JSW Dulux Limited (500710) Earnings Call Transcript & Summary

Good evening. Wonderful to be here. My name is Rajiv Rajgopal, I'm the Chairman and Managing Director of Akzo Nobel India Limited. One of the reasons we are here, of course, thank you all for taking time and coming. Good to see all of you. Good to see a lot of smiles on the faces, particularly a period of time when the market has been a bit depressed. So it makes me as an individual investor very happy [indiscernible]. Look, the purpose of today is, first, if I can just -- if I can request all the shareholders within this group to kindly put up their hands so that at least we know how many -- is it only one shareholder in the entire group? Are there any other shareholders in the group holding shares of Akzo Nobel too. Okay. So listen, what we've got is we will just take 10 minutes to run through a recent thing so that our shareholders get an idea of what the transaction is, and then we will quickly finish this. We will take about 15 minutes since only two people are there. If you have any questions, do reach out to Rajiv Jha, Company Secretary and Compliance Officer. So first, good evening, and welcome to all of you. I'm joined in this meeting by R. Krishna, CFO, Akzo Nobel India Limited; Rohit Totla, who is the Executive Director and is also what we call the Marketing and Sales Unit Director for the Decorative Paints business. Rajiv Jha is the Chief Compliance Officer and Company Secretary of your company. Our attempt today is to first just talk about a recent post that we did on the BSE and NSE stock exchanges and notified -- notification of SEBI in terms of our interest to sell off the Powder Coatings business and our international research center and buy back the key rights to Decorative, which is a part of the larger transaction which the parent is going to make. But before I do that, let me hand it over to Rajiv. He will quickly run through a safe harbor statement, right? And Krishna will thereafter run through the slides. Yes. Rajiv, over to you.

Thanks, Rajiv. So as per our process, we are starting with this safe harbor statement that whatever is going to be stated in this meeting, that may vary depending upon many factors. And as far as the strategic review from our parent entity is concerned, we are -- we keep updating the stock market as well as the shareholders about any updates. So nothing to be relied upon as far as this meeting is concerned. We have to apply your own data analysis. Over to you, Krishna.

Thanks. Thanks all for joining us in terms of this thing. A couple of ground roots in terms of today's conversations. Rajiv has clearly said that what is the safe harbor statements. And we will [indiscernible] ourselves -- so we'll confine ourselves to discussing on the proposed transactions. That's the objective of this conversation. And in case any questions revolving around the transaction, which we are intended today to do, which is -- then we will take the questions. And then, of course, we'll complete the session, then we can have an informal [indiscernible]. Thank you. So coming to -- previously, last time we came to the investors seek for their special approval in terms of mandate is that in 2017, '18 and we intended to divest the Chemicals business with the objective to focus on the core of the Paints and Coatings businesses. Thereafter, in line with what we explained to the investors during that meeting, we continued our revenue growth trajectory of around 6% in the last 5 years, CAGR of 6%. EBIT CAGR has been up from 12% to 15% post divestment. And if you see we ended up EBIT at around 13.9% in '23-'24 against the 8.8% of 2017-'18. So there is a continuous improvement on a year-on-year basis. It's not built on 1 year, but it's across the years, there is a continuous improvement which is there. And EPS has significantly shot up from INR 44 to INR 94 over a period of time. And then we do strongly believe with the data set available in the industry that we are a best-in-class industry in the Paint segment in terms of the [indiscernible]. All this translated into stronger cash flows, which has been shared with the investors as and by way of the dividends. And overall dividend, if I add across the period of time is last 5 years is around INR 13.8 billion, which translates to around INR 303 per share. Moving forward to what has happened during the last year and the last 9 months, and how have we performed versus the paint industry of the listed space, the top 5 we have taken. Industry in '23-'24 has grew by around 3.8%, whereas we grew around 4.2%. We have [indiscernible] we've outpaced the industry. And the market share against paint industry. And as far as the current fiscal 9 months is concerned, industry has declined by around 2.7% on back of the price drops and the soft economic market conditions. And whereas we continue to grow [indiscernible] albeit there is a slight decline of the growth percentages happen but we still continue [indiscernible] in terms of growth of 2.7%. EBIT percentages minimum dilution which has happened on a year-on-year basis is [indiscernible] basis points versus the [indiscernible] basis points of the industry as a whole for the 9 months. Moving to next page in terms of the -- what we are trying to do now in today's conversation is that as you are aware, in October '24 -- in October '24, Akzo Nobel N.V. has announced that, that its intention to do the strategic portfolio review, which was disclosed to the stock exchanges. And the intent of that review is to redeploy the capital towards the growing its core Paint Coatings business. And with the initial focus of South Asia, this was disclosed. And there is also a strong clarifications which was given during the announcement -- Akzo Nobel, and we recognize that India is outperforming the industry. It's in the sweet spot in terms of this thing. At the same time, there is a strategic mismatch between the group's priorities versus the India operation. So that has the India operations or the Decorative Paints for that matter that has led to this. And there is -- then moving forward, the initial outcome of the -- so the strategic review continues with the internal assessments in terms of how does the portfolio fits in, where does it fit, what are the gaps which are there? What are the things which needs to be prioritize. Then as an outcome of that, parent has come back to India entity somewhere in the early January asking that they would like to buy out the Powder Coatings business. And at the same time, they would like to buy out the International Research Center which situated out of Bangalore. And they also offered that intellectual property along with the brand would be sold to the Indian listed entity. So these three things, then we promptly disclosed it to the exchanges and discussed with the Board internally. And Board has authorized the key manager in person in terms of exploring the taking the necessary next steps and appraisal. So we did started the process in terms of engaging with the consultants and the legal advisers in terms of what it would entail in terms of the valuation piece, okay? The rationale piece and other stuff, Rajiv, then and I'll come back to valuation.

Yes. So look, I think Powder Coatings, we are designed to keep it because globally, we are a market leader with a market share twice the #2 player. And it's got a lot of distinctive technology, raw materials, et cetera, which we obviously want to keep it internally. So that's the reason we've decided -- Akzo Nobel has decided to that reach -- they will create another unlisted company in India eventually, which will house the Powder Coating business. And along with that, we also told them to keep the R&D center because it's a cost center, which only does 99% of the work for the global parent terms, Automotive and Specialty Coatings business unit, and they don't do anything for India. The R&D labs for India in each of the business are separate, like Decorative is in Thane, each of the Coating business, MPY, Marine and Protective or Industrial Coating or VR is in Bangalore. It's a separate team, right? So this is another team. We said that we had to spend about INR 50 crores, et cetera. So we got two agencies as suggested by the Board, by the audit chair of audit, we get two agencies. So we got KPMG and Grant Thornton, both are very reputed companies in India. And they came with the valuation and move to the next step. And Krishna will walk you through the valuation, but what to say what we want to do is to sell the two top ones which is in white field and buy off the one which will perform the deco IP rights and the net proceeds of that will be given to us. That's why I asked who are our shareholders. Shareholders are going to get quite a bounty. We just gave a huge dividend of, as you know, INR 70 per share for our 70 years in Akzo Nobel India. And over and above this, before the transaction, the global transaction of the company, there will be additional dividend that will come in, right? And Krishna will walk you through the rationale of how this has got done. Krishna?

Okay. So the valuation of exercise is done by two independent SEBI registered valuers KPMG and Grant Thornton, and while coming to the Powder business, it was valued at INR 20.7 billion in a blended approach of the market multiple and the discounted cash flow for the future investments. And the range came between INR 20.6 billion to INR 20.7 billion. So we chose the highest among that to get us say consideration for the period. And then coming to -- INR 20.7 billion. Then the INR 20.7 billion translates into around 24.5x of the EBITDA from the last reported numbers.

Almost 5x. 4x to 5x the...

5x of the...

Powder is about 10% of the overall company. So about less than [indiscernible].

And R&D center, as Rajiv has explained, it's a captive R&D center who does the development activities for the Automotive and Specialty coatings -- Specialty Coatings BU and...

It's not research, it's more development. It's more -- yes it's very one -- only one senior manager. The rest are all basically young staff who do a lot of the programs that are written outside, they do it in India because it's like -- obviously, India is the right place for global business in India. GLCs and GBS are flying. So it's like that. They do all the -- what is conducted globally in terms of [indiscernible] they do all the tests in it. That's basically...

So the valuation range is between...

What was the EBITDA multiple for Powder Coatings business?

It's around 24.5x.

Around 25x. 24.5x.

Is it trading EBITDA?

Trading EBITDA.

24x EBIT.

24.5x.

So for -- as a governance process, the detailed valuation reports are available on request for all the shareholders.

For shareholders, you write to Rajiv Jha, and we'll look up. So together, you have to be a shareholder.

Coming to the valuation of R&D center, it came landed between -- it's a discounted cash flow method and landed between INR 579 million to INR 700 million. We took the highest of that thing.

So we've taken the highest of what we sell and the lowest of what we buy. We said that's the best for the minority shareholders, right?

So moving forward to the Decorative IP rates and the brand, the valuation ended up around INR 11.5 billion. The method of [indiscernible] here is that royalty relief method. Presently, we do pay a royalty of around 3% to the parent. Post this approval and execution of the transaction, we will not have to pay any royalty and range of valuation is between INR 11.5 billion to INR 11.8 billion and we said it will be INR 11.5 billion. We buy out the process. I do pause here and seek any clarifications, questions in the topic for which we have gathered here together.

So the IP right of Decorative paint business, which is bought, it's for the lifetime or any take away...

It's a full transfer perpetual -- perpetuity.

Perpetuity.

And India covers Nepal, Bangladesh, Bhutan also. Akzo Nobel in future will never enter in Decorative business as a fact...

That will be done by the time of the file. That's nothing to do with the listed entity. We have only done powder. So at the time of the powder business, we have put that there is no compete for 3 years is what we...

For listed company.

For the listed company, once we -- because we are selling that to [indiscernible]. On the other part of the transaction, it's a global transaction. So we have...

So the question is clear. As far as the IP transfer is concerned, it is coming to the Akzo Nobel India Limited as a listed entity, okay? The question of noncompete doesn't arise as Akzo Nobel holds 75% of the listed entity.

When we say IP rights, what were the brands which are coming is?

It's Dulux predominantly and there is a list of...

That Industrial brands...

No, it's only decorative piece.

So the INR 990 crores net inflow into Akzo Nobel listed company post tax or...

Pretax.

Pretax. What is the taxation impacts?

Taxation impact would be around 14% of the purchase consideration -- of the sale consideration.

14% of the sales consideration. Purchase consideration you don't...

No, that's a [indiscernible] tax.

Clear?

Can you throw some light on how we arrived at INR 11.5 crores for the IP rights?

It's a relief from royalty. As I explained, we do pay a royalty of 3% on the decorative paint sales value. And post this arrangement, once the complete perpetual transfer of the brand and the royalty -- brand and the IP rights comes into the picture, the royalty cease to exist. It's cease to exist. So there is a valuation metrics which has been arrived at based on the future projections and how much is the leverage comes on that, discounted cash flow.

What is the asset base of Powder business which is going along with this?

[indiscernible]

When you say the asset base...

The powder business is...

It is there in the detail. Krishna is right that for shareholders, you can just write to Rajiv Jha. So you can submit.

One question. In the powder business, does it have any dependency on the rest of the industrial business?

Absolutely in the [indiscernible] business going forward and around powder businesses. There's no dependency. Technology is completely different. Manufacturing process is separate.

Facilities as well.

Facilities as well, largely.

Is written one which was there in [indiscernible]

Gwalior.

Gwalior.

Gwalior.

So we have three sites. One is Bangalore, Thane, and then Gwalior. Gwalior is the recent one.

In [indiscernible] deco rights [indiscernible] of perpetuity come Akzo Nobel.

Yes, you are right.

Okay. And there's no noncompete as per like in the case of Powder Coatings?

Powder Coatings business is concerned, business transfer equipment would be Akzo Nobel India Limited as it's divesting the Powder Coatings to Akzo Nobel N.V. would not be participating in the Powder Coatings business for the next 36 months post execution.

That's the transaction between ANIL and [indiscernible]. The other transaction has nothing to do which we are...

It's a well-established process.

It's a different process.

So, I think only [indiscernible] brand transfer. Not let's say any knowledge transfer...

What do you mean by knowledge?

Including the knowledge transfer as well.

Just in terms of...

All. Everything is included.

So incrementally would be parent, let's say, [indiscernible] would they provide you any manufacturing know-how excellence...?

Currently, there is no additional manpower. over the last 3 years, our R&D -- we have built a very strong capability in R&D India. And suffice to say the R&D India today leads the thought leadership on many of the new products, formulations, et cetera. So it's been a reverse. So land, brain drain. So there is limited. Like, for example, the entire Aquatech, Dulux Aquatech waterproofing portfolio has been created and crafted in India, not -- there's no knowledge transfer that's happening.

INR 100-odd crores. Give or take, INR 100 crores are stayed in if we're taking our [indiscernible] for taking it's -- I was trying to understanding of this relief from royalty, what is [indiscernible] for taking the [indiscernible].

It's fully detailed in the valuation process. You can have a look into it.

Any other questions on the topic?

In the context of R&D facilities that we now sold [indiscernible] or it's loss-making entity or was it...

It's a completely captive consumption center. So the cost of the R&D facility is [indiscernible] and in the Bangalore for this particular item which is under the cargo. The entire cost gets recharged to the Netherlands. 12% markup is the profit which was realized in the listed entity.

Okay. Okay. But nor there any significant...

Any questions, particularly from the two shareholders because the idea was to brief you both. Of course, happy to take the questions from everyone. But it's not as simple as you said. Because remember that it's not really from royalty, it's not just 10 years because the deco royalty is approximately INR 68 crores, INR 69 crores. It's not -- it's also growth. So there is a factor of growth for the next 5 years of 11% ahead of market. And there's a technical so there's a calculation. That's why it's -- I think in the interest of time, it's better that Rajiv sent that note, you can read that note. It will explain to you how it is. Good. So are we done with this? Then we can sort of close this session and move to any other questions that you may have. As just Rajiv mentioned in the beginning, we are not going to talk too much about forward statements, et cetera, because the purpose was really to meet all of you and run you through what's our thinking is. But happy, and since we are here to take questions that you may have, any other questions on the business or anything else. We also have an interaction with all our investors on a quarterly basis, and we've stuck to that, right?