Kansai Nerolac Paints Limited (500165) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Kansai Nerolac Limited, hosted by ICICI Securities. [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, and over to you.

Thanks, Ruthuja. On behalf of ICICI Securities, we welcome you all to Q3 FY '21 results conference call of Kansai Nerolac Paints. We have with us today Mr. Anuj Jain, Executive Director; Mr. Prashant Pai, Director, Finance; and Mr. Jason Gonsalves, Director, Corporate Planning, IT and Materials. Kansai has seen very strong recovery in both the segments, that is, decorative as well as industrial with strong volume growth as well. We congratulate them for a strong turnaround in the business and -- rather quick turnaround in the business and posting a strong set of numbers in this quarter. Now I hand over the call to Mr. Anuj Jain for his initial comments, and then we will open the floor for Q&A. Thanks, and over to you, sir.

Thank you, Aniruddha. Good morning, everyone. Welcome to all of you to Kansai Nerolac investor call for quarter 3 of financial year 2021. Our best wishes to you and your family for this new year. During quarter 3, we recorded top line growth of 18%. Decorative and industrial both are in similar range. Just to give you some quick highlights of decorative. The volume growth is 3% to 4% higher than value growth. Demand continued to be better in smaller towns. And in addition, Tier 1 and metros also picked up in quarter 3. Some of the key actions from our side in decorative in quarter 3 was emulsion did well and, to an extent, the product mix was better. We launched a few new products. So one of them was Beauty Gold Washable, which has antibacteria property, very good washability. And the consumer proposition what we had come out in the market was, saaf bhi and safe bhi. It goes very well in the current situation. We expected a range of construction chemical in our network -- retail network and introduced new products. And with this introduction of new products, we are almost completing the basic range of products in the Construction Chemicals. We increased number of tinting machine counters in quarter 3. Our area of concentration in decorative is on distribution, new products, new segments like construction chemicals. Coming to industrial. Automotive demand picked up significantly in quarter 3, led by passenger vehicles. Tractors also did well. Overall production growth as per SIAM is around 17% in the quarter 3. Other industrial businesses, non-auto industrial businesses also recorded good growth, good recovery in the quarter 3. Our area of concentration on industrial is on new business, niche segments like coil coating, functional powders, high-performance coatings, specific products in high-performance coatings and increasing share in the existing accounts. Coming to subsidiaries. Marpol, which is in powder; Perma, which is construction chemicals; Nerofix, which is adhesives, all businesses recorded high double-digit growth in quarter 3. International subsidiaries. Nepal recorded a very strong growth, and Nepal, in fact, took quite long to come out from the lockdown stage, but in the quarter 3, they recorded a very strong growth. Bangladesh, we continued with our good run. Quarter 2 was good, and quarter 3 also, the good growth we have seen. Some of the other point which I would like to mention is that we continued our focus on cost reduction and judicious overhead management. That's the need of the hour, and we continued our efforts on that. Customer visits are normalized. We continued with all precautions and guidelines related to safety in our factories and other offices. Capacity utilization in this quarter went up to approximately 68%. Coming to financials for the quarter. The company has shown a growth of 18%, as I just spelled out, over the corresponding quarter of the previous year. EBITDA, we had a growth of 51% over last year quarter 3, which is up by 430 basis points; and PBT, the growth of 56.8% over quarter 3 of '19-'20. Outlook for the coming quarter -- the coming time. I think the sentiment -- consumer sentiments are positive. The number of cases are going down. And with the vaccine availability, the sentiments are positive. Raw material prices are firming up. There is inflationary trend across. And area of focus for us will remain new segments, new products, digitalization and cost optimization. So that's what we'll continue and, along with that, the cost optimization efforts that we have been taking forward in all the quarters, that will continue. So that's the brief about quarter 3. And thanks, all of you, and I invite questions now.

[Operator Instructions] The first question is from the line of Anshuman Atri from PremjiInvest.

Yes. This is Anshuman. My question is regarding the growth momentum. Given that we had a lower base last year because of weakness in automotive and some issues in our western market, do you see this growth to improve going forward given that the market leader has seen almost 33% increase in volumes?

So Anshuman, as I said that if you look at -- because the paint industry growth is closely linked to the economy, and if you look at all consumption indicators, whether it's the GST collection or the electricity consumption, all are indicating positive. So I think sentiments are positive, and we hope that this momentum continues.

Okay. Perfect. Secondly, on the raw material side, what kind of inflation do you see in the next 2, 3 quarters? And will it warrant you to take some price hikes?

Yes. So it's a -- inflationary trend is there, and I think the impact is seen. We have already started approaching our customers for the price increase. So I think the price increase will be required looking at the inflationary trend.

On both sides, sir, you have initiated on the decorative and industrial?

Yes. In all businesses.

The next question is from the line of Avi Mehta from Macquarie.

I had 3 questions, sir. First was on the gross margin side. Could you explain the process of price increase in the industrial customers? And when do majority of the price increase is going to take place? Is there a timeline for that?

So process for the industrial customer, ultimately, what happens is that when we get the clarity and when we see that how the pricing is getting stabilized and then we take up because in the industrial customer it is one-to-one basis, there is always some lag. So -- because you have to explain the logic and what the market trend is and what is going to get stabilized in the coming months. And then we take up with them and the discussions happen and that is how we arrive at the price increase.

Sir, typically, these contracts are for how -- what duration and pricing contract, for duration of, what, 3 months, 2 months or there is no duration like that?

It's very difficult to comment like that. It's customers to customers and depending on the situation. As I said, in certain segments, we have already implemented the price increase. So it's very difficult to say generally.

Okay, sir. Sir, the second part was -- second question was on the -- we understand that the recent pickup in the decorative is being led by the economy segment in the merchants category. Could you kind of share your thoughts on, a, whether this is correct; and B, how do you see this segment behaving? And what initiatives are we taking in this segment?

So I think if we see now quarter-on-quarter, there has been a gradual movement. And I think mostly all the categories are giving growth, and all the categories are showing the performance. To some extent, exterior categories are still a little lower. So I think, partly, we can say that earlier, these small towns were contributing to the growth. Now even the bigger towns are joining, but the growth is still continuing to be higher from the smaller towns. So I think it is coming to the normalized level. And assuming that the situation remains under control related to COVID with the vaccines and the number of cases coming down, I think it should get normalized now and all the categories will show performance.

So you mean -- if I hear you correctly, sir, you would argue that growth will become more broader-based rather than the economy like the way it is right now? Is that...

Yes.

Okay. And sir, just on the second bit about -- in the economy segment, what all have we launched or what are our product mix at Soldier? If you could kind of give us...

So there's a complete range in the Soldier. There are emulsions in the economy category. There are the putty segment, which is quite large. There are primers. There are -- a lot of other ancillary products are there. So every product that -- because, ultimately, in the paint industry, there are 3 categories within the paint: premium, popular, economy. And economy range also has all the range of the products.

Okay, sir. And sir, last question is on this recent entry by Grasim, which is in the paint space. A, your thoughts on that; and B, your thoughts on -- some players have highlighted products for a particular surfaces like ceiling-specific paints. Are we looking at such niches? That's all from me, sir.

So the paint industry, though it's a big industry, but if you see per-capita consumption in India, it's still low. I think it's about 4 kg per person, and it takes almost 5 to 7 years to increase the consumption by INR 1. So the more the merrier. That's always the principle of the industry. I think more number of players, there's more number of -- there's more noise and more awareness and, ultimately, it helps to expand the industry growth.

And sir, on the surface-specific coating, do you consider such a niche also?

It's like product expansion because, ultimately, every year that we launch new products. And ultimately, the basic products have already covered the market. So I think there's always a trend to get into the niche areas and look at what kind of surfaces and what kind of niche areas can give the growth. I think that's an ongoing process. And every year, we come up with a product. In the last 1 year, the number of new products we have introduced has gone up and a lot of niche products we are getting into because earlier the technology was playing more role in industrial segment, a little less in decorative because people used to go for the basic paint. But I think with the increased awareness, people are giving cognizance to some of the features, and in that line, a lot of new products with the niche features have been introduced or being introduced.

Sorry, sir, you are [ running ] niche features, right? I mean all your products have been with very good quality features. It's more [indiscernible] but it is not surface-specific. Like you are not launching something only for floors, not only for [indiscernible].

So what I'm saying is that, okay, one is the features. Sometimes what happens is that -- what is ceiling? Ceiling is probably the -- one of the existing paint, but then one can focus on the surface, the specific surface because ceiling has a requirement where probably you need little more whiteness, but a little matte so that the abnormalities on the ceiling is not seen. So that's a matter of -- that you decide which project goes well with what kind of surface, and that is how people introduced. So it may not be specific. I'm not answering specific to ceiling paint, but I'm saying that there are new products which are going to focus on the surfaces are going to focus on the features.

The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

Congrats on a good set of numbers. Three questions from my end. So firstly, you said that auto and industrial, obviously, saw a very sharp recovery in terms of demand. How much as per your analysis it could be actually -- how much of it will be pent-up and, to an extent, how much it could be probably sustainable? Because the first quarter, we've seen that demand revival happening. And given that the base is also fairly low in coming quarters, what's your outlook on that?

So there is no right number to put what is the pent-up demand, but it's a mix of pending demand plus regular demand. The only thing that now since the situation or this pandemic situation is getting normalized and the growth of economy is coming back, I think, as you rightly said that base sector also would play a role, so we hope that the situation continues.

Is it suffice to say that unlike the past or, let's say, pre-COVID, you were already struggling on the auto side, at least those things are pretty much things of the past right now? Can you probably now expect even if the base normalizes, you would be relatively better [ growth ]? Can that be a fairer assessment now?

Outlook is positive.

Okay. Okay. Sure. Sure. Sir, secondly is on the waterproofing part and the other additives and all. Could you probably throw some light on that part in terms of how much could have that contributed to growth and how much would they be as a part of our overall revenue at this point of time?

Did you say about construction chemicals?

Yes, construction and waterproofing.

So construction chemicals is a large industry. And generally somewhere, people say it is about 7% to 10% of the paint industry. The consumption comes from the construction chemicals. We are a new player. In fact, we have acquired a company Perma Chemical, who was into the -- Perma Construction Chemicals, who was into the construction chemicals, and they have a complete range. Using their technology and the product range, we have started launching the products. And it has a very big range of products because every problem needs a different kind of solution. So a very large number of products are there in the retail and the project. And gradually, we increase our range. As of now, difficult to say because the contribution to the paint sale may not be very high, but gradually, it is increasing.

Any numbers in terms of growth rates in the overall pie, which is your waterproofing and your construction...

Base is very low. And since we are at the introduction stage, we can't talk about the growth because there's no base.

Okay. And last question from my end, sir. You spoke about a lot of cost initiatives being taken and that probably is still helping out. Just wanted to understand how much of this is still left going forward. And also the fact that what are the costs which you're probably expecting to see a comeback? Or how much of it actually still come back in terms of cost? Because we've seen a fair bit of containment on the cost front, both on other expenses and employee costs. So any comments on that would be helpful.

So we had exercised controls on fixed and variable, both. And as you rightly said that when there's a problem, ultimately, the innovation comes at the problem stage. So I think some of the elements where we have been able to work out a solution will stay. And some of the costs which were purely related to nonfunctioning of the thing in the first quarter will definitely come back. But I think some of the controls which we have been able to exercise, some at least we'll be able to continue.

Any idea in terms of incrementally [indiscernible] probably may be sustainable?

Sorry, I didn't get you.

No, you said you've worked on some of the elements. Could you just say which of these elements you have worked on in terms of -- or do you have any stated target in terms of what you intend to stay for the next year or so? Is there anything about that?

We can't put the numbers to that, but only thing I said is that we have leveraged this opportunity. And some of the costs I'll just give example like travel. Earlier, in fact, people used to do a lot of travel related to -- customer visit will continue, but I think if you really look at the meetings and the new digital way, those costs can be controlled. And along with the travel, the hotel and all these things can come under control. And there are some other things that -- where a lot of automation is happening. And therefore, with that automation, you are able to balance out the cost and some of these things will continue.

The next question is from the line of Abneesh Roy from Edelweiss.

Sir, first question is you have gained market share in auto coatings and powder coatings. So again, who you have gained and what is the reason? Is it because your OEMs have grown faster than the industry? Is that the main reason?

So it is basically that, as a strategy, we worked on the new businesses, and new businesses could be a part of the existing customers or the new customers. And technologically, we are very strong there. And also, our proposition to the customer is a service because we have multiple plants. So I think we have areas of strength and using that areas of strength, we have been able to expand our base.

Sir, second question is [indiscernible] seeing a good revival across cities. So would your market share in the B2B part of deco be higher than the B2C part? Are you ramping up your teams in any of the cities because of the revival? And what would be your view on revival? Is it more short term? I'm just asking for you. Obviously, no one would know. But do you think this is a more structural revival, so 2, 3 years revival at least?

So I think the initiatives our government is taking seems to be a structural revival. But partly, I would say that because, generally, this B2B business is more in the bigger towns, and last year, in the first 6 months, the works have virtually stopped, to some extent, you'll see a pent-up demand. So for some period, we do see that work which has not happened and, obviously, any big building is to be painted, people can't ultimately stop it, it can only be postponed. So for some quarters, there is a possibility of pent-up demand. But this B2B business is not a very high contributor to the total paint industry. It's within 10%.

No. But my question was are you over-indexed or under-indexed versus the B2C deco in B2B part?

We are similar to our market shares in this segment also.

Right. That is helpful. Sir, next question on Grasim's entry. So they spoke on innovation in terms of the tinting machines. So I'm asking in terms of your own strategy, have you tried out? Because you're also a #3 player, much smaller than the leader. So have you also tried the innovation in tinting machine wherein instead of a dealer end, you have more localized [ debut ] in the cities? Does it work? Any thoughts on that?

No. Our approach is basically to provide the tinting machines to the dealers. That is what we do. Because at the end of the day, the customer comes to the dealer shop and whatever shade is required, the dealer has to tint at the shop and provide the shade to the customer. So our approach is basically to provide the tinting machine to the dealer.

So the innovation doesn't really work, right? Otherwise, you would have also tried it.

I can't comment on this because, ultimately, tinting machine is, what, it's like, you can say, mini-factory, and there is an opportunity provided to the dealers that they can keep less inventory and whatever shade requirement is there from the consumer, instantly they can provide that. So it's a facility to provide larger number of shades with -- keeping the lower SKUs at the counter. So that's the requirement and that's the solution from our side.

No. My question was just like Swiggy, Zomato or in the restaurant business, localized dark kitchens are there. So you don't need to have presence in every shop. You have, say, 6, 7 places in any city, just an example, and then you try to fulfill the demand like that. This way, you can work on the handicap of having tinting machine in that dealer.

You know that -- because we have been providing tinting machines for so many years and almost 65% of our counters already have machine. And so any counter who has a potential, he works without -- with machine because without machine today it is very difficult. So what you're raising the question, what is the need of that because the people have the machine and they are able to service the requirement of the customers.

Right. And sir, last question, these 3 new products, these are something which you didn't have a presence. So how does it compete with the existing, say, market leader in terms of, say, pricing or positioning? Is there a difference? Or are you just closing the white spaces in your portfolio?

It's a mix of that. Somewhere we are just closing the gap. And in some cases, these are -- as I mentioned that Excel Virus Guard we introduced, it's definitely a different product. This Beauty Gold Washable, which we have launched, is a different product, a different price point. There's another product which we introduced, Suraksha range, which is dust resistant. So maybe the feature exists, but it's in the -- as I said, paint has premium, popular and economy. So somewhere what happens, some of the features were existing in the premium range and now there is a scope to expand those features in the category of popular or economy. So these products are falling into these areas.

The next question is from the line of Jay Doshi from Kotak Securities.

Yes. I have a quick question on raw material price inflation. So I understand that bulk of the inflation is largely due to shortage of monomers, which affect emulsion's portfolio significantly. So are you witnessing acute inflation in only emulsions within decorative paints? Or are you seeing similar inflationary trends in the industrial coatings as well? So essentially, I don't -- I'm not aware about the raw material composition or raw material basket of industrial paints and what is the level of inflation there.

I request Jason to take this question.

So the inflation is both in the decorative as well as the industrial segment. So basically, there are global supply chain challenges on various types of raw materials. So currently, at least in the last quarter, we have witnessed inflation in both the areas.

But similar extent or is it...

Yes, similar extent. And not across all raw materials, but in certain categories, there is definitely inflation.

Understood. And I understand that auto players, in particular, are facing other commodity inflation as well in terms of metal prices. And the demand has recovered, but still there is some uncertainty or tentativity there. So is the environment conducive for you to engage into price increases with auto OEMs? Or do you think you'll have to absorb a part of it for the time being?

No. As you said that in this situation, it is important because inflationary trend is going to be there. And obviously, we are waiting to see that -- to what extent it is going to get stabilized. But having said that, the price increase would be a requirement and, to a certain extent, we have already started getting into the engagement and discussion with our customer to see that -- how much can be done. And obviously, it has to be a win-win situation. And at the end of the day, whenever this inflationary trend is there, obviously, one way we work is in terms of seeing that -- how much is right increase from the customer point of view also. Obviously, it's from our point of view also, but from the customer point of view also. And then we increase our work in terms of the value addition so that we are able to -- to the best possible, we are able to offset the trend.

And final one, what is your -- what is the visibility you have? Or what is your outlook on RM inflation? Is it transient, maybe will last for another quarter or 2 or it's difficult, you don't have that kind of visibility at this juncture?

Jason?

No. So what we are seeing is there are challenges across the global supply chain. Those challenges are partly due to COVID, which are there across. So these trends are likely to continue at least in the immediate future. Now how the vaccine plays out across various countries, we will have to wait and watch. But at least as of now, the visibility is not there -- or the visibility is there that the inflation will continue.

The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.

So first question, these newer categories of, say, adhesives and waterproofing, as you mentioned, the base is low. But probably the -- I mean the applicators that you are targeting are different from, say, your existing products. So in that context, despite lower base -- do you think we can grow faster despite lower base? Or -- I mean the growth should be incremental and very gradual because of altogether a different applicator being targeted?

So when you talk about the waterproofing, there are 2 parts of this: one is the existing applicator because a lot of painters also use this product and then there are incremental or extra applicators. So I think the first task is that whatever distribution we have because our strength is our existing distribution, and through that existing distribution, the existing applicators. So the first task is to leverage that, that how fast with the entire range we can expand into our existing distribution and through them the existing applicators and then parallelly start the work of the new applicators. So I think the first, we are going to leverage the existing itself and that's also a good market.

Okay. Okay. Understood. Sir, second, on powder coating or, say, any other product, I'm just thinking aloud that with a lot of thrust on manufacturing a lot of [ carbon ] imports, especially on consumer durables, any -- so any benefit you are seeing? Any increased inquiries or increased interest or that is too small a segment for us to move the needle at a company level? So any thoughts on powder coating or any other coating that is being used for import substitution products?

So generally, just to mention about powder coating, it's a strong business for us, that we have a leadership position in this particular business. And there's a lot of shift in the auto ancillaries, which is happening from the liquid paint to the powder coating. And to that an extent, there's a lot of work happening on the functional powders. There are some new categories like rebar and pipe coating, so we are working upon that and, therefore, expanding the range into the area of the functional powders. Other than powder, there are some areas where we have worked upon coil coating, where we were not there 4, 5 years back. We made the entry. And there are certain other niche products in the high-performance coatings. Today, the metros are coming up expanding into different cities. The Mumbai Trans Harbor Link is coming. So there are different kind of requirements, which are coming up for these kind of projects and, therefore, it gives us a leeway to work on the technological product and provide to them as a solution.

Okay. And just a follow-up on this. So whichever competitors in decorative segment for this kind of industrial products, the same competitors compete for the customers or the peer group is different? You can share some thoughts on it. I mean does it become more smaller peer group and competition or a different player than these 4 players?

So existing players are definitely there. But in that area because that works like a niche. So there are a lot of niche players who have a specialty into different technologies. So to that an extent, the basket is a little more.

Okay. Understood. And sir, just last question. Just drawing a parallel. So there are a few contract manufacturers for, say, white good products. And what they say is that from the brand, they get visibility of, say, at least next 6 months, but -- broad-based visibility. And they get a production schedule for, say, next 45 days, so -- which is very clear what they are going to produce as per their contracts. Now just drawing a parallel. So from -- in our automotive division, so what kind of visibility do we get? And how do we get the, say, demand projection? I mean how do we -- how do we project the demand? And what is the visibility as far as months or weeks or quarter is concerned?

There are 2 ways. One is that there is an industry body, SIAM, that -- and they keep doing study and then they provide the trend for coming 2, 3 months. And obviously, internally, we do get the position from our customers. So -- but the position changes because, ultimately, what happens is there is always some volatility in this situation, and today, what you project, tomorrow the situation may change. So we do get the projection, but I think we balance out in terms of understanding from the industry bodies and from the customers and the regular trend, and that is how we estimate our demand.

The next question is from the line of Bharat Shah from ASK Investment Managers.

My question is about competitive position in the decorative side of the business. So if you take a long-term picture into consideration, both the market leader like Asian Paints and the second significant player, Berger, they continue to grow their business either equal or faster than Kansai. In other words, Kansai, in the decorative part, what does it need to do to gain the competitive ascendance? Because both the players have displayed agility and strong distribution and performance in the marketplace. How does Kansai kind of competitively position itself to gain relative ascendance in the picture? Especially now considering that even somebody like Indigo in decorative paint is kind of closing the gap between Kansai and itself, where do we see our position?

So the first thing what I can say is that if you see over a period of time because periodically it changes, but over a period of time, in this industry, the shares are intact so -- over a period of time. And what happens is that we have our own strategy. We have our own market mix. We have our own product mix. And there are market dynamics which changes in terms of the market may expand the product mix. And that is how in certain periods you see a particular change. But what is important is that we have our own strategy in place, and there are areas of strength, and we continue to focus upon that. And as I said, over a long period of time, if you really see, the market shares are intact.

And let's say, if we take a picture of, say, 5 years back, what are the competitive share positions then and now?

Very difficult to speak on these kind of things, but I can only say that we have our own strategy in place and that we -- now the strategy goes into our product, goes into our distribution and as I said that our past demonstrated that over a period of time that -- because the differences comes in terms of the mix. So there's definitely a strategy in place, and we continue to work on that, and we have our own focus areas, and we'll continue to build our strength on that.

No. Sure. I mean every company will do that. What I'm trying to understand is, what are those differences which will permit us to believe that competitively our share may rise? Because if these are larger competitors, hopefully, we should be in a position to, hopefully, lift our share if our strategies provide us an edge over the competition. So what are those strategies and whether we believe that our share can improve?

No. How do we talk about future? I can only tell you that if you look at, say, last 5 years' time, okay, our market share is intact. So there's no change in the market share. In fact, we may have slightly gained the market share in the last 5 years' time. So that's the one thing which I would say. And when you say the advantages, what happens is that it's a 100-year-old brand. So there is a brand equity which is built. And it is higher in certain market. It may be medium in certain markets. So when you build this kind of equity, ultimately, that becomes your strength. And with the equity, you have the distribution. And what you'll then keep adding is the -- another strength what we have is the technology, and that's how we demonstrated our strength in the area of automotive and the industrial businesses. Now in the decorative, earlier, the role of technology was limited, which now it is expanding. And being a part of Kansai Japan and as a global company, I think we have access available to all kind of technology, all kind of product emerging trends. And that's what brings the differentiation.

The next question is from the line of Amnish Aggarwal from PL India.

Yes. Congrats on a good set of numbers. I have a few questions. So my first question is regarding the overhead which you have indicated in our PPT, which is on Slide 8. Despite our top line growing by 18%, our overhead in absolute terms are down from INR 205 crores to INR 187 crores. So my question is that is this due to some initiatives taken by us during this pandemic? And will it result in some structural reduction in costs going forward?

Prashant, will you take this question?

Yes. Anuj has already answered this question, but still let me just clarify. As the pandemic started, we had a detailed study of all our expenses, and we have classified all our expenses into fixed and variable. A lot of stress was given to how do we reduce our fixed expenses. And there we got a fair bit of success. And as far as other operating expenses are concerned, specific tasks were given to all the departments and everybody worked on it and we could achieve it. Now going forward, whether we are going to -- whether it's going to sustain? Yes, of the fixed expenses where we had taken some innovative ways of reducing, I believe some reduction will be available in the future. But on the other side, the ongoing ones will continue.

Okay. So it means that quite a bit of these savings will remain with us even going forward.

Yes. Fair bit I think we should get, not all. But as the business grows, we can't constrain the expenses, but at the same time, what is required will be spent.

Okay. Sir, my second question is can you share with us the exact quantum of volume growth both on the company as a whole and the decorative and industrial side?

So -- no, as I already said in my commentary that in decorative, the volume growth is 3% to 4% higher and, generally, in the industrial area, the volume growth, value growth are in the similar range.

Okay. But sir, any quantum of how much of the overall volume is for the company?

Can you repeat the question?

The overall volume growth for the company?

So overall volume growth would be about, say, 2% higher; in the decorative, 3% to 4% higher.

Okay. Okay, sir. And sir, my final question is that in the nonpaint segments, particularly your waterproofing and adhesives segment which we have entered through acquisitions or otherwise in the past 2, 3 years, so what sort of a path on scalability are you looking at, say, in the coming few years? Can it be, say, a sizable business accounting for, say, 10% of the top line in 5 years? So what kind of a path are you looking for those segments?

So I'll not put any number to it, though, I can say that it's a good segment, and paint industry has already got the traction in the construction chemicals. And as we started from last year in our network, we are also getting a good acceptance of product range we are expanding. So in terms of incremental business, we see some good contribution.

The next question is from the line of Kunal Bhatia from Dalal & Broacha.

Yes. Sir, I had one question in terms of your gross margins and the related EBITDA because, sir, you did allude to the fact that now since the things have normalized, so your premium portion of your paints would go up with Tier 1 and urban picking up. So taking into account the 2 aspects, one, raw material prices increasing and the premium paints also going up, what would be your outlook in that context? So on a quarter-on-quarter basis, what kind of inflation you are expecting? I would expect more of a qualitative answer. I understand you can't give exact number.

Yes. So as we already said that the product mix going forward would be a little better because after the lockdown is lifted, the market started with the lower end products and slowly that emulsions have picked up. So with the situation getting normalized, the product mix definitely would be -- when we say better in the sense that will come back to the normal levels, that if emulsions used to contribute X percentage of sales, it will come back to that level. Because, otherwise, in the second quarter, third quarter, the product mix was towards the lower-end categories. So to that an extent, yes, it will help.

The overall EBITDA margin, can we sustain at these levels?

Prashant?

Currently, it's at a high level. So let's hope that how best we are able to maintain it, difficult at such a high level.

Okay. Sir -- and my second question was regarding you -- sorry, I missed out on your number for the current utilization levels of your capacities and...

About 68%.

What was the CapEx outgo for the current year? And if you could also give us the capacity, how much is the current capacity in terms of volume? And going forward for FY '22 and '23, what is the kind of CapEx and volume addition we are looking for?

Prashant?

So CapEx outgo for current year is expected to be around INR 200 crores, of which INR 60 crores is the maintenance CapEx and balance is the project CapEx. So we are on track on that. And maybe we should be close to the whatever we have planned like.

Capacity utilization is around 68%. That was your other question. 68%. And overall capacity, we have about 5.5 lakh...

Million.

Million. Yes.

And going forward, we are expanding to how much by '22, '23?

See, actually, in the recent past, last 2, 3 years, we have expanded our capacity in industrial and decorative, and we are quite equipped -- our current capacity is quite equipped to handle the market demand.

Okay. Okay. And sir, finally, just taking from your comment, you did mention that we are expanding our powder coating because the auto anc players are shifting from a liquid to a powder coating solution. So is it that it's lower on cost for them? Or what would be the main reason?

No. Expanding in the sense I said that there is a trend in the auto ancillaries that the customers are shifting because of a lot of reasons, convenience reason and the environmental reason, they're shifting the liquid paints to the powder paints. And so even in the liquid paint, some of our existing customers, the existing OEMs, we were the suppliers. And now it is being shifted from the liquid paint to the powder paint. Also, there are certain new segments which are coming up and where, in fact, because of our technical know-how, we are able to provide the solution. To that an extent, the new emerging segment we are able to cater.

And sir, are these solutions cheaper vis-a-vis the prior solutions, powder coating cheaper to the liquid coating?

So it's not cheaper. It could be the similar thing. But ultimately, it helps in increasing the efficiency and also it helps in terms of reducing, say, VOC levels. So there are indirect advantages, but the productivity advantage is there.

The next question is from the line of Shirish Pardeshi from Centrum Capital.

Yes. I think you have done a fantastic job. I'm quite amazed with the recovery which you have said. I just wanted to understand -- I mean there are many questions on volume growth. I just wanted to understand, qualitatively, we have been given to understand eastern part is doing well while the quarter 3 was very good for the southern market. So in your experience, which market has done better for you? And maybe if you can explain what kind of contribution to our decorative business comes from these 2 markets.

What kind of contribution? Okay. Okay. So our areas of strength are more into the northern and eastern markets. And also, our areas of strength are there in the Tier 3, Tier 4 towns, and these markets have done well for us.

Any comments on the growth part?

I think in the quarter 3, the growth was quite similar across all the markets. We can say that in the quarter 2 or quarter 3, maybe more growths were coming from the northern or some part of eastern belt, but in the quarter 3, I think it was quite across. Because initially, we have seen some of the market like west and south, especially the metro cities in these, markets have not been able to pick up the demand, but they also have picked up the demand. So it's quite uniform, I would say, in quarter 3.

Okay. Just a follow-up on that. I've been given to understand the northern market is the most complicated and most unorganized players which are available there. So obviously, the new find which industry has been banking on, the popular and economy emulsions last 2, 3 years, and there is a lot of new products which have got launched. So in your sense, will this demand will remain for a longer time? The shift from unorganized to organized within the last 2, 3 quarters. The MSME segment has really struggled from the liquidity point of view. So do you think that shift will continue for some more time? Or do you expect the competition from the unorganized players to come back?

So there is good strength in the unorganized segment also because they are very closer to the market, rural market where the companies are not able to reach. And typically, what happens, as we discussed, that the penetration of paint in India is still very low. And therefore, typically, the cycle is that from the no painting to the line, from the line to distemper, from the distemper to emulsion. And given the fact that the penetration is still very low, I think this trend will continue. And obviously, at one stage, what happens is that the smaller companies, they build the market for the product because they are closer to the market, they understand the market well. And once the customer graduate to a next level, then he shifts from the non-branded to a branded. So that trend will continue because the penetration is still low. So that cycle will continue.

Okay. One question for Prashant. You just mentioned that sustaining this EBITDA margin is difficult. In fact, rather, I was expecting the cost initiative what you have taken, you still have the room for growth here because auto OEM is really talking about throughput improvement, which will come definitely post the vaccine issue is sorted out. So in your thought, what are the sensitivity or what are the risks to this market? Or what is your fear that it may not remain?

See, the raw material cost is a major factor. You see a fair bit of our contribution of our sales comes from the industrial segment where the material cost is higher compared to the decorative part. And you know that when there's a B2B discussion happens, getting a price increase is difficult. It takes time. There's always a lag. We do get, but there's a lag involved. So that's the reason I said -- as Jason mentioned, there's an inflationary trend and probably a lot of raw materials are showing that trend, so we need to have a direct dialogue with the OEM customers and which -- for example, there are price -- raw material price is 5%, we may not get the entire 5%, we get 4%, 3%. So that's pure negotiation which happens. So from that point of view, I said there will be a pressure on the margins on such -- due to such cases.

And also, it depends a lot on the market dynamics that one has to keep watching the market dynamics and accordingly respond. So it's difficult to answer these kind of things. But I think depending on the market dynamics and depending on what Prashant is saying, that is how generally we work on it.

Got it. Just last question from my side. Most of the players have been banking on expanding rural reach in terms of dealer coverage, and you mentioned that you have also improved the population in terms of tinting machines. Do you have any clear plans? Or maybe if you can help me to understand what kind of, aspirationally, the dealer coverage which you are looking for next 1 year, maybe 18 months in terms of dealer coverage and in terms of tinting machine also.

So it's like, as I said, the distribution and in the distribution, the machine, that's an important part of this strategy. I think we've been increasing our number consistently, and we do have our plan to keep working on it.

Any number you would like to tell where is our current coverage or maybe aspirationally where do you want to go?

No, I would not put the number, but I said we do work quite aggressively on in terms of increasing the numbers of the distribution. That includes the dealers and that includes the machine, and we'll continue to work on it.

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

Sir, you spoke about competition from demand side angle that there's enough room to accommodate all. But competition has multiple dimensions and one is also from the resources side. So the kind of competition that has increased -- increasing and will increase, are you seeing early signs of competitive pressure in attrition or lack of available talent in market in terms of dealer recruitment or even securing RM supplies?

No. See, competition is a given thing in any business. If you look at the history, last 10 years, 20 years, 30 years, I think competition has been same. The companies have come. Some companies have performed. Some companies have not performed. So competition is always there. And I think that from the -- ultimately, in the business, what are we doing, we are serving the requirement of the consumer. So competition always helps consumers, and to help consumers, the industry always grows. So I don't think there's any -- when these kind of things happen, ultimately, you see improvement in the sectors what you're talking about.

So attrition is not a concern as of now for us?

No.

Okay. Sir -- and looking at the kind of capital which will hit the industry very soon, in fact, based on the announcement by Grasim, do you think that incumbents like us need to expedite our dealer expansion plan? Or we are comfortable with the earlier run rate even now?

No, I can only say that we have our own strategy in place, and we exist in this market for 100 years. And we have our own strategy in place. We'll work on it.

Sure. Sure. And sir, lastly, perhaps my question, but as a group, Kansai Global has participated or is participating in EVs? And does our market share in EV as high as the traditional vehicle markets?

So electric vehicle is a new emerging trend. And so there's a technology available. And as of now, the contribution of the EV to the total business is very, very low. But as you know that there are initiatives to increase the EV vehicle, the technology is in place. Even we have the technology to service EV customers.

The next question is from the line of Sagarika Mukherjee from Elara Capital.

Yes. Sir, couple of things. You highlighted that your volume growth in decorative is 3% to 4% higher while your volume growth in industrial is 2% higher than maybe the value growth. In that sense, then probably your both value and volume growth in decorative is probably lower than the market leader who reported 25% value growth and 33% volume growth in the same quarter, while we derive a larger portion of our revenues coming from Tier 2, 3, 4 cities. So sir, if you could just help me understand why the gap has come in this quarter. And in forthcoming quarters, also, this will be the trend where the demand will be higher from Tier 2, 3, 4 cities. So what's the reason of the underperformance?

So I can only say that as I said that in the quarter 3, I think the market like -- some markets like south and west, where the demand was not so good in the earlier quarters, that demand has picked up. And whenever the demand picks up, you also see some of the pent-up demand. And depending on the market mix, whichever company has whatever kind of market mix, it gets a due contribution. So that's it. The second is that if you look at the volume, ultimately, this volume contribution comes largely from the segment like putty. And as we said, in some of the areas like putty, the contribution -- the profits have gone down. So sometimes, that it's a kind of watch strategy you need to do because in the bottom of the pyramid, ultimately, it's a matter of pricing. It's not that what you -- if you want to get it today, you can get it today; if you want to get it tomorrow, you can get it tomorrow. So one has to keep a watch on the market dynamics, and if the market dynamics continue in the same manner, then one can respond accordingly. But in certain quarters, that you need to do -- understand and wait and see that how the market dynamics are working and accordingly you decide your course of action.

Okay, sir. I understand that. So then sir, in future also, is it correct to say that, let's say, our value growth in future also will remain a little lower than the market leader despite having higher [ tailwinds ] from Tier 2, 3, 4 cities? Because -- or if you could just give us some color as to how fast was the Tier 2, 3, 4 cities, in general, the demand was growing. Upwards of 30, 35, in value terms?

So what I would say is that, obviously, the smaller towns, the growth has been higher than the bigger towns. And even now the growth continues to be higher than the bigger towns. But in the bigger towns, because it took some time to pick up the demand and those markets have picked up the demand. Going forward, still the smaller towns will contribute to be better. In the bigger towns, up to a point, there will be a pent-up demand, then the demand will get stabilized or normalized. The second point is that, as I said that one should not read much on the quarterly numbers because, ultimately, in the long run, we have to see. And as of now, all the industry players, depending on the market dynamics, they participate. Some quarter, as I said, depending on some situations, what kind of mix you have, you may change your course of action. But by and large, we'll continue to be following the market dynamics.

Sure, sir. Just one short follow-up. Sir, in the first quarter or earlier on because of the COVID crisis, et cetera, we all, the whole industry actually helped out all the dealers with higher rebates and discounts. And for us, as per the first quarter disclosure, our rebates and discounts actually went up from 10% of sales to almost 14%, and post that, the disclosure was removed. Sir, any number that you would give us in terms of the rebates and discounts that you're giving currently right now and if our gross revenue has kind of suffered because we are giving higher discounts compared to others?

No comments. It's again a matter of mix. Because in the earlier quarters, the bottom products have performed well and, therefore, you see some reflection in discounts. And as the [ economies ] are getting stabilized, situation is better.

So sir, compared to FY '20, rebates and discounts, which were somewhere around 10%, 10.5%, you would say our 9-month discount rate is somewhere closer to that number or slightly higher, but not as high as 14%.

Again, it is because of the product mix and the market dynamics, as Anuj has mentioned. And this will be purely driven by market. Again, depending on the market, we will change our discount structure.

Sure, sir. And just final question. Sir, in terms of your client mix in auto revenues, we understand 60% of your auto revenues probably come from the market leader, Maruti. If you could just give us some color as to the rest of the clients. Who are your large clients in that? Is it more passenger vehicle? Is it more tractor? Is it more 2-wheeler or CVs? Just some color.

We have a good spread. So we are in the -- we are dealing with most of the large passenger vehicle manufacturers, 2-wheeler, commercial vehicle and tractors. So I think we have quite a good wide presence and wide base in most of the clients in all these segments.

Sure, sir. Then your auto revenue growth is probably in line with the industry growth. Is that the proxy that we should take as the mix -- a slightly higher if CV grows higher than that?

Yes.

The next question is from the line of Jay Doshi from Kotak Securities.

My question is an extension of the question asked by a participant earlier on the call. If I recall correctly, Nerolac was gaining market share in decorative paints between FY 2016 and '19. Then in the past 2 years, I believe you may have ceded some market share. And around the same time, I think your A&P spend as a percentage of sales has dropped and competition, on the other hand, stepped up focus on economy products. So the question is, are you worried that you may be losing market share or you believe share loss is insignificant and you will close the gap going forward?

So as I said earlier also, what we look at is over a period of time frame. I would now repeat it that if we look at last 5 years, our market share is better. And typically, what is happening in this market is that earlier, there was a paint, now there are new categories coming up. Now as an important player, it is always important to see that which market you need to concentrate upon and which mix you need to concentrate upon. So I think the market is expanding. Along with that, we are participating in the segments. And when you talk about this advertising and promotion, I think that was a part of our strategy because what you do is that, that time we felt that our brand needs to be strengthened. And once you reached to a particular level, there is always a possibility of making certain changes because you can't continue to keep spending higher and higher. You have objective in our mind and that objective once we feel that it is served and we have strengthened our brand image, I think the time comes to move to the other important parameters. That is what we are doing. And related to your -- the second part of your question, I think the market is expanding in many products, in many market mix. And it is never advisable to participate in everything because, otherwise, you have a risk to spread your resources thin. So the focused approach works better, and that's what we are now looking at.

Ladies and gentlemen, as this was the last question for today. I would now like to hand the conference over to Mr. Aniruddha Joshi for closing comments.

Yes. Thanks, Ruthuja. On behalf of ICICI Securities, we thank the management of Kansai Nerolac for an insightful discussion with the investors as well as analysts. Now I hand over the call back to the management for their closing comments. Thanks, and over to you, sir.

Thank you, all of you, for participating and having a discussion. And our best wishes once again for this new year, and hope all of you are safe. And best wishes to you and yours. Thank you.

Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.