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

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Results Conference Call of Berger Paints India Limited, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference has been recorded. I would now like to hand the conference over to Mr. Ashit Desai of Emkay Global. Thank you, and over to you, sir.

Yes. Thanks, Janice. Good evening, everyone. We have with us the management of Berger Paints today. It's a pleasure to host them for their Q1 FY '22 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'll now hand over the call to Srijit for his opening remarks, post which we'll begin with the Q&A. Over to you, Srijit.

Thank you, Ashit. A very good afternoon to all of you. I'd like to extend a warm welcome to our Q1 FY '22 earnings call. As usual, I'll start with a few opening comments about the stand-alone and consolidated quarterly performance, after which I'll invite you to ask your questions. So starting with the stand-alone numbers for the quarter. I know it's a little bit of misleading kind of statistic because of the performance last year, such a low base, but for the normal sort of trend, I'd like to still call out the quarterly growth numbers. Total income from operations -- for the stand-alone operations was 96%; PBDIT, including other income was 96.4%; PBT was 169.2%; and PAT was 171.3%. So some comments on the stand-alone operations for the quarter. It was a bit of an up-and-down rollercoaster story as can be imagined with the second wave of the pandemic taking hold in many states from the end of March and affecting economic activity in the country from last week of April onwards for most places. Some states saw delayed effect with cases multiplying and lockdowns being extended in a somewhat delayed manner. June was relatively better compared to May. May was very badly affected, partly also because of the pent-up demand due to the lockdowns in May kind of unfolded in June. So that was why June was a little better and also the lockdown effect was much less. It may be more sensible, therefore, to look at the quarterly growth numbers over the past 2 years, as obviously, last year was an extremely unusual year. So we are looking at somewhere between 2.5% to 3% growth net-net over the last 2 years, even with the substantial dip last year. Lockdown imposed restrictions on business activity accepted, we do, therefore, see some stability in terms of demand trends. I think this is a reason for some optimism. The gross margins, however, have been affected quite significantly in Q1 FY '22. You may recall that I spoke about the very sharp increases in raw materials in the Q4 FY '21 earnings call and the need to take price increases. The process of taking price increases is underway, and some increases have been taken in May and June. However, more increases are needed, particularly in the industrial business lines to restore parity in terms of the gross margins. You may recall that the gross margins had to be read with the impact of our supply/apply contracts in the last quarter of Q4. So I just like to recall my comments in the -- or revisit my comments in the last quarter. Obviously, there was an impact of the supply/apply contracts in the RMC-to-sales ratio in Q4. The impact of that is much lower. So we did less business in Q1 of FY '22 in terms of supply/apply contracts. And therefore, the full effect of that margin expansion, if you like, at the gross margin level didn't happen in Q1 of FY '22. Overall, of course, in the net operating profit level, it doesn't really matter because what we save in terms of raw material costs, we have to probably spend a little more in terms of overheads, and that happened for us in Q4 FY '22, and I'm talking of supply/apply contracts. The process of taking price increases is on. We've taken price increases in May and June and we -- and as well as too taken in July and more to follow in August. These are, of course, price increases for the decorative business. As I mentioned, we will need to catch up a little bit in terms of price increases for our industrial businesses. Typically, there's a lag, and we'll talk about it a little later for price increases in industrial business. The main takeaway, obviously, is the raw material inflation situation. As we have mentioned in earlier earnings calls, this has also encouraged us to continue our raw material vendor development and formulation efficiency improvement activities. We spoke about it a little last time we met, and these are expected to continue to yield reasonable dividends going forward. Obviously, not all of it happened in Q1, meaning all the efforts didn't translate themselves into the P&L in Q1. But going forward, we should see a slightly greater impact. In terms of sales, on the decorative sales front, we saw a stronger bounce back in the Tier 1 cities as compared to the Tier 2 and Tier 3 towns, mainly because of the faster spread of COVID this time in the smaller towns in the second wave. The project business continued into the first quarter, though the associated gross margin improvement, and this was much lower because the business was much lower in Q1 as compared to the trailing quarter. The margin improvement was, of course, partially offset by the substantial recovery in the industrial businesses, particularly in the general industrial and automotive business lines, which have typically lower gross margins than the decorative businesses or the supply/apply business. This effort of taking price increases typically lags behind that of deco business. So going forward, we need probably more increases compared to deco on the industrial business line front. Coming to the consolidated numbers for the quarter. Total income from operations grew by 93.2%. PBDIT, this includes other income, went up by 155.9%. PBT, after share of profitable loss of JV, went up by 482.4%. And PAT went up by a fairly large number, this is 832.1%. Now some comments regarding the consolidated results. Berger Jenson & Nicholson (Nepal) grew significantly both in top line and profitability. Again, the comparisons are a little confusing because last year was so low, they were more impacted by the pandemic in this particular quarter in the last fiscal as compared to India. So the recovery, of course, therefore, is more significant and the impact is higher. Bolix Poland, that's our Polish subsidiary, had a modest top line growth, mainly because of an extended winter. I'll just confirm and recall the fact that the consolidated results in Q1 FY '22 of BPIL, that's Berger, incorporates the results for Bolix' Q1 results, which are -- they follow the calendar year, so it's January to March of 2021. They suffered from an extended winter. This is a low -- lean period in any case and, therefore, sales don't impact the overall consolidated numbers to that extent as compared to other quarters. But the profitability improved significantly on account of price increases taken and improved sales in the U.K. and France geographies with better contributions. Both Saboo Coatings and STP grew top line and profitability quite impressively. Saboo Coatings, of course, has been renamed as [ SBCPL ]. So that's the company we are mentioning. The performance of the JV has also improved significantly in this quarter. That's the JV with Nippon Paints as well as the one with Becker. PAT growth jumped sharply upwards because some of the subsidiaries had suffered losses in Q1 of FY '21, accounting for a higher effective tax rate in the consolidated results in the same quarter in the last fiscal. These subsidiaries recovered sharply, and the effective tax rate, therefore, dropped in this year, meaning Q1 of FY '22. So that concludes my opening comments. I would now like to invite questions from the participants on the Q1 FY '22 results. Over to you.

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

Sir, congrats. My first question is on the deco paint. So last 5 quarters, you and market leader, both have done quite well, better than initial expectation, faster recovery. Now when I see work from home would have helped that because consumer was spending so much time at home, he had time to get his house painted, plus he needed better environment? Second is a lot of reverse migration also happened. So consumer went from big cities to smaller cities. And again, same kind of demand you would have had in smaller cities, which was not the case earlier. So now when vaccine -- 50 crores vaccines are done, and next 3, 4 months, most of the cities, middle class will be fully vaccinated, do you see some risk of this kind of a demand driver not being there, especially base is high and the demand driver also goes away? Any comments there?

Thanks, Abneesh, for the question. We don't see any such reason to be anxious or concerned as yet. As you can imagine, I can't talk about Q2, but -- or the medium-term picture, but no reason to feel pessimistic at all. We feel that trends will only strengthen going forward.

And why would that happen? Any big reasons? Because a lot of the other consumption is having volatile time, plus you have a high base.

Absolutely, Abneesh. I think you will recall my mentioning in earlier quarter earnings calls that we set some confidence in our newer products, waterproofing initiative, the construction chemical effort that we are taking, the slew of new decorative products, including some luxury emulsions that we've introduced recently and which are growing. So I think this leads us to this conclusion. So it's more about our own strategies rather than how the overall market is developing.

Sir, my second question is on the auto JV with Nippon. So auto companies are seeing big issue of currently supply of the chips for the car companies, may not be the same in every kind of a price bracket, but clearly, there's a worldwide global problem, which could remain for a few months at least. So are your customers also giving this kind of a demand scenario? And is it impacting your auto demand also near term, medium term?

To some extent, but we are less exposed to the -- that particular segment of the 4-wheeler category. As you can imagine, we are more exposed to the 2-wheelers, 3-wheelers and commercial vehicles, 3-wheelers in our JV and, to some extent, some passenger cars, of course, in the JV. But in the stand-alone company, we mainly look at commercial vehicles and 2-wheelers. So to that extent, we are perhaps a little insulated from that effect.

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

Srijit, just first on this recent JV change that has happened from Nippon to Isaac Newton Corporation. Could you kind of give us a sense on what exactly is this? I am not sure what is exact Isaac Newton Corporation? Is it an auto company that we're talking about, which is -- is it a subsidiary of an auto company or something of that sort, which I'm not aware of? And does this entail any change in operations?

Yes. I believe press releases have been given by the respective paint companies, meaning Nippon and Berger. So hopefully, that will be a little clear. But just to -- since you have asked this question, I won't spend too much time on it because this is something that happened today itself. But essentially, it is a bit of restructuring of the shareholding of the JV partner. So in essence, it remains Nippon Paints. The technology remains the same. The way the shareholding is structured is through this subsidiary called Isaac Newton. It doesn't change anything for us or for the customers. The company remains the same essentially. The DNA is the same. The technology is the same. Only the ownership in terms of structure is different. The beneficial ownership, again, remains the same.

Perfect, sir. Perfect. That's clear then. The second bit I wanted to kind of just understand on the decorative performance. Would you kind of, like last quarter -- it felt that you were probably the fastest-growing in the industry. Is that the case in this quarter as well in the decorative side?

Yes. We think so. Absolutely right. I mean, clearly, we would have grown the fastest in decorative because you'll have to discount our results a little bit for 18% of our turnover, which is -- consists of industrial. Some of industrial, of course, has grown faster than decorative. But overall, we'd say we would have been the fastest in the industry. My takeaway is that the industry competitor, which has shown the fastest growth rate or the highest growth rate in this quarter, would -- it would have largely come because of industrial growth.

Okay. Okay, sir. And sir, lastly, I wanted to kind of just understand the input cost inflation because you kind of spent some time explaining that. I just wanted to clarify one small part. In the industrial side, could you kind of give us a sense on what is the proportion of input costs that are still pending, in sense that 50% of the inflation has been passed on and probably another 50% or -- 60% is passed on? Just give us some sense on what's the journey that we're looking for?

Yes. Without giving you actual numbers, because that will impact the perception of future profits, which we tend to avoid, yes, a substantial portion of the industrial business line price increases would have remained to be taken sitting on 30th June.

Okay. So there's still -- is yet to be taken as on 30th June, sir. Okay. Okay. But -- and you've got some more increases post that, right, sir? I'm not asking the quantum, but...

It's a continuous process. Yes, yes, of course.

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

Sir, can you give some idea about the volume-value gap for this quarter?

I'll just give you some indication. It would be around 4%, 4.5%, but not all of it is on account of price increase. As you can imagine, the price increase impact is lower. And there is a substantial impact of premiumization as well.

Okay. So basically, value is 4.5% higher than the volume?

That's right. But not all of it on account of price increases is what we are saying.

Understood. Understood. But my understanding was that the industry has taken about almost 4% kind of price increases. Isn't that the case?

Not as much as that if you are limiting yourself to the first quarter. Some price increases have been taken in July, which will be -- the cumulative effect will be, of course, around close to 5%.

Sure. So second question, sir, on margins. So if we look at the latter half of FY '21, Q3, Q4, the kind of margins that many peers in the industry reported, are those sort of exceptional margins in the sense that it was a combination of low input prices, a lot of cost savings on the back of COVID-related disruption, et cetera? And should we take stable state margins maybe better than what we are doing right now, but not as high as we saw last year around? Would that be the correct thought process?

Probably right. I think we certainly expect margins to improve. I can't say very much more than that because the full effect of the raw material price increases have not yet panned out. So it's still a bit of a guesswork in terms of understanding what the impact will be going forward. But yes, there is, of course, every effort to improve margins from the current level, for sure.

Right, sir. And my last question is on distribution expansion. If you could -- if not the absolute number, you're not comfortable giving, can you at least give us the percentage growth in the number of distributors and the tinting machines versus 12 months ago?

Yes. I'll have to restrict my comments to the quarter. I can't -- this is -- the 12-month numbers are not in the scope of this discussion. Obviously, the pandemic did have some effect. But looking at the numbers and our budgeted numbers, we do expect that the FY '22 additions would be close to what we added in FY '21, which is around 12% to 13%.

Sorry, I lost you there for a minute. You're saying 12% to 13% addition was in Q1 of FY '22, is it?

No. The 12% to 13% was last year. We are on track to do the same kind of performance, maybe marginally better in FY '22. So Q1, I've stayed away from the numbers because it's a little misleading because it's still early days, we got affected by the pandemic. And -- but we are on track to do the same or better numbers compared to FY '21.

We take the next question from the line of Alok from AMBIT Capital.

My first question was again on the dealer addition. So while you have mentioned the percentage dealer increase that we might see, just wanted to check any specific markets, geographies that we are seeing this? And if you can break it up between Tier 1 and 2 or Tier 3 and beyond, what -- where we would be adding a little higher dealers? That is number one.

You're right. We don't give specific sector or geography-wise breakups. But you're right, yes, the attempt to increase our Tier 2 or Tier 3 network would be -- would yield much better results than the metro cities. That's happened in the past and will continue.

Okay. And my second question is on the cost line items. So while in the previous year, we have seen a lot of cost reset for most of the companies. Wanted to check any specific guidance or color that you can give in your cost line items? How sustainable the savings have been? And what is the road map going ahead? If you can share some thoughts around it?

I think I'll restrict my comments to what I've already said in the opening comments. Meaning that, yes, the efforts to improve the gross margins in the form of raw material costs, vendor development, formulation efficiencies that will continue unabated. And we have already seen some results of that in the first quarter. Not all of it has translated itself into the cost of goods sold, but we should see some impact of that going forward. So that's there. And in terms of the other expenses, and -- I think I mentioned in the last earnings call that we've had to -- or we took a conscious decision to restore our advertising costs back to normal very soon after the first quarter. And we have planned for substantial advertising spend this year as well. So that is something that we'll have to take into account. But the effect of the pandemic in terms of the other cost reductions like traveling, some of the fixed costs in our factories, some of the manpower costs and logistics costs, we will, of course, continue our efforts to keep them at the pandemic levels or the last year levels. That's something -- by levels, I mean, of course, as a percentage to sales.

Sure. Got it. Got it. And if I can just squeeze in one more. I wanted to check competition has been sort of aggressively pushing products across waterproofing and construction chemicals. Wanted to check would you be confident in saying that you have the whole range already in place and now it's just about placement and marketing? Or you are still on route developing those products also?

No, I think that's a fair question. This is probably one of our faster-growing segments, and I'm talking about waterproofing as a segment or subsegment within the overall construction chemicals. So yes, I think we have all our products in place. You will recall that we had acquired the 95% subsidiary, which is STP. And we are now in a position to source some of the gaps that we had in our portfolio from them, things that we purchased from other people as trading purchases. But now we -- it's all within the overall Berger group. And therefore, most of the products have been plugged or the gaps have been filled. So good potential for our waterproofing products as well as the admixture category in our overall construction chemical portfolio.

Got it. Got it. And this 150% growth in STP for FY '21, of course, that would not sustain that's also because you've increased the stake, but...

That is to be taken in the context, yes.

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

Wonderful performance. I have two questions. The first question is on decorative. I think what we have found, I think, people are talking about big numbers from the exterior paint also. I'm not asking a specific number for this quarter, but if you can split what is the split between the interior and exterior for the decorative business? And what was this number 2 years before?

Shirish, I can't help you with specific percentages. But to give you some color as to what we did in emulsions, exteriors did better, and our newer products including our marquee flagship brands like WeatherCoat, Long Life, and WeatherCoat Anti Dustt did very well. Suffice to say, from my side that they outperformed the average by quite a fair margin.

Exactly. That's what I'm saying because if you look at the digital medium or even the wide range of television medium, we are seeing suddenly there's a lot of thrust on the exterior paint. Is that category broadly unorganized and that's why the organized player are attacking that? Is that the trend? Or genuinely, there is a demand cycle, which is happening? So what I wanted to understand, sir, is that what is fundamentally driving this growth?

A little bit, I think one of your colleagues mentioned earlier that people are spending a little more time at home, so more attention to jobs like painting. But specifically for exteriors, I think it has less potential for safety-related issues in a painting environment in the home. So people are more comfortable getting the exterior painting done in these difficult times. So that may be one of the answers. We also -- the other fact is, of course, interior emulsions have also done well. So probably the answer to that is the fact that people are spending time at home and getting things done. And also, the fact that the major players have really spent some time and thought on making the process safe. So a number of initiatives taken to make it safer for our consumers.

Okay. Okay. My second and last question. On quarter 1, what is the -- I mean, it's very difficult, but if you can give me some qualitative remarks, what is the weighted inflation we have seen in domestic decorative business?

You're talking about the inflation in cost?

Yes, inflation in cost.

Okay. So I can only give you a little color to that. I mean you would have seen the crude oil prices. In other years, typically, the crude oil prices largely affected the solvent-based products. But this year because of the global capacity situation in monomer production, which is also, of course, dependent eventually on crude oil prices, but largely, again, more quick to reflect global shortages in capacity with other economies picking up and demand picking up. So typically, this year, we've seen cost inflation across all the segments, including water-based in deco. So as I mentioned that we've only taken about 5% cumulative price increases in decorative, we need to go much beyond that.

So will you -- I mean -- of course, quarter 1 is not the indicative number, and now we are entering the rain season. But suppose second half is -- if things normalize, would equal amount of price increases the trade can digest?

I think the challenge really is the timing and the understanding of the raw material trends -- price trends. So people, I think, are just waiting a little bit to see how things level out. That's the issue here. And instead of taking sort of a onetime price increase, which can be a little disruptive typically, a more gradual approach, I think, is what all the companies are looking at.

The next question is from the line of Varun Singh from IDBI Capital.

So two questions, one on revenue growth. Sir, as you mentioned that in the decorative coatings, we have outperformed competition. So what are the broad reasons kind of that you will ascribe for our -- this outperformance, sir? If you can give some comment on that?

I think we'll have to look at our newer products, the health of our newer brands. The fact that we have done well in our construction chemicals business as well as the project businesses that we did in Q1. It was, as I mentioned earlier -- in earlier comments, it was much lower than Q4 of FY '22, but still enough to be reasonably significant.