ASIANPAINT — earnings call
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Prepared remarks
Moderator · Conference Operator
Good Evening everyone.
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Our first caller is Mr. Abneesh Roy (Nuvama Wealth Management), who has joined us through tele-conferencing.
Sir you are now live and can proceed with the question.
Q&A 28 | P a g e
Abneesh Roy
Yeah, thanks I have 2 questions this is Abneesh Roy from Nuvama.
My first question is on the backward integration big projects, so first is VAE and VAM, does it also mean in adhesive you will get aggressive, because you are mentioning VAM is the raw material for VAE.
So wanted that clarification; and when you say emulsion for future, what is the opportunity? what exactly is the future?
Is it 5 years?
7 years?
That time frame and similarly on white cement, why now?
Is it because cement players is going to enter paints and what could be the margin improvement because of the white cement Capex.
That’s the first question.
Amit Syngle
Okay, great Abneesh.
Good hearing your voice here.
Now I think when we are talking of the VAM VAE technology, which is kind of coming.
Yes, it would be helpful for us in the entire area of adhesives rightly because the VAM kind of goes into the adhesives in a strong manner.
So, it will give us a strong impetus in two ways.
One in terms of improving the kind of quality of adhesives which we can give in and second from the point of view of margins which would kind of come in strongly from that point of view.
So, I think it makes the entire area far more competitive when you can expect some aggression there coming in from us.
The second area which you asked.
Yes, it is a futuristic emulsion and this emulsion as I see it holds promise you know even for the next 40 to 50 years as we see it.
It’s not a question of just a dip for the next three years of five years because this is an emulsion which possibly, we will have to get into expansion after sometime, for sure to that extent given the kind of overall consumption it can happen and take it.
What this emulsion does is that one it has very low VOC which is the volatile organic compound, which is there, as compare to any styrene acrylate emulsion which is there overall to that extent.
So it offers a very huge leap to the companies who are on the bandwagon of environment friendly paints in a big way which anyway I think most of the organisation are something which are looking at in a strong manner.
The second thing it does is it basically impart some very good properties in the paint in terms of scrub resistance, in terms of stain resistance, and also from the point of view of what you know some other areas which kind of coming which enhances the overall durability of the 29 | P a g e product, when we look at from the overall interior paint’s perspective point of view.
So, I think as a combination it works very well and not only this as I said that kind of really offers you a strong kind of advantage with respect to the overall margins in terms of what it will improve as we kind of go ahead.
Second question on white cement, which you said.
Now obviously I think this white cement we have been kind of looking for at some point or sometime in terms of investing because this is not because of any other entry which is happening in to the paint market but more from the point of view of a purist backward integration initiative, where we feel that if we have to really sustain our aggression in terms of going into the under coat space, because please remember that we are into powder products across which are not only from a putty perspective but also in terms of textures, in terms of tile adhesives, and lot many other areas where white cement becomes a key ingredient to that extent and therefore we have been exploring this for a point of time and we think that this is a very good move we are making so that today it kind of offers us a huge advantage which kind of comes in and from an overall perspective we can say that even in terms of some of our products, it can give us a boost in terms of at least about 5-7% gross margins, overall to that extent going forward.
Abneesh Roy
Sir, there is one follow up on the white cement opportunity, could you discuss that how big will that be.
Already in putty you are big, but when you are saying that you will target the tile finishing, tile joining, etc also and white cement, how big is that opportunity for you?
Amit Syngle
So, overall, when we look at the Indian market that I think is close to about 7 to 8 Lac tonnes kind of a market in India in terms of the whole repairing and other segment to that extent and it is going at almost about 15-20% overall so I think that is also big opportunity and 80% of that sold by our network to that extent.
So, it becomes a fairly big opportunity in terms of selling in retail packs and look at possibly taking that market especially when we are also into bath, tiles and sanitary.
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Abneesh Roy
Sir, my last question is on H2 growth.
So, 3 things there.
In Q1, you had mentioned downtrading in Economy end, and in Q2, you are mentioning in Luxury also there is some level of downtrading.
In H2, you had very high pricing growth starting in Q3 itself last year and of course this time the festive is early.
If I put all this together, would you say in H2, the pricing growth and volume growth in double digits as of now, it is looking very tough?
Amit Syngle
No, I don’t think so, because see I think it’s a function Abneesh of how the overall product mix kind of augurs.
So, to that extent when you look at this quarter as I said largely, you know there is a little bit of inferior product mix in terms of what we have got.
As we get into Q3 and Q4 traditionally, the product mix is quite good overall in terms of what we would kind of see.
We also saw that other retail kind of demand got effected because of the monsoons which were there and also the exterior kind of season got affected in a very very big way.
So, I don’t think so that that should be the case we are still looking at possibly going forward.
I think the volume growth should be healthy and so would be the value growths coming in this thing… because please remember we have also taken some price increases now, which will start kind of giving us some effect as we kind of go ahead.
Abneesh Roy
Amit, just one last follow up and I’ll end there.
So, last year Q2 and this year Q2, your margins have been negative surprise and you also mentioned the mix deteriorate in Q2, so is it because exterior paints is a higher margin business?
Because that is the only seasonality I see in terms of demand.
Amit Syngle
No, see what happens is that largely, if you look at quarter 2, September is a strong kind of this thing for all the products, whether it is wood finishes, whether it is emulsions, whether it is kind of water proofing products, whereas July and August are largely stocking months which really happened to that extent.
So, I think to some extent 31 | P a g e possibly that has kind of a toll with respect to it, but the gross margins over the last year quarter have actually gone up from 35 to 35.6% in Quarter 2.
Abneesh Roy
That’s all from my side, thanks a lot!
Moderator · Conference Operator
Thank you Sir.
Our next caller is Mr. Avi Mehta (Macquarie) joining through zoom video platform.
Avi Mehta
Hi Sir, am I audible?
Amit Syngle
Yes, you are.
Avi Mehta
Thanks sir for the opportunity.
First, I just wanted to kind of understand for the integration in the backend that you have kind of contemplated could you share what has triggered this expansion given typically, raw material availability has not been an issue.
Also, does this not kind of weigh on return profiles, because typically backward integration has meant return profiles sticking ahead, so would lover to hear your comments on these 2 aspects, thank you.
Amit Syngle
So, actually, I think Asian Paints has been into a backward integration earlier as well as you know a lot of emulsions, we are making ourselves for quite some time whereas a lot of companies do purchase all the emulsions from outside, and to my mind you know the emulsion making has given us a very big boost with respect to our overall margins and profitability to that extent.
So I think for us the backward integration has kind of augured quite well with respect to the overall increase in margins and overall kind of really flexibility in terms of procurement to that extent.
The other thing which I see is that this investments are fairly unique and these are not generalstic to that extent so the VAM VAE is really kind of a protected technology worldwide in terms of what is there and it is the technology of future so to that extent which we feel that this is a backward integration 32 | P a g e which really helps us from the point of view of not only increasing our margins substantially but also from the point of view of imparting some new customer facing properties which can give our products a new kind of turn in the market from the point of view of how consumer see it and how they see the performance of the products coming in.
Similarly, the white cement one is pretty strategic, because of the fact that today what we see is that, if there is the raw material which is kind of contributing to a significant contribution in the formulation and today, we have a control in that thing we can really vary various properties at the manufacturing stage which helps us possibly giving qualities in the finished product.
At the same time, I think the marginal gains kind of really change because in some of these products these are the powder products are fairly low-end products to that extent and any kind of improvement in margins can be really very benefiting for you.
So, I think is the strategic and we think that cost and really the differentiation in the market at two very big kind of pillars in terms of what we are riding as far as the backward integration is concerned.
Avi Mehta
Okay sir, okay I hear you ask second bit is just a clarification would it be fair understanding that our margins are going to move to around 39.5 - 40.5 % by 4th quarter, is what you indicated.
What I wanted to understand, you know because you highlighted down gradation in the painting demand, does that not kind of be a risk.
Do you see that as a risk or are you fairly confident about still reaching that target, in the third quarter and second half of the fourth quarter?
Amit Syngle
No, I don’t see any risk because if you have seen that you know we were at 35% last year in quarter two and then we kind of came to about 39% overall as far as quarter one is concerned.
So, I don’t see anything I think this is just a quarterly phenomenon which is happened more from the point of view of the inflation, which we are kind of seeing in the market and little bit cyclical to that extent.
We are very confident in terms of looking at saying that the band possibly going forward would still remain at 39-40% in terms of the overall gross margins as we kind of go ahead.
So, I think It is just a 33 | P a g e phenomena of the quarter in terms of what we are saying but going forward, I don’t see any areas, this thing where possibly the margins would kind of stay at this level.
Second, I think the downtrading and so and so forth is possibly just incidental which happens, because you must remember that today, you know some of the price increases which we have taken have an immediate impact but over a period of time, they normalise to that extent because this is a consumption market and this is not a market where people have too many alternatives or they could defer their overall demand indefinitely to that extent.
Even in covid we have seen that people whenever normalcy has come in they have kind of gone and splurged in terms of doing up their homes to that extent.
So, I see no reason in terms of why possibly it will not jump back.
Avi Mehta
Got it sir, thank you very much and wish you luck.
Thanks a lot sir.
Amit Syngle
Thank you.
Moderator · Conference Operator
Joining us through zoom video platform is Mr. Shirish Pardeshi (Centrum).
We request you sir to please mention your name and your company name and proceed with your question.
Thank you.
Shirish Pardeshi
Yeah, Good Evening this is Shirish Pardeshi from Centrum.
Amit, congratulations for showing that kind of aggression in the market at this time.
So, two things, one is that on the Riddhi Siddhi joint venture, what are the timelines? and do you mean that you will bring the limestone to India and probably towards near the port and the related question to that, what is the reserve and what are the rights Riddhi Siddhi has for the mines?
Amit Syngle
Okay, so first of all, see the limestone reserves are in Fujairah as I said and Riddhi Siddhi actually has a right for you know very long time and I think over 50 years to 100 years as we see it in terms of the overall limestone market which is there.
So, I think 34 | P a g e that is not a concern.
We are putting up a clinker manufacturing unit right in Fujairah so that is something which is what we are planning.
This would kind of come up in the next about 24 months in terms of what we see in terms of this thing.
We are taking aggressive timeline in terms of putting that there.
We would put some grinding units in India in terms of getting the product so that we could kind of save with respect to overall cost which would kind of come into that extent and which align with our putty locations overall to that extent.
So, I think the whole area is where we are able to conserve cost the maximum, at the same time what we are able to do with the formulations so that we get advantage in the product.
Shirish Pardeshi
Okay, that’s helpful.
Second question on the capacity expansion which you have mentioned.
How soon, how quickly which are the locations you have finalised or if not finalised...
This is primarily going to be on decorative emulsions, or the capacity expansion is going to be related to something else also.
Amit Syngle
Yeah so, the overall capacity expansion is respect to our decorative, because that is the key category which has been growing at a very very strong pitch what I showed you with respect to the overall volume growth, quarter on quarter to that extent and largely with respect to our entire initiative on water-based products to that extent.
We are looking at certain brownfield projects as well overall, to that extent.
So, our entire Ankleshwar plant is something which we are revamping up and really kind of doing and putting some solvent based additional capacities which are going to come in there to that extent and as we kind of go ahead we have the second phase of our certain investments coming in some of our plants going forward.
So, I think these are all coming from the point that we are sitting at a certain capacity utilisation and this will all come in the next as I said about three years in terms of what we want to kind of put, which takes our capacity to a certain level as was pointed.
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Shirish Pardeshi
My last question on the demand side, I think the raw material prices are falling down so is that their growth which is tapered or the inventory by the trade has lowered.
Obviously, the rains has prolong, but generally the sense which I am getting that event trade is also expecting very sharp drop in the prices is that the fear or is that you have already implemented or communicated to the trade?
Amit Syngle
See you know, I’m a firm believer that you can’t really play with the prices as if you are playing on a stock exchange.
Okay, so this is something which is really a strong imperative that as a leader, you need to have responsibility, that you can’t be erratic in your behaviour in terms of just increasing and decreasing the prices at your wims and fancies in terms of the way it kind of comes in.
I think we have a larger onus towards the consumers in terms of seeing how demand augurs to that extent.
I don’t think so we are getting immediately in terms of looking at any decrease in prices despite the fact that there would be a raw material decrease which would kind of happen.
We would love to kind of really let things stabilise over a period time and then take a concerted call, in terms of what is there because we are all in favour in terms of seeing to us the consumer demand sacrosanct and would like to continue to kind of really see that we are growing handsomely in the market and overall gaining share.
Shirish Pardeshi
Okay, thank you Amit I could see the bandage on your hand so please take care.
Amit Syngle
Thank you.
Moderator · Conference Operator
Thank you Sir.
Our next caller is Mr. Percy Panthaki (IIFL Securities) joining us through zoom video platform.
Sir, request you to unmute yourself and proceed with your question.
Percy Panthaki
Hi Sir am I audible?
36 | P a g e
Amit Syngle
Yes, you are.
Percy Panthaki
Two questions from me.
One is, what is the total price increases that has been taken between 31st March of this year versus what it is now.
That’s the first one.
Second one is, your difference between the derived pricing, that is the volume you give versus the sales and the announced price increases, if we add up on a YOY basis, the difference is quite high this quarter may be about 13-14 percentage points.
The derived is 10% which is 20 minus 10 and the announced price increase are close to about 24%.
So where do you see the stabilising.
See we have always had some amount of difference between the derived and announced price increase.
This quarter, It is definitely on the higher side, but would you say that out into the future say FY2024 or something, we would still have something close to 10% difference in the derived pricing, sorry derived versus the announced pricing.
Yeah, those are my 2 questions.
Amit Syngle
No I don’t think so it is that simplistic the way you are kind of putting up, but first of all I must tell you that that between 31st of March and now, we have taken about approximately 3% price hike over a total inflation of about close to about 8% in terms of what has happened in quarter 1 and quarter 2 to that extent.
So that’s in terms of the price increase numbers in terms of what you were asking.
The other is from the point of view of this derived number in terms of the volume and the derived value growth in terms of what you are kind of speaking of.
See this is a larger function of too many factors which kind of come in to play one is the whole area of the product mix; in terms of how the product mix is auguring out and which products are doing because the margins on various product categories are very very different in terms of what it kinds of really looks at and the price increases we have taken are also not uniform across the products.
The price increases vary from product category to category.
In some categories, the price increases have been far higher in some categories the price increases has been strategically kept low overall to that extent, so that we don’t kind of really upset the elasticity of pricing at 37 | P a g e the consumer level to that extent.
So, I think going forward, some of this difference will kind of continue.
It is very difficult to really kind of put a number saying will it be stabilised at 10%, will stabilise at 8% or 12%; but I think some variability will look.
I think its best kind of really look at this thing stabilising and saying that in terms of where do we settle, in terms of its kind of a derived growth in terms of what you are talking of.
Percy Panthaki
Sir, reason I ask is, even if we assume that volume growth going into FY2024 will remain robust say at around 15%; but FY2024 will have very little price increases assuming that the materials stay at the current level and then if just implied pricing differential is to the extent of 10%, then we will dip into a single digit value growth in FY2024. So, is that calculation correct and if not, where am I going wrong in that?
Amit Syngle
No, it’s not the correct because you know what can happen is that when the volume growth goes up, what I was explaining to you.
If it goes on certain category of products where the possibly, the increases which we have taken are fairly high to that extent, okay, it would kind of really increase the value growths to that extent in terms of overall to that extent.
Now, if it kind of really doesn’t kind really get on to those product categories and the growth is coming from some of the other growth categories, then the differential would kind of get maintained overall to that extent.
So, I would say that possibly going ahead, you know, our aim would be that possibly the you know the we are able to focus on the right set of products overall, which kind of gives that kind of a value growth and overall gross margin and profitability to that extent.
So, as I said, I think the correct way to possibly kind of look at is that you can’t put an algorithm or trend on to it that it will remain like this.
It kind of really would kind of augur from the point of view of how the product mix kind of shapes up and second please remember that this 3% increase in terms of what is there which is the which will also have some implications going forward to that extent although nominal and not to the tune of what possibly it was last year.
Percy Panthaki
Thanks Sir, very helpful.
Thanks, and all the best.
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Moderator · Conference Operator
Thank you sir, we request everyone to kindly limit your questions to only 2.
Our next caller is Mr. Jaykumar Doshi (Kotak Securities), joining us via zoom video platform.
Jaykumar Doshi
Yeah, Hi Good Afternoon, thanks for the opportunity.
I want to understand this Rs.
2100 crore investment for backward integration of VAE a little better.
You know, if I did some ballpark maths, your overall RM cost COGS is about Rs.
19,000- 20,000 crores.
So, I am assuming your Emulsion purchase will not be more than Rs.
7,000- 8,000 crores today is that right understanding?
Amit Syngle
No as I said, we don’t kind of really purchase too much of emulsions.
We are making a lot of emulsion inside but as I said that there is a clear pricing difference in which comes in from the point of view of what we are using and what this possible technology will kind of offer to that extent.
So currently we might be purchasing some quantity of this emulsion from outside, which we are trying to make, but overall, when it kind of replaces the existing emulsions in terms of what we are using it will also give us a lot of benefit.
Jaykumar Doshi
You talked about 500 to 700 basis point gross margin advantage for, in putty because of this white cement backward integration.
What is the magnitude of gross margin improvement that this capex can drive for your rest of the decorative portfolio or emulsions portfolio?
Amit Syngle
So, overall, what we see is in terms of the advantages would be much higher as we look at from the point of view of the VAM VAE coming in terms of what it kind of really pegs us at from the point of view of overall margins.
What we also have to remember is that we will also kind of see that whether as we kind of use this the emulsion going forward, whether we would like to kind of absorb those margins or we would like 39 | P a g e to also pass some of them in strategic pricing overall, in terms of as you go forward to that extent.
But I think the margins here could be even higher
Jaykumar Doshi
Final one, how did this 1.5 lac capacity compare versus decorative paints.
So, you are targeting 22.57 Lac tonnes of decorative paints capacity so will this be…
Amit Syngle
Sorry, we lost you in between.
Will this be?
Jaykumar Doshi
How does this 1.5 Lac tonnes capacity of backward integration compares versus your overall decorative paints’ capacity of 22.7 Lac tonnes that you are targeting.
Amit Syngle
Okay, so I think what it does is that it kind of bolsters our overall water- based emulsions capacity till about I think 2027 or so to that extent.
After that might have to go for a further expansion, given the fact that the way we are kind of growing and projecting.
So, it would kind of definitely give us an advantage till about 2027-2028, but we will then have to kind of get into expansion plans over this 1.5 Lac KL capacity which we are talking of.
Jaykumar Doshi
Thank you so much, that’s it from my side.
Thanks a lot.
Moderator · Conference Operator
Thank you Sir, our next is Mr. Varun Singh (IDBI Securities) joining us through teleconferencing.
Sir, I request you to please mention your name and your company name and proceed with your question.
Thank you.
Varun Singh
Yeah, thank you very much.
So, my question is on the new endeavours.
So, in the decorative segment sir if you can mention some ballpark number with regards to how much margin accretive, we expect with backward integration overall company level Sir.
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Amit Syngle
Sorry are you saying I couldn’t understand your question.
Are you saying that because of VAM VAE in terms of this thing because if you are hearing, the previous caller was asking exactly that.
Varun Singh
Yes sir, so white cement, VAE VAM combined both any ballpark number that we should expect with regard to overall operating margin improvement for the company.
Amit Syngle
No, as I said that overall basically, I think individually both will affect the gross margins in terms of the product categories differently and therefore we will have to see from the point of their overall contributions in terms of the business, as we kind of grow forward what are you doing; but overall as I said, in both categories.
I think the gross margin improvement easily to about 4-5% will happen.
Varun Singh
Okay sir, sir my second question is on waterproofing business, so where do we stand as on now?
You can give some under objective or understanding about the overall business.
Amit Syngle
So, waterproofing you are asking… okay, so what we think waterproofing we have been in the business of waterproofing for the last about 8 years now.
Overall, the business has been growing substantially over all and is now a significant contributor in terms of our overall business going forward.
Both at retail level as well as from the point of view of projects we have been doing extremely well.
We think that as we look at from the retail market, we are easily one of the leading players in the market in terms of what we are and our brand ‘SmartCare’ has done extremely well.
We have a slew of really differentiated products which we have offered in the market which are performing very well overall in the market.
Even from a project point of view, we have kind of got into the whole backward integration of looking at making bituminous emulsions and bituminous membranes and HDP membranes which are there and specialised range with respect to 41 | P a g e the repair and construction chemicals.
So today I think our range is more than 200 odd products which we have which come in the whole area of waterproofing and we think that today our positioning of being an expert solution provider is very very strong and this is the business we think will continue to kind of do well for us.
Varun Singh
Okay Sir, thank you very much and all the best.
Moderator · Conference Operator
Thank you Sir, Thank you all for joining.
I now request Mr. Amit Syngle to give the closing remarks
Amit Syngle
Okay, I think it was extremely good in terms of taking at least some of the questions from you and I think hopefully we have been able to answer some of your queries which have come into that extent.
We look forward in terms of your interest with the brand kind of going up again and again and I can promise you that today, I think the whole area of excellence in terms of taking the brand ahead is something which we kind of really pursue very very strongly.
Wishing you a very happy Diwali and a strong festival ahead.
Thank you so much! ###