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

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Kansai Nerolac Paints hosted by ICICI Securities Limited. [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.

Yes. Thanks, Margaret. On behalf of ICICI Securities, we welcome you all to Q3 FY '22 and 9 months FY '22 results conference call of Kansai Nerolac Paints. We have with us the senior management team of the company, represented by 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 the initial comments on the quarterly performance, and then we will open the floor for question-and-answer session. Thanks. And over to you, sir.

Thank you. Thank you so much. Good morning, everyone. Greetings to all of you. Since this is the first meeting for this year -- so happy 2022 to all of you. And welcome to this Kansai Nerolac Investor Call for Q3 of '21 and '22. During the third quarter, our top line growth was around 13.1%. Quarter continued to witness inflationary pressures along with volatility in crude and exchange rates. Overall situation has been unprecedented, which we have been talking in the other quarters also. And the situation has now [indiscernible]. In view of this situation, we continued our approach of balance between top line and bottom line. Just to give you some highlights related to our business verticals. Industrial: The automotive growth was hardly marginal. In passenger vehicle, though -- there was a demand recovery, but the demand could not be serviced due to continued shortage of semiconductors. Two-wheeler segment remained subdued mainly because of [ rural stress ], and so there the demand was lower. Commercial vehicle was better, but tractor segment also was sluggish. In terms of our focus, we have been focusing on technology which basically gives environment and efficiency benefits to our customers apart from finish. So to say that we have been working on from the conventional solid system with the medium solid system. So that's what we've been concentrating upon. In the area of non-auto Industrial business which we call performance coatings, there we have taken a direction of shifting our mix from lower-end to high-technology products. So there are a lot of [ epoxies and cases. And ] inflation has been so high; and the margins are very, very low. So that's the focus. We wanted to take our technological advantage into that area also. Some of the achievements are, like in performance coating, we are now a [ tool ] supplier of [indiscernible] and [indiscernible] for our C5 system. C5 is basically a fluoropolymer-based system which gives [ the life ] of 15 to 30 years on the steel structure. In coil coatings, where we made entry a few years back -- when we were supplying only to the roofing systems; and that was also another good, profitable area. Now we got approvals from the appliances. So all of you must be knowing that we are [ quite ] strong in the appliances through our powder coating systems. And now we got the approvals and started supplying in the appliance. Because the product requirement is going to be specific, it's like a 360-degree [indiscernible]. So we are able to develop that product and get the approval on that. In power coating, also the focus is toward the premium category. And one of the achievements is that we started supplying to one of the leading construction equipment company who has set up the fastest robotic line, no manual intervention at all. And we have developed a customized [indiscernible] product and, [ of course, got approved ]. In this area, again you know that -- in drums and barrels, where we are a strong player but [indiscernible] external coatings where we have got approval for the internal [ letters ] also. And we have been working with our customers in the entire auto and non-auto area, related to inflation and price increase which we discussed earlier also. And we are able to get average around 18% increase in Industrial segment. When it comes to Decorative, the volume growth is high single digit. Value growth is double digits. Demand was better in urban towns and was lower in the up country. So to get an extent with the contrast: If we compare with the last year, remember the demand was better from the up-country towns. Some of the key actions what we have done in Decorative, we continued our focus on differentiated products. The approach what we have taken is a problem solution approach. So first product which we introduced in that area was Beauty Gold washable, which is now present across different states. So this product is a [ gold ] finish with the washability, and that's a problem and solution approach. We introduced mica marble stretch and sheen, which is again a [ gold-finish ] product along with the no-crack property because that's one area identified as a consumer need which was still not serviced. And that's the solution what we have provided, and this product is being expanded to the other markets. We also introduced a rapid-set product in the [ Nerolac ] construction chemical. So typically, in the areas where the winter -- the temperature goes down to 0 degree or 1 degree -- and during those days when the construction activity is happening, the setting time of concrete and the cement goes up from -- so 6 hours to 12 hours. The rapid set, which is [ like an add mixture ], this goes into concrete and cement. The setting time is reduced to the original level of 5 to 6 hours. So that product is also introduced. We also introduced ceiling emulsion in some markets. And we also announced the launch of Nerolac impression [ cashmere ], which is getting into the market now. This is also -- well, this [ protection and ] impression [ cashmere ] [indiscernible] impression [ cashmere. It works for ] a good combination of beauty and purity. So it's anti-bacterial, antiviral. It has a -- generally there are products which are launched in the exterior [ for the vertical ], but this has [ our vertical ] property in interiors. So normally in the interiors, when you do cleaning and -- there is a lot of dirt [ that goes and gets ] settled on the wall, yes. So this product has the capability to [indiscernible]. So some of these are highlights of the new products. And because of these reasons, our new product contribution is going up consistently. And this is helping us increase in salience of emulsions also. So our emulsions salience has gone up. Within the emulsion, the growth in super premium category -- so we divide our categories now into superpremium, premium and popular. And in the super premium category, the growth has been higher, so that's also a good sign. And I think that's getting reflected from whatever data we read that [indiscernible] recovery. And in the premium segment, I think this story is good and intact. There are more products in pipeline in the coming quarters. That's a part of our strategy that, good problem-solution-approach products, we should be introducing. Also what we have done is that we have increased our activities on the painter engagement. We have introduced these [indiscernible] apps for the painter. And we're doing migration from the manual disbursement to the digital disbursement, so it is gradually picking up. Quarter-on-quarter basis, it is picking up. Our objective to -- was to have a quick settlement of incentives because we do offer loyalty [ one-off ] incentives to the painters. And generally the disbursement used to take a longer period of time. And now with this introduction, we are able to [ give ] the disbursement in 2 hours time, which is the quickest probably [indiscernible] painter is getting now. This is for the big painters, also for the small painters who get the incentives disbursement through the dealers. There also we have provided a facility on our [indiscernible] app [ which is in-line ] for our customer dealer. And through that, even [ those ] dealers are able to get the disbursement within 24 hours time. And therefore, they are able to disburse with the painters -- the smaller painters also in -- with a good speed. Our distribution increase. So it continued to be in double digit. [ It's a direct engine ] in the distribution, which is in double digit. And projects business, because -- this year, maybe last year, this was more impacted in the metro cities. And the pent-up demands in the project, that pent-up demand has come back in this year. [ However, we are not going a good ] [indiscernible], but it has picked up for us in quarter 3. In new businesses, I think we have introduced the range which is required by the market, whether it's construction chemical or wood finishes. So most of the product gaps are already filled. And we have already caught up with the market growth, though only low base. And our salience remained low, but we are [ part of the market growth ]. And overall salience of the new business is also going down. And in Decorative also, we have taken a price increase which is more than 20% on the YTD level. Most of the increase was taken in the third quarter. And third quarter also, it was towards the later part of the third quarter. So our focus [indiscernible] continued on paint part because there are a lot of new businesses [ that were being ] added. So even in the new businesses, we are primarily focused on CC and wood, yes, but paint [ and ] the new commercial distribution, that remain the focus. Subsidiaries also [ fairly ] did well, barring Nepal where the -- there was impacts of COVID in the last quarter and where the growth was negative. But otherwise, all our subsidiaries have done well in terms of top line growth. Bottom line, there was stress in all subsidiaries because of the inflation. And the story what is there in India was true for other subsidiaries also, where the [ pricing gain ] is taken, but the weighted impact so far is low. And maybe going forward, it will [ get reflected ]. Some of the other highlights are like the product mix is better. Material cost reduction initiatives continue. And our judicious overhead management in place, our continued focus on that remains. We are a great place to work certified for 2021. And we have taken several digital initiatives across [indiscernible] and the back end for the purpose of enhancing our efficiencies [indiscernible], which will definitely help in the long run. When it comes to our employees, more than 96% are vaccinated fully. And all operations are normal. There are certain supply chain logistics challenges, but we are able to manage that. And we have ensured that our customers' supplies are not interrupted without -- any supply chain issues. Also on a good highlight is that KNP is rated in the top quarters -- quartile of S&P ESG index in CSA 2021. Also we are retaining top quartile in manufacturing space and #1 in paint sector by CRISIL in ESG compendium. So it's a good news for us. Coming to financials. In quarter 3, the -- in terms of EBITDA, there was degrowth of 28.5%. And for the PAT, the degrowth was 34.7%. And on 9-month basis, in terms of EBITDA, it is 11.4% down. And PAT is 13% down. So these are some of the highlights. For the quarter 4 outlook of January, February, I think that, because the third wave -- though impact seems to be limited, numbers are coming down, but January and February, in first half, we expected that maybe the demand could have some impact of that. But that will be for the limited period. In the Industrial segment, the shortage of semiconductor is continuing and because any of the additional capacities [ which are getting created ] is a little long term. So that problem may continue. Maybe to some extent it will get mitigated, but it's may -- continuing. So that's the situation. Inflation continued to still rise, so there is no ease in inflation. And especially in [ industrial India ], we'll still see that, month-on-month basis, quarter-on-quarter basis, the inflation is still going high. And therefore, the price increase we have taken is still not able to mitigate the inflation [indiscernible] need to go for more price increase, yes. And that is how we see that how we are able to make a progress in the coming quarter. So this is from my side, and now we welcome the questions.

[Operator Instructions] The first question is from the line of Avi Mehta from Macquarie.

Sir, I wanted to understand the price increase impact across Decorative and Industrial. After this 21% increase which was taken in December, crude has also moved up. We would like to hear your thoughts on whether we need more prices increase in Decorative. And the second question, which is linked, is in Industrial the difference in price increase is only about 3% or so. So Decorative is 21%. Industrial is about 18%. Would that additional 3% be enough for Industrial margins also to come back to normal? Or the cost inflation basket is relatively different and hence there is much higher need which will come. And by when do you expect that?

Yes. So in Decorative, the 21% price increase as of now probably has mitigated the inflation. And similarly, what happened, [ like ] the food prices [ are going on ], but we are more dependent on the crude derivatives. And there is always a lag. So as of now in the near short term, we feel that this price increase is sufficient in Decorative, but Industrial, there is a big gap. The inflation is very, very high. The material inflation is higher than the consumption inflation what we have seen in the last quarter, and therefore the need of the price increase is further higher. And as I said, in Industrial, because [ most of the price happen in the ] solvent category, the inflation is further going up on a month-to-month basis. So there the [ price fill ] requirement is definitely there. And accordingly, we are [ pursuing ] our customers, though we have taken a good increase, but I think we are [ pursuing ] our customers. And we'll have to wait and watch at how we are able to -- how and when we are able to get it.

And on that one, if I may, just to follow up, it is fair to see -- argue that all your initiatives -- the non-auto is where the return to normalcy should be faster than the auto. Because you did highlight that auto semiconductor issue [indiscernible].

Yes, in non-auto, if you are talking about the top line demand, the normalcy is faster because in auto the demand is not much issue. Issue is related to supply chain and logistics, while in non-auto that issue is not there.

We lost his line, so we'll move to the next question. [Operator Instructions] The next question is [indiscernible] Aggarwal from Prabhudas Lilladher.

Yes. Sir, I have a couple of questions. My first question is my -- I may have missed, but what is the volume growth in your Decorative and non-decorative in this quarter?

The volume growth, as I said, in Decorative, it is high single digits. And then the other segments, the growth is lower.

Okay. So sir, in that context only, if I look at, say, some of the peers, in this quarter, the -- your overall demand scenario was quite good. Even your -- most of the quarter was normal, so any particular reason that our volume growth is lower than the peers, say, from not only this quarter, say, from the past many quarters the last 1, 2 years?

Yes. So there are like 2 things I will say. One is that it all depends on the mix, market mix, business mix. So one factor is, like we said, new businesses, that we are -- [ we were the latest startup ], as we have caught up with the growth, but our salience is low. So on the higher salience, that is there and still getting the good growth in the market [ that we wanted ]. The other is that traditionally our strong markets are the up-country market. You can say rural or up-country market. And we are not so strong in the other markets. So this time, this year, if we see, the growth in the other market is quite higher if we compare with the up-country market. So that's also a disadvantage we have. [ However, it is ] that, because, as we said, our approach of striking a balance between top line and bottom line, we have not been much focused on the economic segment. And there are also the differences there. So these are some of the reasons, but having said that, [ maybe ] they have done better.

Okay. And sir, as you said, in the economy segment, Kansai has been weaker, but how has been the trend in the last 2, 3 years with Soldier or some of the other products which we launched? So are we trying to fill the gap? And how far we have been successful in that.

So Soldier has done good. In fact, we have been able to establish a good [ traditional ] distribution structure to Soldier and we started with the economic [ work. And Soldier also has ] started moving up now. And the attempt is to see that how do we upgrade. So having established a distribution there, also the story is about upgradation. And the growth from the [ hiring ] of the product is something which we are trying to gain better than the economy [ range ].

Sir, my second question is on the margins because our margins are a multiyear low. So will it be fair to presume that the margins have bottomed out?

So as I said, that again in our case, because we have a very good blend of Decorative and Industrial -- and quarter-on-quarter, you can see that mix also changes. So there are like festival periods where the Decorative salience goes up. And then other period, the salience of Industrial goes up. And in Industrial, the volatility of the inflation is still going up, so I would say that in Decorative probably what you are saying is yes because no one knows about the feature [indiscernible]. But Industrial, I think this situation still continues to be going up.

Okay, sir, that is pretty helpful. Just one bookkeeping kind of a question: In our results, there's a -- notes to the accounts which is a 6 number. And it states that there were some trade deposits which were written back of INR 34 crores and INR 41 crores in 3 months and 9 months. And there is some incentive which has been, you can say, written back, so can you throw some more light on these 2 transactions?

[ And so here's ] Prashant to answer that.

Yes. So you must be aware that we have got machines which are placed in the market, which is -- actually goes [ even free of cost ], but generally what happens is that some deposit -- trade deposit is taken against that. And that is returned to the dealers provided they complete the targets. Now these -- or this write-back is pertaining to such dealers who have not completed targets. Now if you look at other companies, normally they do year-on-year basis. We had deferred this write-back for some time, so that is what we have taken, this, and corrected to be in line with the peers. As far as the second, incentive: What we are talking and what you have seen in the note is the incentive from the state government. We have our plant in Lote, where there is some incentive available towards expansion. So that is that incentive which we got. And that has -- that is not a write-back. It is actually accrual given by the state government which -- of INR 9.8 crores, [ which you got it ]. That's [indiscernible].

Okay. Sir, the second one seems to be related to some GST, et cetera, if I...

Yes. So it's like this. Whatever investment you do in that plant and whenever you make sale from that plant, the GST collected against that is [indiscernible].

So I think, sir, this will be a recurring item going forward then.

Yes. It is -- that's not -- it's not a big amount, the total sanction. We got part sanction now and there's a sanction expected maybe in next 6 months.

Okay, but this is not something which will recur for, say, next 4, 5 years [indiscernible].

No, no.

No, no, no.

Okay, sir, regarding the first part of your trade deposit, on the tinting machines basically, so which now you have taken back. Now what will happen, for example, if -- those dealers, if their deposits have been taken by the company? So will they go out of the system? Or can they, you can say, take some action against the company? Anything on that front?

No, no, nothing of that sort because this is not -- this is -- this money belongs to the company. Now it's -- see, as I told you, they have not completed targets and which they are aware. And there is a clear-cut understanding, if the target is not completed, the amount is forfeited. So it's part of the agreement.

Okay. And sir, this amount is -- on how many tinting machines this month has been forfeited. Or how many dealers? If you can share.

[indiscernible] small amount [indiscernible] all put together, say, a number of machines [indiscernible]. It's -- say it is accrued over a period of 4, 5 years. That is what has got -- [ been forfeited ].

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

Sorry, sir. My line got dropped. I just wanted to sort of check on that Industrial part again just to follow up on that. Would it be fair to say that the non-autos is where you expect a faster recovery in gross margins? And autos will come with a lag given you -- because you pointed towards chip shortage issues likely repeating some time.

So in terms of demand, it is yes, but in terms of inflation, as I said, Industrial, whether it is auto, non-auto, there the inflation continues to increase. So in terms of margin, we'll have to wait and watch because inflation is still higher.

Okay, sir, yes. And sir, that -- I know it's a little bit of crystal ball gazing, but by when do you expect things to start normalizing on the margin front? Any -- I understand it's not something that will be hold onto, but your expectation will be better than ours, so...

It's very, very difficult. We don't know what is going to happen, so it's very difficult to comment on that....

Our guess is as good as your guess.

Next question is from the line of Amit Purohit from Elara Capital.

Just one thing on the sort of distribution expansion. You said double-digit growth in distribution. Can you help us with the count? And second, this is the markets where you are -- I mean the -- is the strategy is -- to get into new markets or existing market where the, say, [ gains ] of the new expansion is higher?

I didn't get your second question.

I said where is the salience of the expansion higher, whether it is in our existing strong markets or into new markets.

Okay. So distribution is the -- when we say 10% because our distribution was around [ 37,000, 38,000 ] over the year. As of now, we are [ talking about YTD in December ]. So over a year, it is 10% increase on that particular base. And it is across. In fact, the growth in our weaker markets is slightly higher, which is South and West.

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

Sir, I just wanted to hear your thoughts on are you seeing any impact of the sharp price increases that you've taken in Decorative, especially in the "bottom of the pyramid" segment. Because you've also shifted your strategy towards focusing on the premium end. So -- while 2 different questions, but yes, if you can share both and throw some light on both of these basically.

Well, logically, if we speak about what we keep reading and when we look at the [indiscernible] recovery -- and I think there is a lot of data which is floating which says that in the higher end the income has gone up in the [ COVID ] period, whereas the lower end, there is definitely a dent on the profit of the population. So from that logic, there should be some reduction in the demand in the economic category, but having said that, in paint, probably it does not yet reflect so much because the penetration is lower. So if you look at [ FMCG status ] -- where the penetration is very high. So there is a direct implication of this kind of thing. While in paint, because the penetration is lower -- and even if there is some increase in the penetration that compensate the dent on the demand -- but otherwise, we do feel that there should be impacts on the economic demand. In the premium category, the story remained intact. And there, in fact, we feel that the growth will be better.

Understood. And so there is no real reason or interplay for shifting strategy because of this, or you have consciously shifted because you're expecting demand to be impacted going forward. And -- or you're seeing some signs of that basically.

So it's part of, I think -- earlier also we discussed that we have worked on a new strategy and that effectively we are getting more focused on emulsions and this kind of premium products. It doesn't mean that our focus will go away from the economics, but you know that the aggression in terms of growth will be on this kind of category. And for this year, as we said, because of these reasons, the growth in the market is also expected [ to be better ] because it's a long-term strategy. And whenever the growth in the economic category comes back, anyway, we have the range available. So depending on the market response, those things will vary, but our area of focus will be into these premium line of products.

Understood. The reason why I'm probing on this, sir, is that earlier also, 2 years back, we probably entered the economy segment quite late after seeing the growth in the -- at the industry level was far higher in that place. And then we had lost some kind of demand because of that. So again, while we always wanted to focus on [ premium end ], we had to shift strategies 2 years back because of the shift in industry. And again we are shifting the strategy back to [ premium end ], so I just wanted to check on that, but okay, I'll take this offline. The other question: I wanted to just check with you on can one assume some of the future demand has been preponed as individuals who -- are sitting at home and painting is a planned activity. So when they saw that they will start going back to offices, "Let us get any kind of work done." And demand can probably see some kind of a moderation going forward as opening up happens. Your -- so your thoughts on this point, sir.

So just to quickly respond to your earlier question also. So it is not a shift in the strategy. It is not that gradually we are changing that. What happens is that we are a national player and the entire-range player. So therefore, we are there in the entire range. What we have done with this culture is that we have created a base. We have created the right distribution. Now once you have created a base, thereafter, you [ can sell ]. And you can decide in every year then how much [ aggression ] you want to showcase on that in terms of the growth. There is a base that's already created. And typically, in this scenario where the inflations are high, the market growth is higher on the premium segment. And also when there is a stress on the margin related to inflation, I think it makes sense to go a little more aggressive on the premium kind of thing. Otherwise, that -- in the normal situation [ and the situation comes back to the normal ], one has the leverage to see that growth in categories because, at the end of the day, in the premium category you do invest more in terms of marketing activities, while in the other categories it is more of an expansion of the distribution, which is team-related expense [ and the ] distribution. So that's a difference between these 2 kinds of things. And therefore, some kind of modifications depending on the market situation is what we look at. So that's the first part. And the second part. You know that -- we have no insight like what you are saying, that the demand is preponed. We only feel that, whenever there's COVID impacts and -- maybe to some extent, the -- painting activity gets deferred. And then in the coming months or the coming quarters, it can generally come back. So we have no understanding as of now that there's any preponement because of people spending a lot of time. That's a change in the behavior we can say because people are spending a lot of time at home. So they are becoming more conscious in terms of doing painting or doing better painting. That's an implication [ of that ]...

Understood. If I can turn the question a bit: How much of pent-up demand do you think has been addressed or satiated? Yes, any insights on that? Any research [ would you give that shows ] up on this insight, sir?

Well, not really. I have -- I don't have -- really, [ the numbers, it's ] difficult to comment upon that, but what -- I can only say that, whatever demand was there, I think that is catered. And maybe some drop which is the last part of the December or January, that may get addressed in the coming months because the situation improves.

Got it, understood, okay. And lastly, on the other expenses line item on the P&L, most -- so we would have taken a lot of cost initiatives during the pandemic; and maybe certain other costs that were getting postponed or deferred or not -- so like, for example, travel and so on. Can one assume most of the costs is back and this is like a normal steady-state, yes, expense run rate that will continue?

We can say that, but just like travel and all, it still was not a complete year. Or to that in extent, you can find in area like travel, business travel, that may still go up in the coming period.

Yes. What you saw in the third quarter is what I was trying to ask.

Yes, yes.

Got it, okay.

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

Sir, 3 specific questions. Let me take one by one. So first is, as you mentioned, that one of the reasons why our volume growth is lower than industry peers is because our focus is on -- more on, say, premium and super premium and not so on, say, economic segment. That impacts our volume growth, but shouldn't that positively impact our gross margins versus peers since our mix is getting better? So just your thought on this equation.

I think the -- you see some kind of improvement on the sequential basis. That is one. Second, what is happening is, as I said, in the premium category also there are a lot of new -- introduction of new products. So typically if you see that, earlier, market was [ where it is smooth finished ], now there are sheen and glossy finishes. So on the unit basis, the margins are good, but in terms of percentage, if you look at some of these new categories which are coming up, in terms of percentage, that will be lower. So that is how the situation is.

Okay, okay. My second question is on, yes, automotive volumes. So at least from the auto players, the commentary is coming that sequentially the situation is improving [ some ] month after month, if not, say, this quarter versus last year this quarter or, I mean, any period. So rather than year-over-year sequentially the situation is improving, do you have a different view from that? And what kind of indication you are getting from our clients.

I think sequentially, yes, because, I will say, they are able to manage it better now. The capacity constraints of semiconductor [indiscernible], but they are able to manage it better, so I think we agree with the view that sequentially it's a little better.

Okay. So when you say normalization will take time -- so you are comparing with a specific year or a specific period.

So we are comparing like -- what we keep hearing is that demand [indiscernible] supply. So there is still a gap. Because if we look at passenger vehicles, the booking period is still quite large. And also the availability of the semiconductor is still not enough because, I think, that depends on the additional capacity which is getting created, which is -- normally takes about 2, 2.5 years of period. So [indiscernible] 1.5 years is past, so to some extent, the supplies are improved, but it is not back to completely normal. And therefore, we feel that it will take some more time to come back to the natural demand and that we are able to service that demand.

Okay, understood. Sir, third question is on, yes, client additions -- or our client list in electric vehicles, either 4-wheelers or 2-wheelers. And all the emerging players or the current -- so what is our penetration in the electric vehicles, both 2-wheeler and 4-wheelers? Are we present there?

Yes, yes. So mostly you know that -- in the electrical vehicles, that most of the companies do not have their -- yes, this in-house paint shop. And therefore, you know that they are getting it painted through the ancillaries. And most of these ancillaries, we are present.

Both 2-wheelers and 4-wheelers.

Yes, yes, both.

The next question is from the line of Chanchal Khandelwal from Aditya Birla Capital.

Firstly, what is the cut in the advertisement expenditure you have done in the first 9 months?

There's no cut. And so there's some increase in the advertising [ expense ].

Sure. Given the context that the competition is going to [indiscernible] Decorative, I mean, this is [indiscernible] there is 2 more players who are planning to enter this. How do you feel that your market share has been in Decorative? And what are the steps you are doing to further increase market share? Any thoughts on this line?

Yes. So Decorative is, as I think I mentioned in one of the questions earlier also, that the approach what we are taking is a problem solution approach. To that an extent, the starting point is the product. And our focus has been introducing a differentiated product, which we started with 1, 2. And now we are there with 3 and 4 products and more products in pipeline. That is first part. The second part is in terms of our marketing. We are doing activities around consumer and activities around painter because, when it comes to decorative painting, one side is the consumer. The other side is painter; and so the initiatives which we have taken, which I earlier spoke about. So that would be area of focus. And third part is the distribution because, the more distribution you have -- more accessibility to have with the customers. So we have a large infrastructure, more than 100 sales offices, warehouses. And therefore, we can cater to a larger number of distribution through that. And the distribution for -- getting more distribution, obviously you'll have to ensure that -- how fast you're able to liquidate your material from the dealer shop. And therefore, for getting that extraction from the counter, you need to work on the demand [ relation ] which is related to a painter because painters also play a big role, and also related toward demand for the consumer. So these are some of the activities which we are working upon in a disciplined manner. And therefore, we feel that we must continue to work on this particular strategy. And as we keep getting results in terms of increasing demand and getting the distribution numbers in place, we would be able to achieve [ our ambition ].

Sure, sir. So just on the first point, on the product basket which you are trying to increase, do you have putty and construction chemical? Well, that is on basket, which others are trying to do. And also, on the distribution of -- enhancements which you spoke about: The #1 player spoke about adding almost 45,000 distributor in last 18 months. They have added hardware dealer or paint dealer. I mean they're very aggressive. I mean, given that competition heating up, why don't we also go in an aggressive manner, I mean, in terms of distribution expense, sir? [ They're 2 back-to-back question ]. I mean...

Yes. And your first question is putty. Yes, we have putty. And that's part of our economy segment where we have not been aggressive as of now because of the current situation. Construction chemical, yes, we've started; and we have caught up with the market growth. The entire range is introduced in the market and we are getting a good response. We are making good growth in construction chemical. On distribution, what I spoke, double-digit growth of -- in direct distribution. There is no indirect distribution here, and what we are comparing is with the direct and indirect distribution. So there are a lot of new businesses which are added in construction chemical [ and sales ], where there is a lot of indirect distribution. As of now, I'm not talking about those numbers. And when I said double-digit direct distribution growth, it is you can say that -- better than the market growth of that -- increase in the direct distribution.

Sure. Just lastly, there was an article in the media that said that you are starting to buy office space. Any capital commitment you are doing for the office space? And any plan to sell the office location that we currently have?

Prashant, can you answer the question?

So this office space we have purchased. Yes, we'll be moving out over a -- maybe next 6 months. Right now there's no plan to -- anything on this current place where we are.

Well, so if you are moving out to the office space, this land becomes vacant, right? If I am reading it right.

Yes. So the thing is we wanted a space where we can -- because what has happened going -- due to this new working -- we are working on, a lot of space is vacant here. So we wanted to shift to a place where we can accommodate the number of people who will be attending in a smaller place. So that is what we are doing.

Yes, yes, but this office space, you may sell at some point in time, is what I'm just trying to understand...

No plan [indiscernible].

No plan, no plan...

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

My question is that if we assume that over the next 2 months the price of your products as well as the input prices remain constant at today's rate. In that scenario, will the Q4 gross margin be higher or lower than the Q3 gross margin?

I hope what you said is right, but it is not the reality. So even in the month of January, we are seeing a higher inflation.

Yes, but you would also be taking price increases, right?

Yes, but generally what happens is there is always a lag because you are always carrying inventory which is a higher-price inventory. So that impact also will be there.

And the other thing is that some price increases that you would have taken in Q3 would not have fully affected Q3, but they will fully affect Q4. So therefore just trying to understand that, in Q4, do you expect the gross margins to sort of recover from the Q3 levels. Or do you think there is some further downside [ like this ]?

So 2, 3 points. See, one is, as I said earlier also, that quarter-on-quarter basis, there is a mix change. So since we have a very good mix of Industrial and Decorative. And October to December, generally what happens, because of the festival period, the contribution of Decorative is higher, which in the coming quarter the contribution of Decorative is lower. So that can affect because the margins are higher in Decorative if you compare with the Industrial. The second point is what you have said is right, that whatever price increases we have taken, that was factored partly in the last quarter. Partly it will get factored in the coming quarter, but [ new point ], which is related to a mix change, and also the further higher inflation will have some impact on that.

Okay. So basically there is a possibility that Q4 gross margins may be on the lower side compared to Q3, right? Am I reading that correctly?

I just said what is the reality, this -- you can read whatever you want to read out of it.

Okay, okay, understood, yes. And in terms of your distribution expansion, et cetera, just wanted to understand, are you sort of expanding? And I am sure that you are doing both, but I want to understand where sort of the focus is a little higher. Are you expanding more in your -- already markets where you are strong? Or are you expanding in sort of relatively -- in markets where your market share is relatively weak, as far as the distribution expansion is concerned?

Distribution is -- the objective is always [ state basis ] because generally you look at what is your numerical region. What is your weighted reach? And even if, say, in the stronger market you're X percentage of numerical or weighted reach -- and we have a target of extra something. So accordingly, that we will decide that maybe we want to add, for example, 100 dealers there, but when it goes to the weaker market, there maybe the increase in terms of number of dealers could be a little higher. But in the weaker market, we always look at the quality dealers [ which mean the ] weighted reach, while in the stronger market, you know that -- where our market share is strong, we go for the numerical reach. So in terms of number of dealers, that you may still find that they are a little higher in the stronger market because of numerical reach, while in the weaker market we look at the weighted reach. So numbers could be lower, but the impact is higher.

Right. So what I will do, sir, is not look at the absolute number of dealers added but the percentage of addition. So obviously your base is larger in this thing in your strong market. So on that higher base also, you think the percentage addition would be higher than the weaker market.

Yes, yes, yes, it will be higher than the weaker market.

The next question is from the line of Lakshmi Narayan from ICICI Prudential AMC.

Sir, my question is that what are the important initiatives you have taken in the last 3 years and which has actually resulted in success. It could be on across various fronts. It could be [indiscernible]. It could be operational, or it could be getting into new segments. While there is always business as usual like appointing distributors, et cetera, what are the top 2 or 3 important initiatives which you've actually taken with a long-term mindset in the last 2, 3 years?

So the first part is in the area of technology and service, where we are continuously working to get some advantage, that -- in terms of providing product which are very, very different and understanding the problem in B2B and B2C and how we can provide a better solution to that. Because technologies are a strength. And I will say the services level because, for the long run, it is very, very important. To give you an example: that if you see last 2, 3 years, the number of products have really gone up in Decorative. Earlier, there used to be one finish. Now there are multiple finishes, matte, semi-gloss, sheen. Different varieties are coming. And typically if you find that dealers have a limited space, warehouse -- and most of the dealers, majority of the dealers, will not be able to expand, [ especially ] in the bigger towns. They'll not be able to expand their space, so those other service requirements goes up. So this is one area of initiatives that we are continuously improving, on that particular part. The second part is ensuring that our customer satisfaction index is improving, which is also related to services or settling the deals, those kind of things. That's another area. And from there, it goes to the, as I said, demand addition because, yes, if you are dealing with the customer for them, especially in the Decorative area, what is important is the return on investment. So how much demand we are able to generate, which is a function of how we increase the demand from consumer, opportunity for consumers [ where in fact ] our brand is very strong. We have a very strong mind share. So as of now, what we are working on, the painter activities, painter engagement, where we are able to convert the demand into [ the converging areas ]. So this is related to B2C. And then B2B. Our strong footing always has been technology service; and capability to ensure that, whatever product we supply online, that is completely okay at the line. Because the different line conditions have a different kind of humid conditions, climatic condition. And therefore, there is always a challenge that we -- how [indiscernible] working at the line. So that kind of service network, we already have in place, where we have the capability to see that the client [ consents smoothly ]. So these are the areas which we have worked upon.

Could we -- sir, on the B2C thing, right, what -- any drastically different approach you have taken to increase your reach? Or I mean it could be not just a number of -- number in terms of expansion but something which you have actually changed the way in which you would look at, say, 5 years back and now.

See, it's like the -- one point is product because product is always a starting story. So slowly, if you look at, say, 5 years back, maybe all companies, all products are similar, similar price point, which is not the situation now. There are many products where there's a complete, let's say, differentiation in terms of the proposition and in terms of the pricing. That is first part. The second part is the channel. If you compare to last 5 years, the channel, it was a regular channel, [ art ] channel or paint channel, where the typical approach is, [ if somebody goes in, whether it's a painter or customer ], you go and buy the products. Now the change is that there are segmentations which are happening within the channel. And there's a new generation coming of the dealers, and they are not really comfortable with the old kind of setup. So therefore, there is initiative in terms of ensuring we have a preferred partner model; and every year, that we are adding numbers; and going forward, that we want to add more numbers on that. The third part is that the painters that were -- painters get attached to the dealers. And the painter also look at what kind of demand generation. Or the additional leads can happen. So there are initiatives around digital marketing where you generate the lead and ensure that, that lead gets connected with the painter and the dealer. So it's like an entire process which is going through a transformation or the change process, and that is what we are seeing. And that is what is being done because, all these digital initiatives, along with the physical model, the connectivity of that is making the differentiation. So processes are getting changed.

The next question is from the line of Jignesh Makwana from AMSEC. Due to no response, we'll move to the next question, which is from the line of Jaykumar Doshi from Kotak.

See, I think one of the view -- or there is a common view on the street that Nerolac -- sort of Nerolac's decorative paints business gets impacted while industrial coatings business goes through a challenging phase. I've not tracked the previous cycles, but when I look at the past 2 or 3 years, I notice that, since the time auto slowdown commenced in CY '20 and CY '21, there was a sharp cut in advertising spend. So if I look at CY '19 [ mark ] that maybe Nerolac's media spends were comparable to Berger, today when I look at CY '20's, it's on same [ mark ] data, it indicates that you're spending a fraction of what you were spending in CY '19. And today, perhaps those media spends will be much lower than the #2 player. And again, when I look at growth rates also, I think there is some evident market share loss, so I'm unable to sort of -- so is this assessment correct, that there is effect of weakness of Industrial or challenges of Industrial on Decorative at the organization level in terms of the budgets, the way you plan about growth?

So I'll tell you in 2, 3 parts. So one is typically what happens is that -- if we look at the paint purchase cycle and how it works. So first is the mind share. And then you'll try to convert that mind share into the market share or the market sale. So when we look at the period what we are talking about, yes, we have a spend higher in terms of advertising or increasing the consumer demand. And once you reach to a particular mind share, then -- and if -- that mind share, that is good, then you try to bridge the gap between the market share and the mind share. And that gap can be built with that -- when the conversion happen and the distribution [indiscernible] at the end the painter [indiscernible]. So -- and therefore, in that situation, your focus shifts to further -- creating the further mind share, ensuring the conversion part. So to that an extent, you know that we have reduced in terms of advertising and spend more in terms of the inter-creation of the distribution [indiscernible]. That is for [ center ]. Second is that, maybe last 2 years, also the advertising got impacted because of the COVID results. Because for 4 months, 5 months, 6 months, there was no kind of advertising [ to that in extent now ]. So it has come down. And when it has come down even in this year, if you see, maybe we have [indiscernible] down on the advertising because, for a large amount of months, we felt that it may not be necessary. And therefore, what we spent is more on the market activations, local market activation, especially related to a demand generation to the painter and dealer part. And third part, what you're saying is, as I said, that depending on the situation, some kind of balance between the top line and bottom line, one has to do but, as I said, more in the area of the economy range of products. Because these are like commodities. Basically you give more incentives and then you can get more sales. So there, even if you have a short-term loss in sales, it is not something which you cannot try to get back. More important is emulsion that -- which is definitely consumer oriented. And there, if you are able to maintain your [ sale ] and able to increase your salience, that is something which is long term. In the economic category, one can always modify the approach depending on the situation.

Understood. This is helpful. And as you think about your business from the next 2 to 3 players perspective, do you intend to compete across the segments? Are you increasingly going to position yourself or focus more only at the premium end of the portfolio?

So generally you see what happens is that, since our -- the advantage is what -- distribution. And then therefore, whatever distribution demand, you have to provide the entire range. And we are entire-range players, so therefore, that availability of the entire range will be there, but when it's -- comes to the focus, obviously the focus is never on the entire category. The category "other categories" moves with the focus category, so there, in fact, we'll be very, very focused on few categories of products. I'll not take the name, but few categories of products. But they are obviously as a part of the emulsions. So the product which has differentiated propositions at a differentiated price point. There we would be spending more of our resources in terms of providing the focus on those products, and other products get -- tags along with that.

Understood. So you will not -- unlike the market leader, who has taken a very conscious call over the past 2 to 3 years to aggressively sell putty, economy emulsions, construction chemicals, even something as sort of a INR 10 per kg priced tile adhesive. So you are clearly not going in that direction. That is the right understanding, correct?

Well, range. In terms of range availability, all these ranges are available...

Available, but you don't want to sort of just capture revenues or volumes by aggressively pushing...

[indiscernible]. No. As I said earlier also, that these products are commodity products. And as of now, we are not participating in that kind of discounting on these products. And it always goes with the time. When the time is right, you can decide that you know how much you want, but otherwise, at this situation, yes, we are not [ going into that here ].

The next question is from the line of Veenit Pasad from Investec.

Sir, just wanted to come back to the point where you've made a comment regarding new generation coming in, as far as dealers is concerned, and then moving on to the preferred partner model. Can you just elaborate on this? Is this a case where we are moving towards exclusive dealerships? Or it is a case where you will stop all -- multiple brands but still focus on a particular brand. How does that work?

Yes. So it is basically a change in selling approach from the dealers because there are market and dealers who are more dependent on the painter purchase. And there are market and dealers who are more dependent on the consumer purchase. So wherever there are consumer footfall and the shop conditions are not so good -- so in this model, that you provide a good, amicable kind of ambience at the shop; and provide certain demand generation activities specifically for the counter. And therefore, your focus is to sell more of a premium product because, as you -- more product that which offer the benefit to the consumer. And therefore, we train these next-generation people, who are now ready to work, capable of taking this particular thing. As well, in the past, conventionally, people sell the product, but they don't sell the benefit of the product to the customer. So these are -- we call it next-gen preferred partner dealers, that -- where we train them that what is the benefit and how you should pitch the product to the customer. Rather than just selling [ at the price ], concentrate on the benefit and what exactly the customer is looking for and if you can provide the solution. So it's a win-win situation. [ Person will get the ] answer to what he's looking for. And in the process, the dealers also manage good margins, so it's a win-win situation. That is how that we are taking this approach.

Understood. And is this an approach adopted even by other brands? Or it is [indiscernible] that you started this over the past couple of years. How the scenario is changing.

That is something -- the thing what I am talking about is very specific to us, but maybe in some other manner, they may have taken this particular direction. But we have a clarity in terms of that how many number, identified number. It's not something like open available in the market where anyone can get into it. So we identify the counter. We know where the footfall of the consumer is good. And then getting specifically into it. And therefore, it's not [indiscernible] scale of numbers to whatever extent. We're taking this approach. And as we keep making progress on that, then appropriately, gradually [ we'll fill it up ].

The next question is from the line of Jignesh Makwana from AMSEC.

Yes. So just one clarity question on the volume side. You said Decorative witnessed a single -- high single-digit kind of volume growth, and Industrial witnessed a low single-digit kind of volume growth. And if I assume, can -- you took almost 20%, 21% kind of price, I mean, Decorative; and 18% price, I think, in Industrial segment. Even if I'm assuming that you haven't factored the entire price hike in the Q3 itself [indiscernible] price hike. And assuming the 60-40 kind of revenue mix, I think, the growth which reported on a stand-alone business, that math is not [indiscernible], so am I missing some element over here?

Prashant, would you like to answer this question?

No, you are saying 60-40 -- because this is not matching, you are saying.

Yes.

So see, it's not like that. It all depends on the mix again. The mix changes. And within the range also within the Decorative and Industrial, there's a mix change happening. So accordingly, the growth, what Anuj just mentioned, they are the growth numbers.

Okay. Can you please quantify the -- what will be the mix component in the entire...

We don't do that. I will leave it to your imagination. Generally we don't say that.

[Operator Instructions] The next question is from the line of Hitesh Taunk from ICICIdirect.

Most of the questions have been answered. Sir, my question is on the current capacity, our current capacity. And what is the CapEx plan going forward?

So look. Capacity is good enough because, last few years, we have created a good capacity. As of now, the utilization is around 60%, so [indiscernible] capacity. And there is a regular CapEx spend, maintenance CapEx which should happen.

If you can quantify, sir, the CapEx...

So right now there are no projects. As said, normally maintenance CapEx, which ranges from 60 crores to 70 crores per annum.

Thank you. As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you, everyone. Thanks so much. I hope it was helpful for you. And thanks for all the good questions; a lot of good business, marketing questions. And we really appreciate that. We hope that we are able to answer and satisfy your queries appropriately. So we wish you the very best. Have a safe period. And we wish you happy 2022 once again. Thank you all.

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