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Asian Paints Ltd
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Ladies and gentlemen, good day, and welcome to the Asian Paints Q2 and H1 FY 2019 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Arun Nair. Thank you, and over to you, sir.
Good morning, and welcome to Asian Paints investor call for Q2 FY '19 results. We have Mr. K.B.S. Anand, the MD and CEO; we have Mr. Jayesh Merchant who's the CFO and Company's Secretary and also the President of Industrial JVs; Mr. R. Jeyamurugan, VP, Finance; Mr. Parag Rane, Chief Manager of Finance; and myself, Arun Nair, from Corporate Communications. Now I hand over the mic to Mr. K.B.S. Anand to take the call forward.
Good morning, everyone. Thank you for attending our conference call. I'll give a small explanation of our results and then we'll take a question and answer.The domestic economic environment continues to remain challenging with no clear signs of a secular upward trend. And the same was reflected in the demand conditions within the coating industry as well. Rising crude oil prices, significant depreciation in the rupee, tight monetary conditions have only added to the challenging business environment.The consolidated financials. Revenue from operations increased by 8.5% to INR 4,639 crores in Q2 and by 11.8% to INR 9,037 crores in H1. PBDIT decreased by 0.8% to INR 847.5 crores in Q[Audio Gap]to INR 1,783.6 crores in H1. PBT decreased by 3% to INR 748.7 crores in Q2 while showing an increase of 12% to INR 1,596.9 crores in H1.Net profit from continuing operations decreased by 3.8% to INR 506 crores in Q2 while it increased by 11.7% to INR 1,077.3 crores in H1.In the stand-alone financials, revenue from operations has increased by 8.7% to INR 3,914.2 crores in Q2 and by 12.2% to INR 7,620 crores in H1. PBDIT increased by 1.9% to INR 799 crores in Q2 while it increased by 15.4% to INR 1,692.6 crores in H1. PBT increased by 1.1% to INR 709.6 crores in Q2 while showing an increase of 16.5% to INR 1,519.5 crores in H1. Net profit increased by 1.7% to INR 481.5 crores in Q2 while it increased by 17.1% to INR 1,024.1 crores in H1.Please note that the figures for the previous year have been suitably adjusted to bring them in line with GST financials.One peculiarity in -- between this year and last year is last year, there was the impact of GST implementation in Q1, and as a result, Q1 was subdued and Q2 was buoyant. This year, as a result, Q1 appeared to be extremely buoyant, although on a cumulative CAGR basis, it actually was not so.Similarly, Q2 appears to be subdued in retrospect, both in terms of top line and profits, largely on account of the buoyant Q2 relatively last year. However, our profits, it was, to an extent, affected as I had pointed out in last quarter's telephone discussion that we decided not to pass on the raw material price increases during the quarter because GST had been lowered by 10% on 27th of July in spite of high inflationary pressures in the period due to the fall in the rupee as well as increase of raw material prices. We have since then taken price increases of approximately 2.35% in the month of October.Reviewing the decorative business, the decorative business registered a low double-digit volume growth in the current quarter. Volume growth in this quarter has been higher than the value growth in spite of a 3.4% price increase due to a number of factors. A much higher sale of distempers and puttys in this quarter. The reasons for which could be a better Diwali or some change in sales from the unorganized sector to the organized sector. It is probably too early to say this. But the distemper, especially in the smaller markets, have increased substantially, and the impact of the stoppage of our Phthalic unit in July last year has had a value impact on the stand-alone business.Indonesian, there was a significantly higher input cost in this quarter, which has affected the top line. This input cost was given in the 4 days prior to July 27 because we wanted to dispose of stocks with the higher MRP because it required massive quantity of restickering.Reviewing the industrial business in this quarter, the Automotive JV, PPG-AP, witnessed growth -- some good growth in the General Industrial segment. The industrial JV, AP-PPG, continue to grow well[Audio Gap]Protective coating business and in the Powder segment. Price increases taken by both the businesses were, however, not enough to counter the pressure on profitability from rising raw material costs.Reviewing the international businesses. In the international portfolio, major units like Egypt, Ethiopia, Bangladesh and Sri Lanka continued to face challenging business conditions and economy. In Ethiopia, the difficulty in sourcing ForEx for imports continue to impact the operations. Incessant rains affected sales at the unit in Sri Lanka. Reduction in fuel subsidies in Egypt added to the inflationary environment. The greenfield operations in Indonesia continue to progress on the planned trajectory with the focus on expanding the retail network.Reviewing the Home Improvement business, the scale and operations of both the businesses within the Home Improvement space, that is the kitchen business under Sleek and the Bath business under Ess Ess, continued to expand with both the segments registering good growth. Both the segments continue to work on further enhancing their market reach and product portfolio.The first phase -- CapEx. The first phase of the plant at Mysuru, Karnataka was commissioned as per plan in the month of September 2018, and we are on schedule to commission the first phase of the plant at Vizag of Andhra Pradesh in the last quarter of the current financial year. The total CapEx plan for stand-alone operations for the current year is about INR 1,000 crores, including spend of about INR 800 crores on the 2 new plants.Going forward, as mentioned, rising crude prices and the depreciating rupee have added to the challenging business environment. We will need to monitor the impact on demand conditions given the less than forecasted rainfall in the monsoon season as well as uncertainties arising from a busy election period. At the same time, we expect the raw material prices to rise further in the ongoing quarter. In the international markets, ForEx sourcing difficulties in Ethiopia and the overall rising inflationary conditions continue to be a key cause of concern.Thank you, everyone. We are happy to take any questions you may have.
[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.
My first question is on the stand-alone numbers. So your sales growth is 8.8% and you have mentioned low double-digit volume growth. So taking assumption of 11% volume growth, there is lots -- up to around a 2% difference. The volume growth is higher. Plus you would have taken some amount of price hike, so that is around 3%. So why is there a 5% gap between this? Ideally, your value growth should have been higher. So you alluded to putty sales and distemper, so it was better to the portfolio sales currently...
So overall, if we look at the product profile and growth rates, by and large, the product profile and growth rates have been fairly consistent over the last couple of years quarter-on-quarter. They were adjusted for the vagaries of GST and things like that. So definitely, there was a much higher growth in emulsions last year in Q2 because of the impact of GST in Q1. That itself gave a higher growth rate as far as emulsions itself is concerned. Distempers have definitely shown a higher volume growth rate in this quarter. So frankly, given all the variables of GST, GST reduction, different Diwalis and seasonality, probably taking value and volume growth rates for quarter-to-quarter will lead to anomalies. In addition, if you remember last year, we had shut down the Phthalic plants around middle of July. That extent, the value growth that came from Phthalic, while not significant, would add to a odd quadrant in terms of the difference between value and volume growth. Similarly, I indicated that we took a substantial input hike this year as well, when the GST reduction was announced, to liquidate stocks. Because we had to undertake restickering of some 170,000 kl of stock that we are carrying prior to the season at -- to a lower MRP rate, and it was not feasible to do it all across stock. So we eased this process to complete the exercise given the short span of time by giving a fairly substantial rebate to liquidate stock. This[Audio Gap]profits too, but it also affected the top line.
Sir, one follow-up here.
Yes, go ahead.
Sir, one follow-up here: you mentioned in opening remarks that because of GST rate cut, distempers have done well. So what could be the unorganized share in distemper? And would you expect that to continue because this is the first quarter only?
Yes, it's just the first quarter, so let's just wait. At the end of next quarter, I will give you a more specific remark.
But what would be the percentage, sir, unorganized?
The unorganized share in distempers would be substantially higher than the overall share. So if you take the overall share of the unorganized sector as about, say, 30% of the paint industry, in the case of distemper, it should be at least about 40%, 45%.
Sir, one more clarification here. In opening remarks, you said good putty sales could point to us a better Diwali. Could you elaborate on that part?
I didn't say good putty sales could point to a better Diwali; I said this was a longer Diwali. So sales get stagnant in a slightly different manner. Last year, emulsion sales shifted from Q1 to Q2 because of the GST impact. So it had a different shift in value sales.
Right, sir. Sir, second question is on Indonesia. So in Q3, would you see some impact of the earthquake and the tsunami? And second in Q2, could you give some granular detail in terms of retail outlets? Any part of the portfolio which is doing better, which is not doing well and any market share? It's initial days, but any numbers you can put to those remarks?
Market share, as you know, I frankly can't talk about. We are still very small. The tsunami, et cetera, occurred on a relatively low populated island. More than 50% of the market of Indonesia is on Java, and most of our sales focus is around Java at this point of time. So frankly, our sales are not affected. We have expanded our network by opening rough -- maybe more -- we have about 150 outlets this year and increased the range of emulsions we are selling through the network[Audio Gap]we've launched in the market has been fairly good, but we have a long, long way to go. We are only -- it's a heavy investment we are making in that country, and we are on track as far as our plans are concerned. But it's like a 5-year plan, and we'll really know how successful we are at the end of 5 years, but so far, things look good.
And sir, last one, again, on stand-alone. So other cost is, one is slightly higher growth of rate versus sales. I would expect it slightly higher because of the crude oil related impacting your logistics cost. So if you could comment on that part, how has that behaved. And advertising, is there some cutback because of all these? As a industry, has advertising cost come down?
See, this is -- you are again looking quarter-to-quarter. There is a later Diwali this year so advertising gets postponed automatically.
Logistic costs, sir?
So logistics costs did not increase as we -- see, we have 2 freights. The first freight is from the factory to our depots. That cost actually did not increase substantially per ton in this period. So actually, freight that goes from the depot to the dealer did go up a fair amount, but the overall impact is thereby automatically reduced and after that certain costs, which we typically value due to like deal confidence, among other things. So quarter-to-quarter it's not a right consultant, but there are certain additional costs that could be an issue.
The next question is from the line of Avi Mehta from India Infoline.
Sir, first, I wanted to just check on your comment that you made about the demand environment. You said that the coating environment is challenging with no signs of uptick. Would you argue that -- I just wondered if you could clarify, are you calling out for weakness or is that a risk that you are seeing? If you could just help us understand.
All I'm saying is the demand has been consistent at that level for the last 1.5 years.
Okay, okay. So you're saying that it is -- the uptick signs is what you're kind of seeing. It's not yet kind of the...
There's no real dramatic change or uptick. It's different from the past.
But sir, this is -- remainings are despite a delayed festive season, right? That is the understanding correct, right?
Yes.
Okay. Secondly, sir, on the gross margin bit, you have -- you have been seeing a sharp Q-o-Q moderation. Now you had indicated some certain items in your commentary which could be one-off. One was the liquidation, the other was the higher input costs -- sorry, higher distemper sales or mix. Would you be able to let us understand how much of the impact would be because of this?
No, no. See, inflation was around 5% over Q1 [ mixed in ]. So we have taken the 2.35% price increase in October, which ideally we should have taken on 1st of August.
Okay. So this price increase, this really takes care of the inflation as of now. Should a further inflation happen at another point?
Indeed, because if -- when the rupee has depreciated a little further and there is a little more volatility, so we may have to take further corrective action over a period of time.
Okay, okay. And essentially, sir, you're saying that the inflation rate till 2Q was taken care, but probably the timing of the reason for this...
Yes.
Yes.
But sir, the one-offs that you were indicating, would you be able to help with...
I was trying to explain because a lot of questions were being post while[Audio Gap]what I was trying to indicate is the reasons for which I could understand the differences between value and volume growth in spite of our approximately 3% price increase.
Sir, that I understood. I mean, that was very clear on your part. What -- really that was very clear. What I meant is, there is a corresponding impact that will happen on margins because of this, especially the liquidation and the change in mix that you have seen. Would you be able to give us any color on what the impact that would have been? Just to get some thoughts...
The change in mix will not drastically affect margins.
Percentage in margin will not get impacted significantly.
Yes, there would be some impact on the how many inputs we give, I agree. But there was -- the change in mix may not make a significant impact in margins.
And the liquidation bit, sir?
Yes, exactly.
That will have a little impact. I can't give you off-hand, I'm sorry, but spent a lot of it.
Okay, sir. And lastly, sir, if you could share any sense of the input cost trends. High currency I understand, but other than that on the crude base derivatives and titanium dioxide, how has the environment been right now?
So it's -- I would say, raw material prices are more or less the same level. It is the rupee variation that is affecting you to the[Audio Gap]cost to what we are importing, means rupee depreciation is impacting significantly. And then secondly, now the monomer has since gone up, even is expected to go up in Q3.
Okay, so there is an inflationary monomer pricing because we're delayed. That delay is due to...
Basically comes as derivatives of crude and as a result, although they are not directly linked to the crude prices, they're dependent on supply and demand, they tend to have a lag effect over a period of time.
The next question is from the line of Vivek Maheshwari from CLSA.
My first question, sir, you mentioned about 2.35% price hike, which you took in October, you should have ideally taken in August, right?
Right.
Sir, does that mean because September was a period where actually crude actually grows quite a bit and rupee depreciated again quite a bit, so does that mean that price tag that you've taken doesn't factor in September inflation?
Yes, it doesn't fully factor in September inflation. You're right.
Okay. And any specific reason if you were[Audio Gap]called out your price hike at least for next few months would be difficult, but when you took up prices in October given from a channelizing perspective, you can't keep taking up prices, why did you not go for a slightly higher price hike?
We were not 100% clear what the authorities are looking at for the GST reduction, whether they're looking at the price hike of raw materials from 27 July till the current date or from the beginning of the quarter till the current date. So we decided to clear sales tag, let a little more time elapse. Anyway, it's a Diwali season, so we didn't want too much pricing instability in the market, so we decided to do step increase in pricing.
Okay. And given that September saw such a large increase and you have taken up prices, the season is just around the corner, which means essentially price hike -- the next price hike will be at least a few months away, right?
Right.
Okay. Second, sorry, I have a very basic question, a follow-up to your liquidation part. So if I understood it correctly, basically whatever you had channel inventory and whatever material would have gone out of the factory on which you would've paid 28%, that the rate got changed and it became 18%. That 10 percentage point delta, around 27th of July, you would have given to the -- as a rebates to the channel, right? That is what is getting absorbed in a way -- innovating in -- is affecting the revenues and margins, right?
No, no. See, we did resticker on our own as much stock as we could. But especially the small packs, which are packed inside cartones, become extremely complex to resticker. So we did the trade at additional discount in that period not equal to 10%, significantly lower, to pick up as much stock as possible so we would not be that adversely affected in restickering all our stocks.
So that was essentially the stock which was lying, let's say, with your -- at your warehouses, right?
Right.
Yes, yes.
Sir, what about the inventory which was in the channel, whatever it was? And on the day of 27th, the rates were lower. So ideally, there would have been some compensation given to the channel at that point of time. Was there a substantial number or no?
No, there is no compensation given because there is no impact on the dealer network. Our retail sellings are priced to the dealers prior to the tax remains the same. It's the GST component that has been lowered from 28% to 18%. So whatever we have greater by 28%, they were getting -- they would've got a GST credit of 28% in their account. And units that built at 18% after that to the end customer, they had an extra credit of 10% in their account, which they could adjust in future sales. So they had no monetary impacts on them. It was a pure loss -- logistics nightmare at our end obviously. We were very clear that we were not allowed to bring any material containing the old MRP from our depots to our customers. So we either had to clear all stocks before 27 July or resticker [ at sub-premium ]. So whatever we could not build till 27 July, we restickered at a lower MRP and then sent it out to our dealer network.
Okay. And one last follow-up on this one because my -- in my understanding, looking at other FMCG companies and all, whatever was a channel inventory, it was expected that, that would retail at the lower price. So was that not the case with your dealers on 27 onwards?
Of course, they were selling at a lower price because GST is lower.
So there was no impact of this lower...
See, there is only -- in the first place, there was a total change in taxation policy. There is only a reduction of GST. There is a difference in the 2. So the product marketing with the highest GST, they got the credit for that. Our painting contractors and large customers especially are fully aware of the scenario and nobody -- and we have directly more than 55,000 stockists all over the country, more than 1,500 in Bombay. So in a competitive environment, nobody is going to easily buy a higher price. They go from shop to shop for our prices.
Sure, I'll probably take it off-line separately with Arun. And my last question, sir, on the economic recovery. Your first quarter comment was economic recovery continued to be visible in first quarter, whereas there is quite a bit of a change in the second quarter. Can you just elaborate on this bit for me?
That indicates that while it appears to be good, the CAGR over 2 years was consistent, following a consistent pattern. It wasn't really good as it appeared on paper. The CAGR over 2 years was consistent with our annual growth rate.
The next question is from the line of Amit Sachdeva from HSBC.
Sir, much of it has been clarified, but just wanted to ask you about the distemper sales getting brought forward in this quarter. So sir, usually, if my understanding is correct, typically Q3 revenue is distemper heavy quarter just because of the festival thing as well. Now that has been sort of brought forward because of Diwali onset and things like that. Sir, do you expect that mix in Q3 would be different from Q2? And we should expect maybe the Q3 should have little bit more emulsions going in -- which is going into Q4 and further Q1? How do you see mix shaping up? Assume there is a difference in split festive season last year and this time, how does mix, which has impacted somewhat, if not too much, the revenue line -- how much next quarter mix should you expect?
See, in general, Q2 has a much higher distemper component than Q3, you are right. Q3 has a much higher commercial component. But this year, Diwali is later than last year. So Q3 would possibly have a higher distemper component this year than last year.
So as you go into Q3 as well, you'll[Audio Gap]going into Q3 as well?
Because it is a later Diwali, more distemper is sold in Q3. Now better stock -- or dealers that stock that much higher distemper, which I doubt, in Q2 from us is a question mark. But in general, distemper is sold largely in the pre-Diwali period in Q2 in every year. Since it is a later Diwali, more distemper would be sold at least in the month of October -- not in November, December, but in September, October.
Sure, sure. So that's very helpful, sir. Sir, one more thing. Let me talk of input prices and look at some data as well. Like COGS in the stand-alone has grown by 11% roughly. And so -- and volumes have also grown by 11%. I see some deteriorating mix, which may have impacted margins or something like that, but it doesn't seem to show that COGS have increased so much as the input price has fell so much or maybe there is some lag of the indirect component, which is further due, but how do we sort of resolve this sort of -- and how do you see that basket growing?
So I tried to explain to you that there are 2, 3 factors why the top line has not grown at the same level as volume. One is the mix, which I have to admit. The second is the shutdown of Phthalic unit in the previous year. The third is the higher input this year, specifically to get rid of GST cost. So there are 3 factors that have led to this diminution.
But sir, COGS have grown just by 11%, in line with volumes.
But sales for Q2, we did see a 5% inflation over Q1, but we also had the 3% price increase that we have effected from March and May. So that helped a bit. But just the material cost inflation is higher. Going forward, for the balance, we are looking to bridge to the 2.35% increase in October.
The next question is from the line of [ Shilpi Di ] from NBS Brokerage.
My first question is that can you throw some light on the status of the expansion of plants at Mysuru and Visakhapatnam? And as stated in the annual report, this expansion will help in manufacturing of things at the lowest cost. So can you provide me how much percentage this cost reduction will be there in the future?
I can't answer the second question, but the first question, I had already indicated that the Mysuru plant has gone into production from the month of September, went into commercial production on the 20th of September 2018. And the Vizag plant is scheduled to go on production in the last quarter of this financial year.
Okay. And my next question is, what proportion of sales is between enamel and emulsions and distemper paint? And can you please repeat how much unorganized sector controls in the paint market?
The unorganized sector is somewhere between -- around 30% of the paint market. The other question I cannot answer.
Next question is from the line of Aditya Soman from Goldman Sachs.
A couple of questions. First, just on the higher import cost to dispose materials. So basically, there's no increase in promotional intensity in the industry across the channel. And since then, things have normalized to the promotional activity, which was before in the first quarter or something.
Yes, more or less like that. I mean, competitive intensity is always there. This was not the main reason because of competitive intensity. This was done because it was only a logistical nightmare. So we have taken 170,000 kl of stock.
Okay, clear. And the second question is, is there any difference in geographical demand across the country that you want to call out for? Or has it been consistent?
For us, the East has been consistently growing well. The last few years South did not do well, but they're showing signs of recovery this year. Kerala, as you know, has been obviously affected in this quarter, especially in the month of August because they're peak on a seasonal month. But other than that, it's fairly consistent.
The next question is from the line of Nillai Shah from Morgan Stanley.
Sir, the first question is on the JV's profitability. There seems to be -- I think you pointed out the fact that the price increases that you made were not sufficient to cover the input costs. Well, given that this is usually a B2B transaction, why is there a delay in pricing for the JVs?
Because there are big boys on the other side. They don't agree to increase the prices. I wish B2B was easier than B2C.
Okay, has it been corrected more recently or still there is a lag?
It's been corrected. It's been -- there is a lag. Since the trouble is we're in a constantly inflationary scenario, so while you -- and you also have to be clear that this has been a tough quarter even for the automobile sector and some of the industrial sectors because of the demand situation. So they haven't been very open to price increases, so to speak. So there's been constant negotiation. And in an inflationary scenario, when you increase prices on one day, and you can't indeed go back on the next day and say I need another price increase.
Sure, I hear you. And that is my second question. In the past, whenever we live through very, very sharp inflationary periods, we've not really had a big lag. I know the conditions are different this time. There's GST to contend with on one side and plus the demand situation. But in context of where your current margins are in context of where it was historically, say, 3, 4, 5 years ago, are you comfortable with the comparative scenario that Asian Paint is today in vis-à-vis the past periods?
See, I think we have indicated that there was a lag in pricing to an extent essentially on account of GST. But in the context of architectural coatings, we tend to operate at a certain operating margin, which we think -- with which we are comfortable and can be competitive in the marketplace, and we are focusing towards doing that. And I don't think that it has been in any way adversely affected or otherwise for the medium term. It may have been affected for a quarter but in a different scenario. The industrial business, of course the margins are much lower than what we would like in an inflationary scenario, but we are working towards improving that.
Sure. And the last question, you mentioned 170,000 kiloliters of stock which needed restickering. This stock resticking works out to about 10-plus percent of your total output, right? Isn't that too high? I thought your inventory levels -- the finished goods inventory level should be just about 10 days or so?
You have got it wrong. There are about 30 days.
30 days.
The next question is from the line of Tejash Shah from Spark Capital.
A question...
[Operator Instructions]
Yes. Just picking up from your demand environment commentary. You mentioned that there was an element of unorganized or organized purchasing that will lower realization. Sir, usually unorganized/organized happens when the demand environment is robust, and that's where the premiumization happens from that segment of demand to more organized segment. So I just wanted to understand how are you reading this trend versus the overall commentary that you made.
I only related this trend to distemper sales because the proportion of the[Audio Gap]is relatively higher in that segment. And because of the implementation of GST, they had a certain price disadvantage compared to how they used to operate in the past, and maybe that had pushed the sale of the organized sector a little higher. But again, as said, it is too early to assess. We need to gain 1 or 2 quarters more before we can make a purely definitive statement.
Sure. And sir, was there any unusual share of project business and the decorative business, higher share of the business?
We have been growing consistently in project sales business over the last few years, and that growth has continued.
But margins in that part of the business would be lower than your...
Yes, you're right, you're right.
Okay. And sir lastly, if you look at your gross margin business, the lowest in last many quarters. And you rightly pointed out that there was a lag in terms of pricing action that you could have taken. So looking at demand environment, do you believe that market can absorb further price hike if need be without hurting volume growth momentum?
I think so. But we'll take that decision on the basis of as we assess the market situation.
And that will be post Diwali or before that? How would you...
Sorry, I can't give you a statement. My customers are the first to know about my price hikes.
The next question is from the line of [ Viresh Patad ] from Goldman Sachs.
Yes, just to better understand the cost push, so what percentage of COGS is TiO2 and what percentage of COGS is other 2 downstream monomer?
Yes, so 80% to 20% would be [ TiO2 ].
[ All better than ] costs.
Yes, and/or sales [indiscernible] have been around 30-odd percent.
30-odd percent, okay. And in terms of better understanding the mix, what percentage of sales is rupee and what percentage of the domestic...
So we don't share information on this.
Next question is from the line of Arnab Mitra from Crédit Suisse.
Yes. The last time the GST rate was cut, there was some expectation that there could be potentially some premiumization within the decorative segment. I'm not talking about the distemper upgrades except for -- among the rest of the decorative paint segment. So have you seen any such trend with the 10% price reduction? Or anything else you have seen happen after the price has been cut by 10%?
No.[Audio Gap]
Question was the -- in terms of the Karnataka facility. Are there any tax incentives that you now have now that the facility is commissioned? And will it help in terms of margins in the next couple of quarters?
Yes, there are certain -- demonstrations we have to pass in terms of getting it agreed upon actually. The government has agreed that we are just documenting it. Once done, we will be commissioned actually. It is now in the realm of industry loads.
Okay, okay. And lastly, on -- in terms of, again, the question on the input cost cycle. So other than this lag effect which is coming out of your conservative stance and the profiteering, you do not see any major challenge in ultimately being able to pass on this inflation over the next 2 to 3 quarters once you have better clarity on GST and the profiteering?
Yes, in architecture coatings, yes, you're right.
Our next question is from the line of Vicky Punjabi from JM Financial.
Sir, I just want to know, how do you guys forecast or plan for comps for a year like this that you have 2 new large plants that have started up for commissioning? And the reason behind this question is that if I look at the past, I know you had a new, large greenfield plant coming up, the example being Rohtak in FY '11, '12 and Kerala in FY '13, '14. Your operating expenses line has typically grown at a significant proportion than what it typically grows at. And given that there are 2 of them now, I just wanted to ask for some sort of input from you as to how do you see overheads growing going forward.
So on the Mysuru plant, we'll have the cost impacting us for the next 6 months because it is now commissioned. By that, I don't think most of the costs will -- any cost will impact significantly this year.[Audio Gap]will impact of the plant in the last quarter. So maybe next year. But you're typically -- you're right. Typically, in the first of our [ metals in season ] when the plant is actually running at a sort of capacity utilization, we will have the [ overrisk swap picking ] at a much higher rate. I can't quantify this for you, but there will be an impact.
But given that you are actually -- you could be in a position to really project in terms of how capacity utilization could progress over a period of time. Is it possible to match the cost structure with the volume progression at those plants? Or is it...
It's not our standard because you'll have present fixed costs in the plants, which is sort of in the -- in terms of revenue produce extra X number or X plus Y. So those costs, they begin impacting us [ just above the ] [indiscernible].
And given the deals, these 2 plants have now come up like 4, 5 years after the last one, which was Kerala. And given that technology, et cetera, has become more efficient over a period of time, let's say with renewable energy, et cetera, et cetera, has there been an element of cost efficiency built into these plants such that the additional hit will be lower than what we've seen earlier? Or the impact could be as drastic as what we've seen in the case of Kerala? So the point that I've been...
We have invested money in terms of upping the commission quotient at these 2 new plants versus, say, what we had in Kerala just in terms of material handling costs within the plant. So there could be some bit of optimization on that front as compared to Kerala.
The next question is from the line of [ Pravin Sharti ] for an individual investor.
Am I audible?
Yes, [ Pravin ].
Yes.
Yes, okay. Most of my questions have already been answered, and I had 2 additional questions. First is, it is very much obvious that the market capitalization of your competitive companies are obviously going down since it is a challenging environment for all the paint companies. So given that the only provisions [audio gap]
In India, that is a difficult task given the kind of market segment we have and market share that we enjoy in India. So I think that would create a difficult task. On the home instrument front and the international front, we are at better [indiscernible] [ at big discounts ].
Okay. And my second question is...[Audio Gap]given the way market is, the crude rate is getting up to about $200 per barrel. So what will be the impact, the margin impact that the company will have? And it is very much obvious that is -- the company will take a hit on it, but...
Can I say, 2 or 3 months ago, we've comment on all these [indiscernible] activity. But anyway, any announcement [indiscernible] we'll handle it. We have handled that. We will see.
Okay. I'm just calculating a worst-case scenario should it happen.
We will not comment on that.
The next question is from the line of [ Jigar Shah ], an individual investor.
Sir, would you be able to elaborate on the wood coating business separately and also give what kind of revenue and margins are there in this business and some future outlook?
Sorry, we don't give you the usual breakups of revenue and margin. All we can tell you is the -- we have a steadily growing business. We have a tie-up with an Italian company called Renner, and we manufacture some of their products in India and import others. And we are selling these premium-end products through a large number of our stores all over the country, and we've seen steady growth in the polyurethane, polyester and the water-based wood finish segment.
Okay. So what's the revenue for this segment?
Sorry, we can't comment on that.
We take the next question from the line of [ Shilpi Di ] from [ NBS Brokerage ].
With respect to rising oil prices and rupee devaluation, how much percentage of your portfolio of the business is hedged?
So as I said, on the crude side, our [ business push ] is close to 30%. But there are not too many sort of exchange-related products available for hedging. On the dollar front, we typically look at short term maybe 2 -- maybe 1 or 2 months, not more than that. That really [ depend as on date ].
Okay. But you can you provide the percentage in the case of rupee devaluation? How much is hedged? How much is...
I'll take the short-term basis, which is typically a month or 2 months of exposure.
Next question is from the line of Abneesh Roy from Edelweiss.
Sir, in the international markets, in some of those, you are not the market leader. So where all you have you been able to take the price hike? And there, what is the quantum?
So we have been able to take price hike in almost every market. But the quantum -- we have been able to take varies. In most of the markets, high -- we have taken in the quarter are very close to what is the required for the...[Audio Gap]realizes towards the end of the quarter, so the impact is higher. Maybe in 1 or 2 markets, this is not true, Dubai and Sri Lanka. But otherwise, by and large, I think we have been able to take prices to recover most of the costs.
But -- so sir, what is the issue? Because the market was regarding that crude is up.
We have a very, you can say, rigorous competitor after the implementation of VAT of 5% this year, this calendar year. We lowered the prices by 5% to absorb the impact of VAT in an inflationary scenario.
That is a market leader, right?
More or less, yes, the volume market leader.
And sir, one clarification. You said the Mysuru plant will lead to higher overheads. On the other hand, because it is closer to one of your bigger markets, the logistics costs could also come down, right? Isn't that material enough?
We -- sure, material, but you get -- that will help us next year intensely as volumes pick up. In this year, the impact may not be that significant.
The next question is from the line of [ Parthajom Shah ] from [ NBS brokerage ].
Sir, I just got one question. When I look at auto sales, the auto sales number are really not so impressive of lately. And how do you perceive your sector growing pertaining to this auto sector?
So we have a joint...[Audio Gap]And some proportion of their business is to the 4-wheeler auto segment. We -- they do not supply largely to the Japanese manufacturers, and they supply more to the non-Japanese manufacturers. This year, in [indiscernible] we have bought a 100% supplier to [ form ] their interest. So actually, our business has gone up. But the overall growth of the automotive sector is a concern of -- cause of worry for us.
Okay, and sir, on -- what is your current market share in India? Like if you can just give me some rough idea on that front.
No, we have no idea, sorry.
Okay, okay. And my very last one is on the Vizag plant. Your Mysuru has already started the operation. So what if -- when Vizag starts with the operation in Q4 or the last quarter, what will be the production which will be coming off from that plant?
Not significant in the first quarter in any case, which will be...
No, no, after -- I'm not just asking in the first quarter; once it's hopefully ramped up and all.
So...
Yes, we like capacity. We like them.
The next question is from the line of Keyur Pandya from ICICI Prudential.
Sir, my question is, sir, you mentioned that you have taken a price hike of 2.35% from October, this to take of care the inflation in August. So inflation after August. That is one thing. And second thing is the current mix of distemper, Diwali, festive season. So looking at base coat paint, if you do not increase the price, then there will be some...[Audio Gap]
So there is a little margin pressure. We don't deny that. So there is a probability of a further price increase in the quarter.
Got you, got you. But -- so the vendors' story of premiumization in paint, that is the case with most of the products in India, so that is the -- or so this differential in mix is a short-term operation? Or how do you see that?
So the premiumization continues. I tried to indicate that the growth rate of premiumization remains the same. But there is 1/10 of the market that has grown a little faster. So if you see the last -- the average growth rate over the last so many quarters, has not been consistently 11%, 12%. It has been a little lower. This higher growth rate is probably because of the higher growth of distemper than festive.
Okay. And that will continue for some time? That is my point here.
I hope so.
Which would, in turn, impact our margins, right?
No, nothing to do with the margins. If I spend more on something and make a profit, my profit goes up. I look at absolute margin more than anything else.
The next question is from the line of [ Pratik Podar ] from [ Marmolia Financial Advisors ].
Sir, I wanted to ask, sir, rise in short-term debt and the costs consolidated also due to the rupee depreciation, right?
Rise in short-term debt?
Yes, in consolidated.
Yes, this is -- probably I think we have in our international holding co level where we are using certain additional borrowings to fund the operations in -- at Indonesia.
In which region is that, sir?[Audio Gap]Indonesia, okay. Another question, sir, that I have is, if I look at the half year in your balance sheet, so it appears that you have already used there INR 900 crores approximately in the CapEx. So on a full year basis, you gave a guidance of INR 400 crores on a consolidated basis. So are we going to spend revenue on it or it would increase going forward?
It should be indirect provision.
No, it will be within the JV CapEx line.
Then within the JV, okay. One last question in order to understand the direct provision better here. So other expenses were a little bit higher due to stickering, logistics or overheads from the new plants. Which of these components affected you the most?
I think because of the inflation that we have seen the logistics costs versus Q1. The great part is they have recovered, but largely, it is the logistic costs.
The next question is from the line of Chinmay Gandre from Future Generali.
Sir, just a broad estimate in terms of the rebate that we gave to the dealers or -- and so what about the change in the SPA rate? Could it be in the range of, say, INR 60, 70-odd crores for the quarter?
No, no...
No, no.
Much lower.
The next question is from the line of Tejash Shah from Spark Capital.
Sir, just one follow-up.[Audio Gap]destocking pertaining to GST in the month of July. So did we also experience that kind of destocking from -- at a dealer level?
So as we indicated, we had given the way to clear our -- dealers didn't want to stock material that had the old MRP because it would complicate their operations. So we took the countermeasure of incentivizing dealers who picked up stock with the old stickering. So then the thin material. So we did see -- so we probably saw higher stocking in July.
The next question is from the line of Jaimin Shah from RWC Partners.
I'm just trying to understand on the price increases, when you said that you planned this 3.3% increase in August and it was finally taken in October and then you had kind of [indiscernible] pieces in crude. I'm also trying to understand here is what's your margin thought process behind it. Because coming from 2016,'17 and '18, we had these peak margins when I look at your longer-term trends. So are you thinking about margins on -- in these last few years to kind of maintain around these levels? Are we kind of going back to the longer-term trend of 19% or 20% or around the [indiscernible] range?
18%, 20% we're okay. See, it's very -- we don't normally change pricing month-to-month and nor do we operate at that level. In a...[Audio Gap]which we saw 2 years earlier, margins certainly increased because raw material prices are falling. And then in an inflationary scenario, it is the results. So we want to balance that out. We are -- I think we are okay at 19% to 20% margin.
Okay. So sir, these price hikes kind of keep you in that 19%, 20% range and not necessarily the peak margins you actually even lapped at last year's?
Yes.
Thank you. Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.
Thank you very much for participating in our conference. See you next quarter.
Thank you very much, sir. Ladies and gentlemen, on behalf of Asian Paints, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.