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

Hi. Good evening, everyone. This is Nitin Gupta from Emkay Global. I would like to welcome all to the Berger Paints India Limited Q2 FY '26 Results Conference Call. I thank Berger Paints management for allowing us to host. We have with us today Mr. Abhijit Roy, Managing Director and CEO; Mr. Kaushik Ghosh, CFO; Mr. Sujyoti Mukherjee, Vice President, Finance and Accounts; and Sayantan Sarkar, GM, Finance and Accounts. I shall now hand over the call to the management for opening remarks, post which we will proceed with the Q&A session. Over to you, sir.

Thank you, Nitin, and good afternoon to all of you. We start the second quarter results analysis. It was a tough quarter due to excessive rains. We had a high single-digit volume growth with low value growth. Growth was impacted by inclement weather and heavy monsoon alongside sustained competitive intensity, marginal dip in gross margin. The gross margin dipped by about 0.8% due to lower sale of exterior emulsion products and downtrading the economy segment to an extent. The operating margin moderated much more due to subdued value growth, which resulted in lower operating leverage and higher spend on brand building. Company continues to invest in expanding dealer network and adding stores in urban pockets to strengthen market reach. Looking at the volume-value growth, which we registered for the second quarter and also the first half. In second quarter, the volume growth was 8.8%. The value growth, 1.1%. In the half year, it is 7.1% and 1.6% for the standalone results. As I mentioned, we delivered high single-digit volume growth despite unusually extended monsoon and flooding across key markets, including Andhra Pradesh, Kerala, West Bengal, Northeast, Gujarat and Maharashtra. Sales momentum revived in the latter half of September as weather conditions stabilized. Value-volume gap driven by mix dynamics, higher contribution from products like tile adhesives, admixture and putty and lower sales of high-value products such as exteriors and roof coating resulted in an increase in the volume-value gap. Protective and infrastructure coatings saw muted value growth impacted by monsoon conditions as most of the painting gets done in the exterior conditions were not suitable for painting. Auto and powder coatings registered mid-single-digit growth in both volume and value. As far as volume CAGRs are concerned, volume CAGR for two years is 7.5%, for three years is 8.9%, for four years 12.6%, and for five years, it's 16.9% if we look at the half year performance. In quarter two also in very similar trajectory, a slightly lower rate, 6.2%, 7.7%, 8.4% and 10.8%. The value growth, however, is quite different. As you can see in terms of 5 years, value growth in the half year is similar or slightly higher than the 5-year volume growth. But in the last two and three years, it has been much lower than the volume growth. Two reasons for it. One, of course, is the price drop, which we had, which had an effect for the last 1.5 years. And this year, it has been more of a higher volume of these type of items like tile adhesive and putty selling more and the high-value items selling slightly lesser quantities, especially in the second quarter, which impacted this growth rate. If you look at the gross margin, the gross margin has been relatively much more stable for us. It's been in that -- hovering in that range of 39% to 41%. And that's where we have been even in this quarter in spite of deterioration in the mix, we are still at 39.6%. Actually, it would have been higher. There was some raw material price advantage, which was there in this quarter. Unfortunately, it got negated by the mix, which was inferior because of the excessive rains, we could not sell, especially in our key states of West Bengal, Kerala, Northeast, there were excessive rains ending right up to September and it carried on. And so therefore, much more of our -- the exterior category, which drives up profit got impacted to a large extent. Therefore, the mix deteriorated. Otherwise, the margin -- gross margin would have been higher. However, the operating profit margin shrunk to 12.7%. That's a big drop which happened. Typically, the second quarter, it has -- it's always lower than the first quarter for us, it is more so. Traditionally, that has been the case. This time also, it's the same way. So the growth in advertisement, the growth in overhead could not be absorbed by the softer sales, which is the main reason for this deterioration in the overall operating profit margin. Also the mix, as we saw the gross margin going down by 1%, but this overall growth rate is down -- our overall operating profit to sales ratio is down by a much higher amount. And as I said, much of it is due to the scale effect. We did continue to invest in advertisement brand promotions. In normal way, not increasing, not decreasing. And we did invest a little bit extra in terms of the urban markets where we continue to invest in manpower resources. That, of course, did not yield fantastic results in the second quarter because of the rains, the projects, it is a little bit project-oriented market, the urban markets, and it got impacted because of the exterior conditions. We expect that to revive in the third quarter. So we will see more positive results in third quarter, as we have always indicated earlier as well that third quarter will be better and fourth quarter will be even better, and we hold to that statement earlier made. In terms of the standalone results, total income from operations, 1.1% growth and operating profit minus 18.8%. As you can see, material cost actually went up by about 0.8% only. The employee cost, this is a scale effect, went up from 6.8% to 7.4%. And the other expenses, as I explained, the branding and the expenses in terms of off-roll manpower in the urban markets, which we have invested in, resulted in an increase from 17.8% to 19.5%. Now this -- a part of this in the third quarter, because of the increased sales, which always happens in the third quarter, the scale effect will neutralize to a large extent. We are expecting decent growth, and therefore, this will be much better once we go forward into this quarter. Standalone results on a half year basis, 1.6%. Again, if you see material cost is 60.2% last year and 60.2% this year. So there's no great fall there, even though second quarter, we did slightly poorly here. Employee cost has gone up largely because of muted sales from 5.9% to 6.4% and other expenses has moved up again because of the increased advertisement spends and spends on the urban markets, not getting neutralized by the sales growth. And that's something which is primarily the scale effect, which we hope that once the volume and the value becomes better in the third and even more in the fourth, this will get neutralized. As far as decorative business is concerned, we delivered muted value growth, as I had mentioned earlier, due to extended monsoon conditions impacting all our premium markets, marginal shift from premium luxury to economy emulsions in both exterior and interior segments. Construction Chemicals business registered robust growth and wood coating segments also registered good growth. Steady retail expansion with focus on urban pockets, store network now exceeds 1,600 outlets in line with our annual targets. And tinting network rollout remains on track. Over 5,500-plus machines have been installed by us so far in the first half. And this will ensure that we cross our target of an ambitious 10,000 machine installation for this year. We had introduced certain innovative products, Roof Cool & Seal being one of them. It's doing quite well. Of course, in the monsoon, it got impacted a bit, but we are expecting after the monsoons because of it is excessive monsoon, this is, in fact, going to pick up much faster. We have full range of construction chemicals now, and we keep expanding on this. So the range keeps going up. As far as two more recent product launches, which we did, one was Kolor Plus, which is in the Premium Emulsion segment and the other one is the Luxol Metallic, which is the metallic gold, silver and bronze. Both of these products are doing quite well in the market, and we expect the momentum to keep moving upwards going forward. Net cash on a standalone basis on March '25 end was INR 670 crores. In September '25, this remains at INR 636 crores in spite of the fact that we did make a dividend payout of INR 443 crores during the quarter. As far as consolidated results were concerned, revenue was higher at 1.9%, largely driven by Bolix and Nepal. Operating margin, more or less same as that of standalone. Here again, if you look at raw material cost, RMC is more or less stable vis-a-vis last year. But other expenses, employee cost went up, other expenses, as we saw much more of it is scale effect, which we cannot avoid because of the weather conditions in many, including Nepal, where there was -- in addition, there was some turmoil there in that country, but we still managed to grow because the bases were lower. So we had a good growth in Nepal. On a half year basis, we are at 2.8% growth on a consol level. with a PBDIT growth of -- degrowth of minus 7.9%. Bolix Poland had strong top line growth, profitability muted due to pricing pressure. BJN-Nepal a strong revenue growth on a low base, profitability slightly muted due to seasonal mix impact, the same reasons which we had of monsoon. STP soft top line impacted by temporary shutdown at Jamshedpur plant. We are expecting this plant to start operations this month. Gross margin improved on account of favorable product mix. SBL Specialty Coatings Limited had muted sales growth and profitability. New factory opened in Basauli in Punjab, fully funded through internal accruals. Berger Becker Coatings, healthy growth in both top line and profitability. This is the coil coating. The sales of this division doesn't get added only the profits get added after PAT. So it is not reflecting in our sales figures. Berger Nippon Paint Automotive Coatings continued strong performance driven by buoyant demand in the 4-wheeler segment, strong double-digit growth, both top line and profitability witnessed robust growth. However, again, it doesn't get added to our sales. Only the profit comes below PAT [ line ]. Business outlook, demand revival expected post Diwali, supported by improving weather and release of pent-up demand after an extended monsoon. Gross margin is expected to improve in short term, aided by benign raw material prices and improving product mix. Continued investments in brand and manpower, strengthening retail and dealer network to capture upcoming demand momentum. ForEx volatility and tariff changes may pose near-term uncertainties. Thank you and open to questions now.

Thanks, Abhijit. So we will now start with the Q&A session. I hand over the call to my colleague, Mohit Dudeja, to moderate the Q&A session. Over to you, Mohit.

[Operator Instructions] The first question is from line of Mihir Shah. [Operator Instructions]

This is Mihir from Nomura. So firstly, on the mix deterioration that we have seen this quarter, should one expect a similar mix deterioration going forward or was this a conscious choice for this quarter given that you had some benefits of lower raw material prices and you could have managed your gross margins well? So that's my first question.

So Mihir, no, actually, it's not a conscious choice. It's a forced choice. Essentially, the weather conditions, as I have mentioned, is a problem, was a big problem. If it continuously rains, obviously, on the exterior side, no one wants to paint because there is no way you can paint there. Hence, there was a negative impact as far as the exterior coating was concerned. As you know, those are high value, more profitable products. And hence, the mix deterioration, which happened. Same thing holds true for the roof coating as well. How do you paint if it is raining all the time? So therefore, the mix was expected to deteriorate under such conditions. For the whole industry, it will be in similar lines. So therefore, that's one. As far as the going forward issue is concerned, I have already mentioned that that it should improve for two reasons. One, of course, the rains have stopped now, thankfully. It kept on raining almost the end of October as well. But now for the last few days, at least, it's abated completely for most parts of the country. So therefore, we expect solid pent-up demand, which is there to come up, and that should improve the mix substantially. Typically, in the third and the fourth quarter, these are non-rain affected right up to April end. It tends to be good months for painting and paint. And therefore, we, I would say, are quite confident that the mix will improve substantially going forward.

Understood, sir. Sir, secondly, on volumes, now given October has also seen some impact. And I guess maybe last year, some of the festive demand of -- would have also been sitting in October. So then given that there is an impact, how should one think about volumes for 3Q and 4Q? 4Q, maybe, yes, it can be much better. But 3Q, will one see impact of that in 3Q because of weak October?

So typically, whenever the season is slightly preponed as it has happened this time, it tends to impact the sale a little bit. So October for the whole industry would have been muted. I think going by our estimate, we would have done slightly better than the industry in October. November, December will be months where we expect very good growth to happen, should be double-digit growth in November for sure. And December as well, we should see good growth. And therefore, overall, as we have said earlier as well, we should have a sort of a single-digit -- mid-single-digit value growth is what we can look at. Volume growth, obviously, will be higher as we have always seen that the volume-value gap exists. And hence, this is our reading of third quarter so far. Of course, November has to pan out well for this to hold true.

That's heartening to know. Lastly, on margins now with the exterior and the normal emulsion paints coming back in the coming quarters and the benefits of raw material, do you think that there is -- there can be a case made to further investments in ad spends or there is a possibility that it translates down in margins and you move up higher versus the earlier guided band in your margins?

So our guided band has been the 15% to 17%. We would like to remain there. If we see that we are having the luxury of spending a little bit more. We would like to invest in brand building a bit more than what we are doing even today. We have increased it, but we would like to increase it further. We would like to gain share, which is very important in the current situation that exists in the market.

Sir, this is Avi Mehta here from Macquarie. Sir, two questions. One, I wanted to kind of just get your sense on what do you think would be the industry growth in the second quarter? And the related question to that is, if you are expecting, say, a high single-digit volume and a mid-single-digit value in 3Q, for the full year, does that -- what kind of expectations should we look at? Because the first two quarters has been more low single digit. So I would love to hear your thoughts on both these aspects.

So as far as industry is concerned, you've seen Kansai declared their results yesterday. They were at about 0.4%, I think. We have declared today. I think Akzo will declare on the 6th. And I think Asian is there on the 12th. There are two factors here. One is the base effect. And the other one is overall scenario, rain, which would have impacted everyone. I would expect the leader to do slightly better in terms of growth due to the weaker base. And I would expect Akzo to be similar to us or slightly lower. And therefore, the overall growth rate for the industry won't be greatly different from where we are positioned. So that's how I would look at it. On a YTD basis, we expect that we should have gained market share overall amongst the listed companies. This is where we stand as of end September.

And sir, for the second part, which is 3Q, if you're expecting, say, a mid-single-digit kind of momentum, for the full year, does that kind of -- just wanted to get your thoughts, how should we look at that? Because we had some expectations given the changed weather conditions, is there a revisit to that expectation for the full year?

Too early to say, Avi, but my expectation is that -- and we have said this earlier as well, that in the third quarter, we had always said that it will be around the mid-single digit. And in the fourth quarter, we will be closer to the double-digit mark. We stand by that. And therefore, that's what we would expect to happen for the year.

That's very clear, sir. Sir, the second question is on the competition. Would love to know if there's any change in competitive intensity and wanted to kind of just get any updated comments on the new entrant versus what we were kind of seeing last quarter?

So competition continues. The intensity has stabilized, I would say, in the marketplace. So what is happening is possibly from the first quarter, whatever sales that the new entrant might be having in the first quarter. The second quarter, as it happens for most companies, in their case also, it will be slightly lower than the first quarter sales. So that's our estimate. Of course, we may be wrong, but this is our estimate that it will be second quarter total net sales will be lower than the first quarter sales. So it's stabilizing as such since they have now basis over the third and the fourth quarter. So the type of growth and therefore, the type of market share that they were taking away from the industry, that will get moderated completely. And the impact, therefore, will be lesser on the existing players going forward.

Okay. Sir, last, just a bookkeeping. I missed the last part of the earlier -- the question from the earlier participant. The 15% to 17% range, given the current environment, we would still be in that range or at the lower end of the range given this quarter's performance? I just -- I didn't pick -- I didn't kind of.

As I said, in the third quarter, we should be in that 15% to 17% range. And in the fourth quarter, more towards the higher end.

The next question is from the line of Aditya Bhartia.

My first question again is on margins. Wherein if you look at last 7 quarters, our revenue growth has been in low single digits. But every time we have been kind of maintaining our EBITDA margins in, let's say, 14% to 17% kind of a range. This time around -- so to that extent, there was a certain degree of negative operating leverage that was playing out in the last few quarters as well. We were controlling our costs fairly well. So what has really changed in this particular quarter that margins at the EBITDA level has taken such a big beat here?

Yeah. So if you look at quarter one, for example, we had, again, a low sale at that point of time as well. But the overall sales in the quarter one is always much higher than quarter two. It's been traditionally for us a very good quarter. Typically, we have much higher sales in quarter one. And then in quarter two, it tends to move downwards. The same thing happened this year as well. And on top of it, we did not grow. So if you look at absolute value, quarter two is much lower than quarter one for us. The growth rate is similar, but absolute value-wise, it is much lower. And hence, absorption of the overheads became much more difficult in this quarter, which is why you see this stronger fall in quarter two.

Because it was pretty much the same thing in the last year as well, Q2 being lower than Q1. But even on a year-on-year basis, the kind of drop that we saw in margins this quarter was higher than what we usually get to see.

In the last year, quarter two, if you look at our gross margin, it has expanded largely because of two reasons. One, the raw material prices went down at that point of time. This quarter also, it had gone down, but the mix deteriorated much more this quarter. So we could not get the full advantage of it.

Understood. Understood. And sir, that brings me to the second question. What's the kind of raw material cost advantage that we are going to see in second half of this fiscal with the crude being so benign?

Yeah. So there is an advantage coming up, which we see about 1%, 1.5% possibly in terms of margin expansion, which is likely to happen on account of raw material prices cooling off.

Understood. And that's at the gross margin level that you are speaking.

That's right.

[Operator Instructions] The next question is from the line of Aniruddha Joshi.

Aniruddha Joshi from ICICI Securities. Sir, two questions. First of all in terms of expenses, there is a lot of variability in expenses also. For example, if the sales team doesn't achieve the targets, so generally their bonuses get capped or incentives also get capped or in a way, in terms of distributors also, if they are not able to meet the targets, some of their incentives are not paid out also. So given that there is a natural hedge in the business to the sales growth itself. So now despite that, we have seen a material impact. So how should we see this? Do you see it to be an ongoing activity, let's say, if the industry growth remains muted over the next one, two years? Because definitely, the industry growth has slowed down materially. And if we don't see a revival, do you see this impact to continue to play in next couple of years also? That is question number one. Question number two, in terms of ad spend, if you can share more details in terms of what was the ad spend to sales, let's say, in last year same quarter versus this time Q2 or any increase that you can say, let's say, in percentage terms also, it will be better. And third, we have been hearing that October has been a very soft quarter for the entire industry itself. So how is it at the Berger end? And how do you see the growth rates panning out starting in November?

Okay. So the first question that you asked, how come the expenses are going up. And we mentioned that one, if you look at the ad spends, we have increased it from last year levels almost by 22%, 23% possibly. And that's on television and digital put together. And therefore, of course, the sales did not go up -- it went up marginally. And hence, the major impact that you see in terms of expenses to sales. The second part is you did mention that, okay, when you don't get sales so much, you might be not spending as much on dealers or on employees, bonuses, et cetera. We have invested mostly in additional manpower in the urban markets, which I mentioned. If you are not getting results in one quarter doesn't mean that you withdraw that manpower. So that continues. We keep because we believe strongly that it is going to yield result this quarter and going forward. So that's why you see this increased expenses. This will wean off in this quarter and even more so in the next quarter. So to answer two of your questions, these are the answers. The third, which is there is -- which you asked is October sales. As I said, we believe strongly that we have done better than the industry at large of most players, I think. Of course, the base effect counts but even though our bases were much better or higher, I would say, compared to some of the other players, we would have still done better in October.

Okay. Sir, last question from my side. In terms of auto and industrial, what will be the revenue contribution and which almost customer base would be getting benefited from the GST correction? For example, white goods and durable AP companies or auto companies, et cetera. So which -- what percent of our customer base would be getting benefited from the GST?

So it's a lower percentage for us. It's about 8-odd percentage, not significantly material for us as far as we are primarily a decorative company with more than 82% approximately coming out of decorative.

Okay. And auto and industrial, any ballpark percentage, if you can share?

Industrial, auto put together is 18%, the balance protective all put together.

The next question is from the line of Karthik Chellappa.

This is Karthik Chellappa here from Indus Capital. Two questions from my side, sir. The first one is, I think our earlier expectation was this volume-value gap will narrow by fourth quarter of this year in the sense that volumes will start -- I mean, value will start tracking volume growth. Do you believe that expectation to still be reasonable? And if not, by when do you expect the volume-value gap to narrow to almost nil?

It is not going to narrow to nil in the short duration, largely because there are certain categories of products which we are going to grow much faster than the paint category itself because it is coming on a very low base. However, we see the volume-value gap narrowing to about 4%, 4.5% and likely to remain stable around that point. And that should happen going forward from maybe the first quarter or fourth quarter to first quarter of next year.

So which means for us to see a high single-digit value growth, our volume growth invariably has to grow at about double digit then if the 4% to 5% gap has come.

Absolutely. Absolutely.

Okay. Excellent. My second question, sir, is on the A&P expenses. So you did highlight that those expenses grew about 22%, 23% for the quarter. And in the opening remarks, you said that urban markets were seeing some extra investments. Could you give us slightly more details on which are the urban markets that you are targeting at this point for these higher A&P investments and why you chose these urban markets?

A&P investments are across the country. So it's not focused only on the urban markets. In the urban markets, we have invested in additional manpower on the ground resources. These are off-roll manpower, which we book in the sales promotion expenses essentially. So this particular markets which we have chosen are weak urban markets, which we have defined. These are markets mostly in the West and the South of India. Many of the metros or mini metros which are existing there. These are markets where we are weak, and we would like to strengthen our presence in those markets.

Okay. My last question, sir, is on the margin range of about 15% to 17% for the medium term. So given that in the first half, we are at 15% and you had highlighted in one of your previous responses that by fourth quarter, you expect it to go towards maybe 17-ish or so. Would it be fair to say that at least this year, it looks like the margin range will probably be closer to 15%, 16-ish percent than it is to 17%. And any tailwind to margins will probably happen only in FY '27?

So as I said, we are currently at around that 15% mark, right? And if you look at where we are headed, we will improve slightly in the third quarter, and we'll be more closer to that 17% mark in the fourth quarter, right? So on an average, probably we'll be around that 16%, 15.7%, 16% for the full year. So that's where we will be most probably by the end of the year. I think that's a fair thing given the current situation that it exists. Given the weather conditions that existed, I think overall, for all of us, it has been a bit challenging, but I think things are improving, and we look forward to coming 5 months, which should be much better.

Excellent. And just one clarification, sir. Although you highlighted monsoons and rains as one of the reasons for demand, there was really no GST-related disruption at least for the paint categories or for your distributors, right? We can negate that as any impact or so.

No, it had no impact.

The next question is from the line of Pratik Gothi.

This is Pratik Gothi from HSBC. A couple of questions, please. The first one regarding your comment that premium luxury segment saw some downtrading to the economy segment. Can you please elaborate on that comment? Was it across exterior, interior? Any color there, please?

Yeah. So basically, excessive rains was basically a major factor here. So the impact happened across emulsions, but some amount of down trading we saw moving more towards the economy emulsions. The economy emulsion growth was there, at least the luxury emulsion, the premium emulsion, there was a little bit of a slowdown there, more so on the exterior category, but it still impacted the interior as well.

All right. Good to know. And apart from that, any color on incentives, dealer incentives rebates? Has that plateaued? Has that been increasing in Q2 as well?

No, no, not really. So it's been stable for the last few quarters. I don't see any major changes happening there. Nothing material, I think. As is the norm in the industry, if the growth are a little bit muted, rebating may go up a little bit to push up sales, but that's about it. It's not significant.