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

Ladies and gentlemen, good day, and welcome to Kansai Nerolac Q2 FY '22 Earnings Conference Call 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, sir.

Thanks. On behalf of ICICI Securities, we welcome you all to Q2 FY '22 results conference call of Kansai Nerolac Limited. The paint industry suffered during COVID and lockdown, but the demand revived very sharply. However, the industry is now facing challenges of higher input prices. We believe the much awaited price hikes are happening in this quarter itself, Q3 FY '22 itself, and it will partially ease the pressure on profitability. Kansai Nerolac is likely to benefit from revival in decorative as well as strong recovery expected in industrial paints too. We continue to remain positive on the company. From the management side, 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. Now I hand over the call to the management for initial comments on the quarterly performance, and then we will open the floor for question-and-answer session. Thanks, and over to you, sir.

Thanks, Anirudh. Good morning, everyone. Seasons greetings to all of you. Welcome you all to Kansai Nerolac investor call for quarter 2 of financial year '21/'22. During second quarter, we recorded top line growth of 16.2%. In this quarter, we witnessed a significant hardening of raw material prices and the level of inflation what we are seeing was like never seen before, it was unprecedented. In view of this situation, our approach was to strike a balance between top line and bottom line, and we moved with that approach. Giving you some highlights about decorative business because you know that we are equally divided in decorative and industrial side. So in decorative, if you look at value and volume growth, they were in the similar range. Demand in the quarter 2 was, you can say, better in the urban towns. But at half year level, urban towns and the urban towns and the rural markets are performing in the same way. Some of the actions which we have been working upon in decorative and what results we have got, emulsions did well, and we have increased our salience in super premium category. That was part of our strategy to improve the product mix. We expanded network last year and said, the expansion of the network did not happen because of the COVID situation. But now the workings have been normalized and we expanded our network and also putting focus and accordingly increasing the number of tinting machines in the market. One of our key focus was in terms of introduction of differentiated products, differentiated from the offerings what are there in the marketplace. And we have introduced more product and expanded some of the new products, which we introduced in the first quarter in more markets. And therefore, the contribution from the new products have increased. One product, Beauty Gold Washable, which comes with the antibacterial property and also washability. And our proposition was given as Saaf bhi and Safe bhi was accepted well and it is gaining traction consistently. We supported this product in last quarter with a 360-degree campaign in many markets, there are a lot of touch points related to consumer, which we have attended. And also, we have increased our presence on the digital platform. Continuing our focus to introduce differentiated products. We just launched Mica Marble stretch and machines. This product also has a very unique feature. And one of the key benefit is that the outside buildings develop crack over a period of time, and this product is kind of no crack. More products are in pipeline for introduction in coming quarters. In new businesses, where we were a late entrant, we are progressing as per our plan. We have strengthened our portfolio and expanded distribution. Quarter-on-quarter, we are able to do that. Some of the initiatives related to digitization with dealers and painters, our apps, what we have introduced, and we tried to build some customer-friendly features in our apps. Those are gaining traction, and we are able to bring more engagement from the dealers and painters as we are moving forward. In terms of price increase because the inflation has been quite high. We have taken price increase in line with the industry. In fact, in the past quarters, some of the price increases we have taken ahead of the industry also, and we have our plans to take further increase so that we are able to mitigate the impact of inflation. Our focus in decorative continue on paint, emulsion -- within the paint emulsion is our focus, distribution expansion, introduction of new products and new segments where I just said that we made late entry, but we are making progress consistently there. Based on the progress of various internal initiatives, we remain optimistic and determined about our future prospects. Coming to Industrial. The demand outlook was getting better. But unfortunately, these shortages of semiconductors resulted in production drop mainly in the passenger vehicles segment. In two-wheeler segment also, there is some impact, but not as high as it is there in the 4-wheeler. But in 2-wheelers, the demand remains subdued, mainly the rural demand has still not kicked off. So there, the growth is poor. Within the 2-wheeler, scooter segment is doing better than the Mobike and commercial vehicles and tractors are continuing to do well. As a company, again, there is the unprecedented inflation what we have seen, but we are working very closely with our customers to arrive at a win-win situation because there is definitely a pressure in terms of these shortages and therefore, the production drop and customers are also facing the heat of that. So we are working very closely with them to arrive at win-win situation. Partial price increase we have taken, and we are very hopeful of getting further increases in industrial. In order to finish and performance coating business, our salience has gone up because the growth rates are better in those businesses, including powder, and we are able to get higher pricing increases in these segments. In industrial, our focus continues to be on the new business. Based on the new technologies, we are working very hard to build new technology, which gives advantage to the customers in terms of efficiencies, productivity. And therefore, they get not only the product performance advantages, but the other advantages also. Also, the new segment like coil coating, functional powders, high-performance coating and also we are attempting to increase our share in some of the existing accounts. So that has been some of the highlights in industrial area. Coming to subsidiaries. Marpol and Perma. Marpol which was powder and Perma which is construction chemical. These are merged with KNP. Nerofix which is adhesive, they recorded a good growth in quarter 2 and even in H1 the growth is getting continuous better traction. Our international subsidiaries, Nepal did very well in terms of sales and profit despite there were lockdowns, that despite there were heavy rains in the quarter 2, but still Nepal did well for us. Bangladesh in the quarter 2, we had a strict lockdown, and therefore, the growth for the quarter is lower. But on the H1 basis, the growth levels are quite healthy. Sri Lanka had a very longer lockdown in the first half, almost 80 days if you compare with the 40 days of last year. And therefore, there have been challenges in terms of Sri Lankan economy. But we are getting a good growth. Obviously, the base levels are low, but we had made certain changes in our strategy in Sri Lanka in last year and we are getting traction on that particular part. Some of the other highlights, which I would like to share with all of you is that we are working and getting a better product mix in all our businesses. Material cost reduction because of this inflation, that's 1 initiative, whether it's some the formulation or the other parts, the purchase part we are working on that and continuous overhead management, judicious overhead management is the focus where we are continuing with. We are happy to share with you that we are a Great Place to Work certified for 2021, it's heartening that we are getting it again. And many initiatives, digital initiatives we are taking across the organization for enhancing the efficiencies and process adherence that is like building the infrastructure that supports the organization even in the future which is very, very dynamic. On the vaccination front, more than 98% of our complete team have been vaccinated once and more than 70% have been vaccinated with both. Even the contractual labor and the staff, the vaccination levels are quite high. And the subsidiaries also the vaccination is in the line with what we had planned. So based on this, all operations are normal. The market visits have started, everybody is traveling and operations are normal. Coming to financials. For the quarter, we declared the revenue of INR 1,521 crores, a growth of 16.2% over the corresponding quarter of the previous year. EBITDA was at INR 165 crores, a degrowth of 37.3%. And PAT, there was a degrowth of 38.1% for the quarter, quarter 2. For half year, the revenue growth is at 48.3% and EBITDA the growth of 3.3% and PAT, the growth of 9% over the same period of the previous year. Looking forward, we feel the outlook is positive. Demand -- in terms of demand because there's a good progress of vaccination. Definitely, we are seeing a reduced fear of third wave. Monsoon, good monsoons, we have seen. And inflation will continue to remain high. In fact, at 1 stage, we thought that maybe after a particular period it may cool off but it remains high. And the recent last 2 months, the crude prices are going up. The ForEx is volatile. There are logistics challenge. There are conditions. So there are lot of challenges, even availability of raw material. And therefore, that's a challenge, and inflation will continue to be high. As a company, we are making all efforts for price increases and internal efficiencies to see to what extent we can offset the inflation. So these are some of the highlights which I wanted to share with you. And with this, now we invite the questions.

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

My first question is on the price hike in Q3. So market leader has already taken around 9% price hike. Even the #2 player has taken similar. So have you also already taken or planning to take? And if you could tell us from which date, it will be applicable?

So in my commentary, I just mentioned that we -- and even in the last quarter, we had taken certain price hikes ahead of the industry. And so some pricing increase are already taken. And we have our plan. I think you'll come to know. We have our plan based on that the business and the product mix, we have our plans to take the price increase and integrate it, at least, that will ensure that we are able to mitigate the inflation to a large extent.

Sure. And second bit is you mentioned you have already taken some hike in Q2 ahead of industry. I wanted to understand the pricing behavior by the top 4 players. So in the past, we have taken the market leader's lead pricing action in most cases. So in the last 1 year, did that change? If you would tell...

In fact it, not last 1 year, I think last 2, 3 years, it changed. And because every company has some of their strength area, whether it is a market or a certain product categories. And obviously, based on that companies are able to take the call. And this is what we are doing for the last 2, 3 years. And maybe the quantum differs. But depending on the elasticity, depending on the acceptance of the market, we have been making certain changes rather than waiting for somebody else.

Sure. My second question is on the supply chain, global bottlenecks. All paint companies have highlighted this. Also, there is some shortage also of the raw material. So if you could discuss what are your thoughts on shortage, bottlenecks in Q3? Is the worst behind? And on the raw material scenario, if you have any comments to make, how you see the outlook going ahead.

Shortages are there, but the good point is that we are still able to manage so far. In fact, the supplies have not been interrupted, even that in case of industrial OEM, where virtually we supply just in time. So the challenges are that maybe sometimes you have to keep the higher inventory of some of the critical raw materials or we may have to pay a premium to keep the suppliers intact. So the lead time has increased logistically because there are poor conditions. So maybe earlier if the lead time, we say, 30 days, maybe it is going to the 60 days. So some of these challenges are there and we are able to manage these challenges. So when I say that logistics are challenging, it is not that there are shortages and therefore, we are -- the demand or the supplies are impacted. So we are able to provide uninterrupted supplies to our customers. But the challenges are in terms of the cost and inventory.

Sure. That's helpful. One last question, so on chip shortage. Today's article in the EV phase, Maruti has seen now significant improvement month-on-month. So my question is, would you also think that the car, personal vehicle, the worst is behind on chip shortage. And in your tinting machine is the chip shortage impacting?

So as of now, our understanding is because there is a shortage of supplies in terms of chips and new capacities are coming up globally, and new capacities take a time of around 2 years. So difficult to say that whether the situation is under control, we'll have to keep the finger cross and see that whether it is consistently that they're able to -- the customers are able to manage the supplies. But we feel that this problem is a little longer, and it may take 1 year to completely come under control. Related to tinting machines, as of now, no impact. But obviously, the shortages are supposed to impact all these things. But as of now, there's no impact.

The next question is from the line of Prachi Kodikal from Bay Capital.

Mr. Jain. My first question is related to your cost front. In your closing remarks, you mentioned that there are a lot of internal that are looking to leverage in -- to mitigate the raw material cost increase. If you could just give us some examples or sense, what are the low-hanging fruit in terms of costs that we could benefit from that would be very helpful.

So what is this -- so 1 is alternative raw materials. Because typically what happens is you centralize the formulations and than because this inflation period has started from last year. And so there are the replenishment of the raw materials, alternate raw materials, taking care of that the properties which we offer. And then the -- globally, that leveraging Kansai, Marshall and Kansai the global thing to -- so that's 1 area. So cost efficiencies is 1 area. And the other area, as I said, product mix because there are say water-based products or emulsion or the premium range, where the margins are better. And even in the industrial side, that migration to the high-end products, because there are a lot of low-end products where the sale is higher, but the margins are very less. So these are some of the low-hanging fruits, which we are taking care of in. Any addition, Prashant or Jason you want to make.

No, that's fine.

I have 1 more question. In our recent annual report, you mentioned that you are revisiting your decorative strategy in looking at new distribution channels, et cetera. So could you elaborate a little bit on that as well? What are the key changes that we are looking at?

Some of the point, I think I mentioned in my commentary also. So 1 is that we are working on the differentiated products. So today, if you see in the market that we have a product called Beauty Gold Washable, which is differentiated offering and differentiating size that it is not competing in the market prices. There is a product called Suraksha Dust Repellent which we have introduced. So some of these products we are rating because generally, the market was moving on the price points, but we are trying to go away a little from the price point in the marketplace. In terms of distribution, that sort of a strategy to further expand the distribution. And within the distribution, I'd say we are creating certain retail points that where the consumer will be offered our experience that -- and those retail points will be completely focused on the premium categories. Also, we have selected like the market size has already expanded. Earlier, it was only paint. But now the -- if you see the size because of the water proofing and this Italian wood finishes and some of the other businesses. So not that we are going to touch upon every business. But whatever business we are seeing a synergy with our distribution, those businesses we've entered. And there, we have completed our portfolio, and then we have made our plan to progress on those portfolios in a period of 3 to 5 years' time.

But when is the new retail distribution points -- would they be selling just paint or all your other adjacent products as well. Is that the thought process?

Yes. Yes. So they will be selling paint and construction chemicals and the wood finishes.

Okay. Okay. And have you already launched such retail touch points or they are only in the plan?

Yes. No, no, we have already introduced and some of the retail points are up. And we have our plan that within 1 year, how many retail points we'll reach to and then over a period of 3 years, what actually we are going to achieve.

[Operator Instructions] The next question is from the line of Keyur Haresh Pandya from ICICI Prudential Life.

Sir, question is on the industrial side of our business. So on the growth front or any outlook on the growth as well as implementing profitability? And if you can divide these 2 aspects in the automobile and non-auto industry?

So in automotive, the growth prospect from the demand point of view, it is good but the shortages and therefore, the production drop that we still feel that will impact the business, and it will take some time to come back to the normalcy in the auto part. On the non-auto part, I think the business is back to the normal and some work which we have done in the past in terms of getting the new businesses, and we have entered certain new segments, and so the premium segments where our market share was relatively lower. So there, we are concentrated with some efforts for the dedicated team that has started working. And in the non-auto business, the growth is back to be normal, and I think outlook is positive. Coming to the pricing margins in auto. Obviously, in the industrial, entire industrial, the inflationary pressure is higher relatively. And therefore, the more price increases are required. And I would say that reasonably with the discussion of the -- in the current situation, with the discussion with the customers, we have been able to take the price increase. And the discussion with the customer is continuing. And as I said, we are hopeful of getting more price increases. In the non-auto business, we are going more aggressive in getting the price increases, even if it affects to some extent, because we have advantage of services and the quality and the technology, I think that we are leveraging and going for higher price increases.

Okay. One follow-up is in auto. Any thought on, say, new market entrants. Basically, I just want to understand how the market share has moved and customer concentration has changed over the last, say, 2, 3 years? And what is the current level, that is one. And on the industrial side, there is a lot of buzz about say in infra or CapEx revival, are we seeing any uptick related to that in our non-auto industrial business, and so it is growing faster than the company level growth?

So I think your first question was -- what was the first question? Second, you said on the non...

Okay. So it is -- and so within the auto, how the market share has progressed in the last 2, 3 years as well as the client concentration as we have seen many new players entering. And with change in say technology going toward EV, how are we up to date with that as well?

So in auto, in effect, based on our technology and services, last 2 years, if you see that we have progressed and even the new businesses, that strategic initiatives we had, and we have progressed consistently year-on-year basis in the auto. There are some new players which are seen in the 2-wheeler industry, but most of these new players are in the electrical vehicles category. You must have heard that a lot of players are announcing the inflection of EVs in the 2-wheeler category. But mostly, these players as of now, they don't have their paint shop. They're getting it painted from outside. And all these ancillaries that they are our customers, and we are able to cater these customers through our ancillaries. In the non-auto where you're talking about the increase in CapEx, the uptick, there are projects like metros and bridges, we are seeing a lot of uptick there, and we are participating. We have a technology available through our Japanese customers, and we are definitely seeing the uptick in that. And we have created some dedicated capacity also in our Sayakha plant for some of these businesses, which are nonauto business. Like coil coating, we have calculated a dedicated capacity in our Sayakha plant even for general industrial and high-performance coatings that we expanded our capacity.

Understood, sir. Sir, just 1 clarification. So when you see you progressed well in auto, I mean, have you maintained market share or lost any or we have gained share any thoughts on market share?

We have gained market share.

The next question is from the line of Percy Panthaki from IIFL Securities.

Sir, can you give us some idea versus 12 months ago, what is the total cumulative price hikes you have taken in decor and in industrial?

It is in line with the industry, in decorative. And industrial generally, I know we don't comment on the quantum of the price increase because customer to customer, it is different, and then we have contracts with them.

Yes. But for your overall business, if you tell us the number, it doesn't sort of give us customer-wise data, right?

So we would just like to comment on the decorative in line of the industry and industrial, as I said, we have contracts, and we don't generally comment on that.

Sure, sure. And also because auto has now been weak for 2, 3 years, can you give us an idea of how much your decor paints contribution to the overall has gone up? How much would it be, let's say, currently versus 3 years ago? How much would those numbers be, sir?

So decorative is about 55% of the total business.

And how much it would have changed over the last 3 years?

2%, 3%. Within industrial and trade like auto was weak, but we made certain initiatives in the non-auto business in auto refinance business that we have gone aggressive and coil coating, rebar in powder, a lot of new segments we have added. So some of the weakness which was there in the auto got compensated with the some other initiatives.

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

Sir, I just wanted to clarify 1 thing. One, you said you have taken slightly ahead of the industry price increases in the last quarter. Is -- did I hear that correctly? And if that is the case, so if you could clarify that first?

Yes, yes. So we have taken certain price increase of certain products ahead of the industry.

This is in decor, sir, you're talking about or...

No, I'm talking about decorative.

Okay. So probably -- and sir, is with this recent price increase that has been announced by our peers. Do you think margins should be now coming back to the third quarter, fourth quarter levels in decorative at least or would be more price increases?

Yes. We can say more or less. But the impact could be seen probably in the fourth quarter. But more or less, I think the margins would be taken care of.

Will be taking care of. We don't need other rounds, right, sir, in decor after this or no, we would.

So we have -- we don't know because just to tell you very frankly that when we started this year, we thought inflation is very high. Then at the end of the first quarter, also we felt inflation is very high. And the second quarter also we felt that now it will stop. But month-on-month basis, it is rising. And this time, the -- when we say unprecedented because it is not 1 side. One side, you see a chemical inflation, you see a kind of crude oil price pricing, you see a rupee getting depreciated. So everything is getting affected. Logistical, that the cost is going up. So difficult to comment as of now. Assuming that the prices further does not go further up, then probably it is the situation would be comfortable. But if the price further goes up, I think it may demand more.

Okay, sir. Okay. And sir, just on the industrial side. I mean, you have clearly outlined that you'll be more aggressive in price increases. Sir, I just wanted to understand, is it fair to argue that there also the expectation or the target would be to pass this on by fourth quarter? Or it might take longer, sir, how should I look at that? Because that is a little more...

Yes. In industrial, it is very difficult to pass on the complete because, as I said, that customers also in the current situation, they are facing a problem, and we are truly a partner to our customer and in this difficult time that we have to have a discussion and arrive at the win-win situation. So there, it will be a combination of -- but in the given situation, we have no choice to take a price increase. So it will be a combination of the price increase and the internal efficiencies and also giving a lot of value-added services to our customers to see that how do we create this as a win-win situation.

Okay. So it will be a mix of a period of these 2. Okay. I understand, sir. Sir, lastly, sir, on this entry of a new player, I mean, there is a lot of talk now that Grasim is kind of doing that. How would you kind of look at that? And do you see that kind of weighing down on the margins of the industry structurally?

Difficult to say because that's a little far as of now. And generally, logically, if you see the paint, the penetration is low, 50%. And in the past also, we have seen that when more number of players participate even in the other markets we have seen, it always help the industry to grow the size. And also, the industry has taken the initiative in terms of expanding the addressable market size by introducing this construction chemicals and some of the other categories. So I think from that point of view, it is good for the industry when more number of players participate. And there is always a phenomena of formalization of the economy like from the unorganized it is getting to the organized. And then that we have our distribution in place, the product range, the service network, all these things are there. So I think net-net, in the future or the overall long term, if you see it is good for the industry, and it will only expand the industry.

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

Sir, my question pertains to industries pricing power and discipline and the flexibility on the same. So despite every player calling out facing unprecedented inflation for the last 4 months, 5 months, we didn't see that kind of urgency in terms of making intervention in terms of saving, protecting margins. And this could not happen in last month of the quarter, it was actually happening every quarter, every month of the quarter. So if you can say some thoughts on why industry waited. And even now the announcement has been post Diwali hike. So why there was no sense of urgency as we have seen it in past to protect the margins?

So in fact, when this year started, and obviously, we never estimated that there will be a COVID second wave, and that will impact the market, which has happened. So that was also not expected. Then there were a lot of things going on around that. There is a fear about the third wave and the certainty was not there. So I think in this period, what you have seen was -- there was a little unclarity in terms of how the demand will pick up, how the sentiments will come back because when all this happened, there were fears in the mind that painters, they have gone away from the cities, how soon they will come back. Whether the customers will allow them to enter their home. So already, the sentiments were you can say, weak or we are suspecting that all these things behaviors will change. And at that moment of time, if there was a high price increase, it would have further -- probably it would have been further detrimented to the sentiments of the consumers. So there was little wait and watch. And also this market from the distribution, they were not ready to absorb this kind of high price increase. They were also worried and their operations were not normalized. So to that extent, I think this got impacted. And now when the situation is normal and there's a reduced fear of this COVID, and we are seeing that people are moving out and they're accepting the painting process, and therefore, probably it is the right time to go for that.

Sure. So sir, does it mean that the price hike now the industry has announced can be absorbed without hurting demand much?

We'll have to wait and watch because there is always an elasticity in the demand. So I won't be able to comment. But there is no scientific way to say that how much pricing did you do. Let's accept it that probably this is the highest price increase we would have seen. So we don't have any experience now that we have implemented this kind of price increase and what is the impact on the demand. But that obviously in the economy range of products, the pricing is more elastic. So there, we'll have to wait and watch. But in the higher-end product or the mid-range product, I don't foresee any impact on the demand. But in the lower end category, there may be some impact.

Sure. Sir, second question pertains to rebates. So what we picked up in our channel checks that there were unprecedented debates also given in the recent time from some participants. So have you seen that also coming down in the recent months to fight inflation?

It will depend on the product mix because I think the market discounts have been increased in the lower-end products. So luppam patti or some of the other lower end products where there is a formalization happening. So there, the inputs have gone up. But on the higher-end product, not much of changes. So we have not focused much on the lower-end product because in this current situation, it was important for us to strike a balance. So to certain extent, it depends that how the product mix will behave in the market. And as we are increasing the pricing in the lower-end products also now, if there's an impact on the demand there, then maybe to some extent, the rebates will get rationalized.

Okay. And sir, on EVs, do you supply to any EVs in India as of now?

Yes, yes. In fact, most of the players we are supplying. As I said, that in EVs today, as of now, I think there is no -- other than the existing players, the new players, they are getting it painted from outside ancillaries and all the ancillaries are our customers.

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

2 questions. The first 1 is that this industry -- I mean, the paint industry is talking about, there is a conversion happening from unorganized players to the organized. And we have been hearing this number is in the range of about 30%, 35%. Generally, I tend to believe that when I look at the industry, when the inflation is high, I think the French player will back out. So is that the thing which you are seeing a visible last 2 to 3 quarters, and if that is influencing the demand cycle for the organized players?

So this change from the unorganized to organized. You are right that it's generally a phenomenon in any industry for that matter, in the paint industry it was there. Probably in the recent past, maybe because of some aggression of the industry, it has increased. But I think unorganized players do have their strength because they know the geography well and they understand the customers. They are able to service in that geography better. So having impacts on the margin. But I think that they have their own strength, and I do feel that with these some of the changes, in fact, they also would be able to make a come back. Because generally, it happens that they are able to reach out to the market, especially in the interior markets or specific states, they are able to reach out faster. So maybe there were certain challenges in the recent past for them, but I think they have also made changes in their strategy and they also had looked at their product mix. And going forward, I think that based on their strength, they would still continue to do well. Formulization will happen, but it's not that rapidly the market will change from unorganized to organized sector.

Okay. Just 1 follow-up here. Since there is no syndicated data available. I think you being a leader in the industry. Could you comment something on the distribution structure? I mean, is that one of the things because what we noticed from the market leader has added a big number in terms of coverage. So is that the satellite towns are showing the demand for the organized players? Or how 1 should look at this market? I mean is that the paint dealer network is really growing or is that the distribution is growing?

So in distribution, what happens is that we have 2 parts in the paint industry. One is the dealer, who's the retail customer, and we supply directly to the retailer and then we sell to the consumer. The other is the wholesaler or you can call him a distributor, and we supply to him, and then he supplied to 1 distributor, 1 wholesaler supply to 50 to 60 or 50 to 100 subdealers. So it's like that when you see the increase, 1 increase is the direct increase that how much customers I'm adding or how many dealers I am adding direct extension. So generally, the speed of the market is 5% to 6%, if the growth every year, in the industry happens. And therefore, you increase your distribution between 5% to 10% every year. And then there is a indirect reach, which generally many companies do not try. So if you're adding the wholesaler. And typically, it happens in this particular time, and there are continuous price increases that are happening so some of the distributors or wholesalers who have good money capacity. They tend to buy more quantity during that particular period of time. And therefore, they are able to service the demand of these subdealers that for a little longer time. And in that particular period, you see that your access to the subdealer network or the indirect network is increasing. So I think the comments that in the industry is that it's a direct or indirect reach, but generally, we track the direct reach. But there is definitely a direct reach also, and there is an expansion happening there also.

Okay. My last question is on -- if you comment some -- maybe spend 1 minute or 2 on the demand conditions in the month of October because what we gather from the trade is that demand is very strong maybe because of pent-up demand for ratings, which is happening now. But then how you look at it purely from the decorative paints business?

In our view, there's no pent-up demand now because if you see this year, May was impacted, only May. April is supposed to be a big month and April was completely open. So if you compare to the last year, where there was a big impact in the first quarter, April, May, June all 3 months and there were a lot of pent-up demand came later. So going forward for the entire industry, if you see the basis are higher. And we can only say that demand outlook is positive, but we just hope to see that because there have been a lot of ups and downs in the last 2 years. Now things will get rationalized, normalized. And you see, generally, the paint industry has been growing in line with GDP. There is always a percentage. So I think that will come back and things will be normal or you can say pre-COVID level, if industry used to go at a double-digit rate. So that -- those kind of growth rates will normalize and accordingly, the industry will show the performance.

The reason, Anuj, I was asking, is that the industry is saying that the consumer sentiments are weak. And because of this COVID people have spent money on the health care and other things. I suspect that if there is some trends, it can share whether there is a visible down trading. I'm not saying down 20%, but if the demand is on the low end emulsion is higher than the luxury and premium.

No. No. In fact, there is no impact on the demand of the premium products also. And in fact, one of the trend, consumer trend, what we have seen is that during the lockdown, people spend a lot of time at home. And therefore, in the home decor area, they are more positive and their sentiments are better and they are ready to spend more in terms of as long as they're getting value for money or the benefits they are getting. So there is no downgradation of that people are shifting from the premium product to the other percent that is not there. The demand of the premium products is good enough.

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

Sir, just want to understand the decorative side you mentioned the industry demand momentum seems good. Now I want to understand concise context that logic is that #2 and #3 players on a low base would grow faster. Now is it happening? And if not, can we assign a reason why that is not happening? Or should we grow faster than the market leader or the industry growth rate considering our ability as well as our size benefit?

So I think partly, I mentioned that it depends on the timing. So there were periods where in the past when it happened. But in today's context and specifically in our context, if you look at it, because we are equally divided between industrial and decorative. And whenever there is a pressure, we have to accept it, honestly, that whenever there is a pressure on the industrial, the pressure comes on decorative also. And therefore, in that situation, the right approach is to strike a balance because there, if you try to show a more aggression. And as we said that in industrial when the inflation is high and the price increase comes with a lag effect, and therefore, the impact on the margin is quite high in that particular part. So in this situation, if we try to show that aggression, I think it will -- we can know the situation. So that's why probably the timing is not correct.

Okay. Understood. But as situation improves, I mean, when ability to spend goes up as a company, we should grow faster than the industry on a structural basis.

Certainly, definitely. So that's our role and that's what we are determined to do.

Okay. Sir, just 1 question. On the distribution side, you mentioned that 5% to 10% kind of addition happens at the industry level, what would be our current distribution and any average rate at which we are growing the distribution?

Around 28,000 distribution we have. And as I said that last year, the expansion was very less. But this year, it is closer to 10%.

And that should continue in the medium term?

That's our objective.

Thank next question is from the line of Amit Purohit from Elara Capital.

Just 1 question on the growth rates for the industrial and decorative in this quarter, if you could highlight that? And second is on the CapEx. These 2 things. That's it.

So growth rates are similar, quite similar. Overall growth is 16.2% and growth rate in decorative, industrial are similar. And our regular CapEx continues. What is the figure, Prashant, of regular CapEx.

Regular is INR 90 crores.

Around INR 90 crores is the regular CapEx, and there's no cut on that.

And sir, when was the price hike taken in the decorative sales because if we take? I mean, was it in the mid of the quarter because then probably the volume growth and value growth is you said it's same, right? Is that what I heard?

So it was -- the price increase was quite staggered. So almost every month or 1.5 months, there was some amount of price increases are happening. And it is quite staggered.

Okay. So you would have also taken around 16%, 17% from April to now. Is that a fair for our decorative space.

No, not that high. The price increase as the industrial price increase is about 6% to 7% in that particular range, not that high.

Okay. No. So -- but the industry has taken another -- announced a price increase now.

That is now. We are talking about April to September as of now.

So okay. Right. So after this announcement, have you also taken some price increases?

I think I mentioned in 1 of the questions. So we have our plans, and I think that we have our plans on that.

Sure. So from -- till September quarter, the price increase is 6%, 7%, 6% to 7%.

For decorative.

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

Sir, you did mention that Q3, you would like to -- on the margin front, you would like to normalize a bit on the EBITDA margins. And for the same, you mentioned a mix of -- a product mix. Secondly, also in terms of a change in formulation and thirdly, some bit of price increases, what you want to take. So if I look at, say, the Q3 of last year, the margins were still on a higher base at about 15.3% -- sorry, 19.7% kind of EBITDA margins. So what do you envisage here, what would be a normalized kind of EBITDA margins which you are targeting at?

See, I think this impact of all these things what you are talking about would be seen in the fourth quarter because the price increase -- because October is a big month, and therefore, all the impact we will be able to see in the fourth quarter. The impact in this third quarter would be very, very low. So for the quarterly perspective, difficult to say what you are saying, but I think impact would be seen in the quarter 4.

Okay. But sir, my -- the important question here is what according to you is the EBITDA margin target you are looking at a normalized kind of EBITDA margins, what would be our...

Prashant, would you like to answer this question?

Difficult to make any statement right now because it is -- it will be a forward-looking statement. But still, we are, of course, difficult to maintain last year's high EBITDA margins, maybe slightly lower than that, we can target.

So what range if you could...

We would not like to comment on the numbers or range.

Okay. Sure, sir. Sir, and secondly, in terms of auto, you did mention that we gained market share. So what would be our current market share in case of auto? And also I would like to just get some sense on how big is the -- because you've mentioned some comments this time specifically about 2-wheelers and tractors. So just wanted to get some sense on how big are these 2 segments for us.

So our market share in auto is close to 60%. And generally -- so the total market share is close to 60%, and we are a very strong player in the passenger vehicles, 2-wheelers. And if you see tractors in commercial, we are there, the market share is further higher. So I think in most of these industries, passenger vehicle, commercial vehicle, tractors and two-wheelers, we are a very, very strong player.

And sir, what would be the current size of the auto paint industry?

In size, you can say that it is -- the industrial overall is 25% to 30% of the total market size. That's the industry size.

The next question is from the line of Parag Chavan from UTI AMC.

Wanted to understand on the industrial side, so actually, my perception was earlier that in industrial business, whenever basically the raw material goes up, it is easier to actually pass on the price hike. Also, on the flip side, when actually the raw materials I just pull off even that benefit also has to be passed on quickly to the consumer. Now is that perception wrong? Or currently, as you mentioned, that some of these higher price hikes on the raw material side where we were not able to pass on to the consumers. Is it a one-off this time around?

I would have been happy if your perception was right. So generally, what happens is that there is a lag. And this situation is different because generally, what happens is that it is very difficult to go to your auto -- this auto customers or OEMs on a regular basis to demand for the price increase. Now in the situation like this where there have been a lot of uncertainty, and it was very dent project that month-on-month basis how the inflation will go up. So typically, traditionally, what happens is that you wait and see that where exactly the inflation got stabilized and once you have that understanding, then you work out and then have a discussion with the customers. And in the OEM, obviously, along with the pricing case, you have to work with them in terms of a lot of other initiatives, as I said, that we have to create a win-win situation. So that is what happens. This situation is a little different because every month, there has been inflation. And in industry, definitely, it is not possible, which can happen in consumer business, but the industry doesn't happen that every month to go and ask for the pricing deal. First, you have to wait and see that what price increase you require. And unfortunately, in this situation, if you had asked for a particular price increase and the 1-month subsequent or 2 months subsequently, the figure itself has been changing. So to that an extent, the lag has always been there. And this time, it is a little more and the discussions are happening and people are like to work out because you have to understand the customer situation also. And therefore, we have to fall in line with each other's expectations and see that how do we create win-win.

The next question is from the line of Ranjit from B&K Securities.

In one of the earlier questions, you have kind of indicated that this is for the industry and not for the Kansai space, with the recent price hike that we have seen is kind of offset the raw material inflation that we have seen. But the way I say it that post 2Q and now in the month of -- towards the end of September and October, we have seen further price increases in the raw metal inflation has only got intensified if you look at this month of September and October. So how should 1 view that the price hike that we have taken is likely to offset the RM inflation?

Difficult to say because as of now the trend is further going up. But I think, to a large extent, it would be done. And then we have to wait and watch for the demand that after the price increase, how the demand is impacting the response. And based on that, in further course of action would be decided.

No, the question was that the price increases that the industry has taken, is it going to neutralize the RM inflation for the 2Q? Or it also takes into consideration the inflation that we have seen in the month of October.

Prashant, yes.

Yes. As far as decorative price increase, what we have projected were built on whatever is that people are now asking or should cover at least up to Q2.

The next question is from the line of Varun from IDBI Capital.

Just 2 questions from my side. So first, on -- this is a differentiated product offering, as you mentioned on the call that we have now become relatively more aggressive in terms of launching new products and a lot of products are even in pipeline. So just wanted to know if you can share some objective or guidance in terms of how you are willing to kind of grow this category. So any numbers in terms of revenue contribution currently and how you want to drive this category going forward in terms of -- I mean, are you looking at just a number of product launches or even from a revenue point of view?

So this part is quite focused on that understanding the need gaps of the consumer and then plugging it with the product where the offering and the proposition can be very different. We have already placed 4 to 5 products in that range, which are quite differentiated. We have our internal plans to increase the volume and value of this business significantly. I would not like to talk about the numbers here because that's 1 way to really depart from the competition in the marketplace. So I think our focus is on that. And as I said, that there are multiple projects in the pipeline. And as we go along, we'll see that more and more functional and the future-oriented products, future-led products that will be coming to the market.

Okay. So -- but okay, fine. Fair enough. My second question is on the distribution expansion. So as you rightly mentioned that 5% to 10% kind of addition that or more than 10% kind of addition that you kind of or we kind of aim for. But how are you thinking about the regions where you want to focus more. So I mean the more the growth you think is going to come from rural distribution expansion from urban. Any color on that?

So traditionally, if you see that we are a more stronger player in the up-country markets and relatively weaker in the -- around, urban towns. So our focus is both sides. The 1 side that is strengthening the markets where we are already strong and wherever we are weak, there we are building up. So I think it is -- the objectives are different in both the markets, but the focus would remain in both the markets.

That was the last question for today. I would now like to hand the conference over to Mr. Aniruddha Joshi for closing comments. Over to you, sir.

Thanks, Bilal. On behalf of ICICI Securities, we would like to thank the management of Kansai Nerolac. Mr. Anuj Jain, Mr. Prashant Pai as well as Mr. Jason Gonsalves as well as all the participants too. It was a really interesting discussion and many thanks to the management for sharing valuable inputs as well as resolving queries of investors and analysts. Wish you all happy Diwali and now hand over the call to the management for closing comments. Thanks, and over to you, sir.

Thank you so much. Thank you all the participants for patience hearing and all the questions always enlighten our understanding also. Thank you so much for that. And best wishes for the season. Diwali is coming ahead and fortunately, as a country, we are -- it seems to be on track in terms of vaccination and there's the safety part is taken care of. Hopefully, this challenging situation, which we have seen last 2 years will go away, and we'll see bright times coming ahead. So wish you all the very best and my best regards to you and your family and your near and dear ones. Thank you so much.

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

Thank you.

Thank you.