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

Ladies and gentlemen, good day, and welcome to the Berger Paints India Limited 4Q FY '21 Earnings Conference Call, 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 from Emkay Global. Thank you, and over to you, sir.

Yes. Thanks, Faizan. Good evening, everyone. We welcome the management of Berger Paints, thank them for this opportunity. It's a pleasure to host them for the Q4 earnings call. From the management, we have with us Mr. Srijit Dasgupta, Director, Finance and CFO; and Mr. Sujyoti Mukherjee, Vice President, Finance and Accounts. I'd now like to hand over the call to Mr. Dasgupta for his opening remarks. Over to you, sir.

Thank you, Ashit, and thanks to Emkay Global for hosting this. Good afternoon, ladies and gentlemen. May I, on behalf of Berger Paints India Limited, and my colleague, Mr. Sujyoti Mukherjee, extend a very warm welcome to all of you to our Q4 FY '21 earnings call. I hope that you and your families have stayed safe and well since we spoke last. I will begin this session with the customary comments on the quarter, some comments on the year's business and then take your questions. I would, however, request you to limit your questions to the quarter or year under review. This has been quite a roller coster year, ups and downs caused by the disrupting influence of multiple waves of the pandemic. Markets were shut for the whole of April, though we saw a strong bounce back when the markets eventually opened. In terms of our Deco business, our new products like Long Life 7, Easy Clean Fresh, Self BreatheEasy as well as our construction chemical products did exceedingly well. It was also a year when we could revisit our overhead spend structures, particularly in expenses like traveling, rents, works upkeep, maintenance. However, we were mindful of the need to sustain our advertising and promotional spends, and restored the expenditure to pre-lockdown levels very quickly after the lockdown eased. We could also address the raw material costs through renegotiation, innovative reformulating and substitutions on an accelerated trajectory, which probably may not have been possible in a normal year to this extent. I will now offer my comments regarding the quarter that's gone by. I'll start with the growth numbers for stand-alone operations. So these are growth percentages. Total income from operations grew in the quarter by 53% and in the year by 5.8%. PBDIT was, of course, affected by the fact that other income had dropped sharply in this quarter because we had no dividend income to that extent as we did in Q4 of FY '20. So I'll read out the growth numbers for PBDIT, excluding other income, I think this is a more comparable figure, the 2 quarters. So that's 58.6% growth in Q4 and 14.5% in the full year. Similarly, I'll read out the PBT numbers, excluding the effect of dividend and other income. So that becomes 79.7% growth in the quarter and 15.4% in the full year. PAT, excluding, again, the effect of dividend, would be 91.2% growth versus 13% for the full year. There was a gross margin expansion in the quarter of almost a percentage point versus Q4 FY '20. Though compared to the trailing quarter, it was pretty much around the same level. Even though raw material prices rose sharply during the quarter, the effect on gross margins were mitigated to some extent because of the inventory effect of earlier purchases at lower rates, including some strategic purchases. The ratio was also improved because of the effect of some additional institutional business in our decorative and protective coating lines through some supply/apply contracts which, as the name suggests, has the effect of depressing the raw material to sales ratio. This happens because the top line includes the application element as well. And therefore, the gross margins tend to get depressed because of this feature. But simultaneously, the expenditure also goes up because the contract work charges get included there. However, raw material prices, particularly for solvent-based products, saw the highest increases in the quarter, phthalic hydride, soybean oil, penta, solvents grew very sharply, flows very sharply in terms of prices as well as did monomers, which go into emulsion production. There was a strong performance in the quarter for newer products, I mentioned some of them; and construction chemicals, which helps the top line growth as well in addition to the lower base factor and the fact that the larger towns also opened up. Manpower cost ratios improved significantly over Q4 FY '20. That can be expected because of the scale effect of higher sales in this quarter. If you recall, Q4 FY '20 was severely impacted, at least for us, by the imposition of the lockdown in March. Overheads were largely under control with significant gains coming in, in expense heads like traveling, I mentioned this. Though overall, the expense group was higher on account of the application charges to supply/apply contracts. So this explains, to some extent, the delta that you see positive and negative in gross margins and other expenses. Other income was significantly lower than Q4 FY '20, which had much higher dividends from subsidiaries, approximately INR 96 crores in Q4 FY '20 versus Q4 FY '21. And therefore, the unadjusted PBIT and PBT numbers are not comparable. The effective rate of tax was also higher compared to last year on account of the lower tax on dividends and the onetime effect of deferred taxation gains last year on account of change in tax rates. I now move to the consolidated growth numbers in percentage terms. So total income from operations grew by 49.5%, full year was 7.1%. PBDIT, excluding other income, was 61%; full year, 12%. Obviously, for the consolidated numbers, the dividend adjustment need not be done because it's dividend from subsidiaries. PBT grew by, and this is before share of profit and loss from JVs, 75.9% and 10.4% for the year. PBT after the JV share is 78% growth in the quarter and 10.8% for FY '21 full year. PAT grew by 102.2% and 9.7% for the full year. The consol numbers, therefore, were approximately at the same levels of growth as the stand-alone numbers. Strong performances came in from SB SCPL, this is the erstwhile Saboo Coatings; and STP, this is our newly acquired construction chemicals subsidiary with the improved performances from the 2 JVs, BNPAC, that's Berger Nippon and Berger Becker. BJN-Nepal continued to recover in Q1 -- Q4 FY '21. If you recall in earlier quarters, they were really struggling with the effects of lockdown and multiple lockdowns, but they recovered in Q3 and Q4 to a large extent. So this is a little bit about the results. I now invite participants to ask their questions. Thank you.

[Operator Instructions] The first question is from the line of Percy Panthaki from IIFL.

Sir, could you give some idea about the input cost inflation? And my understanding is that it's pretty high. So how is it that all the companies are managing with some 3%, 4% kind of price increases? Is it that you have taken only the first brand and very soon some more price increases will come through? Or do you think that with the help of some cost reengineering product, reformulation, et cetera, you have sort of nullified part of the increase there, and therefore, not too much price increase will need to be taken?

Thanks, Percy. A relevant question. I think the answer lies in 2 parts. One is, for sure, another price increase is necessary even with the improvement that I spoke about in RM substitution, reformulation, strategic purchases. These efforts continue, as I speak, and well into FY '22, we hope. But for sure, we are looking at another price increase in a couple of months' time. I think this is pretty much agreed upon by everybody concerned. It's unlikely that there will be any dramatic turnaround in raw material prices in such a short term. So some kind of price increases looks likely.

Sure. Secondly, if you can just give us some idea on the domestic volume growth and how the volume value gap has trended for this quarter? Because this quarter would have seen metro demand coming back, which is generally a little more higher priced. So has your volume value gap come down? If you can give some data on that, please?

Pyes, absolutely. I mean you've answered your question yourself. Absolutely true. With the metros coming back very strongly, the volume value gap is actually reversed itself to a little -- to some extent, meaning in many locations, the sales has outstripped the volume sales. Of course, when I talk about volume sales, I should clarify that we use a normalized metric for volume. I think I explained it in earnings calls earlier, where we negate the volume, let's say, assisting effect of low ASP products like putty. We kind of normalize it a little bit. But having said that, on a like-to-like basis, it is exactly as you say, and that's what has happened.

So for this quarter, at the overall company level, would you say that volume, value are the same, the growth percentages, the volume and value?

We are 20% industrial. So that is unaffected by all of this, by Tier 1 and Tier 2 because the customers remain the same. But certainly for our Deco business, this is applicable.

Okay. So in deco, basically the volume value is more or less equal?

The gap has, for sure, been negated. The gap that you perhaps were familiar with earlier quarters, that has sort of got negated.

Okay. And last question for me, which...

Yes, go ahead. Go ahead.

Yes. Last question from me. We've seen very strong growth in Q4 this quarter. And for the full year, if I look at it, for the India business, we are at about 6%, 7% kind of -- sorry, 6% kind of growth. And maybe the decorator would be higher than that. So it seems to have been a near-normal year, of course, not absolutely normal because you have been doing double-digit growth earlier. But if it's, let's say, 8%, 9% kind of growth versus a normal growth of, let's say, 10%, 12%. We've almost doubled up whatever sort of demand destruction happened in the first half of the year, we covered that in the second half of the year. So in light of this covering up already happening, would you say now that FY '22 would be a normal year in terms of growth rate?

I wish I could say that, Percy. The beginning has been good. But I don't think I can say very much more. I have to restrict my comments to the year that's gone by or the quarter that's gone by. But let's hope this happens and then that there are no serious disruptions caused by the pandemic. I mean that's obviously the spoiler or potential spoiler in this case.

But would you say that at least the demand destruction, which happened in the first half of FY '21, that has come back in the second half? Or that also, there is some amount which has not yet come back and which could come in FY '22?

I think the pent-up demand factors over and done with. I think whatever strong demand that we see in Q4 is hopefully a shape of things to come. That's what we optimistically hope for. I don't think there's that pent-up demand factor that will play out any further. I think it's just demands shoring up generally.

The next question is from the line of Praveen (sic) [ Avi ] Mehta from Macquarie.

This is Avi here. Just one thing continuing from the last one. The input cost inflation, how much of the price increase do we still need to take? Any range you could share with us, sir?

You know, Avi, we can't because it would be like giving some kind of guideline for Q1 or Q2. We have to stay away from it. I think in my earlier replies to the first question, asked by Percy, I think there is a strong case for a further price increase. So I don't know whether that helps you, but obviously, there is a gap that still exists.

Okay, sir. Okay. Sir, the second question was essentially on the subsidiaries. Now we've seen actually do very well, almost in the entire part of the year, barring first quarter. Actually, not even the first quarter. So I wanted to understand, is this -- do you believe that you structurally moved to a better growth trajectory over there? Or is this more a situation wherein the lockdown nature of Europe kind of aided growth? If you could kind of share some comments out there, please?

Yes, Avi. Absolutely right, Bolix has improved structurally. I think -- I should -- I mentioned also in the earlier earnings calls that we've now made forays into the United Kingdom, France and Switzerland and U.K. And some of the Western European countries hold tremendous potential as far as this business is concerned. I think it would be fair to say that Bolix was probably the best performer on an annual basis, both in terms of top line growth and profitability in the whole group of companies in the Berger Paints India Limited consolidated group of companies. So yes, very strong performances. Structurally, the U.K. business is making a difference. Poland is also jumping back into the fray. I mentioned, I think, last time that Poland and Portugal were the 2 best-performing countries in the EU. And we are hoping that this is a structural shift to better times for Bolix.

And sir, would it be fair to say that it's essentially leverage, which is aiding margins? Or is it also a mix play over there as well?

It is. The raw materials are pretty much similar to what we use in paints. So the ups and downs pretty much echo or mirror the fortunes of the paint industry. But they have been probably more successful or, let's say, more frequently successful in terms of getting price increases.

Okay. Okay. Perfect, sir. And sir, lastly, essentially, on the CapEx side. I mean we had contemplated adding capacity. Now given the current situation, the uncertainty, could you share plans on how are you looking at that? Are you sustaining that momentum or revisiting it? Any thoughts on that, sir?

I think we are committed to the expenditure, Avi. No double take on that one. Unless there's some disrupting influence in terms of actual construction and site management, which gets disrupted because of the COVID. I mean that's out of our hands. But in terms of our plan and our commitment, I think there's no change, and we will carry on.

So this would be, sir, what is the addition that we are proposing? And by when do we expect to get the capacity on stream, sir, right now, the plan?

You will see some perhaps comments on this. It's a little premature for me to say right now. I can talk about rough costs. And obviously, this involves substantial capacity as well. We'll be in a position to give you a more clear capacity addition phase-wise additions, perhaps in a couple of months during Q1, maybe in our annual report as well. In terms of the project cost, we are looking at upwards of INR 800 crores for the new plant.

INR 800 crores, would this -- I assume it was looking for FY '22, I mean, any guidance on that sense, is what I can pencil in that...

Pretty much. I think we are committed to try and finish this by March of next year. So pretty much everything will come in, in this year. So a little bit of a spike compared to what we've been spending in the past couple of years.

And this is largely decorative, right, sir?

Yes, but protective coatings as well. So pretty much everything, emulsions, everything. I mean pretty much -- other than, of course, specific things like general industrial or automotive.

Okay. Perfect, sir. And just a bookkeeping question. The distribution expansion or could you share the -- what is the reach right now you typically -- if you could give us some understanding how much...

I don't think we've been giving absolute numbers. I always like to help you out by saying that we -- this is the rate of growth for net worth, and happy to say that we actually grew the net worth at a rate faster or higher than previous years. So normally, we grow by about 10% or 12%. This time, we actually grew by a little more than that. So good news on that front.

Sir, is that -- is it more like a 15% or it substantially higher? Any number you could kind of put the percentage front?

Let's say, significantly higher.

The next question is from the line of Abneesh Roy from Edelweiss.

My first question is on your auto JV. So essentially, if I see the customer...

Sorry to interrupt you, Mr. Roy. We are not able to hear you clearly, sir. Please increase the volume of your device.

So my question is on the auto JV. So essentially, if I see the customer profile there, it is dominated by the Japanese player. And the market also on the paint side is dominated by Japanese player. So having Nippon, how has it helped you over the past few years in terms of gaining market share and adding new customer, how difficult, how easy is it? Any impact you can share?

I think it has been difficult, Abneesh, to be honest, but satisfying. We have grown market share significantly. We have broken into the Japanese players, but that's not the end of the story. I think earlier, if I don't know whether you recall from earlier earnings calls of previous years, this used to be a JV, which only address the plastic components of automotive business. And we were sort of struggling as a stand-alone company to cater to the other businesses ourselves, meaning Berger Paints. Now obviously, you understand the global relationships between paint suppliers and car manufacturers. And it is becoming very difficult to break into non-Indian automotive customers in the existing company, and therefore, the need to augment the JV. So once that happened a few years back, those opened for the nonplastic paint -- plastic component paint element of automotive demand for paint as well. This was a field that was catered to entirely by the concise, the PPG, Asians, the BASFs, et cetera. And we didn't really have much to say. So this has happened. We have broken into some of the customers that you mentioned. But we are also keeping our legs firmly planted on the ground, going after all businesses possible, including ancillaries, including Indian manufacturers. So if that helps.

Sir, one follow-up there. You said door has opened, but you also said it is difficult. So you are getting a very small share. When you say it is difficult, what does it mean?

Yes. I mean naturally, a start-up will grow a little by little. We can't expect to suddenly get half the market share overnight. It's not possible. It also means that our products have to be tested, the trials done, acceptance of the samples made. It has to work on the line. So there is an iterative process. But so far, it's been encouraging.

Right. My second question is on the other industry practice, which has been there. So the top 2 players in paints do have customer retention programs, loyalty programs, et cetera, wherein they give the tours, travels and all those kind of tips to incentivize same. Obviously, it's a very good marketing. But obviously, in COVID, it's not possible. So my question is do you save on that cost in FY '21? Or you have to replace it by some other actual monetary discount or incentive to replace that?

See, we have to do -- respond as the industry responds. We can't be appearing to do something which is different from others because then we don't become or remain competitive. So there is pressure to find alternative means of reward for these customers and we do that. So maybe the physical trip doesn't happen, but the reward in someway is given to the customer.

Sure. And my last question is on the CapEx. You mentioned INR 800 crores is a very large CapEx for your sized company. My understand -- that's first question. My question is, are you getting any tax incentives because the market leaders got huge tax incentives for their 2 South India plants? Second, your logistics costs, will there be savings because of this?

Yes, absolutely, both on -- both the questions. GST benefits are very, very significant. And these actually form a sort of funding tool for the factory itself, assuming that the projections are realized in terms of sales. So you're absolutely right. GST plays a large part in all of this. But I think the larger question is that we are -- UP is one of our stronger markets, and there is a very strong domestic demand and a very strong rationale for having a factory close to market.

And could you elaborate on the GST-related savings? Any numbers you can put there?

We talk about it in the annual report and others, but it's a multiple of the eligible investment. By eligible investment means pretty much the whole of the investment in the factory. This can be realized over 12 years.

12 years. Okay.

The next question is from the line of Tejash Shah from Spark Capital.

Sir, first question pertains to on pricing part. So how much is like did we take in FY '22 already? And just to recollect, how much price hike we had taken in FY '21, if any?