Indigo Paints Limited (INDIGOPNTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Indigo Paints Q3 FY '23 Results Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you. Over to you, sir.

Yes. Thanks, Dorvin. On behalf of ICICI Securities, we welcome you all to Q3 FY '23 Results Conference Call of Indigo Paints. Now I hand over the call to Mr. Srihari Santhakumar, General Manager, Finance and Investor Relations, for the introduction of the management, and then we will open the floor for question-and-answer session. Thanks, and over to you, Mr. Srihari.

Yes. Thanks, Anirudh. Good morning, everyone. Thanks for joining us on Monday for our conference call. Today on the call, we have Mr. Hemant Jalan, Chairman and Managing Director; Mr. T.S. Suresh Babu, Chief Operating Officer; and myself. As usual, we'll start the call with the highlights of the previous quarter, that is the quarter ending December 31, and then we will have a quick Q&A. Over to you Mr. Jalan.

Thanks, Srihari. Thanks, Anirudh. A warm welcome to all of you on a Monday morning for our earnings call of Indigo Paints for Q3 FY '23. Now our financials for the quarter and for the 9 months ending 31st December '22 have been uploaded on the stock exchange portals, along with our analyst presentation. Now a small apology, there was a minor typo on Slide 16 of the analyst presentation, and the corrected presentation was also uploaded yesterday. And I hope you've had a chance to go through them. I will start first with a summary of our financials and then move on to our future strategy and guidance. Now compared to Q3 of the last fiscal, our sales in Q3 of FY '23 have registered a value growth of 5.95%. You probably already heard the commentary from other paint majors who have all reported muted top line growth, and the reasons are the same, twofold. We had an early Diwali on the 24th of October, and monsoons pretty much continued across India until the 18th of October. So we had a very short festive season this time, which badly dented the sales of the entire paint industry in the month of October. However, we are happy to note that the sales growth has rebounded very sharply in both November and December. Our gross margins for the quarter have further improved to 43.82%, which is higher by about 2 percentage points from the immediately preceding quarter, that is Q2 of FY '23, where we had a gross margin of 41.72%. And this gross margin is also about 1 percentage point higher on a Y-on-Y basis from Q3 of the last fiscal, where we had reported a gross margin of 42.89%. We have not implemented any price increases in the last quarter as raw material prices have more or less stabilized. Our EBITDA for the quarter has increased to INR 40.56 crores, which is about 5% higher from the corresponding figure for the same quarter last fiscal, although the EBITDA margins have largely remained flat at 14.42%. It was 14.57% in the comparable period of the last fiscal. PAT has increased by about 8%, and PAT margins have increased very marginally from 9.08% in the same quarter last fiscal to 9.21% in the just-concluded quarter. If we look at the 9-month financials, the overall sales have been 21.09% higher than the corresponding 9 months of the last fiscal. Gross margins have improved slightly to 43.55% for the 9-month period. The EBITDA for this 9-month period has been 33.56% higher than the corresponding 9 months of the last fiscal. And the EBITDA margins have expanded significantly from 13.31% in the 9 months of last fiscal to 14.68% in the 9 months of this fiscal. The PAT for the 9-month period has increased by 68.34% to INR 83.26 crores. Now I'm happy to note that our PAT for our entire 12-month fiscal FY '22 was INR 84 crores, and we have just about achieved that in 9 months of this fiscal. In line with our brand-building strategy, our company continued to spend aggressively on advertising and promotion. And A&P spends for the 9-month period ending on December 31 have been marginally 1% higher than the spends in the corresponding 9-month period of last year on an absolute amount. So it should be noted that on a 9-month basis, despite having very similar gross margins compared to last year and despite a marginal increase in A&P spends, the EBITDA margins have expanded by almost 1.5% compared to the 9 months of the last fiscal, reflecting the benefits which are kicking in from economies of scale. We have given our volume and value growth numbers for each of the 4 major categories of paint products, consistent with our past pattern of transparent disclosure. You will note that, again, the value growth is higher than the volume growth across all categories, which is a natural consequence to the price increase of almost 15% which was undertaken in Q3 of the last fiscal. During the last quarter, the company witnessed a very strong volume growth and value growth in the putty and cement paints segment, where the volume growth was almost 35% and the value growth was in excess of 42%. The Emulsions segment has registered a slight negative growth in volume. However, if you look at the 9 months period, even the Emulsions segment has grown by 6% in volume and about 23% in value. Going forward, the base effects due to price hikes, et cetera, are now all behind us. And going forward, unless something very unusual happens, we would expect volume and value growths to be almost in tandem in the upcoming quarters. We continue to focus on network expansion, and our count of active dealers stands at 16,785 at the end of the quarter, and our tinting machine population stands at 7,978. That is almost 8,000. Now I would like to specifically mention about our additions of tinting machines. Now although during the entire 9-month period of this fiscal, about 35% of our new tinting machines have been installed in our targeted 750 large cities. But this whole idea of focusing on the large cities has really been gathering momentum starting from April. And in the last 4 to 6 months, we noticed that this number is over 50% of all the tinting machines being installed. So our focus on improving the sales in these larger cities has definitely started yielding results. We note that the sales growth in these 750 cities is almost double the rate of sales growth observed in other upcountry areas. In terms of new products, we would like to announce that we will very soon be launching a complete range of waterproofing and construction chemicals in the retail space. These are very high-growth sectors in the economy, and they share good synergy with paint products, both in terms of product placement and our distribution network. Finally, for Indigo Paints, you may have noticed that Q4 of every year is traditionally our strongest quarter in terms of sales volumes, in terms of absolute profits and also in terms of profit margins. We expect this to continue in this fiscal. The company has witnessed good sales growth in January '23 in continuation with the good growth it experienced in the preceding 2 months in November and December. Having consistently maintained industry-leading gross margins, we will continue to be aggressive in trade discounts to further accelerate growth while improving product mix and profitability in our seasonally strong Q4 quarters. That's all I have by way of a presentation, and we'll be open to take questions from all of you. Thank you.

[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.

Sir, my first question is on the EBITDA margin and gross margin going ahead because you mentioned that the volume growth and the value growth will now be fairly similar, which means pricing growth will be hardly anything. So how do you get the, say, inflation, say, arising in the employee cost or in terms of advertising costs or the other costs also? Second is, yes, I do understand raw material scenario is coming favorable. Plus, you also mentioned that the trade discounts could go a bit higher. If I mix all these 3, how the trade will be in terms of growth and EBITDA margins for you?

So we'd like to kind of maintain the gross margins around the level they're at. Now what happens is that because of the cooling-off of the raw material prices, if you do not increase trade discounts, then the EBITDA margins would go up. If we had not increased trade discounts during the last quarter, our gross margins would have been significantly higher than the already-high level they're at. But that is really not workable because there is aggression on the ground because all paint companies are experiencing the same drop in raw material prices. So the EBITDA margins -- I mean, the gross margin is after all discounts, et cetera, that you compute your gross margin on net sales basis. Increase in employee cost in terms of inflation is a very minor component of our P&L. So employee costs do not account for a huge portion, and the minor increase that happens on a year-on-year basis does not materially affect your EBITDA margins. In terms of advertising spends, although the advertising spends on an absolute amount increases marginally year-by-year but since the top line growth is always much more than the advertising expense growth, therefore, the advertising expense as a percentage of the top line drops by about 1.5% year-on-year, and that is exactly what has played out. If you look at the 9-month period, I mean, the sales growth has been about 21%. The growth in A&P has been about 1%. And therefore, A&P as a percentage of sales has naturally dropped, and that goes straight to the EBITDA. So that will continue to happen for the years ahead because we continue to remain over-indexed vis-à-vis the rest of the paint industry in terms of advertising spends as a percentage of top line. I hope that answers your question, Abneesh.

Yes, sir. Quite useful. My second question is on the outlook, which you have shared in the presentation on launching a complete range of waterproofing and construction chemicals. So here, is there any preponement of your strategy here? And how aggressive would you want to be because it's already -- almost every other paint company is present here, apart from some of the cement companies also.

So I admit that we have been a little late compared to the others in coming in into this range. We wanted to be sure about our formulations and coming up with products which are best in class. I think our trials are showing that we have kind of achieved that. And we will be quite aggressive. I expect that in Q1 of the next fiscal, we will have a formal launch of this entire range. And we will offer virtually the entire range, which other companies, both in the paint sector and in the nonpaint sector, are offering. And we understand that it is this component of the portfolio, which is giving a very high growth to the other paint companies. It may comprise of maybe 10% of their overall sales, but it contributes disproportionately to the growth percentage. And since the channel of sales is pretty much the same, I think it is a synergy that we should await of.

Sure, sir. And the last question on the demand side. So normally, you strive to grow faster than the other paint companies. In the paint costs of other companies in the Q3, companies have said that just like you, they have also seen improvement in November and December. And in Q4, they, as of now, aim to have a high single-digit to double-digit kind of volume growth. Would you also expect similar kind of numbers in Q4 in terms of volume growth?

I would expect that we would grow faster than the larger peers that we have. You have to be a little careful when you compare us with our larger peers in the paint industry. Some of them have roughly 50% to 60% only exposure as far as the decorative paint segment is concerned and about 40% to 50% exposure in industrial or automotive paints. So the trajectory of growth in those segments could be very different from what it is in the decorative paints. And therefore, if you compare the overall volumes or the value growth of both components put together, we may not be strictly comparing apples with apples. When it comes to the #1 and the #2 player, yes, by and large, I understand that almost 85% to 90% of their sales does come from the decorative segment. And to that extent, they are a little closer in factor or we are a little closer and connected to them. The industry leader is so much larger to us that I don't really know whether a comparison with them is very meaningful. But yes, if you look at the decorative paint component of the entire industry, I have reason to feel that if we are not the best, we are very close to it in terms of percentage growth, and we hope to improve upon that as we go forward.

The next question is from the line of Shrenik Bhandari from Investyadnya.

Sir, my question is regarding the net debt expense. So we see the momentum of the active dealers. The addition has been slowed down. So if you compare it to the last 9 months and 9 months of FY '22, you added almost more than 2,000 dealers. And if we see in this current quarter, you have less than 1,000 dealers. So what's your view on that?

Suresh, would you like to take this question?

Yes. Mr. Bhandari, see, we have already lined up in our strategy that our concentration in terms of increasing our network was supposed to be more in the 750 bigger towns or the Tier 2 towns as we would call it. Now when we are going to these towns, obviously, we are looking at the quality of dealers rather than in the numbers. So that is one of the reasons that we have been having a lower number of dealers in terms of the pure numbers are concerned. However, we have been concentrating on in terms of increasing the throughput per dealer, and the throughput per dealer is definitely higher in this 9 months as compared to the last 9 months.

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

So 3 questions from my side. So first, how are you reading the consumer sentiment on ground? And usually, 3Q is also loaded with good wedding season demand also which in other categories, which are associated with this sector. You have seen that they showed reasonable demand momentum. So just wanted to understand how to read through consumer sentiment last quarter. And how are you reading as in then this current quarter?

The wedding season is on in full swing as we speak in Q4 also. And January and February, as we say, are heavy lover months in Northern India. Now the pattern of the wedding season in South India is somewhat different from what it is in North India. So definitely, in terms of that, and you're quite right that the wedding season does give some kind of a boost as far as paint consumption is concerned. So we are facing very, very heavy wedding season. We have had it in January, and it will continue in February. Almost all of February, there is a very heavy wedding season.

Sure. Sir, second, just partly an academic question. Just wanted to understand Tamil Nadu plant, which will be starting in next quarter, what's the supporting distribution infra we'll be investing in terms of depot for the -- depot, which will be required to support the plant?

No, I don't think we are planning any increase in depots because of a new plant coming up. So you add capacity when you feel that in the next 2, 3 years, your existing capacity is going to be insufficient to meet your growing demand. So that is how everyone in the paint sector, to the best of my knowledge, does it. So putting up a new plant does not instantly mean increased sales or increased infrastructure because I think we plan for increase in depots as and when the need arises, and we are already represented in every corner of India. Having said that, depots will gradually increase over a period of time, which I think is quite unrelated to setting up of new capacity. So I think the setting up of the Tamil Nadu plant has been because we feel that in the next 6, 8 months, we could start facing supply constraints from a manufacturing viewpoint, and therefore, you set up a plant, which will hopefully take care of your needs over the next couple of years. And it is -- each time, when you set up a plant, you set up a plant which is more modern and more automated than your previous attempts to keep up with technology. And we do expect to start our trial productions in the Tamil Nadu plant in the month of March. And yes, it will probably go into commercial production from April onwards.

Very clear, sir. And sir, you spoke about trade discounts going up in the coming future. Just wanted to understand, is it a tool to boost primary sales? Or is it also that end consumer also responds to such initiatives?

No. The initiative is primarily to fill the channel because what happens is that because of higher disposable margins available with all the competitors, all of them become super aggressive in the market. And when we are competing in the like-to-like space, we should also be competitive with them. So that's why we are kind of hinting at increasing the trade spends. Of course, the secondaries will obviously depend upon the demand, which is there. And we expect that the demand will only go up being the so-called lover season in the North Indian market. And in general, the paint industry picks up in the second half of every financial year.

Got it. And sir, last one, if I may. Mr. Jalan, you have seen industry for so many years, in fact, decades. Just wanted to understand, do you think that the current competitor intensity and the one which will actually come in next 2, 3 years, do you believe that it merits consolidation in some form? Or industry has seen worse than -- or very high competitive intensity in past and still survive without getting into a consolidation phase? Just wanted to know your thoughts on that.

I don't think there is a need for the industry to do any further consolidation. Some kind of consolidation happens on a natural course over time. You have seen a couple of smaller companies being acquired by potential new entrants during the last 1 year. I cannot predict whether more of that will happen as far as the next year is concerned. Amongst the larger players, I do not see anyone open for acquisition or trying to acquire the other person. So I doubt if any consolidation would happen at the level of the top 5 players. But if some company wish to acquire smaller companies, sometimes maybe in the paint sector, it could be in adjacent sectors. So that kind of consolidation has been going on, and it will probably continue in the future. But if you're talking about any material change in the structure of the paint industry, I -- at least, I do not foresee it, but I don't have a crystal ball, so I cannot really predict about the future.

The next question is from the line of Hiral Desai from Anived PMs.

Hello? Am I Audible?

Yes, yes.

So I had a couple of questions. So I think 2 years back, during the IPO, you had spoken about 2 sets of states, right? So there was the Bihar, UP, Orissa, where you are present in [indiscernible]. And then there were some of these newer states, like Maharashtra, Gujarat, Kolkata [indiscernible]. So qualitatively, can you give us a sense of what has happened in these 2 cohorts over last couple of years?

So some of the newer states that we have entered in, like you mentioned Gujarat. Now Gujarat, I think, is registering one of the strongest growth that we have amongst all the states in India. Telangana has also registered very good growth in the last 2, 3 years. Maharashtra, a little more in line with our company growth, whereas some of our larger states, like Kerala have been actually outperforming. And this year, Kerala has gone stronger than the company average. So I think the growth is on a norm. Some of the more new states that we have ventured into subsequent to the IPO discussions that you're referring to, like Himachal Pradesh or Jammu and Kashmir or Delhi, at least Himachal Pradesh and Delhi are showing the strongest growth that we are observing on an all-India basis. So it is heartwarming that even in metros like Delhi, Mumbai and Kolkata, at least we see very, very strong growth potential. So that is heartwarming for us because the whole idea has been to now shift the focus to the larger cities. I wouldn't say that it has happened to the same measure in a big city, like Chennai or Bangalore is yet, but that's only a matter of time. So we are seeing good growth across all segments, both the states where we have been present for 15, 20 years, and even more so in the states where we have entered more recently.

And sir, any specific [ rundown of other ] states and you have any reason you'll be able to attribute to that?

So there will always be -- when you're talking about 28 states in India, there will always be 2 or 3 states, which will underperform in 1 year, and then they will start overperforming the next year. Usually, that is a result of something to do with your sales team there. Maybe you need to strengthen the sales team. Maybe you need to replace 1 or 2 people there. So that is a continuous process that goes on. You will always have some states, which will underperform and some that will overperform. You can never have all states growing at exactly the same rate. But just taking order of which state grows faster and which grows lower tends to change very rapidly from 1 year to the next. So it's a function of competitor dynamics. It's also a function of how well your sales force is executing on the ground. And it is our job as management to identify the underperformance and make suitable changes in our teams out there to strengthen them.

Got it. Got it. The other question is on the advertising and promotion spend that you historically then shared, but we are now over in the spend -- the A&P spends will grow at single digits. But given that we are trying aggressively to get market share in these 750 cities, plus you're likely to launch the waterproofing and construction chemical. So you feel that the [ visibility ] in the A&P spend growth will be enough to support all these initiatives, and especially given the competitive intensity as well?