlikely at the moment, unlikely. There's just too many things happening and too much potential for each major player. I can't talk about the smaller players, of course. Some amount of shakedown may happen. So that's possible. But certainly, difficult -- it looks difficult for the established players. But one never knows. I think there is always a learning curve and a fresh opportunity at every step and turn. So let's see.

The next question is from the line of Avi Mehta from Macquarie.

I had three questions. First, I wanted to kind of just look at the other expenses. Now at the start of the call, you highlighted towards investments in marketing that you had done, given the negotiation -- the benefit of the negotiations. Would it be fair to say that this is primarily the reason for the sharp increase in other expenses? Or is there anything else that is...

By and large, some of our contract work went up. And you know that the accounting standards require that the contracts on a supply-apply basis means that the top line includes the labor component and the other expenses reflect the labor payments or the labor charges. So to that extent, it's a little vitiated. But this will -- this is part of normal business. And that's the reason why perhaps it may be a little higher than other quarters. But the true explanation is really the investment in marketing and advertising expense.

And did I hear you correctly that because you would kind of retain because, obviously these are more -- these negotiation benefits should continue, would you also retain the marketing aggression? Or how should I look at that line item as well as we go forward?

I can't talk about future quarters, Avi. But I would say that, yes, we have made up a little bit some of the lags that happened in Q1 and Q2. Q1, at least we didn't spend a whole lot on advertising, as you could appreciate. So some of that has been unwound and come through. So maybe a little bit of tapering off going forward, but I can't be more specific than that.

Okay. Let me rephrase it. Is this momentum or pickup in marketing across the industry? Or have we spent ahead of the industry? Is our share of voice...

My take is for the quarter, certainly we have spent ahead of industry. But that's only my take. I'm not privy to the exact numbers.

Fair enough, sir. Sir, the second bit I just wanted to kind of just check you, from what we understand, we have launched bathroom cleaners or kitchen cleaner-related products as well. I'm not sure if my understanding is correct. Or is this primarily only online? So if you could kind of just comment your thought process over here, what is the plan? And...

Yes. You're very right. I think the challenge is in distribution. So we are looking at all the various avenues for distribution because these are slightly different from the usual paint type of outlets. So yes, we are working on that. Whatever could be sold through the paint network is being done. But you're right, the challenge lies in widening the distribution, and we are working on that.

So is this more tactical for you or you're looking to kind of invest in a brand and develop BreatheEasy as a brand in this kitchen cleaner segment? If you could, what exactly is the driver?

We can't divert much from our core paint competencies. This is an opportunity that came through during the lockdown and COVID period. So we will do -- we will milk it for what we can. But we won't take our eye off the paint ball, so to speak.

And are you looking to invest more in the digital channel for selling of paints as well or you -- is that a...

It is certainly higher, yes, but not significantly higher.

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

Congratulations for a good set of numbers. In fact, my part of answer has been asked by the previous participant. So I think that you have just interacted saying that this is a tactical opportunity. But what I'm looking from a medium- to long-term perspective, what are the things which we can look at? I mean is it a trial? Is it a pilot? Or is it that we would be seriously playing into the kitchen cleaning and more products to support our presence in the market? Because the channels are a little different.

I think the philosophy has been, as with paint, differentiate our product and give something new to the market and relying more on the attributes, the product attributes, rather than on a very fierce and aggressive branding campaign. I think that's been our philosophy in paint as well, and it's worked pretty well hopefully in paint for us. So whenever we've introduced a product, and I can talk about the Safe 24 surface cleaning product, for example, it is differentiated. It is very effective and accredited by very, very reputed institutes and labs. And hopefully, the consumer appreciates or will appreciate this. The challenge, I think, as I mentioned earlier, is how to get it to the market and to reach the consumer because the consumer is not looking for a hygiene product in a paint store really. So that's where we are at. And we have the products and the products are good is my belief.

Yes, exactly. That's the point which I was trying to elaborate, saying that then if you have to look at the different channels, cleaning is one of the fastest-picking opportunity. But would you substantially introduce more products to keep a basket because we are trying to reinvent the different channels in terms of our general trade and grocery?

Yes. There is a -- there is always going to be a demand through our painters and our network because that's how consumers will feel safe, if they have a good product that's being used by the painter or used in their home. So there's a, let's say, a seed demand, which is already there and being usefully utilized. But the larger play, of course, we will -- let's give it a couple of quarters. It will need a little time to expand this.

Sure. My second question is on -- if I look back last 4, 5 quarters and when we look at this year, first 2 quarters, there was a slow demand recovery and then we are seeing pent-up demand which has happened. What happened -- what I'm trying to understand, I mean, you and market leader has really shown a tremendous volume growth. But the sense which we are getting while speaking to channel partners, there's a whole set of down-trading or value for money which is happening. So basically, on the one side, you can say that the rural is moving up the ladder from the putty and distempers to low-end emulsions and enamels. But on the other side, the urban markets also, there is an issue and people are trying to look at the economy emulsions. So in your sense or your part of business, do you actually see that this is a strategic change in behavior, which is either tactical or will remain longer time and therefore we need to focus more product basket because the contract choices and performances are -- was different in the urban and rural market and in terms of metros also?

Yes, you're right. But we only had one very good quarter. And of course, as I explained in my initial remarks, it was a combination of pent-up demand in Tier 1 and metro towns as well as certainly sustained demand in Tier 2, Tier 3 and Tier 4 towns. So Q3 is -- it's a little early to speak, but we are encouraged by the sustained demand in Tier 2 and Tier 3 towns. Q3 was helped to that extent by the recovery in Tier 1 and metro cities. And then that's kind of probably be -- behind the good numbers that you spoke of in the industry. So that's there. Q4 and Q1 will be again difficult to talk about. And I mean Q4 of FY '21 and Q1 of FY '22. Because the base numbers will be quite, quite low and difficult to kind of read really into any kind of -- make any sense of what the growth numbers could look like going forward. But I think it's -- we are optimistic that there is demand recovery perhaps a little bit beyond pre-COVID levels, which encourages us.

Sorry, [indiscernible] stretching more. What I could not understand, when I look at 5 quarters, the rural is one of the part and even market leader has been very [indiscernible] about rural recovery. So fundamentally, in your experience, what's exactly happening this volume growth, which is driven by consumer? Is that there is a money or there's a sentiment? Is that the affordability which is driving? What's exactly happening behind this volume growth?

A combination of everything, I think, including expansion of the network. We are now reaching out to the smaller towns and making our paints available. And this is a result of urbanization, this is a result of consumerism, result of advertising, making our products known. Paint is now a lifestyle product as opposed to a commodity, I think. So a combination of everything and then some optimism coming out of a very bad COVID period.

Okay. Just last question, I just wanted to understand. Now we have seen the raw material prices inching up. And I think one of the things which is more talked about when industry is resilient, when the benefit comes, you can take the price increases. Do you think you have exercised any price changes in this quarter or recently or if the competition has done this?

We will probably have to look at price increases in industrial, where its margins, as you know, are lower. And it's more cost push-driven negotiation rather than elasticity or inelasticity of prices as far as deco is concerned. But the price increases have not yet been so dramatic to merit an instant reaction. Let's wait and watch for a little while. I think some prices have started stabilizing as well after the initial swing upwards. So let's see, I think we'll need a quarter or 2 to figure this one out.

So if I understand, there is no change in prices, which has happened in deco part of the business?

Not as yet, no.

The next question is from the line of Aditya Gupta from Goldman Sachs.