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

Hi, good evening, everyone. This is Mohit Dodeja from Emkay Global. I would like to welcome all to the Berger Paints India 1Q FY '27 Results Conference Call. I thank Berger Paints management for allowing us to host. We have with us today Mr. Abhijit Roy, Managing Director & CEO; Mr. Kaushik Ghosh, CFO; Mr. Sayantan Sarkar, GM, Finance and Accounts. I shall now hand over the call to the management for the opening remarks, post which we will proceed with the Q&A session. Over to you, sir.

Thank you, Mohit, and good evening, all of you. Let me start with the presentation first. This is the first quarter result. Why is this not moving forward now? Okay. The volume growth that was there in the stand-alone results was in high single digits. Value growth, as you have seen already, is at 12.7%. Decorative business outperformed with nearly 13.5% value growth and nearly 20% in terms of operating profit growth. The Protective, GI and Powder Coatings divisions recorded relatively lower growth largely due to the fact that the price increases were taken more towards the end of the quarter after protracted battle in the field and then it will come through more in the second quarter. The Decorative performance was supported by calibrated price increases implemented through the quarter. Gross margin moderated marginally, primarily due to delayed and partial pass-through of input cost increases in Industrial business. In Decorative, the full price increases were effective only for part of the quarter. Decorative business delivered nearly 20% growth in operating profit and the consolidated PBDIT margin expanded by 40 basis points year-on-year. Stand-alone and consolidated PAT increased by 26% and 29%, respectively. If we look at the figures, volume about 8.4%, as I said; income from operations, 12.7%; PBDIT growth 12.6% and PAT growth 25.5% Home Shield and Wood Coatings delivered strong growth. Exterior emulsions did well, while the newly launched Kolor Plus interior emulsion gained strong traction in the premium segment. Automotive Coatings reported healthy double-digit value growth. And protective, GI and Powder, as I mentioned, the growth rates were relatively lower due to delayed price increases in these categories. Gross margin comparison, more or less in that band of 39% to 42%. And this time, it was at 39.3%. It could have been higher, but largely due to the industrial business lines, as we said, the increases were more towards the end of the quarter and not full increases have been received there. Some of it is happening in July, some will happen further more in August. So it is always a little bit delayed in the Industrial segment, which is why the gross margin is at that level. Operating profit margin, however, was a strong 17.4% in that range, which we have always indicated of 15% to 17%. Typically, in quarter 1, it goes higher because of the higher value sales. So the operating margin tends to be slightly higher in the first quarter. That is true in every year. If you look at quarter 1 financial year '25 or '26, '27 also at similar levels. So that's how it is and sustained at those levels, even though there was a little slippage as we saw in the gross margin. Stand-alone, we grew at 12.7%, PBDIT at 12.6% and PAT at 25.5%. The Decorative business line, highest growth in the last 12 quarters with Decor delivering 13.5% value growth, nearly 20% operating profit growth with margin expansion. Exterior emulsions outperformed, while Kolor Plus continued to gain strong traction in the premium interior emulsion segment. Construction Chemicals & Waterproofing delivered robust volume and value growth. Roof Kool & Seal continue to gain momentum. Wood Coatings reported strong double-digit volume growth. Store footprint expanded, taking the total count to 1,900-plus stores as on date with the urban stores alone around 900 plus and growing. Tinting machine installations crossed 2,100 plus for the quarter. Because of the price increase, there was lot more attention there in terms of sales. Otherwise, we could have done even better, but this is a good number in the first quarter. In Luxol Metallics, this was another range which we had introduced recently and is doing very well. These are the stores which we have set up across many markets. The consolidated revenue grew 12% with slight moderation versus stand-alone performance, primarily due to the muted revenue growth in wholly owned subsidiaries, Bolix and STP. Bolix, because primarily it is a weak seasonal quarter, always Jan, Feb, March, which gets consolidated in this period is a weaker quarter there because of snow, et cetera. And STP because of the Jamshedpur plant, which has now come back to normalcy, but in the first quarter remained a little bit disturbed. So overall, these 2 had a flattish growth, and therefore, the growth got pulled down a bit, but they are back in action in this quarter -- in quarter 2, this will be fine. Operating profit increased by 15% on the consol level with consolidated PBDIT margin expanding by 40 basis points. PBT and PAT grew by 18.1% and 28.6%, respectively. The joint ventures continue to deliver actually very strong growth in both revenue and profitability. This is the consolidated result, 12%, 15%, 16.1%. And then if you go all the way down to PAT at 28.6%. BJN Nepal registered double-digit value growth. Bolix reported flattish revenue, as I mentioned, during the quarter due to seasonal factors. However, profitability improved driven by gross margin expansion. U.K. operations remained subdued. STP delivered improved profitability, supported by favorable product mix, calibrated price increases and gross margin expansion. BNPA joint venture posted robust growth in revenue and profits. Margins moderated slightly as the full benefit of price increases is yet to offset higher input costs, but there was a very strong performance as far as this JV was concerned. Of course, the revenue doesn't get added to our sales because this is a 49% JV for us. And therefore, both Becker and BNPA sales doesn't get added to our -- or is not included in our consolidated sales. Berger Becker JV maintained its strong performance. Again, a very robust growth registered, registering healthy revenue growth along with higher operating profits. Growing cash surplus from INR 992 crores to INR 1,198 crores now to INR 1,424 crores as of end June financial year '27. Large part of it will, of course, be used for the 2 factories, which will be coming up, one in Panagarh and the other in Odisha, near Bhubaneswar. We had a very interesting campaign, which we have just introduced, a corporate one, which is on Berger, [Foreign Language] is the campaign which we have launched. It has received very positive feedback from the market. And this will be a major focus area and help us in building the brand Berger more strongly in the near future. So this is something which we are very upbeat about, and it's a nice, interesting campaign. For those of you who haven't seen it, can go to YouTube and see it for yourself, but it's a campaign which has received so far good feedback from the marketplace. Business outlook for financial year '27, double-digit revenue growth expected to sustain, supported by the full quarter impact of price increases in quarter 2. So we had delayed, as I said, in Industrial business line, the price increases were lagging. That full impact will come in, in this quarter, plus festive demand and distribution expansion should help in expanding sales and as well as operating margin from what it was last year, definitely. Operating margins are expected to remain within the guided range, which we have always said, that is between 15% and 17%. This quarter, of course, was beyond 17% in the stand-alone and within just short of 17% in the consolidated. Our expectation is that in quarter 2, the results will be good and possibly slightly better than quarter 1. Well progressing monsoon may support rural sentiment. Market competitiveness, however, is expected to stay elevated. Sustained investments in brands, innovation and retail activation to strengthen consumer base. Macro environment remains dynamic with crude oil, currency and geopolitical developments being closely monitored. And we end with on every wall, in every heart, [Foreign Language]. Thank you. We can go to the questions.

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

Congrats on decent numbers. First question is on the outlook slide, you have said that the monsoon is progressing well and you expect a benefit out of that. I wanted to understand that because this is a El Niño year and currently, we are having around 13% deficit. So are you saying that because of more dry days as in the less rains will lead to more painting opportunity. Are you saying to that respect or because this time the Diwali is delayed, so we'll get enough time before the rain ends? I could not understand because this time...

No, that's a fair question. I think the first part is where I would like to -- because last year, it had rained very heavily from mid-May to right up to October. And hence, the painting season also was very short because the Diwali was preponed. So both of these factors are relevant here. In this case, since it has not rained as heavily and it has been seeing more dry days, so the offtake, therefore, has been much better than last year in terms of exterior paint, which is one of the major segments, along with some of the other paint categories because typically, if it rains very heavily, it becomes a problem. So that's what we mean.

Understood. Second is the 2,100 tinting machines, so what will be the annual number? And are you essentially entering areas where you had under-indexation, so say, South India or Western India, are bulk of these machines going there? And second related question is, the new player who entered around 1.5 years back, they claim that their tinting machine is small, talks to the headquarter live and is more modern looking, et cetera. How is now your latest tinting machine when I compare with the new player?

Right. To answer the first question, our aspiration is to try and touch 10,000 machines for the year. Last year, we were very close to that figure. This year, we expect that we should be able to, again, touch 10,000 numbers. That's a number which will be equal or more than the new entrant even. So -- and most of these machines are getting installed in our under-indexed markets. We have a list of such index -- under-indexed pin code-wise, where we would like the machines to be installed. So the vast majority of that is getting installed in those places. So that's how it is. As far as the second answer to your question of the size of the machine and talking and all that, this has been there for most companies, almost all companies. I don't think those really matter too much. The size, of course, makes some difference in especially in congested city areas. Up country though, it makes no difference almost. But our size is pretty good. Maybe a few inches here and there, it won't make too much of a difference anyway. And connectivity is established from -- we do get all the information from the machine into our office as well so that we know which are the products, what are the shades which are getting tinted. So nothing new there as far as technology is concerned.

And total universe of the paint shops is around 110,000. How much is the total universe now?

Abneesh, that depends how you look at paint shops because it depends on the size of the paint shop. It will be much more actually. But those are very small ones which crop up, seasonal ones. If you call them paint shops also, they are paint shops, but they sell also hardware. As is the case in many of the upcountry markets, they sell a lot of other products along with paint. So, the total universe will be higher. But if you look at those which are meaningful paint shop, maybe 120,000, 130,000 will be the meaningful ones.

Yes. So this 10,000 tinting machine is going into that 120,000, right, in terms of renewals?

Yes. Mostly the objective is that, yes.

Last quick question. If you could talk about some of the non-paints. Other paint companies are aggressively going into waterproofing, tile adhesives, construction chemicals. Any update on that?

So we are there. Abneesh, as you know, we have a pretty strong presence in the waterproofing, construction chemicals and the growth has been quite robust there. And that will continue. I think we have a fairly good presence. The products are well established now. The quality is good. We have -- I think the growth rates that we see is much higher than paint in these categories, and it will continue in that way.

Even tile adhesives.

Tile adhesives also, yes, we sell a decent quantity, not as much, but we would like to probably do more.

The next question is from the line of Mihir Shah.

Congrats on a good set of numbers. So firstly, on demand front, wanted to just check the dealers ideally would have stocked up before the price increases that happened over the last couple of months, which eventually should have some impact in July. Can you share how much would be the volume growth for July? Or how is it shaping up? And where do you think we will land in terms of the second quarter? So that's my first question.

Right. So you're right, there has been some amount of stocking up, obviously. But the secondaries also have been much better than last year. As I said, the rains have been less intense compared to last year, and therefore, the secondary sales has moved quite well. July growth was reasonable. So we would expect that the second quarter revenue growth might be slightly ahead of first quarter revenue growth. The volume growth will be somewhere around similar levels as quarter 1, slightly below maybe. So we were at 8.5%, maybe it will be 7.5% to 8% approximately and a price increase, which is there of -- varying from 7.5% to 8.5%, 9%.

Okay. So this quarter, the price increase was 7.5% would be fair?

No. This quarter was about 5% and it is going to increase to about 7.5% to 8%, possibly.

Okay. And I thought the price increases were to the tune of closer to 12%, 13%. Was that...?

That is the DPL increase which was taken in stages. So you got only part of the price increase in the first quarter. So the impact -- net impact for us was that. It also depends on the mix that we have. So on a typical mix, if you look at it, various companies will have different percentage increases, right? If you sell certain kinds of products, which have lesser price increase, then you will have obviously an impact which is slightly lesser than some of the other products where the raw material prices would have gone up, and therefore, the price increase has also happened proportionately much higher.

Understood. And would you say the pricing growth of 7.5%, 8.5% that you indicated can increase in 3Q, 4Q as the mix changes because you will have a lower mix?

It can or it can go down. It depends on the -- totally on the mix, as I said. For example, just to give you an example, suppose in emulsions, the raw material prices had gone up slightly lower, whereas in thinners and solvents, it had gone up much more. So the price increases in some of these products might be higher. In some of the other products, it might be lower, right? And therefore, if your mix changes more towards luxury emulsion, the overall impact in terms of revenue growth due to price increase might be lower, whereas if you have a much higher concentration in those type of products where the price increases have been much higher, you might see more impact of the price increase.

Understood. Understood. That is clear, sir. Sir, secondly, I wanted to -- you did indicate on the margins that it will be better. But one when looks at the margins in 2Q of last year, it had some impact. So, on a normative level, what is the level of margin that one should think about for the second quarter for this year?

Yes. So as I said, there will be some improvement. Of course, the bases are in favor slightly because of the -- as you said that there were impacts there in the second quarter. But in spite of that, there will be some impact there in terms of both -- 2 advantages. One is the operating leverage, which will be there because the value sales is expected to be at a decent level. And at the same time, the mix will probably improve because the rains have not been as intense. And so we will have possibly more sale of exterior emulsions this quarter than what we had last year.

Understood. Understood. Sir, lastly, other expenses seems to be lower. Would you say that this is lower because of lower ad spends? And some comment on Saboo Coatings, if you can just share?

Why Saboo Coatings -- anyway, the first question is as far as other expenses are concerned, there has been no cut in the ad spends as such. It hasn't gone up substantially, but there has been no cut. But we have saved -- certain savings have been there in some areas, which we are working hard on. And that's something which will continue possibly going forward as well. So some areas of savings in the operational expenses that we have.

The next question is from the line of Percy Panthaki.

Sir, I just wanted to understand the mix effect this quarter, like Asian Paint said that the mix for them is positive 3%, which was like after many, many quarters, they have seen a positive mix effect. So how much is our mix effect this quarter?

Yes, because fortunately, one part of it is, of course, of the price increases, which has been taken, which has resulted in some amount of stocking up of good products, which are more profitable, I would say. The second is that overall, if you look at it, the mix has improved for the first quarter and is likely to improve even in the second quarter as well.

Okay. So would it be in a similar region of 2% to 3% positive?

Similar. I haven't measured exactly what percentage it is, but it is -- it should be close to that.

Fair enough. So if I split up your overall 13.5% Decor growth, you said 8.5% is volume, right?

Right.

Then let's say, another 2.5% would be price. So that would bring it to 11%...

No, no. Price is almost...

Sorry, mix. Mix would be 2.5%. So that would bring it to 11%. So that means that the pure pricing impact is only 2.5%.

No, no, no. It is -- 8.4% is the volume growth. [ Additional ] 5% is the price increase impact. The mix change is included in that overall volume growth, if you look at it, possibly normal circumstances, if you had gone, seen last year, it would have been much higher in terms of volume growth, value growth was coming out lower, right?

So that 8.5% includes mix effect, is it? Because that 8.5%, I thought is just the pure tonnage growth that we are recording.

Pure tonnage growth, that's right. And in the price increase, that includes the mix change also of about 5%, which has happened so far.

Correct. So therefore, if that 5% is, let's say, 2% to 3% mix, then the pure pricing change is only 2% to 3%, right?

Mix doesn't improve by 2% to 3%. I don't know what Asian Paints has told you. Our -- normally, the mix changes is about 0.4% to 0.5%, the improvement in mix.

Okay. Got it. Now this 5%, which has happened this quarter is because it is time-weighted, right?

That is right. Mostly.

If I look at Q2...

But more of it is because of the Industrial business lines where it is a time-weighted more -- because we got it more towards the end of the quarter.

Okay. Okay. But what do we expect this number to be -- the pricing effect to be in Q2 because it will be there for 100% of the quarter. So will it be like a double-digit number?

No, it will -- that's what I was saying, around 7.5% to 8.5%, probably 7.5% to 8.5%, depending on the mix that we have.

Okay. So sir, why is it so different? Because when we talk to dealers in 3 tranches, the actual price increase has been to the extent of 12% to 13%.

That if you take a straight product by product without any weightages to any product, that may be true, right? But for different companies, different products have got different price increases. For example, in the luxury product category, we have had an increase of, say, 6%. In the case of enamel, it might be 12%. In the case of some other product, it might be only 3%. In some other product, it might be 14%. So it depends on the mix that you are selling. So it's very difficult to tell exactly pinpoint that this is the mix per se, and therefore, this will be the percentage because every quarter, depending on the seasonality, product mix changes and therefore, the impact of this revenue increase will be different.

Understood. Very clear, sir. Just one last question. So, just wanted to understand, I mean, if any insight as to why our Decorative growth this quarter is a little lower than what the industry leader has posted despite the tinting machine additions, et cetera?

Yes, that's true. So the explanation is simple because the base effect kicks in. The industry leader had degrown in last year, we had grown. And therefore, there was a 3.6% differential in terms of the value growth in the base itself. And at the same time in the profit, there was an 8.6% differential between industrial leader and us because they had degrown last year and therefore, the base impact was there. So that's the reason primarily.

Very clear, very clear. And lastly, sir, on margins, you mentioned Q2 margins can be better than Q1. Assuming that crude sort of fluctuates in the mid-80s, would you say that Q3 and Q4 margins would also be similar to what we see in Q2?

So it all depends. It's very difficult to say what margins will be. It depends on Mr. Trump than anyone else, because the raw material prices keeps shifting up and down. So -- but as far as we can say, I can say with a degree of certainty as far as Q2 is concerned, that the Q2 operating profit will be decent. The growth will be good, and we can expect a good top line and operating profit growth in Q2.

The next question is from the line of Avi Mehta.

This is Avi here from Macquarie. Sir, I just wanted to conceptually understand. See, for fourth quarter also, on a secondary basis, we saw high single-digit volume. Now we've also seen high single-digit volume, and what you're suggesting -- and correct me if I'm wrong, you said 7.5% to 8% is what you could possibly do even in 2Q. What I'm trying to appreciate is for the year as we see and as we go into the second half, would it be fair that despite this high single-digit pricing that is kind of flowing through, we are able to maintain for the year also a high single-digit volume growth? Or can it -- just -- and or because pricing -- or will pricing have some -- do you see a risk on that volume growth? So just wanted to get your thoughts on how should we look at volume impact because of pricing?

Understood. So I think we should be able to maintain that. We have -- as we said, we are taking many initiatives from our side as well to grow the volumes. One is, of course, the expansion in network itself. The second is the branding campaign, which we hope that it will have also some energetic effect on the ground as well for the team as well as the consumers as well. So overall, some new product introductions, a combination of all of these factors should help us to maintain the volumes that we are talking about, and that's the objective. Along with there, there is this price increase, which should get absorbed, therefore. And we don't see a downside risk there in terms of volume growth.

Got it, sir. Very clear. And sir, secondly, on this margin front. Now my understanding is that we saw flattish margin Y-o-Y in 1Q. We are arguing for it should kind of expand. We obviously don't know where crude is. The crude is volatile. But assuming this current scenario continues, would it be fair to argue that operating margin profile expansion is what we should be able to drive for the full year? Is that what it implies? And is that reading accurate?

Yes. If it holds true at these prices, the raw material and if the prices don't get dropped subsequently, then -- in terms of selling price drops, then of course, yes, the operating margin possibly will expand. That is why I'm saying there are too many ifs and buts. But in the second quarter, I expect that the operating margin will grow at a decent pace.

Okay. So what you're saying is contrary to what has been -- pricing -- inflationary scenario has actually helped because the impact on volumes has been limited. Is that a correct reading, sir?