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

Ladies and gentlemen, welcome to the Berger Paints India Limited 2Q FY '22 Conference Call 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, Emkay Global Financial Services. Thank you, and over to you, sir.

Yes. Thanks, Malika. Hi, everyone. So it's a pleasure to host the management of Berger Paints for their Q2 earnings call. From the management, we have 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, post which we can open the floor for Q&A. Over to you, Srijit and Sujyoti.

Thanks. Thanks, Ashit. Good afternoon, ladies and gentlemen. A very warm welcome to all of you to the Q2 FY '22 earnings call for Berger Paints India. As usual, I will just cover the quarter performance, both from a stand-alone and consolidated perspective and then invite questions from the participants. So these are the stand-alone numbers very quickly. These numbers are already with you, so I won't dwell on them too much. Total income from operations went up in the quarter by 26.1% year-on-year and for the half year by 50.6%. PBDIT went up by 1% and for the half year by 27.5%. PAT went up by 0.5% -- was 0.5% negative and 34.8% positive for the half year. As you can imagine, these are very, very slightly disappointing numbers on the margin front, on the profitability front, for which the biggest culprit is, of course, the unprecedented raw material price increase that's been happening in the last 2 quarters. But on the business front, all the business lines showed sustained growth in the top line, though the industrial businesses suffered a higher margin contraction because of the expected delay in the price increases that we could secure. But the good news is that the price increase process is well underway. There's always a lag behind decorative business of price increases as can be expected because of the protracted negotiation which goes on. But these are happening in due course. I'm happy to say that most of the new products of the company showed substantial growth in the quarter, including, of course, its range of waterproofing products. As I mentioned, the quarter continued to see very high raw material price increases, essentially in the crude-based derivatives, phthalic anhydride, vegetable oils, like soybean oil, monomers, methyl acrylate, in particular, and solvents. The raw material price effect was only partially offset by the finished goods price increases of around 5% cumulative in decorative business compared to Q2 FY '21 and about 10% in industrial businesses as compared to Q2 FY '21 as well. We also saw raw materials and formulation savings, a lot of vendor development and raw material substitution work, better price negotiations, particularly after the partial lockdown in Q1 May and some strong mix effect because of higher growth in better contributing products in Q2 FY '22. All of these kind of helped towards mitigating the very, very sharp raw material price increases that we saw. A note about manpower expenses would be in order. The expense showed an increase in Q2 FY '22 year-on-year, mainly on account of a particular performance-linked retention bonus scheme that we have for employees in the company. This scheme was brought forward in terms of announcement and actual declaration to employees in Q2 FY '22 as against Q3 FY '21, which happened last year. So there's a little bit of change in terms of periodicity or timing of the charge. And this accounts for this sharp increase that you might notice in this expense compared to the last quarter. It is, of course, important to note that this is only a timing difference. And therefore, going forward, this will reverse itself in terms of the growth or difference. And in full year terms, it will be neutral. I thought it might be important to mention this because this does impact the growth numbers for this expense head. In terms of our consolidated numbers, the total income from operations went up by 27.7% in the quarter and 50.5% for the half year. PBDIT went up by 2.4% and 35.8% quarter and half year, respectively. That went up. There was a degrowth of 0.8% and a growth of 52.3% for the quarter -- for the half year, sorry. To kind of explain the consolidated numbers in a little more detail, the improvement over the stand-alone numbers was basically supported by the performances of both the BJN-Nepal and Polish subsidiaries, Bolix, robust growth in top line and profitability. BJN-Nepal, if you recall, was severely affected by lockdowns for most of the last year and off and on. And this year, they've been able to recover and show very strong growth, both top line and profitability. The Polish subsidiary, Bolix, was -- the performance was augmented by very strong performances in the U.K. and France subsidiaries. I think I mentioned in earlier earnings calls about the U.K. operation and recently in France. These are overseas forays of our Polish subsidiary and very, very strong numbers, mainly on the platform of energy efficiency improvement and support from these governments in the respective countries. The industrial businesses of SBL Specialty Coatings, earlier known as Saboo Coatings, and STP had very strong top line growth but were affected in terms of gross margin because of the sharp increase in raw materials has affected everybody else and the lag with respect to price increases and finished goods. But it's important to note that many of these price increases have been negotiated and are likely to be in effect in Q3. So good news on that front. So price increases are continually being taken and margins for these two businesses should improve going forward. The JVs, BNPAC, that's the Nippon Paint JV, and Berger Becker, had strong top line growth but were again affected by the raw material price increases in terms of gross margins. As I have mentioned before in the context of the Berger stand-alone numbers, price increases are being taken and hopefully margins should improve going forward. No further surprises from crude accepted, of course. This is a little bit about the performance for both the stand-alone and consolidated performances. I would now invite questions from the participants on the results.

[Operator Instructions] We have the first question from the line of Abneesh Roy from Edelweiss.

Yes. Congrats on a good set of numbers in the current context. My first question is when I compare on a 2-year basis stand-alone sales and EBITDA, you seem to have done much better on the EBITDA front. So market leaders are around 44% sales growth on a 2-year basis. And you saw around 38%, 36%, so 800 bps lower. But in terms of EBITDA, you have done far better. So could you explain what's happening, given normally there is similar raw material, with inventories could be different. Plus on the MRP level, also it's fairly similar. So how can growth be so different?

Abneesh, I can only speak for Berger, you'll appreciate. So I can't really reconcile accounting-wise the difference. But I'll try and tell you what for us, I think, if that gives an indication. Consciously, I think we rebated less. There was a very, very strong competition, particularly in the lower ASP products. I'm talking of putties, distempers, enamels. And we didn't enter into that game. This probably reflected in slightly lower sales growth for us and maybe a little -- we were a little less affected on the margin front for that reason. So that's comment number one. But I can't really tell you whether this is the main reason or substantially the whole reason. I don't know. But also some of the other things that worked for us, we had a very good mix in Q2. As I was mentioning, lower, lower -- growth in the lower contributing products and higher growth in some of the better contributing products. So that really worked for us. We also had some very, very strong initiatives on the raw material savings front, led by a inventory effect of strategic buying, which we consciously did. We took a call that inflation would be perhaps sustained because of the steady crude price growth. And therefore, we carried a little more inventory, particularly of these products, which are crude-based, also of rutile, which we imported in sufficient quantity to see us through. So a little bit of a combination of strategic buying as well as renegotiation of price contracts and some raw material substitution and value development activity. We also had significant formulation savings in this period, which was an initiative that we carried through from the first quarter as well, but we were able to build more momentum and do more things in this area compared to earlier quarters. So these are some of the things that worked for us. Of course, we are looking at a strong inflationary condition going into Q3. So the price increase has been most welcome.

Sure. That was a very detailed and useful answers. So I've got a few follow-ups on what you said. And here, I'm comparing Berger to Berger, I'm not comparing you to the market leader. So versus last year, has the rebating changed because you said rebating is lower. Second follow-up is in terms of mix change. Normally, consumption in India, in 1 year, mix doesn't change much. So when you say mix has improved, is that because the putty as a percentage is lower? And in terms of the formulation efficiency, could you give more clarity? I know you will not share a number. But what exactly is happening? Does it impact the product quality in terms of formulation change?

I'll take it one-by-one. Yes, the improvements in terms of rebating are with reference to competition. I limited my comments to the fact that we may have rebated less. In terms of last year, we were marginally lower, not a whole lot different. But for sure, we -- from what I know of the prices that were relevant in Q2 from competition, we would have rebated much less. So that's one. I mean, I can only talk of myself or rather Berger. In terms of formulation improvements, obviously nobody tampers with quality. That's a very risky strategy, so absolutely no question of tampering with quality. But we have been -- and you know it's a slow and long, drawn-out process of trying to get formulation efficiencies without affecting quality. There are a lot of testing to be done, a lot of durability and exposure test to be done, particularly in exterior emulsions. So all of those were being done. And many of those have got implemented in the quarter leading to this benefit. So it's not just a knee-jerk response to the price increases. It's a very, very sustained and consistent effort that we do right through the year. So it's not something that suddenly happened in Q2. The effect may be felt in Q2 because many of these formulations got implemented after rigorous testing in this quarter.

And on mix?

Mix, definitely, I mentioned that we didn't rebate as well as others in some of the lower contributing products. So I suspect our numbers may have been a little lower in terms of growth. And therefore, the mix would have become richer at least for us.

Sir, my second and last question is if I see, you have done well on gross margin sequentially. So your Q1, Q2 gross margins are almost same, which is a great achievement, given such sharp inflation. What has driven this? Because Q1 to Q2, was there much of a price increase? And earlier in March end, your inventory levels were on the higher side, you had mentioned that. So how has been the inventory level in June and September quarter?

Yes. We have been consistently closing contracts, particularly the imported products, for a period covering more than the immediate couple of months going forward. So that's been really our strategy. And that has, I think, worked for us. The import comparatives do show that we bought cheaper for the same period.

Okay. And Q-on-Q gross margins?

Sorry?

Quarter-on-quarter, your gross margins have remained stable in spite of...

Yes. So that is mainly because of the other initiatives we said, the RM development, vendor development, the formulation improvements that got implemented and, of course, improvement of the mix compared to the trailing quarter.

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

Three questions I had, sir, if I may, just clarification to some extent. First, on the gross margin side, now you have essentially divided the benefits into three buckets, if I may: one is price renegotiations or the ability to capture or understand how the inflation would go and make good calls over there; b, you have highlighted formulation changes is the second bucket; and c, you've said mix changes, which is the third bucket. Could you -- I understand the quantification might be different. Would you be able to give us which was the biggest contributor or beneficiary in this quarter? Where would you have seen the biggest benefit?

I think equally, Avi, so -- and of course, if you look at the bottom line as well in terms of the denominator and the ratio, which is also dependent on the denominator, part of the stability or part of the ability to preserve margins compared to the trailing quarter would have also been because we have not rebated like what the market was doing. So a little bit of improvement there as well that helped us as well. So these four factors really.

Okay. So you would say it's broadly equal. So where -- I mean, just to kind of lead with this further, would it be kind of fair to argue that as things normalize, I mean, we don't know when, maybe it's fourth quarter or maybe it's beyond that, and the price increases flow through into the market, would probably settle at a higher gross margin than history? Is that the right way to look at it?

It depends what you call by history. Certainly, this quarter. that's to be expected. But whether we will go back to margins 1 year back, it remains to be seen because crude doesn't show any signs of tapering off in terms of pricing. So we'll have to keep our fingers crossed and hope the market absorbs the price increases without any kind of disruption.

Okay. Sir, but if -- no, I'm not saying for fourth quarter, let's say, FY '25 and things normalize, it's a very long-term kind of thing. What I mean is these formulation changes are more structural, so should you not...

Absolutely. Absolutely. You're really right. That's a fair point. So actually, these are aimed at a more sustained kind of improvement. So hopefully, these will be with us to stay.

Okay. Perfect, sir. And sir, the second was essentially on the employee cost. I didn't quite understand the comment. If you could just explain, is this more one-off because you're harking that the...

Yes, it's more a period change, meaning traditionally, we used to give these retention or performance-linked retention bonuses in the second quarter. Last year, because of COVID and the fact that things were very fluid, we had delayed it to the second quarter. And under the constructive obligation principle of accounting, you have to account for it when you do firm it up. So last year, we had accounted for it in Q3. And this year, of course, things were back to normal and we went back to the usual announcements in Q2, bringing forward the charge by a quarter. That's all. So on an annual basis, nothing changes. It's just the comparatives between Q2 of this year and Q2 of last year, which need a bit of explaining. That's all.

Perfect, sir. And lastly, on the subsidiary, now if I look at just of the [ rule ] limited to major subsidiaries, which is stand-alone -- consol -- the difference between consol and stand-alone sales, it seems that you moved to a higher quarterly sales spend, which is probably because of Bolix. Is it fair to argue that there is no one-off, and hence this is the metric that we should be kind of comparing ourselves with as we go forward?

Yes. The only proviso to this is you should remember that in Europe, particularly in the northern European countries, the best quarters are the April to June quarter and the June to -- July to September quarter, which is -- translates to the most important season kind of for them. So don't expect this in all the quarters. But surely in the season for these countries, we can expect sustained growth going forward.

So there's no first half thing, right? That's what I wanted to just confirm. It's not like first quarter sales have come in second quarter because of disruptions in the market and that's...

No, no, no. These are sustained business -- sustainable businesses. And if I'm talking of Poland, for sure, the gains in U.K. and France are sustainable. They are not one-offs.

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

Sir, wanted to get your sense on the demand situation. I know -- I mean, it's probably too early to tell. But all the pent-up demand now more or less has been addressed. Festive season also is sort of behind us. So with these things, both these factors behind us, is the demand now more at a normal level that we would have seen on an average between, let's say, FY '15 and '20?

Difficult to say. I'm just keeping my fingers crossed that the price increases go through without any cuts. I'll be able to give you a better idea of what's happening at the end of the month. But right now, we are around the cusp of the price increase, so let us wait and watch for a few days.

Okay. But I mean, before...

Yes. On a medium-term front, it looks more -- definitely more optimistic, for sure.

Okay. More optimistic than the FY '15 to '20 average?

I'll go back. I don't even remember previously how much we did. But for sure, better than 2021 for obvious reasons. And perhaps we are hoping, it should be an improvement of '19, '20.

Okay. And the demand, can you give some idea on relatively where it is strong geographically speaking as well as product segment-wise, et cetera?

We can't. Unfortunately, we can't divulge that information. I don't think nobody gives this. But I think to be fair to you and to us, it's an all India -- the growth is in an all-India perspective, barring 1 or 2 specific geographies. I won't name those. But only a few, 1 or 2 has disappointed us.

Sir, when I said geography, I meant more in terms of POPs that are large towns, medium towns, small towns, rural, et cetera, and that kind of a situation, not state-wise.

Okay. I understand. No, to help you out, we saw definitely an improved performance this quarter in the Tier 1 and Tier 2 towns. Normally, we were -- for the last few quarters, we've been seeing that Tier 3 and Tier 4 was outstripping the growth rates of Tier 1 and Tier 2. This quarter, we saw the Tier 1 and Tier 2 towns bounced back in terms of growth.

Is that just a base effect? And would it be the same even on a 2-year CAGR basis?

Not really. Definitely, this is limited to the particular lockdown and all the other factors, difficult -- and I wouldn't read too much into it. On a 2-year basis, would have been pretty comparable, yes.

Okay. And in terms of product segment, again I'm not looking at any numbers, but would you say that the premium segment is growing faster? Or is it the mass or the low-end segment of the paints which is growing faster, excluding...

Again, define what you call low end and what you call mass. But definitely, the premium segment has done well for sure. I mentioned in my opening comments that we were a little less aggressive on the low-end products, particularly on the rebating front. And we might have been faring a little lower than competition in the low end.

Right. And last question from me, sir, the -- typically, paints is a sector which relies heavily on repainting and not too much on fresh painting.

Yes.

But given that there is a real estate revival underway, so would you say that the percentage contribution from fresh painting is now higher than what it used to be historically over the last 2, 3, 4 years?

It is. But in terms of overall numbers, it hasn't yet made a huge impact because it's hardly about 15% of total demand to the institutional or new building demand. So even a significant growth there doesn't really translate into a very, very large number in the overall architectural or decorative business.

The next question is from the line of Anirudh Joshi from ICICI Securities.

Sir, two questions. One, the formulation gains that we are seeing, so I mean, certainly the timing is post COVID or is it -- that has been a planned R&D that we have been doing? That is point number one. And the second question is whether the formulation gains are largely in the numbers or we will see more formulation gains, I mean, significant formulation gains in coming quarters, too?

Okay. Anirudh, I'll respond to this, first, by saying that formulation savings is only one of the 4 or 5 elements which go into our, let's say, performance as gross margins go. So one should not read as it is the major factor or one of the major reasons for the contribution being better than what you expected. So that's point number one I should clarify. It's just one of the factors which go into the performance as far as gross margin is concerned. Secondly, I think I mentioned this very clearly in answer to somebody else's question that this is a sustained long-term thing. You can't suddenly do a major revision of formulations without first testing the outcome very, very rigorously in terms of the properties. And some of these properties can't be measured overnight, particularly exposure tests, even with accelerated exposure methods, they take a lot of time. So it's all about when the testing matures, when the R&D and the development team feels it is right to release it into the production. And therefore, this is done. But I think one point that I can mention is that these efforts have escalated. As a company, we put more muscle and backbone into this in the last 1 year.

Okay. And whether the benefits are largely in the numbers or we should expect some more benefits to accrue in coming quarters, too?

Difficult to predict. It will, as I said, depend on the testing and the outcome. And yes, the plan is to, of course, introduce more savings in the future.

Okay. Okay, sir, last question. Now with the formulations, can we say that -- I mean, obviously, most of the other paint companies have not really spoken about formulation, except market leader making some passing comments. So can we say that now we would be having probably the best cost structure as far as any product would be concerned, so considering the formulation gains or it would be tough to say?

I don't know the cost structure of competition. I can only comment on the fact that we do rigorous [ interfirm ] testing. So quality-wise, let me assure you that we are in no way inferior, in most cases definitely superior to comparable products. That is a basis of premise on which formulation improvements are done.

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

I have a few follow-on questions. So first is you mentioned the mix was better sequentially and Y-o-Y. And also the market leader was more aggressive on the lower end and putty, et cetera. What was the reason for this conscious call in putty? Is the gross margin pressure also fairly high? Was that the key reason?

Yes, a little bit, that's true. I think that's the main reason. And we found that the rebating was going to very, very extreme levels. So it didn't make sense for us in our limited wisdom as far as the market was concerned. So that's how we responded. I don't know if time will tell whether we made a mistake or not.

So Berger Paint, last few years, has done very well from a volume growth/market share expansion versus the overall industry. Now if you rebate lesser versus the market leader -- and you did discuss Asian Paints' higher growth on a 2-year basis. In any consumption category, this is very dangerous, right? So what would be your strategy from a rebating from a medium, long term? Do you want to take a more balanced view on margins and market share? Or do you think this is a short-term measure from the market leader, so did not retaliate? Because losing market share, I think, is very dangerous. So I want to understand on the rebating.

Absolutely. But I would also draw your attention to the fact that one swallow does not make a summer. So we should not look at only 1 quarter. It is absolutely clear that losing share is disastrous in the short or even in the medium or even in the short term. So rest assured that all efforts and all caution will be applied to this aspect.

Sure. My second question is on the employee benefits, wherein you did discuss in detail, you said it was just a preponement and on a yearly basis, nothing changes. I want to understand the reason behind preponement. Why I'm asking this is we are seeing one large player enter. And we all know that, obviously, they'll be hiring people. So do you see salary inflation as a concern? I'm not asking on an annual basis. You did mention that point. But there will be poaching of your senior people or the market leader's senior people. So is that something which is a major concern next 1 year, 2 years?

Abneesh, I hope we are not mixing up the two issues. One is the concern of employees being poached. That's a very valid concern. And of course, we will do what it takes to retain our valuable people. So let me clarify that. But regarding the point of preponement, that is independent of anything with regard to poaching or threats from potential competition or future competition. So the two are quite separate. I mean, one doesn't have anything to do with the other. The preponement has nothing to do with offering better incentives to retain people, if that's what you meant.

No, I completely understand that you did say that on an annual basis, nothing in it. Obviously, it is not a retaliation to the poaching issue. What -- why I brought that point was when there is a gross margin pressure in any consumer company, there is belt-tightening. In your case also, we did see a 40-year-high inflation. So in that scenario, what was the specific reason, if you can discuss, for the preponement?

No, it's an accounting issue, Abneesh. It's got nothing to do with strategy.

It's not a payout, not a part of payout to...

No, it's an accounting principle. As I mentioned, there's a principle, a very basic principle in accounting called the principle of constructive obligation. When the obligation is constructively happening, that is the time at which you recognize the, let's say, charge or the expense. It's a very, very basic principle. So last year, because of the uncertainty and the COVID-related problems, this incentive declaration was different because we didn't know how much we would give and whether we would give it at all. And that happened in Q3, so we recognized this in Q3. This year, because normalcy resumed, we were able to recognize it in Q2. That's all. So it's just a timing change. It's got nothing to do with a new incentive scheme or anything like that.

Sure. I understood because last year, many companies have done that. And sir, final question on new products. You did highlight new products have done well. So if you could elaborate which were these products, any new segments or either more of slightly more premium products. Could you elaborate on this?

No, a combination of everything. There were [ primer releases ] that did very well. There were admixture business in construction chemicals, which did very well. We had some general purpose thinners that were introduced that did very well. We went into masking tapes and abrasives and brushes. All of that did very well. We introduced paint aerosols for the first time. I think that was also very good. So in all, all of these products did very well.

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

I have two questions. First, on waterproofing, sir, if you can share any color on that in terms of where do we stand as of now in terms of market share, market -- I mean, how we wish to grow this category going forward. And any color on the waterproofing business?

Yes. I'll tell you what we do normally say. We don't talk about the market, they're difficult to -- because different people have different definitions of waterproofing. In our case, we look at the waterproofing, which are basing case sealers, the -- all the damp-proof and DampShield products, the Wall Shield products, the Dampstop products, the crack fill paste. All of these showed a much higher-than-average sales growth for the quarter, meaning if you've seen the sales growth for the company, waterproofing products would have been well above that.

If you can give some numbers, sir, for example, when you say well above the company growth number...

So I can't give can more than that, sorry.

I mean, any range?

No, I really can't talk about it. It's not our policy to give growth numbers segment-wise.

Sure. And sir, how do we wish to grow this category in terms of aggressive -- a very aggressive -- any objective guidance in terms of how we wish to pursue the growth in this category?

A combination of -- you know we went through this acquisition a couple of years back, which gave us some products into our portfolio. But I think the effort has been to constantly introduce new products, combine the synergies of our subsidiaries with our own company, use our network to distribute. So combination of all these strategies.

Okay. And just last question on distribution expansion, if you can throw some light in terms of how we are targeting the distribution on -- particularly on the rural versus urban or Tier 3, Tier 4 cities versus Tier 1, Tier 2 cities? Any guidance on -- or anything on that front, sir, if you can share?

I'll respond by saying that we are well ahead of our planned targets for installation of tinting machines. If you use that as a benchmark for distribution network expansion, so that is well ahead of our half year targets. So that's a good development, we think. And we should be -- finish the year well above our planned targets for FY '22.

And sir, incremental addition will be largely into Tier 3, 4 cities, am I correct?

Yes.

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

I have two questions. I think in between, I got lost because of network issue. I'm sorry I'm repeating for the sake of understanding. Would you spell out what is the volume growth in decorative?

I think I will respond like I usually do by saying that there is a price increase impact this quarter of around 5%. So you can expect that the same gap between volume and value will be there for our decorative business, meaning the volume growth will be about maybe 5%, 5.5% less than the value growth.

Understood, very helpful. My second question is when we see the exit of September, which has, of course, some pickup because of incremental vaccination and pent-up demand which is there, but I did watch out, you said that the pent-up demand is coming down to normal. But what I see that from the market was that even October and around Diwali, there was a strong undercurrent demand which was there. So is it fair to assume that the demand, what we have seen in the month of September exit, has played, that is 45 days in the quarter?

Difficult to say. I mean, in fact, even if I knew, I don't think I'll be able to share this. I can't look into the quarter. It can't be done. But let's say that things will become clearer once the price increase plays out.

Okay. My second and last question, yesterday, I heard Abhijit on CNBC. He did mention there are some price increases which are happening. So I have two questions on that part. The first question is that what is the inflation hit we are experiencing today? I assume that whatever it is there in the system. And to what extent we have covered? And a related question on that, how much price increases so far happened in the first half?

I didn't get the last part of your question, price increase is going which half?

First half, Q1, Q2 put together to date.

Look, obviously, the price increases were not so high in the first 2 quarters as compared to the very recently announced price increase. So if everything goes well and crude price remains where it is and there's no further inflationary pressure, then I guess, with the sum total of all the price increases, we should be back to our margins perhaps a year ago or 1.5 years. But it all depends on how these raw materials pan out, what is the level of rebating in the industry, what is the demand situation. And everything is dependent on a combination of all these factors.

But is it fair to assume that the price increases are in the range of about 12% to 15% in the first half?

No, no, no. In the first half, it was not nearly as much as that. So that's what I mentioned in my earlier comments just before this that there were very marginal gains, maybe a few percentage points in terms of the first half of the year in terms of price increases. But if you compare with the last year, meaning the price -- the same prices the year before and not on a trailing quarter basis, then it would be around maybe 6% or 7%.

The next question is from the line of Jay Doshi from Kotak Securities.

Very impressive margin performance. I have two questions. The first one is can you give us some idea in terms of what is the sequential increase incremental inflation that you saw and the overall material inflation in your portfolio and your consumption cost? Or maybe how it has changed from March to June quarter and June to September quarter in terms of consumption cost inflation?

Again, these are not numbers that we share. But to help you out, I will say that there's been tremendous increase. And then that's accounted for the drop in margins in the 2 quarters. The margin was relatively sustained in between Q2 -- Q1 and Q2, at least at the net margin front. On the RM front, of course, there was pressure. But because of the effect of -- scale effect of overheads, the margin was less felt. The effect on net operating margin was less felt. But for sure, had it not been for the actions that we took, we would have had a much significant -- much more significant impact on net margins from the raw material price increases. I've talked in detail about some of the initiatives that we took to help protect margins.

Yes. That, I got it. So see, one of your peers in the presentation had indicated that, at least for them, there is a 15% inflation in June quarter and on top of it, another 6% in September quarter. So cumulative inflation, material inflation in terms of consumption, average input price is about 21%. Have you done a lot better in terms of your sourcing or you would also have witnessed a similar level of inflation? At least, can you give us some qualitative comment on that?

I think at similar levels. But as I said, we did some work in terms of when you spoke about the RM from a consumption perspective, that takes into account the inventory effect of higher purchases at lower cost. So that's kind of played out for us, I would imagine. It may have also played out for competition, I can't say. But I can only limit the comments to our own company.

Perfect. That is helpful. Second question is, I don't know, I may have missed this, have you sort of given any color in terms of what is the differential between how has your industrial portfolio at an overall grown versus decorative, whether industrial has grown in double digits, mid-teens or any color that you have provided or you can provide?

Fairly -- pretty comparable to deco business, maybe marginally lower, considering all the industrial businesses put together but definitely comparable, so...

There is not a huge gap between the two segments in this quarter on a Y-o-Y basis?

Yes.

[Operator Instructions] The next question is from the line of Ashit Desai from Emkay Global.

Just following up on the questions on margins. Could you explain, I mean, the big price hike that everyone's taken in this month? So if you look at your raw material costs in Q2, you had mentioned that you had some low-cost inventory. So moving to Q3, should one expect a complete flow-through of this price hike to margins or, I mean, the price hike will just offset the incremental inflation that you're seeing? So how should one read into this?

No, I think there'll be some restoration of earlier margins. We are hoping quite a significant build. So yes, I mean, obviously the inflationary effect going into Q3 of RM should be more than offset by the price increase and hopefully restoring some of the margin as well. So that's for sure. But it will all depend, as I mentioned earlier, on two things: the movement of the crude prices and the competitive pressure. I think we made -- I think the issue was also that whatever happens in the short to medium term, we are not looking at giving up market share.

Got it. And secondly, any update on the UP plant? And I guess, it's expected sometime in Q4, but -- so when you have a new plant because of increased serviceability in that region, do you expect higher market shares and higher growth? Or is it that the -- that market is already well serviced by you?

A few plants, not in UP, but nearabouts. So that's one thing. But definitely, a plant within UP should give us some benefit in terms of servicing of demand for sure, so -- but it's also been constructed with a slightly longer-term perspective in view as well, meaning that was one geography where we did not really have a very large plant. And hopefully, we made up that gap.

Okay. And lastly, on demand trends, any drivers that you see that can further accelerate the industry growth from here? Or is -- I mean, the market is broadly steady, one would say?

Well, we're keeping our fingers crossed that there is no third wave of COVID. So that's always a spoiler, I think we've seen. But keeping our fingers crossed. Barring that, I think we are quite, let's say, cautiously optimistic.

Okay. Just last one before we close, are there any -- is there any benefit of this project business or supply projects that we see in Q2?

Not a whole lot, no, not much, not much. Much lower than, say, the last 2 quarters.

[Operator Instructions] As no questions from the participants, I would hand the conference over to management for their closing comments.

Yes. Thanks all of you. Thank you for your participation, and thank you for your support and insights which have helped us to be better. Hopefully, with the vaccination going strong, we will see better times ahead. And as all of us do every day, we need to be very conscious about the inflation factor. Season's greetings to all of you, and look forward to seeing you in the next quarter. Thanks.

Thank you very much, members of the management. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.