Akzo Nobel India Ltd

NSE:AKZOINDIA

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and welcome to Q1 FY '21 Earnings Conference Call of Akzo Nobel Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Manoj Menon from ICICI Securities. Thank you, and over to you, sir.

[Manoj Menon, analyst]

Hi, everyone. As always, it's our absolute pleasure representing ICICI to host the results conference call of Akzo Nobel India. Today, the management, as usual, is represented by Mr. Rajiv Rajgopal, Managing Director; and Mr. R. Krishna, Chief Financial Officer and Whole Time Director.

Before I pass on the baton to Rajiv for the presentation and post that, the Q&A, et cetera, I do want to congratulate Rajiv for the board proposal to reappoint him for 5 more years as the Managing Director.

Sir, in the last few years of tracking your company as an analyst, we are very excited to note the guidance what you have given, the timelines what you've given and also the milestones, et cetera, has been [indiscernible]. And in my opinion, consensus is pleasantly surprised, and we look forward to yours stewardship, driving most stakeholder value for Akzo Nobel India in the medium term.

Rajiv, over to you, sir.

[Rajiv Rajgopal, executive]

Manoj, thank you so much, and thank you, [indiscernible], for anchoring this. Manoj, thank you to you and the team for sort of outlining. And -- humbled, as you all know that my first tenure was ending on October 31st. And I got a formal confirmation yesterday, in fact, day before evening in terms of the tenure. I'm also told I'm the first Managing Director after many, many years between ICI and Akzo Nobel who's got reappointed and that should give a lot of confidence to our investors, who had one major [ goals ] in terms of the fact that the top management, the CEO and the MD changes between 3 to 5 years. I somehow see that as a bit of a positive. If a person goes to operationally within Akzo Nobel to be able to do more for India, but we'll -- for the moment, I'm very much here and focused on the India journey.

What I want to do today in the next 15, 20 minutes with Krishna, our CFO, and Whole Time Director, is to run you through a few slides. I'm not going to bore all of you with the slides, but the slides are already available on the website. So really, this is to walk you through. For those of you who were in the AGM yesterday, a little -- maybe a couple of slides may be repeat, but it's -- this is more focused on the quarter that went by compared to the AGM was on the year that went by, okay? So that's how we'll do it. So please indulge me in just the next 15 minutes.

So first about Akzo India. We have approximately about 1,500 employees. We've got 5 offices, 5 manufacturing sites, capacity augmentation and expansion plans are in place. I've talked about it in all the investor calls. Our focus, our priority is on scaling up distribution, both online and off-line. We are now in about 5,000 tons. And our real focus is to say that, look, how can we try and make sure that the distribution 2.0, which we unveiled is really yielding results as we start entering into the smaller towns.

We did a district-wise analysis, and we saw that at least in about 290 districts. We have almost a negligible or zero presence. So our endeavor is to say that in the next couple of years, how do we really get that? How do you build the brand. Dulux when we did research with consumers, it comes across as the best-in-class quality. So how do we leverage on it? How do you really start dialing up marketing. And those are things that we will talk about later in the call today, yes.

We today cover more than 20,000 retailers, and we have about 4,000 customers with whom we enjoy a great relationship. We have a world-class ASC center in Bangalore. And again, an invitation, unfortunately, because of COVID and a few other things that got derailed. We will look at hosting an investor call for those analysts who are interested once in Bangalore. And we also started what we call the low-cost innovation center in Thane, where we are also building to drive differentiated products. In fact, India is going to be the hub or test center for a lot of these products that we may want to do within the region or even outside, yes?

Can I move to the next slide, [indiscernible]. Yes, thank you. Next slide. So on the business environment, really, I'm just going to quickly run through. I think most of you have known this since we all read the same newspapers. But I think, look, I think personally, for me, it's -- I think, if there's any place to be in the world right now, it's in India. India is, on the cusp of the next 5 years, going to see some tremendous growth. And we saw some newspaper articles on 3031 -- 2031, the growth -- India will continue to be the fastest and growing at between 7% to 7.5%.

I genuinely think that the quite favorable, the macroeconomics are favorable from an India point of view. And we see also that reflected in the last quarter in the core sector growth at 8.2%.

One of the things that is really aiding our results, and you've seen the results is really the softening of crude. Of course, in the last 2 weeks, crude has started marginally inching up, so we need to keep an eye on it. Of course, crude and ForEx, the U.S. dollar are the 2 variables that impact the profitability and impact the pricing. So that's something that we will keep our eyes on. And one of the things that we also note is the fact that the interest rates are at elevated level, and all of us who've got home loans know that today, it's much higher than the last 2 years. So it's -- I do still think it's favorable compared to many years ago, right?

Yes, let's move to the next slide. So if you look at the key strategic drivers. Next slide, please. We've outlined on the slide, you can see our new CEO, Greg Poux-Guillaume. Greg has worked for McKinsey and GE, and he ran the Alstom business for GE. So he knows India very well as he told me. He set up GE power in India. And you know all of -- many of you may know it's a very robust business. And even through his McKinsey days, and also Sulzer, where he was the CEO, and he turned around the company. He's a Harvard sort of student and Harvard educated.

And what I really see in him as a person who's very laser sharp in terms of what he wants to do. There are 4 global principles that he's annunciated. Margin management, operating expenses in terms of adjusting costs to the market reality. How do you really reduce working capital to enhance cash flow, which is an important need from an Akzo Nobel global point of view. And how do you really make sure that the integrated supply chain is far more responsive to the business.

So these are the 4 -- pretty much this is what has been driven all across, and it's very relevant from an India point of view, because we, in Akzo India, enjoy very high share in the premium part of our business. And really, what I've seen in the last few months is a bit of a K-shaped recovery, where premium consumers have not reduced spends. But you can see companies, both FMCG and in paints, and you've seen the largest player. We've got a higher component of mass markets, right, which typically was the fastest growth driver. Obviously, you've seen a bit of a blip.

It's also because of a base correction because last year, the consumptions were at an elevated level. And so I think a couple of months between June, July, August, one should expect that you cannot read into it. But I do believe that starting September, October, with seasonality coming in one of the best Diwalis, I do think that you can see good growths really bouncing back. So this is what we are really working on. And Greg is here with -- me and the Chairman of the company, Oscar, at our Thane side.

What we -- and the reason I'm showing this slide is because it was the inauguration of our robotic pelletizer. This shows the level of automation we've done and our Head of Manufacturing is turning next to Oscar between Oscar and Sumit, who's from IT. And one of the things that we've done is bringing technology, IoT, et cetera, into our factories. Really, the level of automation in Akzo India, I think, is second to none. Forgetting the industry, I wouldn't even argue, it would be best-in-class in if you want to look at the best in the FMCG business, yes.

Next slide, please. Now on Paints, just to sort of run you through because I know some of the questions will come. So we've had double-digit growth, specifically very high double-digit growth in premium and projects. That's one of the reasons our mix is a little better and has improved, and we've seen a strong finish to the quarter with premium leading the category growth after a few quarters where we saw the otherwise, the mass and the economy leading the growth.

We'll continue to see healthy demand in the projects business. Our projects is doing double digit. And we see that a Tier 3, Tier 4 terms. So we embarked on distribution 2.0. While the contribution is much smaller. Obviously, we've had rapid growth there. And this quarter, the quarter that's gone by, we've seen slower growths in the metro. Again, that's a base effect. But when you normalize it, if you look at a moving annual total, we see no major issues. And we've seen margin expansion led by RM softening and mix improvement.

Next slide, please. In our Coatings business, we've seen double-digit growth coming across many of our business, except one, where we had a bit of a challenge. Automotive specialty again had very good growth because of good demand in auto, we are in the aftermarket and some good work being done on both the premium and value brands.

Our powder coatings saw double-digit growth across segments. We've seen a good uptick in the automotive, real estate and consumer durables.

Marine & Protective, I must say, it's a cyclical business, and we are now riding the other end of it, which is the [indiscernible] up and we've seen both in Marine & Protective. Infrastructure, oil and gas and navy, we've seen a good uptick.

The one business, which was challenged a bit was Industrial Coatings, while coil grew, we had a bit of a challenge in packaging because last year in the base, there was a huge consumption, onetime consumption by one of our customers. And that obviously is only going to start after a couple of months again. So you will see that uptick in the next quarter, perhaps, right?

And it also -- exports were a little lower to Sri Lanka and Bangladesh in the preceding quarter, and that is also getting corrected. By September, we should be able to get back there, yes. So that's largely on the businesses.

Next slide, yes. The other thing really is in terms of financials, and I'll request Krishna to just walk you through the financials. Krishna?

[R. Krishna, executive]

Thanks, Rajiv. And we began the year -- financial year FY '23, '24 with a high note. We have achieved an absolute record in terms of absolute [Indiscernible] revenue contribution margin, EBIT and the PAT. Revenue, we grew around 7%, driven by our B2B businesses and the details of which are shared by Rajiv in the earlier slides.

One of the things which I would like to call out here is that the previous record was in the Q3 of last year, which is driven by the seasonality, and in a non-season quarter, we could be able break that record. That's a positive news.

And how we have done is that we remain focused in terms of our execution and also the strategic priorities alluded by grids are embed in our internal systems, which has translated into margin expansion, recorded the prices. And then our product mix improvements, as explained, Rajiv, the premium has been continued to enhance our margins, and the margins expanded by around 400 basis points. And then EBIT cost points resulted in the EBIT growth by around 40%. So that's largely about the financial results. It's an extremely, extremely satisfactory quarter. And -- yes, back to you, Rajiv.

[Rajiv Rajgopal, executive]

Yes. So I'll quickly sort of go through it. We've had a record in absolute revenue in terms of EBIT impact, yes. So a little disappointed. As all of you can see, we did INR 999 crores, and I was telling Krishna that if I knew I was going to touch INR 999 crores, maybe we should have just stretched a little more to get the INR 1,000 crore mark, it would have been the first ever, but I'm certain that we will sort of achieve it very soon, yes.

Can I have the next slide, please? So really, we will skip the financial slides. I think Krishna has walked you through [indiscernible].

I think for me, the critical one is the last slide, which is the ESG slide. Next slide, please. So really -- this is what we are really driving hard in the company. We want to be the best in class, not just within Akzo Nobel, but even globally, to say that how do we really get moved to zero. We already zero liquid discharge, we're zero waste to landfill. We are 100% compliant to now plastic-waste management rules.

But how can you move from just being compliant to leading edge? How do you really become the company that sells the rules for the future. So we are right now working in terms -- we've already started recycled plastics for our paints, et cetera. We're already on 34% renewable energy. How can you really take that further? On social, we've done a lot of work. I think all of you have seen the CSR awards that we won and credit to the team. But it's not just about policies also about how we are making an impact. And it's one of the projects that we've done is a project called Indradhanush, where we've actually gone to about 4 states. And we realized during COVID, a lot of women were not, particularly in the lower economic trade we're not getting an opportunity, so we've provided the means to open a shop, and many of them sell Dulux, only Dulux in those shops, in those [Indiscernible].

It's something that we started, and we are delighted because some of these ladies have started getting revenues of almost about INR 30,000 to INR 50,000 a month and really imparting them the skills of painting and understanding how to run a business. And this is something that we really want to do to bridge the equality gap and gender gap in the country, not just within the organization, but even how can we influence outside.

In terms of governance, I don't think I need to talk about it. I think Akzo clearly is, to my mind, one of the reasons I love this organization is it's best-in-class in terms of safety, integrity and sustainability. It's -- all our employees are completely sort of at it, and we've got 100% independent audit committee and 50% of our board comes from independent directors. So that's broadly what I'm really proud of around these vectors, if you are able to really make a reshape and be the best-in-class and also redefine standards. That's something that we really look forward to, yes? So that's really pretty much from us. Of course, after that, you would have the safe harbor statement, et cetera.

But really, Manoj, back to you for the Q&A. I think this is a session that we enjoy most. It also sort of adds huge value to us, gets us to think [indiscernible], so we really look forward to it. Thank you.

[Operator]

[Operator Instructions]

[Manoj Menon, analyst]

[indiscernible]. Can I just go ahead and ask a few things?

[Operator]

Yes, sure. Go ahead, please.

[Manoj Menon, analyst]

Rajiv, 2, 3 things, sir. Actually, one, let's start with the short-term one, very short term rather, which is not usual for a conversation. This quarter, there was delayed range, right, for about a week or 10 days. One of the commentaries, which you mentioned and also we heard from some of your peer group have already reported till date. Most of them except Indigo and Berger. It's actually the non-deco outperforming deco mostly. The question here is, does delay grains conceptually benefit painting? Or is it just an academic expectation?

[Rajiv Rajgopal, executive]

I think it's just a change of days, Manoj. So you're talking about the quarter that went in June. In June, India had a deficit of about 6% to 8% to 10% of rainfall. July, we are in excess of 7% to 9%. So when you hear the next quarter coming, it will get both adequately compensated. I think let me address your fundamental question, okay? I think the fundamental question is it's true. What's really picking up is infrastructure, real estate.

And what I mean is if I look at -- if I were to look at give an Airtel sort of an example where I worked, it's an annuity business, right? Those are the places where the revenue sort of uptick L&T, et cetera, our large customers have been fantastic, right? So as far as decorative paints is concerned, yes, I don't think -- I would only say that, look, as I mentioned, our projects business and our premium business, which is really [indiscernible] of what we do, the bulk of what we do has been very strong, right?

Yes, it was a little a tad lower than what I would have expected because we were guiding for a double-digit growth sometime in the mid of May, yes. But one of the things that we've seen is -- and you've seen now 3 players announce their results, which are I think what must be about -- roughly about 67% to 70% of the industry, we've got the other 2 players will take up right?

I think, obviously, you're also looking at elevated levels of last year base, right, and also some price increases during the period of time that was taken. So I think you want to keep all that factors, which we've taken is fundamentally demand sort of off -- I would say that's why I call it a K-shaped recovery, Manoj. I don't see -- I see premium consumers or consumers with a certain upper state of income. And you can see it in the FMCG play, it's very similar when you look at companies, companies which have got a higher premium play, some of which are not also listed and of which I know results, right, have outperformed.

And companies which have got a larger mass play. I think in this quarter, we've seen a little bit of a slower growth. But again, this will get corrected because the more closer -- this time, Diwali is fairly late, it's in November. So you're getting perhaps after almost close to about 7, 8 years, a solid run for the next 2, 2.5 months. So I think we are optimistic.

[Manoj Menon, analyst]

Sure. Sir, the second question, in fact, you answered part of it in the recent commentary. Look, given the K-shaped recovery, which we call it, which is visible in most of the consumption, whether it is tapers or discretionary, given the over-indexation which you have at a portfolio level in the premium end of it, in the deco, is it fair to expect that your growth should be far higher than industry average at least for a time like this?

[Rajiv Rajgopal, executive]

So on the premium end, I would say that I do expect it to be because we are yet to give segment level -- we do our own analysis now in the last year or so in terms of a segment level. But I do expect that it would be a tad above the industry, yes. But again, Manoj, there are drivers to this. And the drivers to this are basically the innovations, the differentiation and the products that people bring in pricing, et cetera.

So on a last quarter, if you ask me, yes, I do expect on the premium. And I do expect -- we really thought when we looked at the quarter results because intuitively, when you speak to large dealers, one got a feeling that the numbers are higher. But now we broadly know now the market growth. We still believe last 2 years has been gaining market share. and we've been sort of a little low key on it because it's good once the full year is over, we've done it because the last year got over, and we've really gotten and informed all of you that we started getting market share.

We believe that in India or in about 6, 7 key states, we are still getting market share. There are 3 or 4 states. We've had some issues in the last quarter, which we are working on, we are correcting, and we know where we have lost and we are putting plans that in a couple of months will bounce back.

[Manoj Menon, analyst]

Sir, I have a few more, but I'll come back and step back in the queue. [indiscernible], can we take the questions in the voice queue?

[Operator]

Yes. We'll take a question from Nikunj Doshi from Bay Capital Investments Advisors.

[Nikunj Doshi, analyst]

Congratulations on good results and as well as for being reappointed as MD. I just wanted to -- if we go through most of the analyst reports on the paint industry and even after the current result despite results being good, most of the analysts are skeptical, putting by recommendation because of the Grasim's entry into the paint sector. So what is your view on Grasim's entry into the paint sector? And how do you see dynamics changing for the industry going forward [indiscernible].

[Rajiv Rajgopal, executive]

So Nikunj, my view doesn't change. Firstly, thank you for your wishes. Of course, my appointment is subject to all shareholder approvals. So I don't like to count my chickens before [indiscernible]. So I'll wait for the formal closure of the process, but thank you in advance. You see as far as -- look, let's just go back, okay? We've had about 2 or 3 formidable competitors into the industry. Let's not demean any company. I think these are all companies in there in the segments, and these are powerful business houses and all [indiscernible] my respect have come into the paint industry in the last few years, right?

I don't think the industry rankings have changed at all. If at all, I think from our point of view, we've really bounced back, which was really [indiscernible] when I came into the job in 2018, and very clearly, I knew that there is an issue, we need to work on it and we correct it. And we've been really putting our head under the ground and really putting our teams to really focus on correcting the core issues and making sure we are there.

Now as far as Grasim's entry is concerned, look, again, they come from a very [indiscernible] business house. They have had some phenomenal launches in products. I've had the benefit of also completing them in one sector that I worked, which is in telecom, right? So I think, look, it's going to be a function. At this point of time, we are doing scenario planning, okay? That's what I've learned in my life -- in the business schools I have studied, I've also been very fortunate, thanks to one of the companies to being sent to Harvard. So I'm doing scenario planning between me and myself, Krishna and our teams, we are looking at 3 or 4 scenarios that could be there, which is not to be shared right now. I'm not in a position to talk about it. And we will look at it.

We believe that, look, because we've got a premium position, right? We're the only multinational company with a phenomenal product. Why do people buy Dulux because of the quality of product. So we are focused on saying, how can we make it and people like yourselves fall in love with us and paint your home, right, because what we've seen is 9 out of 10 people who use Dulux or let me -- even to be on the conservative side, 8 out of 10 people who use Dulux, after 3 to 4 years, come back only to our brand. right? So pretty much the users are fairly solace in nature. So really that's what I would say on the paint side.

Grasim's coming on the paint side, coating side, so it's unscathed for the moment. And we've got great technology grid working out there, relationships with customers. People look at our products as innovation like powder, we've launched metallic bonded powder, which is typically used in very advanced markets, Europe, Middle East, et cetera, where you get phenomenal, it's consistency of paint and you get a metallic finish, et cetera. So we are focusing on our journey right now, to be honest.

And we will see. We have to look at it holistically how they will enter, what are the price points they will enter, are they going to play a branded route versus a pricing route. And already some pilots around. We picked it. And let's wait, we'll have to go step by step to answer your question. I think this would be more relevant if you ask me this question within maybe after 6 to 9 months.

[Nikunj Doshi, analyst]

Okay. No, because analysts are more [Indiscernible] rather than the companies.

[Rajiv Rajgopal, executive]

No, I understand. But I think you'll have to trust the people who are doing their jobs. We've -- our strategy is -- and we've got a presentation to our board in a couple of days, is crafted keeping all the new entrants in mind. And I think if I look at all my learned -- the other players in the market. I would say the same. I mean you've got people of very high pedigree running these companies, I don't think if I were an analyst, I mean when I -- as an individual outside the job, look at buying stocks, I think I look at the pedigree of management, quality of what is the lineage, I mean our lineage is Akzo Nobel.

At the end of the day, the key concern for you is, is Akzo Nobel interested in India. And that's answer because India is the first country that Greg Poux-Guillaume has visited. And let me be honest, he has made it very clear to me that even if 1 month revenue dropped because of some issue, we are going to continue to invest in India. And I've not heard that commentary for a long time. So I'm personally highly excited at all, if at all, I almost feel 22 years of age now. We -- really, to be honest, and bring it on. I mean, let people come in, and we will -- I think I'm very sure I got a capable team and the industry players, there are very strong drivers of this business: brand distribution, tinting machine and technology, painters, customer connect. It will take a while to build. That's what I would like to say. Again, I don't like to belittle any player. I think all the players who have entered have all tried their best. So it will continue to happen, Nikunj. Hopefully, I've answered your question.

[Nikunj Doshi, analyst]

Yes. And just another one on the industrial and coating side. Are there any major breakthroughs, recent breakthroughs, which you would like to highlight or which can help us in growth going forward?

[Rajiv Rajgopal, executive]

So look, I think breakthroughs, we are doing a lot of work on sustainable products. I won't be able to tell you more because then it will no longer be a trade secret. Some of our Coatings formulations on international Interpon, et cetera, are focusing on sustainability, are looking at beyond color. We -- if you look at paints and coatings, we are housed on being a driver of innovation. So we are looking at, for example, let me give you one example. [indiscernible], which is there, what we do is we've got a product, which is a bio product, grated product, which prevents the [ hulk ] of the ship from getting seaweeds, right? So we are coming with many such technologies. We are looking at platforms. We are looking at propositions, which are going to be fairly enticing. And our global team and our local innovation teams are working in terms of best-in-class technology. Do you want to add something, Krishna?

[R. Krishna, executive]

I think you are clear Rajiv in terms of that. Our focus is to provide the improvising solutions to the customers and also ensure that value proportion is met and we grow further, yes.

[Rajiv Rajgopal, executive]

And also, we are using very powerful global tools on CRM, key account management. I think, frankly, I can vouch for one thing, that if you look at our key account management, I think it's at a different level right now.

[Operator]

[Operator Instructions] We have a next question from Gaurav Nigam from Tunga Investments.

[Gaurav Nigam, analyst]

Sir, one question on the industrial side of the business. I think a lot of discussion happens generally on the decorative side. I just wanted to understand a little more on the industrial side because I keep on hearing about the 35% contribution that you have been highlighting in the past as well on the industrial side. Can you give me a flavor may not be quantitative number. What has been the growth in this industrial side of the business in the last 2, 3 years since you took over. And historically, how do we differentiate in this business and may not the forward-looking statement, but historically, how do we differentiate, which has given this kind of growth in that industrial part of the business.

[Rajiv Rajgopal, executive]

Yes. So let me just take a very simple example. If I were to just look at the CAGR of the last 5 years versus the previous 5 years, the CAGR has moved from approximately 6% to closer to about 5.5%. Now so that answers the first part. In terms of what are the drivers, look, I think this is -- industrial coating, whether it's automotive, specialty coatings or it's powder, et cetera, is really built around technology and the quality of our products and the relationship we have with our customers, right?

And why do these customers come with us? So if you look at the auto industry or if you look at -- because we've got products, which are deeply differentiated in the market. So if you look at our powder. Globally, we have a 32% market share and the #2 player has got a 16% market share, right? And that tells you the quality of products where we do almost everything, yes. And it's architectural, we look at what we call the general appliances, you go into pipes, the pipe switch carry, high-value products like oil, et cetera, right, which are powder-coated, yes. So we do a plethora of products. We do vehicles, rims of vehicles, et cetera, automotive.

If you look at our brand Sikkens, it's the world's most premium brand, right? And Sikkens, we also do McLaren, Mercedes, as you all of you know, for [Indiscernible] 70% of the aerospace, of course, in India, we're yet to have big hangers. So that's MRO business, which is maintenance and repair is yet to come in. We certainly have phenomenally profit-accretive business, et cetera. And we -- so we enjoy great positions in our Coatings business globally.

I think as far as India was concerned, the focus was really first building the customer relationships because you may have great products, but if you do not -- you're not able to get customers who genuinely believe in your products, and believe that you are world class. Yes, the rest is history. I mean, when I came and I still remember a lot of customers, while they knew about Akzo Nobel, right, they really didn't understand it. And I must compliment to all the teams who have really driven it hard. And even more recently in some of the businesses, I say that the teams have really been focused on trying to communicate. There are products are world-class and key account management has been really bought [indiscernible]. So that's why I genuinely think we've got a proposition which is going to be a win-win and which is going to take us to the next level.

[Gaurav Nigam, analyst]

Got it. Understood. Just a clarification. When you said 6% to 9.5% to 10%, this is very specific for the Coatings division, right, that you said?

[Rajiv Rajgopal, executive]

Yes.

[Gaurav Nigam, analyst]

Okay. I understood. Sir, one more question on -- we have been hearing from a lot of government on this focus on CapEx and infrastructure development. So I think a lot of focus is coming on this project business. So I was wondering how is Akzo thinking about it? And have you taken any initiatives on that front to grow that part of the business? And is that a sizable part of the business. I'm sure you [indiscernible], but I just wanted to understand some thoughts on that front as well.

[Rajiv Rajgopal, executive]

Yes. So I won't be able to share the specifics on that because again, that's confident. But yes, look, why is government attractive to Akzo in the last couple of years because everything has come through [Indiscernible], where government is now going for specifications. And I think that's where we bring in a huge amount of -- so we can't do -- we are not good at, and we don't want to do any other stuff like lobbying, et cetera. We want -- we genuinely want people to use world-class products. So if you look at whether it's Central Vista or INS Vikrant, where we've been coating -- provided our coatings.

It really starts telling you today. I think the government is also believing in great quality. They understand the value of having a great brand and great quality [indiscernible], which is our fire protection, which is typically used in oil rigs is also getting used in key defense installations, et cetera, not just in India, but even in the United States, right? So -- and U.K., et cetera -- Europe, et cetera, right? So to me, it's the quality of products that you have, how well can they live their promise, right? So that's really what we are focusing on. I do think that government is a sizable business. In the last few years, it's dramatically changed in terms of building on specifications, looking at proper rate contracts, it's all e-bidding, so it's a very formal process. And I do think that will be a good channel for us as we even move forward.

[Operator]

We have a next question from Nirav Savai from Abakkus AMC.

[Nirav Savai, analyst]

My question is regarding the distribution spend, which we had highlighted in the last quarter, that we would be scaling up our distribution spend for deeper penetration. So how much did you spend this quarter, the [ A&P ] by side and appointing new distributors.

[Rajiv Rajgopal, executive]

So look, appointing distributors, the spend is nothing because it's a breakeven of 6 months. So I have a very simple formula. There's no point. I mean I don't anyway share those numbers, but really the appointment of distributers as far as we are concerned in the velocity are now generating compared to 5, 6 years -- or when I embarked on the journey in 2014, where the breakeven used to be about a year, 2 years, is negligible. So really, I think that doesn't.

On [ A&P ], look, we had during COVID brought it down to about 1.8. And I think going forward, I mentioned that we will dial it up to 3.5 to 4. On distribution spends in the markets -- new markets that we are entering, look, what we need to do is to build brand visibility, contractor programs, et cetera, which are fairly cost-effective. We are also using digital platforms now to build it. So we do see a lot of productivity in some of the work that we did compared to some time earlier. Hopefully, that answers your question.

[Nirav Savai, analyst]

Okay. Sir I was just trying to understand, this quarter, we had very good performance as far as margins were concerned. This would be stable kind of margins consecutively in the second quarter, after the fourth quarter, so what do we see sustainably going forward? How do you see this margin spending out? I mean looking at the kind of competition intensity ahead.

[Rajiv Rajgopal, executive]

So let me answer the first part, and I'll request Krishna to add. Look, the margins are comprised of mix and comprised of the softening of crude, right? So how do we see it? As I told you, we'll continue to aggressively play in the premium because really that's what is our strength, and we're not going to let go of it, right, Krishna?

Also, it's in terms of composition of decorative versus the Coatings industrial part of the business, that also has a confluence. And that varies quarter by quarter for all the companies, to be honest. So it's very difficult, Nirav, to be able to sell it because for example, in some quarters at 65, 35, some places, it is 63, 37, some place 65. So I mean, it depends, like as you enter into deco season, obviously, deco sales start zooming through, right? So I think that's been the pattern. Krishna, you want to add something in terms of [indiscernible], yes.

[R. Krishna, executive]

[indiscernible] all depends on the product mix and the...

[Rajiv Rajgopal, executive]

Yes. And also value creation programs. So we've embarked on a lot of value creation programs that we are working with -- so as a team. So some of the productivity measures and some of the value creation programs that we've sort of unleash we'll also add to this.

[Nirav Savai, analyst]

Right. And lastly, about this non-premium segment, what will be a contribution plans to scale up there in that segment as we are planning to penetrate deeper.

[Rajiv Rajgopal, executive]

See -- So that's from a growth perspective, obviously, we need to play in it because a large percentage of our growth is -- of the market growth is coming through segments like mass economy [indiscernible] and waterproofing, right? I think in waterproofing, we are very aggressive, I think, both in terms of quality of product and in terms of the growth. Where we are lacking is [indiscernible] to be specific and also some economy segments.

So we are looking at it. We are dialing in. I think there are some price point adversity that we need to address. We want to do something, which is going to be accretive to what we do. We are not going to do something for the sake of doing it, yes. So our focus is saying how can we specifically do things which is going to -- from a -- not just next quarter, but from a 1, 2 years, going to be the right thing to do. So that's where we are working.

[Manoj Menon, analyst]

[indiscernible] can I take 2 questions in the chat window, please?

[Operator]

Sure.

[Manoj Menon, analyst]

Yes. Sir, we have the first question or rather the multiple questions actually. I'll take one at a time from Shirish Pardeshi of Centrum Broking. Rajiv, the first question is, has there been any consideration to pass on pricing benefits to trade and consumers.

[Rajiv Rajgopal, executive]

So good question. The passing back has gone through elevated discounts, which have happened because of competitive pressures in the market. So at the end of the day, they started sometime in June, Krishna, yes? And we did see some of our competitors getting more aggressive maybe because also of a truncated demand in the first 2 months relatively to the previous quarter. So effectively, the pricing has got a bit corrected through that, Manoj, to answer the question.

[Manoj Menon, analyst]

Understood. And the second one is, do you expect the industry to behave differently once Grasim products hit the market in October, November?

[Rajiv Rajgopal, executive]

Look, I think this is a fairly mature industry. It's been a very disciplined industry. We'll have to see what Grasim comes and does if -- I would assume they're not going to sell their products free. If that is the case, then it's going to be a very different answer. But assuming that they're going to charge even INR 1 for it. I do think it's going to be a competitive one where companies like us will focus on making sure the brands are far more entrenched in the mind of the consumer. And we keep screaming that, look, anybody can come, but -- I also invite all the investors on the call, and I'm happy to offer you a small discount, and I'll take the cost off because of my reappointment if that goes through, right? But try Dulux because I think a lot of these questions will get answered at the moment you use it once. That's really what I can offer you.

Because I use it, I pay for it. I have no discounts, please, because I follow company rules, right? And when I use that product inside my home, I really know what it is about. Of course, you may think that I'm an employee, and I get intoxicated by the paint, almost like as if I am consuming whiskey, but that's not the case. I just genuinely think I mean intoxicated the quality of product. Because look, what are my scientists doing? I mean I hire from the best [indiscernible], if you have heard of these institutes. The team was really focused on converting the magic of science into the magic of paints. And for that, you need passion, the ability to think and that's what Dulux is all about it.

And that's why when consumers -- and this is not manufacture speaker, Manoj, and to all of you. Consumers, I'm sure many of you have used it, I asked TV anchors who have used it. They say, "Look, I used Dulux and I used it 4 years ago, et cetera." So that's what we really want to drive. And I think there, we've got a journey ahead, to be honest. We've got a long journey ahead. I've been saying this for the last 3 years. I'm focused on that.

So I'm not -- let's look at what the new player brings in. It's a formidable player. We all understand it will come with their own disruptive strategies. We'll address those disruptive strategies when it comes. At this point of time, it's like when I was a young kid, my father used to tell me one simple story that Rajiv don't think that the tiger is coming, the tiger is coming and live your life because then your life would have gone by. Manoj?

[Manoj Menon, analyst]

Yes, yes, loud and clear, sir. Completely understood. I hope Shirish would echo my views. Sir, the third one from Shirish is, could you spell out if the consumers are now down trading to economy?

[Rajiv Rajgopal, executive]

I don't think I see consumers down-trading to economy. If at all, I see more premiumization happening in the market, Manoj, right? Down trading means supposing I'm a consumer. I use a premium product AG, either Velvet Touch or Dulux Super Cover or Super Clean and a down trade to Super Dulux Promise Interior. That's down trading. But what we are seeing is a new set of customers coming into economy segment who are using either local players or distemper or something of that. And this has been happening for the last few years. right?

Now we were not present. So we are getting some new consumers from other brands despite of the fact that we are not at a huge price advantage, or we're not at a huge discount to other players, primarily because of the quality of our products. So to answer you, no, I'm not seeing too much of down trading. It would be wrong for me to say I'm seeing too much of down trading at this point of time. This can change if the market changes or the economy changes or income level changes.

[Manoj Menon, analyst]

Very clear. And sir, the fourth question from the same participant is its market share? I presume, he's asking about deco market share.

[Rajiv Rajgopal, executive]

Yes. So we don't give out market shares because these are not like the FMCG industry, we don't have Nielsen or somebody really tracking us. But suffice to say, our market shares have been going up. I mean, you can see the quarterly results, track it, use your judgment. So we've been sort of moving up, yes.

You've been telling us that we are in the region of about 5.5% to 6% or whatever in deco, right? I think we've been sort of moving up, and we are pretty pleased with the fact that last year, we ended up in the top 2. Am I happy about it? No, my endeavor is eventually to sort of start seeing how can I be the fastest grower, but it will take a while. Castles are not built overnight. They're built brick by brick. So we are in the process, and we are determined to make it happen.

[Manoj Menon, analyst]

So one question from [ Laxmi Narayanan Gunpathi ]. Two questions, rather. One, is your non-decorative about 35% of your revenue. I think you responded to that a little earlier. Yes, it is confirmed. How do you manage such good working capital despite being 35% in industrial segment?

[Rajiv Rajgopal, executive]

If I told you the secret, there would be [indiscernible]. So I can't tell you that. People hire a lot of people from my team, but that's -- there are a couple of secrets, which are kept within my lock and my CFO's lock, which nobody has access.

If Coca-Cola told you what the formulation is, please tell me, I can start my factory and I think we can retire peacefully, right? But that won't happen. So look, I can't tell you, but I think I've discussed with you the journeys of what we've done on distribution, or how we sort of manage it. We manage our operations very tightly, okay, which is why you don't see me for too many events because I'm -- between Krishna and me, we have 24/7 really focused on our business and taking it to a different level given the market position we are in and the fact that we have to generate our own solid profits to be able to generate our own top line, right, and grow the business in accretive manner. That was the promise we had given, and we are happy that we are on course right?

On working capital, we put some fundamental principles in place to say that, look, we've looked at some learnings of that we've had in different industries and said that how can we manage it, which is the reason why it's there. But we are very focused not just on revenue, EBIT, EBITDA, PAT, but on ROCE. And what delighted me is the fact that we moved to 36% return on capital employed last year. And that journey will continue upwards. We are sweating our assets. We are using technology. Those are the things I've talked about it Manoj a few [ banners ]. So I've given you -- if you really go through what I've said, I think you would be able to [indiscernible].

[R. Krishna, executive]

[Indiscernible]

[Rajiv Rajgopal, executive]

Yes, yes. Absolutely. Absolutely.

[R. Krishna, executive]

We do meticulously follow, and it's -- as far as the B2B segment is concerned, we do have a fair amount of discussion in terms of when we enter and renew the contracts what are certain negotiables, and what are nonnegotiables.

[Rajiv Rajgopal, executive]

Also, our buying is done very scientifically. Maybe that's the only thing I didn't say. Our buying is very, very scientific and very [indiscernible].

[Manoj Menon, analyst]

Fair enough. Fair enough. Presumably, you have scale benefits because of the MNC linkages?

[Rajiv Rajgopal, executive]

I won't talk about anything beyond that.

[Manoj Menon, analyst]

Okay. Fair enough, sir. Yes, any participant got a question, please feel to raise your hand. [indiscernible] can we get back to the voice queue, please?

[Operator]

Yes. We have a question from Avi Mehta from Macquarie.

[Avi Mehta, analyst]

Am I audible?

[Rajiv Rajgopal, executive]

Yes, you are audible.

[Avi Mehta, analyst]

Congratulations on your reappointment. Sir, would it be fair -- my understanding is it correct that we are looking to strengthen our premium positioning in the paint space. That's how I'm kind of looking at it from a strategic perspective in the decorative segment. In that scenario, would it be possible for you to kind of give us a sense on where we are on marketing spend to sales versus the pre-COVID level? And how do you see them trending going forward?

[Rajiv Rajgopal, executive]

See, we were at about 1.8% [ A&P ] to revenue at a point in time during COVID. We're scaling it up. We are about 2.2 to 2.5, Krishna. Our endeavors to move it closer to about 3.5% to 4%. We believe that that's good enough. Look, technology has changed, the way consumption and feed is happening is very different. Traditional media is no longer the only media where you are there. We are seeing it. We've got living examples where we have proof points of the fact that we've tried certain new media channels, and it seems to be working for us. So we are doing all that exercises to be honest, yes. And its [indiscernible] as far as we are concerned.

[Avi Mehta, analyst]

So in a way, efficiency of those spends is what is being worked on, so not look at a number on a pre-coat number, but probably around 3.5 is what we should kind of look at going forward?

[Rajiv Rajgopal, executive]

That's right, that's right, that's right.

[Avi Mehta, analyst]

Sir, the reason why I asked is, basically, it was on the margin commentary. Now we've seen 2 quarters of almost 16% plus EBITDA margin. You are looking at benign input costs. There is a healthy decorative growth expectation for the third quarter. I mean, in that kind of -- I'm just trying -- I was trying to kind of appreciate what would be wrong in assuming that FY '24 is broadly similar to the 16% plus mark at the least? Or what is it that I'm missing? Because the mix, as you rightly said, 35 becomes 37, that has kind of panned out. Things are only -- 3Q is a relatively better quarter. So maybe you could help me understand what in the equation could be wrong if I make that assumption, or is that a fair assumption to make in this space?

[Rajiv Rajgopal, executive]

The only thing I think in the assumption that would change is our endeavor to say that what is now priority. We've been through different phases. I think we went through global year 15 by 20, where India was obviously to comply. We've gone through a grow and deliver strategy period. Now the focus is on saying that, look, while without eroding margins terrifically, can you really start now getting back to a stronger top line, which is a healthier top line, which is a little -- not a sustainable top line. Yes, Krishna, do you want to add something?

[R. Krishna, executive]

[indiscernible]

[Rajiv Rajgopal, executive]

Yes. We are, because to me, that's the part you're missing. So is -- of course, it's not that we are not -- we really want to drop the EBIT or EBITDA margins at all. But I think what we want to do is to balance it given our market position and say, look, where do we [indiscernible]? And those are things which are -- I'm sorry to say it's a bit confidential, we are not going to talk about it because we've got our journey, we've got our journey cut out.

I've always told the Street that, look, I'll be in double-digit margins, EBIT margins and not EBITDA, EBIT margins when I came into the job. We've been very consistent to our progress. And I don't see any massive reason to dilute it. But that said, because I do think it's not or question, it's an and question as far as I am concerned, but I also realize at a sense, and we know what's coming. We know the elevated competitive intensity, which is there. So we'll wait and watch and do the right thing.

We are not here -- we are a company that if you invest in us, we believe in making sure value goes. I don't want to take a name, but I can tell you when I got into the job, I went and met one of the [Indiscernible] investors with us. And I only said it -- I think the share price was about INR 1,700 that time, if I remember. And I met the team, a fantastic team who had belief in us. That today, I can say one of the things I'm gratified and I'm thankful to God is that at least I have lived in my promise.

So that's where we are. We don't make big promises, but what we say we like to do and we like all of you to have that faith that we're here, you're parking serious money in investing in our business. We believe that we are -- we look at it very seriously. It's like putting our money in our business, right? Because I draw my salary and everything else from it, right? So you can rest be assured that what we do, we'll do it with a lot of thought process and a lot of thinking strategically, granularly before we do get any aberrations. And we will talk about that at a later time. I don't think today is the [indiscernible] day for that.

[Avi Mehta, analyst]

No, sir. That clarifies. I mean that gives me a clear perspective, look at the EBIT margin and where we are, and we kind of work on it effectively to kind of ensure growth versus margin is best.

[Manoj Menon, analyst]

[indiscernible] there are 2 -- I'll take 2 questions again from the chat window. And I reckon my colleague Aniruddha has got a question on the voice, but let me take the text questions here. Sir, there's a question from [ Utkarsh Solapurwala ]. What are the plans on waterproofing and construction chemicals? What is Akzo Nobel's current strategy in these segments?

[Rajiv Rajgopal, executive]

Look, we're playing very aggressively. It's one of my fastest-growing segments, but I can't talk more than that, right? Why do I believe we will win because the quality of products we've got in Dulux, Aquatech is unbelievable. It's unbelievable. I don't think the top 2 players have got products, which are equal to my quality.

My research and development team is working on a lot of innovation and further products, which will further take it to the next level. But we want to be careful because some of the products are also slightly margin dilutive. So we are taking time.

We want to understand that industry segment because, Manoj, some of them have also got large gestation times. You got to spend a lot of time with us. So some of them are very customized, right? So -- so there's a lot -- it's a very -- it's quite a different way of doing business than we've been doing. There's a lot of customer after sales and customer service required. So we want to build those capabilities before we just ramp it up. Otherwise, it's not the right way to do it. So we're doing it step by step.

What I can assure you is that we are a serious meaningful player. If you go to the market and do a dipstick you will see that we -- dealers will acknowledge the fact that we've become quite serious in it, and we are growing fairly well.

[Manoj Menon, analyst]

Understood. [indiscernible]

[Rajiv Rajgopal, executive]

[indiscernible] We move to integrated waterproofing. Maybe we have not looked at categories like membranes for now. Other than that, we are open to everything. Membranes is being used, for example, on large industrial usage, et cetera. That, again, is a thought for later. So we will look at all the segments, and this is -- everything else on the waterproofing side and worker strategy, ground, sealers, sealants and everything, yes.

[Manoj Menon, analyst]

There's one question from [ Rishi Modi ]. He says, did I miss what was the volume growth in deco paints? Was there a comment about this?

[Rajiv Rajgopal, executive]

So our volume growth was a little higher than our revenue growth. So it is absolutely high single digit. That's what I can say.

[Manoj Menon, analyst]

Sure. Anirudh, I think we...

[Rajiv Rajgopal, executive]

[indiscernible] Manoj, that we didn't sell towards [Indiscernible]. So that [indiscernible].

[Manoj Menon, analyst]

And you follow value-added volume, right? It's not tonnage growth.

[Rajiv Rajgopal, executive]

Yes.

[Manoj Menon, analyst]

Yes, yes, yes. Absolutely. Absolutely. That's absolutely the right thing to do. Anirudh, do you want to go ahead with your question? We've got like a few minutes left before 5?

[Aniruddha Joshi, analyst]

Yes, yes, sure, sure. Yes. Sir, we have done 3 super innovations, starting with waterproofing and economy emulsions and then third, the floor paints. So which are the other gaps that you see in the overall paint segment, where Akzo can have a good right to win. And any more colors that you can share? What are the R&D team is working on? And overall, how do we see the new launches? Also, is there any plan to launch, let's say, 1 product or 2 product every year. So what are our thought process on that? Yes, that's the question.

[Rajiv Rajgopal, executive]

See, innovations have been the route to our success over the last 3 years. If you look at India, our innovations and our NPIs account for anywhere between 6.5% to about 10% of our revenue on a stated period, okay? 8 out of 10, and I'll be -- I'm giving you some absolutely honest truth of the real launches have done well or I would say even 7, if I include DIY because DIY, while the products have been great, obviously, consumers are still not ready for doing it yourself, except for young consumers and people who want to paint 1 wall.

So yes, so it's 7 to 8 out of 10 is our track record. Our products are doing very well. Some of it was catch up, to be honest. I don't want to bulls*** and say everything we thought through and we did it.

We also realize we live in industry, which is where we've got a lot of intelligent players and a lot of people applying the intellect in some places. We say, look, we don't earn brownie points by being the first, but when we put it in, we should be -- how can we beat the best. That's what we try and say, like, for example, PU enamel, there was a new player who did an incredible job and been a phenomenal stuff.

So what we did is when we brought it, we brought a different proposition and said our product when consumers or customers try typically, people should say, this is phenomenal. And that's what we are focused on.

So I think our approach is very different or as I call a [Foreign Language] from the way others look at it. I don't like to stress my teams and saying everything has to be first because when you're a challenger brand, you've got other issues to address, yes. But what you do bring in global expertise, bring in global leverage, technology, bring in best-in-class. That's what we are focused on because Dulux is about international, best-in-class technology, great quality. So keeping those things in mind, we start looking at what is there.

[Aniruddha Joshi, analyst]

Sure, sir. Sir, that's helpful. And second question. Some of the peers have articulated the strategy for projects business that what they are going to do in metros and the metro -- maybe Tier 1 cities and then further smaller cities, et cetera. And they have appointed special teams for projects also. So what is our strategy on the project business? I know that you have given -- shared some details earlier too, but what is our real strategy over here? And is the project business really going to -- expected to last at least 3, 4 years because of the recovery in the real estate.

[Rajiv Rajgopal, executive]

So the answer to the last part is yes. Look, unlike the other players, we are fairly serious. We are a large player in the projects business. In fact, we've got a significantly higher share than our average share because of projects. And the way we had built it was really to bring in the best in quality to our large B2B customers, and we've got a marquee customers, yes. So I understand where others are coming from. They're trying to see whether they can get shared, they're welcome. But as far as we are concerned, we see no reason. We've got a good CAGR of double digit, and that's something that we will continue to do.

We've got great offerings. For us, it's about tools, about ensuring that we are able to bring in the best-in-class in terms of presentations and the product area, et cetera. We've got Dulux Professional series, which is very unique in this industry, where we've got warranties, et cetera, for different products, which are quite unique and specific to customer needs, right? So that's what we are focused on. We are focused on our needs of our customer, understanding what the customer and consumer want and really trying to dial up propositions for that for the moment.

Yes, Manoj, maybe a couple of questions to end, Manoj, because 5:30 was the scheduled time, but yes, we started 5 minutes late, so I can understand.

[Operator]

Mr. Menon?

I would like to hand over the conference to Mr. Rajiv Rajgopal for closing comments. Over to you, sir.

[Rajiv Rajgopal, executive]

Okay. So Anirudh no more questions, I assume?

[Manoj Menon, analyst]

Sir, I'm just checking. I can't find any -- sir, I was on mute actually. I can't really find [indiscernible] could you just recheck. Is there anyone in the queue?

[Operator]

No, sir. There is none.

[Manoj Menon, analyst]

Sure. Sure. Rajiv, I think we can close, sir.

[Rajiv Rajgopal, executive]

Okay. So all I want to say is thank you so much. This is something that I've always promised you, irrespective of our results. We'll always be there in front of you. I really want to thank each one of you for your unstinted faith in all of us. We will -- our company secretary process is just getting closed. We have the company secretary joining towards the end of the month. We will obviously at the appropriate time when the individual finally gives us a joining date, et cetera. We will notify and Krishna and I will work around.

And we've -- in the process also got the person who mentored me into this job, and I have no shame in mentioning; Mr. R. Guha, and Manoj, you know Mr. Guha, to support us in this interim arrangement. And what I requested Mr. Guha to do is also to help us. We will set up an investor meet and Krishna will work it. I wanted Krishna also to have a face-to-face with all our investors. So we stay connected.

We want to thank you for all your generosity, support. And we wanted to let you know that for all the investors who are with us, we take every rupee that you've invested or every [indiscernible] that you invested with us seriously. We know it's serious business, and we are here to give you the reassurance that we are -- we take our business very seriously. So thank you, Manoj. Thank you to all of you for setting this up. And I wish all of you a great weekend.

[Operator]

Thank you, sir. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now exit the meeting.