Indigo Paints Limited (INDIGOPNTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Indigo Paints Q4 FY '24 Results Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Menon from ICICI Securities. Thank you, and over to you, sir.

Hi, everyone. It's a wonderful good morning, good afternoon, good evening, depending on the part of the world you are joining this conference call from. As always, it's our absolute pleasure at ICICI Securities to host the management of Indigo Paints for the results conference call. Over to Srihari from the company for the intro of the participants and further proceedings. Thank you.

Yes. Thanks, Manoj. Good afternoon, everyone. Thanks for joining our earnings call for the year ended FY '24. We have uploaded the refreshed investor presentation, along with the disclaimer in the websites of the stock exchanges as well as in our company's website. For today's discussion, from the management side, we have Mr. Hemant Jalan, the CMD of the company; Mr. Suresh Babu, the COO; Mr. Chetan, CFO; and myself, I'm GM Finance here. As usual, we'll begin the proceedings of the meeting with a quick overview of the financial performance for the quarter and the year ended FY '24 by Mr. Jalan followed by the quick Q&A. Over to you, sir.

Thank you all for joining in on the earnings call of Indigo Paints for Q4 FY '24. I hope that you have all had a chance to go through our financial results, as well as our investor presentation uploaded on the stock exchange portals. At the outset, we are very happy to report that for the fourth consecutive quarter, we have outperformed the industry top line growth rate. On a consolidated basis, our top line has grown by over 18% for the quarter against an industry average of less than 1% growth. Although our aspirations were certainly higher, considering the moderation in underlying demand, I would say our performance is certainly more than satisfactory. On the profitability front as well, we have registered good percentages in gross margin, EBITDA margins and PAT margins. First, let me come to the stand-alone results. Compared to Q4 of FY '23, our sales in Q4 of FY '24 have registered a value growth of 12.5%, which is more than 4x the industry growth. As usual, we have maintained the pole position in terms of gross margin. Our gross margins for the quarter of 49.3% is not only the highest in the industry by a fairly wide margin, but also the highest in the history of our company. This indicates our ability to grow fast while keeping our profitability intact. Our EBITDA for the quarter has increased from INR 71.7 crores in Q4 of last year to INR 82.3 crores in Q4 of the last fiscal FY '24, registering a growth of 14.7%. The EBITDA margin of 22.5% clocked in this quarter is significantly higher than the 22.0% registered in the comparable quarter of last year. Our PAT has increased by 10% to INR 53.5 crores compared to INR 48.7 crores clocked in Q4 of FY '23. The PAT margin for the quarter has moderated slightly from 14.8% clocked in Q4 of last year to 14.5% in Q4 of this year primarily due to the higher depreciation on account of our new plant which has been commissioned in Tamil Nadu. Now on standalone basis, again, for the full fiscal FY '24, we have clocked a healthy double-digit top line growth of 16.9% and have achieved a total net revenue of INR 1,255 crores. Our EBITDA for the full year expanded by over 28% to INR 233 crores, and our EBITDA margin for the full year clocked 18.5%, sharply up from 16.9% in FY '23 and has been almost exactly in line with our earlier guidance. Our PAT for the full year rose to INR 149 crores and PAT margin rose to 11.7% despite a significantly higher depreciation burden in the second half of the year. Now moving on to the consolidated results. For the quarter, our revenue grew by 18.3% to INR 384.9 crores, while the EBITDA grew by 17.9% and PAT grew by 11.8%. The EBITDA margin for the quarter on a consolidated basis was 22.0% and the PAT margin on a consolidated basis for the quarter was 14.0%. Our subsidiary, Apple Chemie, has registered robust growth of over 50% in Q4 of FY '24, and we expect them to register strong growth in the upcoming quarters as well. For the full fiscal FY '24 on a consol basis, Indigo Paints has achieved a revenue of INR 1,306 crores, which is a robust 21.7% growth over FY '23, and it is far, far ahead of the industry growth rate. The EBITDA for the full fiscal has grown by over 31% to INR 238 crores in FY '24 and the EBITDA margin has improved from 16.9% in FY '23 to 18.2% in FY '24. All other numbers are given in detail in our investor presentation, and I shall not repeat them here for the sake of brevity. I'd like to give you some more operational details about the last quarter, which go beyond the simple financial numbers. During the last fiscal, our overall A&P spends as a percentage of revenue decreased from 7.7% in FY '23 to 7.4% in FY '24. Going forward, we intend to somewhat increase our A&P spends in FY '25 by supplementing our TV advertising spends with significant spends on digital media as well, which has been an area where we have been somewhat passive in the past. However, the overall increase in A&P spends will be less than the expected top line growth in revenue. And hence, the A&P spends as a percentage of revenue is expected to continue to decline. In line with our disclosure practices, we have given our volume and value growth numbers for each of the 4 major categories of paint products. For the quarter Q4 of FY '24, the company witnessed over 20% value and volume growth in the putty segment and in the primer plus distemper segment. In the emulsion segment, although the volume growth was in mid-teen double digits, the value growth lagged slightly due to price reduction undertaken during the quarter. Growth was somewhat muted in the enamel and the wood coating segment. When viewed for the entire fiscal, we have witnessed very strong double-digit growth across all the 4 segments, and you will notice that the value growth and volume growth numbers have moved pretty much in tandem across all categories. We continue to focus on network expansion, on improving the throughput per active dealer and increasing our tinting machine population. As on 31st March 2024, our count of active dealers was over 18,000 and our tinting machine population was almost 10,000. On the CapEx front, civil works are progressing well in both the new water-based paint plant and the solvent-based plant being set up at Jodhpur. We are also proceeding to double our putty manufacturing capacity at our existing facility at Jodhpur. As mentioned earlier, during the year, our focus on waterproofing and construction chemical products have started yielding good results with mid-single-digit contribution to the revenue pie, and we are witnessing good sales traction in many states for these products. We expect sales of these products to pick up further in the new fiscal. As a responsible corporate citizen, Indigo Paints has undertaken several sustainability initiatives to improving our ESG performance. We have started deploying electrical vehicles for the last mile delivery of our products to reduce our carbon footprint and are planning to set up solar panels at our existing manufacturing facilities and at our head office at Pune in a great push towards green energy. We have also committed to set an emission reduction target with science-based targets initiative. On the CSR front, we have extended educational assistance to over 300 underprivileged girls in and around Pune city. As part of our health care support, at Kochi, where we have a manufacturing plant, we have tied up with Cancure Foundation to provide free dialysis and palliative care facility to the underprivileged sections of society. As part of providing community care, we have extended health insurance to over 1,000-plus families of the painter community in the state of Bihar. And we are extending this medical insurance, health insurance cover to over 1,600 more families of the painter communities in the state of Orissa and Chhattisgarh as well. Finally, I would say that we have come a long way since we met you for the first time during our IPO, which was slightly more than 3 years ago. During the last 4 years, while our sales have more than doubled from INR 625 crores in FY '20 to INR 1,306 crores in the last fiscal, our EBITDA has expanded 2.5x from INR 91 crores then in FY '20 to INR 238 crores in FY '24. And our PAT has tripled or more than tripled from INR 48 crores in FY '20 to INR 149 crores in FY '24. For the upcoming year, we expect the company to continue to outpace the industry growth by a wider margin while maintaining and improving our profitability metrics. That's all I have to say as an opening comment. I look forward to taking your questions.

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

Congrats on good set of numbers. My first question is you mentioned the support programs for painters. So I wanted to understand, is this because competition has been going up a bit because ultimately, all paint companies will target the same painter community. Astral has also completely relaunched under the Astral brand paints across many markets and JSW Paints claims to have clocked INR 2,000 crore revenue in the fifth year of launch. And now, of course, the big daddy has also come, Birla Opus. So if you could comment in terms of the influencers, painters, how has the overall support schemes by you or the industry changing? And any insights if you can give how it can change further?

So when it comes to the CSR initiatives for the painter community, it is truly what it is. It is a CSR initiative. It is not a business initiative to drive sales. We would like to reach out to various underprivileged sections of the society. Since the painter community is a community that we interact with on a daily basis, we have selected that community. When we select painters for coverage of health insurance, there is a very strict guideline given by us to the team below that this enlistment of painters should have absolutely no relationship to whether they are supporting Indigo Paints or not supporting Indigo Paints. We don't even look at that parameter at all. We are simply trying to reach out to the painter community as a whole as one of the underprivileged sections of society, and we are providing this health cover. So I don't think that this CSR initiative should at all be looked at as a competitive tool or a business tool to drive up sales because I don't think that there is any intent on our part to link the 2 together. Yes. Abneesh, have I answered your question?

Sir, we lost the connection with Mr. Abneesh. We will move on to the next question from the line of Percy from IIFL.

A couple of questions on the competitive intensity. So firstly, I see you have about 10,000 tinting machines, 18,000 dealers. So in terms of throughput per dealer or per tinting machine, you would be significantly lower than what the large 3, 4 players are at. So if a new entrant is coming in and sort of wants to make a place for himself at the dealership, would you not be an easy target to sort of replace? That is the first question, sir.

See, this speculation about this new player has been going on for the last 2.5, 3 years. Now so far, all the narrative has been on a speculative framework, what will they do, what impact they will have, et cetera. Now their launch has happened 3 months ago. So as we speak, they are very much there on the ground, we see absolutely no impact of their presence on our top line, bottom line, our tinting machine adoption or our dealer adoption whatsoever. Now I feel strongly that the competition that we face from the existing large players like Asian Paints, Berger Paints, Kansai Nerolac, AkzoNobel, et cetera, is infinitely higher than what we are likely to face from any new incumbent at least for the next 4, 5 years. And therefore, our focus has been for the last 10 years and will continue to be in the next 5 years to focus on competition that we face from these large 4 incumbents who are giants in the industry, extremely well-managed companies, models of corporate governance and corporate excellence and the level of competition that we have faced from them has always been of a very high intensity. So I don't see the competitive intensity changing significantly by a few new entrants coming and that has been our consistent narrative in the past. Now once this quarter is over and that's not very far away, it is time that the speculative and what if scenarios give way to hard numbers because now it's high time that hard numbers have to do the talking. So when the quarter is over and when you see the hard numbers coming out, not only from the existing players and ourselves, but by any of the new incumbents, I think the numbers will do the talking, and you will be able to find out as to whether they have had a measurable impact on either the top line, bottom line or any other metrics of the existing players. My feeling is very strongly, at least as far as our company is concerned, we have not seen any measurable impact on our network, and it has not come as a surprise to us.

Fair enough, sir. Just one comment on that point is that probably 1 quarter is too short a time to judge any one by. A new entrant would at least take 1, 1.5 years to...

Absolutely right. We are perfectly willing to wait for 2 quarters, 3 quarters. As long as it takes for you to get convinced that any new entrant irrespective of how well or how badly they do, that's none of our business to forecast. But to see whether they have a measurable impact on the existing players in the industry, time will do the talking. Let's wait for that. What else can we say?

Sure, sure, sure. Second question, a little related to that is with the new player coming in, what kind of change, if any, have you seen in the competitive environment or rather terms of trades with dealers or with painter contractors. And I'm not talking about whether you have made any change in your terms of trade, but more in terms of is the new entrant offering anything new either in terms of the quantum of incentives or in the way that they have offered versus what the normal practice has been. So that is my question.

In terms of your first part of your question, what impact have we seen on all those parameters, the brief answer is so far, the impact is not even perceptible. As to what they are offering and what is different about their offering, I reiterate, we are really not obsessed with any new entrant. We are completely obsessed with the competition that we face with Asian, Berger, Nerolac, Akzo, and we will continue to be obsessed with the competition that we face from them. We have outperformed them consistently in the past and particularly so in the last 4 consecutive quarters, and that remains our focus going forward. So pardon me, but we really do not have that obsession about a newcomer as many analysts or many people in the media have. And we don't think that it will have any measurable impact on us as to what their offerings are and what is different about their offering. It is better asked to the management of those new players entering the line, it is not fair for us to comment on that.

We have our next question from the line of Rajesh Mangal from Rajesh Mangal & Company.

Sir, my first question is regarding the proposed CapEx, this liquid 1.02 lakhs KLPA and putty plant 1.38 lakhs MTPA. What will be the CapEx cost? And when this will be committed and how to finance this?

Okay. The CapEx cost for the new water-based plant that is coming up at Jodhpur is roughly of the order of about INR 270 crores. The CapEx cost for the new solvent-based plant coming up at Jodhpur is somewhere in the region of about INR 40 crores, INR 45 crores and the CapEx cost of the expansion of the existing putty facility at Jodhpur is less than INR 15 crores. As to the second part of your question, when are they likely to come on stream, we expect the putty expansion to be completed by November, December of this year, hopefully, a little earlier. The solvent-based plant, we are hopeful of commissioning certainly by March '25, and as far as the water-based plant is concerned, although we are pushing for March '25, but because of availability of labor, which has been a problem for civil construction during the last few months, there is a possibility of it slipping by a couple of months. As far as the means of financing is concerned, at the moment, the intent is to finance this entire CapEx by internal accruals, and we feel fairly comfortable with our treasury balance and with the profitability coming in, the cash flows coming in during the year that we should be able to manage it entirely by internal accruals.

Yes, yes, very nice, sir. Sir, my second question is, during FY '23, our CWIP is INR 251 crores and in FY '24 this is INR 15 crores. So what is the addition we have made? And what is the impact on the top line and bottom line also?

So basically, what has happened is that we were in the process of implementing a large water-based greenfield project in Tamil Nadu. And therefore, last year, in March 2023, you've rightly pointed out to a very large CWIP that was there on the books. That plant went into commercial production in mid-September at which time that entire bit was capitalized. And therefore, it has led in the second half of the year to a significantly higher depreciation expense after the commissioning and going into commercial production of that plant, and that has, of course, slightly impacted our PAT margins, although the PAT and the EBITDA has still grown -- I mean it doesn't affect the EBITDA, but the PAT has still grown at a very healthy pace. The small amount of CWIP that you see on the balance sheet of March '24, I would expect that almost all of it relates to the ongoing CapEx going on at our Jodhpur facility, where we have embarked on the CapEx ventures that I've already outlined.

Sir, what is the capacity added in FY '24?

In the last year?

And what is its impact in FY '25 for this volume growth and top line growth?

See, CapEx in paint industry is generally implemented a year or 2 before you see a bottleneck coming. Our business is somewhat seasonal. So CapEx and capacity expansions are designed for peak demand that happens, which usually happens either in the month of October or in the month of April. Those are the 2 peak months that we face a huge surge in demand, and therefore, the CapEx is -- you can't relate that because you have done capacity, therefore, it will lead into top line growth. This is not a commodity and therefore, capacity has really no relation to sales unless you are in a situation where you're losing orders for want of material. And I don't think any paint companies allows itself to fall into that kind of a situation. So the capacity expansion that we have done at Tamil Nadu is about 50,000 kiloliters per annum. And that will keep us very comfortable for the next 4, 5 years because that plant services most of Southern India and small parts of Central and East India as far as water-based paint requirements are concerned. The capacity expansion that we are undertaking at Jodhpur in the water-based plant is keeping in line with the expected demand that will surface more in the northern and in the eastern parts of the country, which are fed from our Jodhpur plant. Our third plant in Cochin really caters to the Kerala requirement and our Jodhpur plant caters to most parts of Western India, Northern India and large parts of Eastern India. So those decisions are based on logistics, and there is no one-to-one correlation between capacity increase and top line growth.

Sir, my -- I think when we increase our capacity and -- but no doubt, sir, we will increase our top line also. Our production will increase so that we can be able to market that product is what I think.

I think it is the other way around, Mr. Rajesh. When you see top line growth coming, then you go for a capacity increase so that you do not run into any bottlenecks in supply in the forthcoming quarters or the forthcoming years. It's not the other way around where you make a CapEx and then that CapEx drives your core top line growth. So this is a marketing-oriented business where the market forces decide your top line growth, and as you see the top line growth coming, you decide that the appropriate times to implement capacity additions so that you do not face any supply bottlenecks going out into the future.

Got it, sir. So your correct -- our estimation for growth -- top line growth is around 16% and EBITDA around 18%, 19%?

No, we have not given any guidance on top line growth numbers for the year because those are somewhat related to the underlying demand situation and what the industry growth would be. The only guidance that we will give you is that whatever is the industry top line growth, we are fairly confident of continuing on our earlier trajectory of growing at, at least 3x the industry top line growth. Now if the industry top line growth comes back to the earlier levels, which has been the norm for the last 10, 15 years of industry registering a value growth of somewhere between 7% to 9%, if that happens, then we should be looking at a top line growth somewhere around 25%, maybe even 30%. But suppose the industry witnesses or continues to witness a slump in demand growth and the industry growth is 1%, 2%, then I'm afraid we'll have to be satisfied with a top line growth of closer to 15%, 17%, 18%. So I have no means of predicting as to when the demand revival will really happen in a very meaningful way. And to that extent, we don't give any specific number guidance as to what the top line growth will be going forward.

Got it. Got it, sir. Sir, last question. Sir, in the investor presentation at screen #30, we have given the picture of Atal Setu and Mumbai Trans Harbour Link, et cetera. Any specific reason behind this?

So those are related to our subsidiary, Apple Chemie. Those are not projects that Indigo Paints directly is involved in. So we have mentioned and on that same page, you'll see the logo of Apple Chemie at the top. So Apple Chemie makes construction chemicals and waterproofing products for the B2B segment, not for the retail segment. For the retail segment, these products are made at Indigo factories under the Indigo brand name. But for Apple Chemie, they are into the B2B business of this same product portfolio, where the specifications of the products are significantly different. And therefore, all those projects that you see on Page 30 are projects where Apple Chemie has been consistently supplying, they have supplied their products at the Atal Setu, at the Samruddhi Mahamarg from Nagpur to Mumbai, at CIDCO PMAY, the Mumbai Trans Harbour Link and the Versova–-Bandra Sea Link and many other landmark projects not only in Maharashtra, but now increasingly elsewhere in India also in at least 8, 9 states of India.

The next question is from the line of Lakshminarayanan from Tunga Investments.

A couple of questions. One, in terms of the dealers that you actually onboard, how many dealers are first-generation dealers? And how many of them are somehow related to the paint industry? So in general, how things have moved and are more people interested to open dealership as first generation entrepreneurs?

So it's a mix of both. Most of the dealers that we onboard are existing paint dealers, and they are dealing with one or more of the larger paint companies. You do have cases of people who are in allied businesses. They may be in the cement business or the tile business or hardware business or pipes business and they look to diversify and open up a paint counter. Usually, those kinds of dealers who are onboarded at least in their initial few years, for us, they are dealing almost exclusively with Indigo Paints. And over time, they may or may not choose to diversify their offering by having some other of the leading brands also there. But I don't have exact numbers as to out of the new dealers onboarded, how many of them are first generation and how many of them are existing dealers. But I would expect that at least 90% of the dealers being onboarded are existing paint dealers who have already been in this business for a significant amount of time. Having said that, definitely, there is a greater affinity for the younger generation, first-generation new dealers to opt for Indigo as the main brand. So that we have been seeing increasingly. But to put a number to that is slightly difficult.

Fair enough. Sir, my second question is that I was just checking the overall paint cost per square feet, almost 55%, 60% in metro happens to be labor cost, okay? So how do you see it at a company level and how do you think about decreasing price, increasing price? How much is actually the customer -- it actually affects the customer? Is it fair to assume that more than 50% of the cost of painting is actually labor cost? Or in your case, how it is? Because I think on the lower value segment, there will be more labor cost as a proportion and as we go up the labor cost as a proportion of per square feet comes down. So I just want to hear your views on this.

It's not exactly like that because when you are using economy range emulsions, the per square feet painting rate is much lower as compared to using a premium range or a luxury range. So for an economic range, I would preferably say that maybe the rates might vary between INR 8 per square feet to INR 12 per square feet. For the luxury range, it will vary from INR 40 to INR 45 per square feet, very close to that of using starting range of wallpapers. So there is nothing like that, if you're using economic range emulsions, then the proportion of material costs will be significantly lower than that of labor cost, it's not like that.

To some extent, what you're saying is right that labor cost being somewhat agnostic of the grade of paints that you use. As a percentage of the total painting costs, labor would involve a slightly lower percentage as you move up to the premium segments and a slightly higher percentage as you move to the economy emulsion, but then what happens is that the labor requirement also changes. The amount of surface preparation you have to do for a premium end paint is a little more than what you do for an economy range paint. But having said that, I think your analysis is more or less right that in general, the labor cost of painting is a little more than the cost of the paint itself, and therefore, you're right in saying that the elasticity of demand with respect to pricing of the paint is fairly low. So minor changes in pricing of paint products do not materially affect the overall demand of paints because the elasticity is low, the overall effect on the overall printing cost is fairly minor.

Got it, sir. Because if you broadly look at it even in a metro city, the cost of painting a 3-bedroom apartment comes to, let's say, INR 70,000 or so, then the cost of -- even if the paint cost is reduced by 10%, it affects only to that extent, it's not going to be material. So I'm just trying to understand that part.

That is true not only in metro, it is true across India. So the labor costs for painting are not very different from metros to Tier 2 cities to Tier 4 towns. I mean that's more or less uniform across the spectrum.

It might be slightly higher in metros...

Slightly higher in metros but not too much.