Indigo Paints Limited (INDIGOPNTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Indigo Paints Q1 FY '27 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anirudh Joshi. Thank you, and over to you, sir.

Yes. Thanks, Atharva. On behalf of ICICI Securities, we welcome you all to Q1 FY '27 Results Conference Call of Indigo Paints Limited. I hand over the call to Mr. Srihari Santhakumar, General Manager, Finance and Investor Relations, to introduce the management and take the call forward. Thanks, and over to you, Sir.

Yes. Thanks, Anirudh. Good morning, everyone. Thanks once again for joining the earnings conference call today. To discuss the performance of the company for the quarter, from the management side, we have with us Mr. Hemant Jalan, Managing Director; Mr. Suresh Babu, Chief Operating Officer; Mr. Aishwarya Pratap Singh, the Chief Business Officer; Mr. Chetan Humane, Chief Financial Officer; and myself will be discussing the performance of the company today. As usual, there will be a brief note from the MD regarding the performance of the company, followed by a quick Q&A. Over to you, sir.

Good morning, everyone, and thank you for joining us today to discuss Indigo Paints performance for the first quarter of FY '27. Now we have uploaded the investor presentation on the stock exchange portals and trust that you've had the opportunity to go through them. Now the demand momentum that we described at the close of FY '26 has carried through into the first quarter of FY '27. Revenue has grown in double digits, the first such quarter in almost two years for us. And while the price increases that we implemented also aided in achieving this outcome, what is more encouraging is that volumes also grew in double digits and did so across the product portfolio. On the input side, raw material prices, which rose very steeply in March following the disruption to global supply chains due to the Iran war, have since retreated from their peaks. However, they remain elevated and continue to be volatile, which necessitates constant monitoring on this front. Set against this backdrop, we are satisfied with the quality of what we have discovered in Q1, a top line growth well ahead of the paint sector, meaningful margin expansion and further strengthening of our distribution network and product mix. We'll first briefly look at the performance on a stand-alone basis before going to the consol financials. Our stand-alone revenue from operations for the quarter was INR 350 crores as against INR 295 crores in the corresponding period last year, reflecting a growth of 18.7%. We believe that this places us comfortably ahead of the paint sector, and we would highlight that the growth was accompanied by double-digit expansion in volumes as well as in value across all 4 of our product categories, details of which have been given in the presentation. The gross margin for the quarter stood at 45.3%. Although it is slightly lower than the level that we recorded in Q1 of last year, our margin continues to run well ahead of the average for all the listed paint companies, a lead that we have now sustained for many years. EBITDA for the quarter was INR 61.9 crores against INR 43.6 crores a year ago, reflecting a growth of 42% lifting our EBITDA margin from 14.8% in Q1 of last year to 17.7% in Q1 this year. This is the healthiest Q1 quarter that we have recorded as far as EBITDA margins are concerned during the last 4 years. The improvement is principally due to the operational leverage that comes with a larger revenue base, together with tighter control of discretionary expenditure across the organization. The PAT was INR 42.4 crores as against INR 26.4 crores in the same quarter last year, reflecting a growth of 60.7% with the PAT margin moving up from 8.8% to 11.8% in Q1 of this year. Now we did have a mark-to-market gain on our treasury income, which also partially contributed to the expansion in the PAT margin. Our advertising and promotion expenditure was 4.3% of revenue in Q1 compared to 6.8% in the same quarter last year. Now although we took a strategic timeout from advertising during the IPL season, we have redirected a lot of those funds towards painter and contractor engagement, influencer partnerships and measurable digital advertising channels. Our commitment to brand investment for the year as a whole is undiminished, and we would encourage you to assess our A&P intensity on an annual basis rather than viewing it on a quarterly basis. Turning to the consolidated picture, which includes our subsidiary, Apple Chemie. Revenue for the quarter was INR 369.7 crores, a Y-o-Y growth of 19.7%. EBITDA was INR 62 crores at a margin of 16.8%, up 40% on an absolute amount and PAT was INR 41.7 crores at a margin of 11%, up 60% on a total amount. Apple Chemie's performance was accretive to our growth this quarter, but marginally dilutive to our margin, and I'll come to those reasons in a short while. On the product mix front, I'm glad to highlight that every product category recorded growth in both volume and value terms during the quarter. The category of primers and distempers led with almost a 30% value growth and a volume growth in excess of 18%. This was followed by the putty and cement paint segment, where the value growth was upwards of 21% and the volume growth was closer to 14%. The enamel and wood coating segment, the value grew at 17.5% and the volume growth was close to 10%. And for the emulsion category, which is the largest category in paints, the value growth was more than 17% and the volume growth was around 12.5%. Our distribution footprint widened further during the quarter. We closed the quarter at about 19,400 active dealers and around 12,400 active tinting machines. The dealer count has risen by about 800 in the last 1 year, but our tinting machine has -- count has increased by 1,100 over the same period. And you would appreciate that tinting machines represent a committed counter space and is a considerably firmer measure of the depth of our dealer relationship. Coming briefly to the performance of our subsidiary, Apple Chemie, it recorded a revenue of INR 19.7 crores for the quarter as against INR 14.0 crores last year, reflecting a top line growth of more than 40%. Profitability, however, was compressed on two counts. The first is that input costs rose sharply in the wake of supply disruptions. And since Apple Chemie is a predominantly B2B business player, it had limited ability to pass those increases through to its customer within the quarter, a latitude more readily available to players like us in the decorative paint business. The second is that Apple Chemie had to purchase significant high-cost inventory when the supply chain disruptions happened, which were procured at elevated prices, which weighed on its cost of goods sold. Now we view both these matters as transitory in nature. As the high-cost inventory is consumed, we expect gross margins of Apple Chemie to improve through the second quarter and return to its normal level by Q3. And as an expression of our confidence in this business, we propose to acquire a further 11% stake as per our terms of original agreement, taking Indigo Paints' aggregate holding in Apple Chemie up to 62%. The original promoters will retain the balance 38% and will continue to drive growth and enhance shareholder value. Coming to capacity, our water-based facility at Jodhpur with an annual capacity of 90,000 kiloliters per annum is in the final stages of commissioning, and we expect to start trial production in the second half of August itself, comfortably ahead of the festive season. The solvent-based plant at Jodhpur is already in production for the last several months and is ramping up output steadily. Once the water-based plant is operational, our ability to serve demand across Northern, Eastern and Central India improves materially, both in terms of lead time and in freight economics. Now with this water-based Jodhpur facility being commissioned, our principal CapEx investment cycle draws to a close. We do not anticipate any significant CapEx requirements for the next 3 years. The plants and capacity are now in place. The network is established, and we continue to invest substantially in our brand. From here, incremental revenue should translate into free cash flows at a considerably better rate than over the last 5 years. Coming to our ESG and CSR initiatives, our installed solar capacity now stands at 350 kilowatts across the Pune and Cochin facilities, and we are planning a further 1,200 kilowatts at our Jodhpur plant. Through our Indigo Seva Utsav program, we have painted over 240 government schools in Tier 2 and Tier 3 towns in collaboration with the painter community at large. Our painter health benefit program now extends to more than 30,000 families nationwide. And our Skill Up initiative has trained more than 1,250 painting contractors in the commercial and interpersonal skills that support their business. We have also extended educational assistance and career guidance to over 420 underprivileged girls through our Educare program. Now these programs are not peripheral to us. At least the painters and the contractors remain our most important partners in our value chain and the trust that we hold within that community is an asset that we have built over many years. Finally, coming to future outlook, we had mentioned in our last earnings call that henceforth, we should be pursuing accelerated top line growth even if it comes at a marginal cost to the bottom line growth. Although we have achieved a healthy top line growth this quarter, the fact that our bottom line has increased at a faster pace indicates that we were not aggressive enough, and we can afford to do more. So we shall be even more aggressive in Q2 with respect to our spends on trade and influencer engagement in an attempt to further widen the gap between our top line growth and that of the industry. On raw materials, the prices -- the price increases that we implemented in response to the RM cost spikes that happened in March and April have protected our margins. The raw material costs have eased since then, but remain elevated and volatile, and we are monitoring the situation quite closely. Taken together, our strongest Q1 operating margin in 4 years, a CapEx investment cycle, which is now behind us, new capacity arriving in time for the festive season and the demand environment that has remained constructive, we enter FY '27 in a distinctively stronger position than the previous year. That's all that I have as far as my opening comments are concerned. We'd be happy to now take your questions.

[Operator Instructions] The first question comes from the line of Abneesh Roy from Nuvama.

Congrats on great set of numbers. If it is okay, my first question is to the Chief Business Officer, Aishwarya Pratap Singh. So almost 7, 8 months into a new sector and a new company, I wanted to understand as Chief Business Officer, what is going right, what can be improved in Indigo Paints versus your 20-year strength in marquee FMCG companies like ITC, Foods, Personal Care and of course, Dabur also. And what else is left in terms of changes as a Chief Business Officer level, what is left to be done in the next one year?

Thank you for the question, and thank you for the detailed understanding of my profile. So yes, in last 6 to 7 months, I have been trying to understand, first of all, the industry and my primary objective was to, first of all, see where are the strength of Indigo Paints lies and what are the opportunity areas. FMCG is an interesting area where you actually work a lot towards ensuring physical and mental availability. And I don't copy paste learning from previous industry. The idea is to understand how industry used to work and what kind of learnings can come over here. With that intent only, I've been working on two major areas. One is to utilize and juice out maximum of the current distribution network. We have a very wide network, like sir was saying, we have around 19,400 dealers associated with us. How do we use it further through segmentation or micro segmentation of dealer clusters is what is my priority right now. And with that intent only, we are looking at different kind of dealers, some are big, some are small, some are really small, some are opportunity. Different kind of initiatives and strategies have been taken and implemented in quarter 1 to take care of those different kind of dealer clusters. Otherwise, sometimes there's an intention to work only with the bigger dealers. That seems to have worked quite well, and we are able to activate a lot more of a number of dealers who are working with us in some way or the other, but they are actually activating -- working quite closely with us. That was the first part of the story, which basically is aligned with how FMCG works and which you want to reach out and work with as many dealers as possible. In this case, my intention was to work with existing set of dealers and working more aggressive and that seems to be working a lot. The second part was about category level growth, and that is where we have devised a strategy in which we looked at the sensitivity of different kind of product portfolio and what works more for which particular category. Sometimes it is brand building, sometimes it is influencers, sometimes it is trade focus. So divided the portfolio into these 3 different clusters and appropriately inputs were injected into the system in quarter 1. Again, that seems to be one of the reasons why we are able to grow faster because we understood that this category works because of influencer. This category is aggression and trade really helps, and this is more of a brand building activity. And that is why you must have seen and like sir was telling, we are able to get good growth across different categories. It is not just coming from 1 or 2 areas. Lastly, a lot more focus has been given in terms of people. Again, learning from FMCG that people are most important. So we are spending a lot of time and energy towards not only training and working with them, but also providing enough bench strength so that we have manpower available with us. A company of our size actually is a lot more dependent on the passion and the work that people are doing on to the field and the difference they are able to make on the -- at that level. So these are the 3 areas through which we have been able to do well. It's been 3 months is the time we have implemented all of these things, and we are seeing results right now. And strategies should be actually continued for a reasonable amount of time before we change anything. So right now, my priority is to ensure execution of all of the activities that we are doing at a greater detail, especially when the festival season comes up, a lot more action will be happening on to that front. Yes, some more action has to happen more towards brand building like sir was saying, we have taken a strategic timeout in quarter 1. So you'll see a more of action on both traditional marketing as well as towards the digital marketing. Again, that is something that I carry from my learning, both handling new age brand as well as conventional, traditional brand also within ITC and Dabur. So you'll see more of that action happening in quarter 2. But on-ground execution is what I will continue to work on exactly the way it was done in last quarter. I hope it answered the question that you were asking.

My second question is to Mr. Jalan. So sir, if I see your sales growth is impressive. It is top-tier growth. But when I see the gap between you and obviously, India's dominant player, the gap is very limited and they are three times your size. So ideally, you should have grown much faster, which you yourself said that should have been done. So, do you think that this is [Technical Difficulty] in terms of mass media because rest of the buckets you have spent in terms of influencer, in terms of painter, in terms of discount you have spent, but mass media, would you say that was a missed opportunity?

See, what happens, and this is something that the industry leader also indirectly acknowledged during his earnings call, when you have steep price increases and the kind of price increases that happened in Q1, the magnitude of the price increases and the frequency with which it happened is something that has been unprecedented in the last 25 years. Now whenever you have such large price increases happening at very short intervals of time, the greatest beneficiary of that is always the market leader. Now that is taken for granted, and it was known that the greatest beneficiary of that would be the market leader because all dealers will tend to first talk up on the leading brand before they start purchasing the other brands. So therefore, the top line growth that you see of the market leader, you will notice that it is well ahead of all the other players in the industry, excluding us. However, what you say is a valid point that the gap between us and the rest of the industry needs to get wider. When we said last quarter that we will pursue top line growth even if the bottom line growth starts lagging a little bit, the fact that the bottom line grew faster than the top line very clearly means that we did not do enough. We need to do more or we can afford to do more. And that is what we will do now. You will realize that last quarter was a slightly tumultuous quarter with the situation in Iran and the consequent effect on supply chain. And at least half of Q1 was spent on somehow getting raw materials together to be able to continue to run the factory and provide materials. And all the elevated spendings and all that we talked about was really -- I mean, whatever happened, happened in the last 45 days of the quarter. In the first 45 days of the quarter, the paint industry had virtually withdrawn all trade discounts and spends because nobody was sure about the raw material situation. So I think you will see a lot more of that going forward. And all I can say is that I hope that the gap between us and the other players should be wider than what it is. And hopefully, it will get wider as we go forward.

Sir, just one follow-up, and that's my last question. You expect gap to become wider. Any concern on Kerala floods in Q2 is fairly severe. And one follow-up I wanted on strategic time out for IPL. What is the specific reason? Was it because IPL, the ROI did not make sense given the rates, advertising rates and maybe too much of crowded paint ads? Second one was Dhoni did not play. So entire season, he did not play. He's your brand ambassador. So he is not active in the season, overall advertising, that rub-off effect is missing. And third is, if I see on the crowded effect, the market leader and new paint player are almost going head on. So it is best left to the biggest to fight it out and then come back later. Which one was the bigger reason in terms of the strategic timeout?

Well, the first question that you asked, I'm not aware of any significant floods in Kerala as such. Kerala is having pretty normal rainfall or maybe slightly below normal rainfall. So, so far, there is no indication of any flood situation. The only part of the country that I think is really under some kind of a flood is parts of Assam and Northeast. So those parts, especially upper Assam region, Jorhat, Tinsukia, Dibrugarh area, those are the parts of India that are really under floods at the moment. But I'm not aware or I have not heard of anything adverse as far as floods in Kerala are concerned. So Kerala is actually doing very well for us. It has done very well in the first 4 months of the year, including July, and looks like it is poised to continue to do well. As far as IPL is concerned, I don't think it had anything to do with the intensity of advertising of two large players. Our advertising is not based on what others are doing. It is based on what we feel is necessary for our brand building. I think we have consistently advertised in IPL for about 7 years or so, and we had signed up to advertise in IPL this year, too. In early March, when the Iran war broke out, and as I said, it did not look very clear as to whether raw materials would be available to continue to run the factory beyond 10th of April or something like that because raw materials have just vanished from the market. In that kind of a scenario, we felt that to spend money to advertise when we were really not sure of how much material we'll be able to supply to the market seemed a little foolhardy to go ahead with such an expensive property. And therefore, we requested time out with the channel that we'd like to opt out for this reason. We had no idea whether Dhoni is going to play or not going to play. That had nothing to do with it. And even if Dhoni has not played, I mean, sooner or later, he is going to retire from IPL, if he's not done so already, we don't know. But does that mean that we stop advertising completely? The answer is no. And I don't think the effect of Dhoni is going to fade away at least for several years. I mean, Sachin retired, what, 12, 13 years ago from cricket. He's still a marquee brand ambassador for so many brands and a very effective brand ambassador. So there are some people who become eternal. I think Dhoni is a legend and will continue to play the role of our brand ambassador very effectively for a long period of time. So IPL skipping out was entirely because of the Iran war. In retrospect, in hindsight, we were able to manage all the raw materials. We were able to provide materials the way we have been doing. And therefore, with hindsight, which always comes easy, maybe we should not have bowed out of IPL advertising. But that doesn't matter. I mean now we want to pump that money back in at an increased pace in the coming months. And shifting of advertising expense from one quarter to other doesn't really matter very much for a company that has been advertising very steadily at an increased pace for the last 12, 13 years and will continue to do so. So I'm not worried about that at all.

The next question comes from the line of Prakash Kapadia from Kapadia Financial Services.

After a long time, Hemant ji, we've seen profitable growth. So how are you reading this? Is this low base effect? Is this demand coming back because we were fairly optimistic about demand coming back and it has come back. And historically, if I were to look at our track record, the biggest concern, which we've shared, discussed on con calls is paint industry not growing was the biggest concern. So now given that we've seen growth across the sector, is it fair to say we'll continue to outperform the industry by a good margin as we've done historically? Because of differentiated products and a slightly slower base and lower market share. So how are we looking at demand and our growth specifically in the coming quarters and..

So you're right when you say, Prakash ji, that the demand situation for the paint and not just the paint industry across all consumer categories had been subdued for the last 2 fiscals. So companies, whether they were in consumer staples or whether in consumer durables or virtually all sectors were reporting very, very sluggish top line growth. And that includes like HUL, et cetera, Nestle, they were all reporting very, very sluggish top line growth. Now I think the paint industry, in particular, started saying and we started seeing the improvement from Q3 onwards. Q3 was significantly better for the paint industry compared to Q1 and Q2. Q4 was even better. And Q1 for everyone has been even better. So therefore, there is a progressive improvement that has happened, and we have been calling it out repeatedly that we can see the tailwind now there. And we can see the growth momentum back to the normal situation that existed 2 years ago and has existed at all points in time in the last 25 years, barring small periods of aberration. So as far as the demand is concerned, I think now we are reasonably comfortable that demand is back to near normal growth conditions. And I've already said in my remarks that we do expect to grow faster as we used to. We are growing faster than others. Maybe the gap this time.

It's not as large as what we wanted.

Yes, definitely not what we wanted. But that is because any strategy execution, at least during the first half of the quarter was not possible. I mean all trade discounts had been totally suspended by us and the rest of the industry. Everybody was busy in somehow just getting raw materials together to keep their plants running. It is only really, I would say, in the second half of May and really in June that we got down to executing the strategy that our Chief Business Officer was talking about in response to the earlier question. Hopefully, if there are no further significant disruptions, we will get the full quarter to execute the strategy that we talked about. And what will happen will happen, time will tell, but we are hopeful that the gap between us and the other players will widen as far as this quarter is concerned. In terms of your earlier comment, your first comment saying that after a long time, we are seeing profitable growth, I think profitability has never been the concern for us, the growth level for 2 years has been, of course, disappointing.

Muted. Yes. What I meant was margin expansion, sales, volume, value all coming in together, which was long ago.

Although I do add that we are not pursuing margin expansions as a primary goal. If it happens as a byproduct, well and good as it has happened this quarter, there could be quarters when the EBITDA margin and gross margins could be slightly less than the corresponding quarter of last year and so be it. I mean, basically, we are focused on much higher top line growth. Bottom line will eventually take care of itself.

Understood. Wishing you all best and hope we regain our mojo back in the coming quarters.

The next question comes from the line of Mihir Shah from Nomura.

Okay. Sir, firstly, on the sales front, if any color you can share on how July and August thus far has been going. We believe that there would have been some upstocking in the earlier quarter in 1Q. And can there be a likely negative impact or destocking impact in the second quarter? Or given that -- so what was -- what is the situation in July and August after the upstocking that we have seen in 1Q? So that's my first question.

So I had mentioned in response to an earlier question that normally when big price hikes happen, the normal tendency for the channel is to overstock on the market leader. So if at all overstocking would have happened, and I have no primary evidence to point to that, the chances are it could have happened with the market leader and maybe a little bit of destocking they may experience in July and going forward, if at all, there was some overstocking. In our case, we don't find that the channel has overstocked at all. July has been actually a very good month for us. So our top line growth has maintained its momentum or maybe gone a little better than Q1. It's a little early to say in August. We are not even halfway through. So -- but things are looking all right. So there is nothing devastating that is happening in the country in any part on account of rains. I mean, every year during rains, there is some flooding here and there that happens that is kind of built into the base. The Middle East problem seems to have slowly gone away from the news, not the problem has been solved, but I guess alternate sources and alternate routes for raw materials have been found over time. And therefore, availability of raw material is not a concern. Of course, raw material prices are slightly elevated, and therefore, the paint industry is not dropping prices at this time, but keeping a watchful eye on it. But so far, the evidence that we have with 40 days in the quarter gone, it looks like the good days are continuing is all I can say.

Understood. That was actually my second question on the margin front on two accounts, both on the gross and EBITDA. Even let's assume you had first 45 days of low-cost inventory and now you will start consuming the higher cost inventory in the second quarter.

Yes, that is possible. So frankly, I will not give any guidance for what the margin situation is going to be in Q2 because we have gone through a pretty much of a roller coaster ride as far as both the raw material input prices are concerned and our selling prices. So it is a very fuzzy situation. When you say that the high-priced inventory will start getting consumed now, that would be true for some raw materials, may not be true for other raw materials. Where the overall average will end up is something that is a little difficult to predict. But in light of that, I would not make any concrete prediction as far as Q2 margins are concerned. In any case, Q2 is the worst quarter for the paint industry as far as margins are concerned because of product mix deterioration. The premium products, the exterior products, all those take a back seat in Q2 because exterior painting gets drastically reduced because of monsoons. And the kind of paints that you tend to sell in Q2 is always an inferior product mix from a profitability viewpoint. So profit margins in Q2 are traditionally lower than Q1 or Q3 and because of this topsy turvy of raw material prices, it's a little uncertain as to what exactly would be the gross margin and the EBITDA margins for Q2. It may be better for the paint industry for you to look at the 6-month period and look at margins for the 6-month period and compare that with the corresponding 6 months of last year. I think that would give a more stable and a more accurate representation. But as of now, it doesn't seem to be causing any major problem to the paint industry, although many people may have a slightly lower profitability in Q2 compared to Q1.

Understood. Yes, fair point. Fair point, sir. In that regard, if I can ask you to just crystal ball gaze a bit in what can happen in the second half, assumption is that the further price increases, there may not be a business case for further price increases now as most things.

As of now, no. Yes. As of now, no. But if you can predict what side of the bed the U.S. President would get off from tomorrow morning, I would be able to make -- do a little better crystal ball gazing. We have no idea which way the war is headed and what will happen.

Yes. No, no, won't we all be better off if you had that knowledge. But the point is that assuming the current prices that we are witnessing now and they remain at these levels, would there be a business case for the price cut in the second half likely?

It is possible.

Because I can see that.

See, it is possible. It depends upon how prices move and how confident. See, even if today, people are a little comfortable with the pricing situation, what happens? We tend to pass on a little more in terms of trade discounts. So it's not that the gross margin changes substantially. Once the industry becomes sure that these prices are stable going forward, and I would expect that, that would only happen post Diwali is my guess. The industry may choose to take a price drop, at which time the trade spends and the discounts will also reduce appropriately. So ultimately, on a net sale basis, I don't think anything changes.

Gross margins kind of remain pretty much the same.