Asian Paints Ltd
NSE:ASIANPAINT

Watchlist Manager
Asian Paints Ltd Logo
Asian Paints Ltd
NSE:ASIANPAINT
Watchlist
Price: 2 279.2 INR -0.14% Market Closed
Market Cap: 2.2T INR
Have any thoughts about
Asian Paints Ltd?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2020-Q2

from 0
Operator

Ladies and gentlemen, good day and welcome to the Asian Paints Q2 FY 2020 Results Investor Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Arun Nair from Corporate Communications. Thank you, and over to you, sir.

A
Arun Nair
Manager of Corporate Communications

Good morning, and welcome to Asian Paints Q2 FY '20 Results Investor Conference Call. On the call, we have Mr. K.B.S. Anand, MD and CEO; Mr. Jayesh Merchant, CFO and Company Secretary and also the President of Industrial JVs; Mr. Amit Syngle, Chief Operating Officer; Mr. R. J. Jeyamurugan, VP Finance; and Mr. Parag Rane, GM Finance. May I now ask Mr. K.B.S. Anand to take the call forward?

K
Kanwar Bir Anand

Good morning, everyone, and welcome to Q2 FY '20 conference call. A few introductory remarks. The slowdown in the Indian economy continued into the second quarter with demand conditions adversely affecting industries. The overall challenging demand conditions were reflected even in the coating industry, which was adversely affected due to a prolonged monsoon in many regions. Actually, for the paint industry, when it rains, the painting activity drops, a monsoon extending right up to Diwali, and when you consider that the months before Diwali is the peak retailing season, actually it has been unheard of in my 41 years in Asian Paints. Against this challenging backdrop, our decorative paint business registered a high double-digit volume growth, albeit lower than that witnessed in the first quarter. The economy range of products grew at a higher rate than the premium rates, thereby leading to a high single-digit value growth for the quarter. Many of you have expressed surprise at this, but this phenomenon has been apparent for the last few years. While the premium end continues to grow, the economy-end emulsions and distempers are growing at a much faster rate. This has been part of our strategy to grow the bottom of the pyramid through new economy products and focused advertising and marketing. This, coupled with higher growths in the putty segment, meant that volume growth would be higher than value growth. In addition, the SmartCare waterproofing and adhesive product range continued to grow well. The company has launched several high-end and super-luxury products this year. Projects business from new construction sites and builders has been affected due to the tight liquidity conditions in the market. The footprint of AP Homes, our flagship multicategory decor stores, has been expanded now to 10 stores all over India. Fortunately, material prices remained benign in the quarter, and we took 2 rounds of price reduction in a few solvent-based products of a cumulative 0.4%. This was in addition to the 0.4% price reduction taken in the first quarter. The adverse demand conditions also affected both the joint ventures in the Industrial Coatings space with automotives JV, PPG-AP, continuing to bear the impact of a sharp slowdown being witnessed in the automotive industry. The Industrial Coatings JV, AP-PPG performance was supported by a decent growth in the Protective Coatings segment. Both the JVs registered improvement in profitability on the back of lower material prices and contained growth in overhead costs. In the international portfolio, overall performance was slightly better in the current quarter as compared to the previous quarter supported by a good performance in Nepal and a bit of improvement in Egypt. Revenues from greenfield operations in Indonesia grew well in the second quarter, although lower than planned. Benign material cost also supported the profitability of international operations. During the quarter, we divested the entire stake in Berger Paints Singapore, the operating entity in Singapore, to further align the international portfolio to our growth strategy. Both the segments within the Home Improvement business, the Kitchen business under Sleek and the Bath business under Ess Ess, faced challenging conditions given the slowdown in the real estate construction space. However, both the businesses registered good growth with continuing focus on network expansion. The Kitchen business has done well in the area of delivering full kitchen and the Bath business in the newly launched sanitary range. The consolidated financials. Revenue from operations has increased by 9.4% to INR 5,050 crores in Q2 and by 12.9% to INR 10,155 crores in H1. PBDIT before other income increased by 13.8% to INR 970 crores in Q2 and 19.3% to INR 2,140 crores in H1. PBT increased by 13.9% to INR 852 crores in Q2 and 17.7% to INR 187 -- INR 1,877.5 crores in H1. Net profit from continuing operations increased by 67% to INR 845 crores in Q2 and 41.1% to INR 1,519 crores in H1. Stand-alone financials. Revenue from operations increased by 9.3% to INR 4,278 crores in Q2 and by 13.6% to INR 8,658 crores in H1. PBDIT before other income increased by 12.4% to INR 873.5 crores in Q2 and INR -- 19.1% to INR 1,963 crores in H1. PBT increased by 12% to INR 793 crores in H2 (sic) [ Q2 ] and by 17.3% to INR 1,779 crores in H1. Net profit increased by 64.5% to INR 790 crores in Q2 and by 41.2% to INR 1,443 crores in H1. The company has chosen to exercise the option of a lower tax rate of 25.17% inclusive of surcharge and sales. The full impact of this change has been recognized in tax expense for the second quarter and in the first half of the year, resulting in a reversal of current tax expense and deferred tax liability of INR 62.8 crores and INR 24.2 crores, respectively, accrued in Q1 of FY '20 and a reversal of deferred tax expense of INR 107.6 crores on account of remeasurement of deferred tax liability as of 31st March 2019. This has resulted in a significant increase in net profit for the quarter and the first half. As mentioned in the previous quarter, the CapEx for the company for the current year is about INR 700 crores. Going forward, the overall slowdown in the economy continues to persist notwithstanding the series of measures being implemented by the government as well as softening of interest rates by the Central Bank to improve the sentiment. We would need to critically monitor how demand conditions pan out post Diwali. And while raw material prices have remained benign so far, we will need to watch out for volatility in key raw materials, especially crude and related derivatives. In the international markets, we will need to watch out for the emerging situation in the Middle East as well as business conditions in key markets like Sri Lanka and Bangladesh. Thank you, everyone. We would now be happy to take any questions you may have.

Operator

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

A
Abneesh Roy
Senior Vice President

Sir, my first question is on the domestic volume growth strong double digit. So my question is, in terms of the geographical mix, are you seeing any underlying different trends? And you mentioned that because of the very high monsoon, there was an impact. So has that impact been overcome by early festive season? So have both of them balanced out each other?

K
Kanwar Bir Anand

Frankly, most people don't get their houses painted when -- if it's raining heavily. So I don't think the impact has got offset. One can only hope that post Diwali, post monsoon, whenever that happens, painting -- retail painting will pick up.

A
Abneesh Roy
Senior Vice President

And sir, geographical, any different trends?

K
Kanwar Bir Anand

I think the North has been a little better than the other regions, but otherwise, it's more or less evenly spread. The impact of flooding and monsoon has been -- wherever we have been, and I think Central India, Western India have been -- and a part of Eastern India have been adversely affected.

A
Abneesh Roy
Senior Vice President

And sir, 2 followups here. One, last quarter, you mentioned ex putty, the sales -- the volume growth has been double digits. So would that have been maintained even in this quarter? That's the first follow-up.

K
Kanwar Bir Anand

Yes.

A
Abneesh Roy
Senior Vice President

And second follow-up, sir, is, you mentioned you have done bottom of the pyramid new strategies, new product, new marketing for distemper and emulsion. Sir, could you discuss that a bit more? Last quarter you had also mentioned you have gained shelf space overall, not just in the lower end, you've gained shelf space because of innovative schemes. So if you could mention these 2 in terms of strategy what exactly has happened?

K
Kanwar Bir Anand

So this is nothing new actually. This is something we've been doing for the last 3, 4 years. We have introduced a number of products over the last, for example, in the distemper category, we have Tractor Uno and Aquaflow...

U
Unknown Executive

Aqualock.

K
Kanwar Bir Anand

Aqualock, which we have launched in the last 3, 4 years, which are doing exceptionally well and leading to a revival in distempers for us after many years over the last few years. We have grown there. We have continuously focused on Tractor Emulsion and Ace over the last 2, 3 years. There's been advertising in this area after many years and this has spurred growth. This year, we have launched 2 products even more economical called Tractor Emulsion Sparc and Ace Sparc, which have met with a fantastic response. This has further spurred growth at the lower end. So we've been continuously focusing because we see there is still tremendous potential to grow at the bottom of the pyramid from both the unorganized sector as well as to spur painting per se, and this has led to widespread volume growth on an ongoing basis, but naturally, at a lower WASP.

U
Unknown Executive

Yes, just to add to that, the strategy has been also to add value to the customer at the lower end because in times when the demand conditions are not very, very buoyant, it makes sense to kind of really take care of the customer in terms of giving the customer far more value for money in terms of which comes in. And that strategy has kind of really paid off because we are finding that today a lot of customers from the bottom end are graduating on to the start-up emulsions, which are there to that extent and also in terms of graduating to better distemper products, which are there to that extent. So that's kind of really, something, which has helped us. And along with this, there has been the above-the-line push in terms of a communication program, which has gone to the consumer so that there is a knowledge in terms of that there is something which is available to us. And we find that this has also given us a lot of shelf space, especially when we look at the Tier 2, Tier 3, Tier 4 cities, which are there, that has given us a lot of shelf space there in terms of possibly giving an advantage over the competition.

A
Abneesh Roy
Senior Vice President

Other follow-up on volume demand is, in Q1, your rural and small town had grown faster than the bigger towns. Now if you see in Q2, most FMCG companies are saying that the rural has grown at 0.5x of urban. So in your case, if you could discuss rural versus urban? And is that still growing faster -- so is rural still growing faster because of these proactive measures? Or in paint, you expect that your understanding is things are different versus staple companies?

K
Kanwar Bir Anand

So rural and -- rural, small town, Tier 2 tier towns are being continuously growing faster for us over the last 10 years and they continue to do so.

U
Unknown Executive

Yes. And what we also see is that the phenomena is that the metro towns and the Tier 1 cities are growing much slower in terms of what we see. We see that the Tier 2, Tier 3, Tier 4 cities how we kind of say, rather than rural-rural kind of a zone, these cities have done fairly well for us and there is also regular expansion, which is happening in these cities. So it's not just a function of just the demand, it's also a function in terms of the kind of expansion which is happening to that extent and many more people coming into the paint cycle to that extent. So I think that has really helped us. And this phenomena has been there for quite some time, but we're finding this phenomena slightly far more in the last 2 years to that extent in terms of that it has paid off along with the strategy we have taken at the economy end.Are we cut off?

A
Abneesh Roy
Senior Vice President

Sir, my second question is on the domestic sales growth. So last few quarters, the value growth was 2% to 4% higher than the volume growth. In one quarter, dramatically, it's shifted by 6%. So now volume growth is around 4% ahead of the sales growth, while in Q2, the volume growth was 2% lower than value growth. So there is a 6% dramatic shift in 1 quarter. If I understand, the price cut has been just 0.4% plus 0.4% in the best case. So hardly 1% gap. So where is this 500 bps gap coming from? Is it only because of down-trading in one quarter? Can the down-trading be so much high?

K
Kanwar Bir Anand

See, it's not so simple. You have, I will say 3, 4 phenomenon occurring simultaneously. What impact these phenomenon has is very difficult for me to put down. We need to examine the whole thing over the full year to be able to explicitly tell you in a more specific manner. But if you remember, last year, on July 1, GST was reduced from 28% to 18%. So there was a much larger movement of higher end products in Q2 vis-Ă -vis what would normally have happened. This year was a normal year. So when you compare the top-end products, that disparity arises. Secondly, this year you have a much earlier Diwali compared to the previous year. You have a much more extended monsoon compared to the previous year. You have a slightly larger shift in products because the real estate business has got hit to some extent this year. So you can say the premium-end products going on exteriors, et cetera, have got affected to some extent. And lastly, our entire impact of the momentum that we have gained in pushing at that bottom of the pyramid has been gaining steam, the impact of that also exists. So now you take out how much you want from where. I can't answer the detailed breakup.

U
Unknown Executive

Only one small point I'll add just to kind of further your understanding. Sir, I mentioned earlier that the metros and Tier 1 cities have grown much slower for us. And today, if I look at, there is a larger contribution of the premium and the luxury products, which comes from these cities to that extent. So from that point of view, I think it kind of explains some slowdown with respect to the premium and the luxury products to that extent. But today, given the fact that the season is shorter, we have more customers in terms of the shorter painting cycles, which come across, which kind of graduate to more economy-end products.

A
Abneesh Roy
Senior Vice President

And sir, last question. Other expense up 17% quarter-on-quarter, 20% YoY. So is it because of ramp-up in one of the new factories or ad spend has also moved up sharply?

U
Unknown Executive

Primarily due to the advertisement spends. Sales promotion spends have been much higher in Q2 versus, say, even Q1 and YoY basis also.

A
Abneesh Roy
Senior Vice President

And why would that be?

U
Unknown Executive

Early Diwali is one of the reasons for this.

K
Kanwar Bir Anand

Yes, so I think when demand conditions are slightly taxing, we thought rather than withdrawing money and kind of watching expenses it's better to kind of invigorate the customer and get the customer right up there in terms of some of the selling propositions we had.

A
Abneesh Roy
Senior Vice President

So there is no ramp-up in terms of factory?

K
Kanwar Bir Anand

No.

U
Unknown Executive

Factory cost versus Q1, Q2, there would not be a significant change. Obviously versus last year, there would be a certain increase of the Mysore, Vizag cost coming.

Operator

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

A
Avi Mehta

I just wanted to understand the comment that you made in the start about a month before Diwali is the peak season. Diwali is kind of earlier by a week. Would that mean that still October is the key month from a festive demand point of view? Is that how it occurs?

K
Kanwar Bir Anand

It would be probably 15th September to 15th October. You have to go by days. We can't go by calendar months because Diwali falls -- so somewhere between 15th September to 15th October, about 10 days before Diwali, would be the peak retail season -- sale from the company point of view. The season would continue for another 5 days. But from the company point of view, the retail peak period would be somewhere from 15th September to 15th October.

A
Avi Mehta

Okay. And hence your comment about how the demand behaves after Diwali determine the trajectory going forward. That is why your comment, right, sir?

K
Kanwar Bir Anand

That we had a monsoon and the rains have continued during this peak period. We had heavy downpour even yesterday in Bombay in the evening. This is all not very nice for us.

A
Avi Mehta

No, fair enough, sir. So basically delayed monsoon, so in that sense, 3Q and the base would have 3Q -- the 3Q base would have the entire festive demand in that sense?

K
Kanwar Bir Anand

Yes. But last year you got to remember Diwali was late, so Q3 was very good.

A
Avi Mehta

Yes, correct. So the way I should look at 3Q is that will be there in the base, but the benefit or the tailwinds or your initiatives what you're doing in the lower end, which would continue, or does that GST anniversarization also mean that is also there in the base, sir?

K
Kanwar Bir Anand

No. No. GST angle would have been a little bit in Q2 of last year. Not really otherwise.

A
Avi Mehta

Not really, otherwise. Okay, sir. Fair enough. Sir, the second bit was this mix change that you're seeing. Is that also a similar trend on the secondary part, so there is no inventory change that is happening in the channel, right? The mix in the -- sorry, inventory mix is also not changing for the channel, right?

K
Kanwar Bir Anand

No, it's been changing for a period of time. It has not been apparent to all of you because we have not published it. But in a quarter where we had so much difference, we thought we got to make it more explicit.

U
Unknown Executive

Yes, and see people don't really change inventory there. They go by more in terms of how the secondary demand is kind of coming and the buying pattern kind of exists -- adapts to that. So while you can have momentary periods there, there could be inventories going up in a certain kind of product category, but people adjust to the secondary demand far more strongly. And you will not kind of, over any prolonged period, have inventory mismatch at the dealers' end in a very big way.

A
Avi Mehta

Okay. Sir, the reason why I was asking is one of the drivers that you indicated was also the launch of new products in the economy and you highlighted Tractor Sparc and Ace Sparc, so which is why I was trying to understand whether that has also driven or contributed to this mix change disproportionately because all that will be sitting in the inventory -- channel inventory, [ and will be occupancies ]. That's why I was trying to understand, the materiality of that.

U
Unknown Executive

So see, the new products as a strategy has been key to our thing for the last now 4, 5 years. And every year, we have a good set of products, which come both at the premium end and at the economy end. So I think that strategy when a new product is launched, retailers definitely kind of stock it because we also kind of work on the demand in terms of how it has to be done. So there have been, I think, good products launched at the premium end as well that's timed to that extent. It's just that today, the value proposition to the customer is far better at the economy end. Therefore, you will have a higher quantum of a response, which will go at the economy end for any new products, which are launched.

A
Avi Mehta

Okay, sir. Okay. And this -- okay. Fair enough. And this last part is, sir, on the input cost front. I mean there is obviously the mix impact that is there in 2Q as well. So if you could help us understand, would first half be a better way to look at how the input costs kind of behave, current input costs are there in the margins? Is that -- would that first half gross margin number be appropriate metric or would the YoY change because the YoY change is no longer accurate, as you rightly pointed out, because 2Q has something in the base, which is not there in this 2Q?

U
Unknown Executive

So see, what really happens is that in general, the 2Q, given the fact that it's a seasonal period, there is relatively a higher discounting, which happens in the Q2 period traditionally as a pattern, which you would see, and therefore, there has been a little bit of a skew, which has happened as compared to Q1, but that's not something which is so alarming to kind of really look at that, we have intentionally done something which is far more what is required. But I think in the second quarter, usually, we have a higher kind of an input cost, which kind of comes in because of the incentivization, both at the retailer and at the customer end.

U
Unknown Executive

And with the earlier Diwali, Q2 input would be marginally higher than last year because Diwali has come earlier.

A
Avi Mehta

So why would that happen because you said Diwali typically has a better mix, right, sir?

U
Unknown Executive

No. No. See, what we were trying to say is that in general when you look at Q2, in Q2, given the fact that the season is there, so Diwali 15 days here and there, but in general, Q2, we have a higher input spend, which happens because of the incentivization programs in terms of what we do, both at the retailer, consumer and the applicator and in terms of what happens. Are you meaning input cost in terms of as material cost?

A
Avi Mehta

Yes, sir.

K
Kanwar Bir Anand

So in terms of material cost, I think the trend still remains -- between Q1 and Q2, there would be certain sort of reduction in, say, the material price index for us, but it would not be significant. Q1 was a much significant sort of reduction over the previous. I think we misanswered you initially because we had a different understanding when you used the word input cost. Okay.

A
Avi Mehta

Okay, sir. Sorry, sir, what is the answer that I should -- I'm sorry if you could...

K
Kanwar Bir Anand

There is actually not very much of a difference in the material cost, et cetera between Q1 and Q2.

A
Avi Mehta

Between Q1 and Q2. Okay. So the first half is a fair representation how the margin should offer. Okay. Fair enough, sir.

Operator

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

T
Tejash Shah
Vice President of Research

In terms of demand scenario, how would you size up the trend in terms of -- is it -- should one see mass end of the portfolio outperforming rest of the portfolio as a sign of down-trading, or is it premiumization from unorganized to organized?

K
Kanwar Bir Anand

I would see it more as premiumization from unorganized to organized, especially in Tier 3 and Tier 4 cities. Like we mentioned, there is a relative slowdown of premium products in the major metros. But you can't actually say down-trading yet because there is growth in the premium end also.

T
Tejash Shah
Vice President of Research

Okay. Sir, second, you elaborated enough on monsoons impact on Diwali sale also, but in terms of consumer behavior, what is your take on whether if a consumer misses the cycle of painting before Diwali, does he postpone by a year or 2, 3 quarters or he still goes ahead with the painting, let's say, post-Diwali month as well?

U
Unknown Executive

So what really happens is that there are different consumer segments who kind of come into play as we look at the seasonal quarters and some nonseasonal quarters. There is a typical consumer profile, which actually paints once a year or once in 2 years kind of a zone. And these are customers who largely come into the cycle in terms of more distempers and economy emulsions and so on and so forth to that extent. And we find that some of these customers do not kind of really come back in Q3 kind of a thing in terms of postponing their purchases there. For them, possibly the year is missed and they will kind of look at deferring their painting to the next year. So that kind of is an effect which happens with respect to the monsoon specifically. So therefore, there would be a certain segment of customers who would have then now got out of the painting cycle and we would not kind of get them to see in Q3 to that extent. And typically what happens is people who kind of miss out in Q2, these are the large 2 BHK plus bungalow houses kind of a thing, which definitely, if they have kind of missed the seasonal quarter, they would kind of come back in Q3 to that extent. But the other aspect to it is that there is also a large amount of projects sale which happens, which kind of gets affected far more strongly because typically if monsoon would have finished around 20th September or 25th September, we would have got that quantum of sale, which would have come in to that extent from a projects point of view in terms of new construction and other repainting of cooperative societies and so on and so forth.

T
Tejash Shah
Vice President of Research

Sure. And sir, lastly, on waterproofing, you had shared our ranking last quarter that we are #2. So in terms of distance versus #1, how far are we? And how much ahead are we from the #3 players?

U
Unknown Executive

So we're in the middle of the year. So I think it's very difficult to say at this stage in terms of where we are, but I can tell you that we have done well.

T
Tejash Shah
Vice President of Research

In terms of product performance, I believe the warranties in terms of what we would have implemented products 2 years back, the performance of the products you must be knowing by now. So how would you rate that in terms of warranty which have come for the products?

K
Kanwar Bir Anand

Sorry, I missed your question?So by and large, the performance has proved satisfactory and we haven't got too many warranty complaints. Wherever warranty complaints have come, more often than not they've been due to improper surface preparation or application of the right product in the right place.

Operator

The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.

R
Rajesh Kothari
Founder, MD & Director

Sir, my question is with reference to the total CapEx for FY '20 and FY '21. And how much CapEx is already on stream and how much CapEx is still balance for FY '20? And if you can give some color on the total depreciation what one should look at from FY '20 perspective?

U
Unknown Executive

So FY '20, as we said, we have a plan of at least INR 700 crores on the CapEx side. Some of it towards balance CapEx in the 2 plants from a CapEx spend point of view. So that will happen. That's about, I think, some INR 300 crores to INR 350-odd crores. The rest is regular maintenance CapEx. Next year, it should be the regular maintenance CapEx by and large.

R
Rajesh Kothari
Founder, MD & Director

So when you say total INR 700 crores, out of which how much is already done?

K
Kanwar Bir Anand

About INR 200 crores, yes...

U
Unknown Executive

Yes. It typically happens towards the third, fourth quarter in any given year.

R
Rajesh Kothari
Founder, MD & Director

Sorry?

U
Unknown Executive

About INR 200 crores has been done. The balance will occur over the next 2 quarters.

R
Rajesh Kothari
Founder, MD & Director

Oh, say about INR 500 crores will be done over next 2 quarters. Okay. And INR 200 crores, which is already done, so that is already commissioned or that will be commissioning from...

U
Unknown Executive

That is, last part of it is towards the balance spends in Mysore and Vizag, which have already been commissioned.

R
Rajesh Kothari
Founder, MD & Director

Okay. So your full year depreciation, therefore, what one should assume, full year depreciation?

U
Unknown Executive

I think that your first half number is a very good reflection of it because the other spends are as and when they get sort of spent, we will capitalize it, but that's a smaller amount.

R
Rajesh Kothari
Founder, MD & Director

So basically INR 500 crores depreciation which -- that will come next year, that's what you're trying to say?

U
Unknown Executive

Yes.

Operator

The next question is from the line of Nillai Shah from Morgan Stanley.

N
Nillai Shah

Just on the demand hand again, just to clarify. After all that we've said about the monsoons and the product mix changes, et cetera. Basically, for the domestic paints business, I'm leaving out putty and waterproofing out here, the volume growth is still double-digit for the quarter?

K
Kanwar Bir Anand

Correct, yes.

N
Nillai Shah

Okay. And secondly on the price cut which you've taken, it's only on solvent base. If it's 0.8% for solvent base, for the portfolio as a whole, it will be less than 0.3%, 0.4%, right?

K
Kanwar Bir Anand

It's 0.8% as a whole on the portfolio. So it's much higher for solvent base.

N
Nillai Shah

Okay, much higher than for solvent base. Okay, fine. And finally, on the other income, why the other income jumped up the way it has this quarter?

U
Unknown Executive

There's a slight -- there is an extent of higher income from the surplus, actually, the funds that we have booked in Q2 versus Q1 and even last year.

Operator

The next question is from the line of Amit Sachdeva from HSBC.

A
Amit Sachdeva
Analyst, Consumer and Retail

Sir, my question is on the -- obviously, volume growth has been stellar and you explained in adequate detail why it has happened. But if I look at the gross profit line, which has -- basically, gross profit pool has expanded by 16%, and I understand that input prices were benign and that has led to perhaps this gross profit despite the revenue growth was 9-odd percent. So can I fairly assume that this mix that has already happened in Q2 and I reckon that Q3 is also a bit of a mix gets inferior as we go into the festive quarter and probably runs into the Q4 as well with distemper being very heavy. So can we take that sort of gross margin picture assuming that input prices are not moving too much to Q3 as well? Is that the mix going to change different? I think you already had the mix, which used to be in the festive quarter. Is this is a fair understanding of how we should think about this?

K
Kanwar Bir Anand

The mix in every quarter for the paint industry is a little different. The mix is a little richer in Q3 and Q4 compared to Q2.

A
Amit Sachdeva
Analyst, Consumer and Retail

Oh mix will be slightly richer, right? Okay. Relative to Q2, okay. I thought last year, Q3 was huge in distemper and...

U
Unknown Executive

Last year, Diwali was greater.

A
Amit Sachdeva
Analyst, Consumer and Retail

Okay. Okay. Understood. Understood. So you perhaps -- the mix will start to become slightly better in Q3 this time. That is a fair understanding, in Q4 as well?

K
Kanwar Bir Anand

Correct. Yes.

A
Amit Sachdeva
Analyst, Consumer and Retail

Okay. That's great to hear. And sir, one comment you made about the transition from the unorganized sector that is happening as a result of consumers seeking more value, but also your own focus on that segment launching new product, which offer greater value for money. This seems like a great powerful transition that has happened just post GST. And do you see that momentum has now on structural and you would perhaps excelling against your competition in capturing that segment business because given your size and scale and distribution? So should we assume that the volume growth that you're getting despite the demand being weak, is that should be a structural trend, right, that volume growth should be coming your way nonetheless, regardless of what the demand situation is?

K
Kanwar Bir Anand

After [indiscernible] cuts.

A
Amit Sachdeva
Analyst, Consumer and Retail

Do you see, sir, I mean reflecting that would be -- it is safer to assume that...

K
Kanwar Bir Anand

The past competitors copy everything we say.

A
Amit Sachdeva
Analyst, Consumer and Retail

Yes. That's why I was wondering that when you're capturing, others are also doing the same thing and how -- should we assume that, that structural trend is likely to stay? And are you seeing that to stay in coming months as well?

K
Kanwar Bir Anand

See, what we see is that, obviously, given the fact that...[Technical Difficulty]

A
Amit Sachdeva
Analyst, Consumer and Retail

Hello?

K
Kanwar Bir Anand

The advantage of the first mover in that segment in terms of creating value kind of for the customer, we have done that earlier as well. And we see that you definitely get initial surge, which is definitely good, but over a period of time, we also see that competition catches up in terms of launching something which is similar. So you can't kind of assume that the same kind of trend would kind of continue forever. So it's basically a time bouncing in terms of what really happens. And we think that possibility of a surge is higher at this stage in terms of what we have got, given the fact that we have got the first mover advantage in terms of some really good new products which have come at that segment.

Operator

Next question is from the line of Kunal Thanvi from Banyan Tree.

K
Kunal Thanvi
Equity Research Analyst

My question is, again, on the...

Operator

Excuse me, this is the operator. I'm sorry to interrupt. Sir, may we request that you use the handset, please? Your voice is not very clear.

K
Kunal Thanvi
Equity Research Analyst

Sorry. Is it clear now?

K
Kanwar Bir Anand

Yes.

K
Kunal Thanvi
Equity Research Analyst

So my question is also on the demand. So can you throw some light on the secondary growth rate that you guys are seeing in the secondary market? And now, on the follow-up on that. You just mentioned about the fact that there is a consumer behavior in the economy or the lower end of the market, which don't come back in Q3 post-Diwali. They miss out due to monsoon. So is it fair to assume that in the coming quarters that segment would not see the kind of growth it is seeing now?

K
Kanwar Bir Anand

So see, the secondary sales have definitely been lower because of the fact that the consumer demand has been a bit stunted to that extent, coupled with obviously what we spoke of in terms of monsoon. So as compared to Q1, you definitely see that the demand conditions have been poorer in Q2 in terms of what has happened and that is reflected in the secondary sales also, which has kind of happened. We also see that -- as I said, that some of these consumer segments would not kind of come back to us in Q3 to that extent. But obviously, we are relying in terms of seeing that today, when the monsoons kind of stop, we do see something which starts happening from an exterior segment, because the exterior painting literally comes to a stop while the monsoons are going on. So I think when we step into Q3, we will definitely have the other consumer segments so who would definitely be there in that segment. Yes, there is some loss because of the shorter cycle customers who have not kind of come in in this Q2 at this moment, but we would definitely get the other segments in as we kind of look at Q3 and Q4.

K
Kunal Thanvi
Equity Research Analyst

Just a follow-up on that. So when the earlier participant asked about channel inventory changing in the dealer level. So when we see the growth in our numbers in last 2 quarters, as you rightly mentioned, that it was largely because of the economic segmenting pause. Then with Q3 and Q4, maybe the premium part of the portfolio may do good on the secondary level. With dealers -- while the dealers have inventory for lower-end products, so how does that catch up? How do we look at that kind of inventory and demand mismatch that might occur?

K
Kanwar Bir Anand

So actually, there is no mismatch which really kind of happens because, as I have said earlier also, it's not that we are growing only in economy products. Some of the premium products have also grown. So you can't really kind of take a stance in terms of not having inventory in the premium products at all and kind of build inventory in the economy products. So I think the retailers don't really work like that. So we don't see really a big mismatch in terms of the inventory. As I said, retailers are fast enough to kind of adjust their inventory from the point of view of how the consumer demand is coming. And as such, today, what we see is that the inventory, which is stocking at the dealers and at the retailers' end is not of a very, very high proportion because of the fact that our servicing to the retailers is pretty good in terms of how it kind of happens. So we don't see very high levels of inventory possibly stocking and therefore, the mismatch which you're talking out is not possible.

K
Kunal Thanvi
Equity Research Analyst

Sure. Thanks for the clarification. And one more question on maybe a broader one, not for say ones of 1 year perspective, from say, 4 or 5 years, perspective, how do we look at the premium end of the market? Right now, we understand due to the -- like in shift of unorganized to organized, we're seeing a very high growth in the economy segment. How do we look at the market say from a 5-year perspective in terms of growth?

K
Kanwar Bir Anand

So it is very difficult to say in terms of predicting because if all of us are good at predicting what is happening 5 years, I think we would have been kings to that extent. So it's very difficult to say in terms of what will happen. I think what we can only kind of say is that obviously, as we have seen in the past, Q3, Q4, the mix definitely gets much better, and we are looking forward to kind of that mix kind of shaping up.

Operator

The next question is from the line of Abhijit Sinha from Pi Square Investments.

A
Abhijit Sinha;Pi Square Investments;Financial Analyst

I wanted to understand, could you just throw some light on the other income growth?

K
Kanwar Bir Anand

We just explained the cumulative impact of the other income growth in Q2 is largely because of our higher treasury income booked in this quarter.

Operator

The next question is from the line of Amit Purohit from CGS-CIMB.

A
Amit Purohit
Analyst

Just on the input cost. When I look at the Q4, Q1 and Q2 quarters, the gross profit growth in Q4 was lower than the sales growth. And Q1 was in line with sales growth and now it is higher than the sales growth. And your comment that the raw material index is more or less same as Q1 and Q2, so I mean, how do I read this actually? Where am I going wrong in understanding this?

K
Kanwar Bir Anand

It's effect is it depends -- There are a lot of factors here. It depends on what the material price and mix versus last year's Q1, Q2. So we have seen a massive increase in the indexing last year Q2. And therefore, even on a probably similar index, Q2 versus Q1, we will probably see a larger benefit in Q2 versus last year Q2. That is the price changes that we took over the last year and the price reductions this year also play a role. So it's a mix of all these factors. But as I said, H1 material cost is probably right indication of where the material prices are sitting.

A
Amit Purohit
Analyst

Sure. And what would be -- is our current buying price lower than the H1 input cost for us?

K
Kanwar Bir Anand

Can't really comment on that, because that will be for Q3 numbers.

A
Amit Purohit
Analyst

Okay. Okay. I'm saying just current buying price for us.

K
Kanwar Bir Anand

We can't disclose that.

Operator

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

S
Shirish Pardeshi
Senior Analyst

I have a few questions. The first question is on inventory. Typically, what is the inventory for the [ sales ] with our dealer?

U
Unknown Executive

It varies from 15 days to 30 days generally. If you are an up-country dealer, you tend to stock about 15 days inventory. If you're an up country dealer, you stock about a month's inventory. That could be an average. It could vary from dealer to dealer. Larger dealers tend to have smaller inventories and number of days. Smaller dealers tend to have larger inventories and number of days. So the mix and you can have quite a range, but I'm giving you an average.

S
Shirish Pardeshi
Senior Analyst

Yes, got it. And so how would the --- the new product inventory would have been increased? So you're saying this average 30 days for the rural dealer would have been adjusting to lower inventory...

K
Kanwar Bir Anand

Yes, as new products represent a smaller proportion of the total sales. So they really don't affect inventories to the same level at the dealer level.

U
Unknown Executive

Also see, for new products, we carry a slightly higher inventory. So basically, the retailer doesn't kind of adjust in terms of kind of increasing the inventories to that extent. So he kind of banks on our inventories being there too, so that the servicing is much better because predictability of the new products is also lower. So we tend to carry a higher inventory at our end.

S
Shirish Pardeshi
Senior Analyst

So in the current economic slowdown, people have spoken on liquidity issue. So for the new product's introduction in the trade, have we extended some sort of credit line?

K
Kanwar Bir Anand

No.

S
Shirish Pardeshi
Senior Analyst

Okay. My next question is on, what is the industry size or maybe contribution for paints or putty and distemper?

K
Kanwar Bir Anand

So putty would be anywhere close to about INR 5,000 crores to INR 6,000 crores as an overall segment in which there are lots of players, which are kind of involved. And when we look at distemper, distemper would be close to about another, I would say...

U
Unknown Executive

INR 15,000 crores?

U
Unknown Executive

[ INR 19 crores, INR 20 crores ]. So...

K
Kanwar Bir Anand

About INR 10,000 crores. [indiscernible] Only about I think anywhere between INR 12,000 crores to INR 13,000 crores.

S
Shirish Pardeshi
Senior Analyst

That's great. In terms of -- now the premium distempers, is that we are interest, sir, in terms of pricing?

K
Kanwar Bir Anand

We would probably be the highest price distempers.

S
Shirish Pardeshi
Senior Analyst

And you say that this price is higher. So this is -- we have a differential price for north and eastern market or...

U
Unknown Executive

No, no, no. We have uniform pricing. We have 2 qualities of distemper. The largest selling distemper is called Tractor Uno, which is priced just a little more aggressively. And we have a better quality distemper, which has an element of, you can say, waterproofing built-in, which is called Tractor Aqualock.

S
Shirish Pardeshi
Senior Analyst

Got it. A few questions on the Home Improvement. We have seen that last 4 quarters, we've been giving the same comment in that net of expansion. Could you say some elaborative explanation, what is the network, what are the markets and where do you see -- I mean, obviously, the numbers are looking very impressive YoY and quarter-on-quarter. But what kind of network expansion we would require to see a meaningful contribution in terms of our sales?

K
Kanwar Bir Anand

So as far as network expansion, both Home Improvement businesses, we definitely are looking at new geographies where possibly the representation is poor and the last 2 years, 2.5 years, the expansion has been very, very aggressive in terms of what we have taken, both from the point of view of kitchen, which has the full kitchens we deliver as well as the components business, which is there, we are looking at more distributors and more reaching out to smaller towns and geographies where we were not represented. Similarly, in terms of the Bath category, we have been opening new retailers across the country, new distribution setups, which have come into that extent. So that's been an integral part of our story in terms of what we have been doing in the Home Improvement business.

S
Shirish Pardeshi
Senior Analyst

My question is a little different. When we have -- and that details. So our product sales have been driving. So is it fair to assume that when project business is not growing, the product business is driving this growth?

K
Kanwar Bir Anand

That's right.

S
Shirish Pardeshi
Senior Analyst

And in the kitchen and cupboards what we have introduced, the growth is driven by that segment?

U
Unknown Executive

No. So it's retail. So the full Kitchen segment is doing very well.

S
Shirish Pardeshi
Senior Analyst

Okay. And how big is this in terms of contribution? Would be 1/3 [indiscernible]?

K
Kanwar Bir Anand

Of what?

U
Unknown Executive

The full Kitchen.

K
Kanwar Bir Anand

Yes. So the full Kitchen business would be close to about 1/3, yes.

S
Shirish Pardeshi
Senior Analyst

And product would be about 40% to 50%?

K
Kanwar Bir Anand

Yes.

S
Shirish Pardeshi
Senior Analyst

Just last one question. Now you say that there is no inventory buildup which has happened. And if the economy segment where we have seen the monsoon has been panning out very well. So that deferment of the purchase, then -- isn't that the inventory would get stuck for maybe another 2 quarters until the summer season?

K
Kanwar Bir Anand

No, no. So that's what we were saying, that today, the retailer who never kind of really increases inventory given the fact that our servicing is very good and the inventory varies from 15 days to about 30 days. The retailer is quickly able to adjust his inventory far more strongly to that extent and therefore, the pileup of inventory would really not happen to that extent. So it could be a very small phenomenon for a week or 10 days kind of zone which will happen, but we will not kind of see any big pile up of inventory happening at the network end.

U
Unknown Executive

See, the other thing now solvent-based products are a much lower proportion of the total volume where we provide all the tinted shades. All the other emulsions and even distempers to an extent can be tinted in dealer outlets, so all we are supplying is basic. So in terms of days inventory, frankly, there is very little days inventory at the dealers' end.

S
Shirish Pardeshi
Senior Analyst

Okay. Just one last question on the international business. So we have seen that Nepal is doing great. But then you sounded there are some issues in Bangladesh and Sri Lanka. Is it because of the stability of business or is it...

K
Kanwar Bir Anand

There was a very severe monsoon, which affected both Bangladesh and Sri Lanka where they are more monsoon prone than even India, so to speak. And in general, the economic conditions in Sri Lanka are not the healthiest. While the Bangladesh economy is doing reasonably well, the Sri Lankan economy over the last 2, 3 years has been going through a rough patch.

Operator

The next question is from the line of Jithin John from CLSA.

V
Vivek Maheshwari

This is Vivek from CLSA. Sorry, I have the same questions, which have been repeated on the volume value growth. So first one is the GAAP between volume and value. And assuming the mix improves as you highlighted in third quarter, which would be the case in the base quarter also. The delta is that -- what we have seen, around 5%, 6% this quarter, is that what will continue or persist for the rest of the year also?

K
Kanwar Bir Anand

We just answered that question saying that it's very difficult to predict that. But as we see, when the mix gets better in Q3, Q4, obviously, that difference is bound to come down.

V
Vivek Maheshwari

Okay. See, the reason is because third quarter last year will also have a better mix, right? So to that extent, the mix is sequential, not YoY, right?

K
Kanwar Bir Anand

Also the reason is challenging that the Diwali has been preponed this year. And as a result, last year, since the whole October -- full October, we got in terms of the retailing period of Diwali. We do think definitely this year in Q3, the mix would be much better.

V
Vivek Maheshwari

Okay. And while you have little bit highlighted upon some of these aspects, has there been a little bit increase in promotional discount because this minus 5%, 6% still looks very baffling to me. So other -- whatever you answer, leaving that aside, has there been higher promotional discount, which is also impacting this number?

K
Kanwar Bir Anand

So yes, second quarter definitely sees a higher spend of the discounting, which happens because this is typically a period when there are lots of consumers schemes which happen, there is incentivized additional schemes for the retailers also, which happens to that extent. And therefore, what we see is that the second quarter, there is a slight skew in terms of the input spending, which happens to that extent and that is something, which is definitely there this year as well. But that's -- year-on-year, you will not have that much of a difference.

V
Vivek Maheshwari

That is the precise point, sir. So is there something unusual on the promotional discount bit or it's pretty much...

K
Kanwar Bir Anand

No.

V
Vivek Maheshwari

And you keep mentioning about slowdown on your calls, but this is seventh quarter to my understanding, which is double-digit decorative volume growth. So I mean, even if economy...

K
Kanwar Bir Anand

That is slow.

V
Vivek Maheshwari

So in good times you expect what kind of volume growth if...

U
Unknown Executive

Very high double digit volume growth.

V
Vivek Maheshwari

Okay. And finally, if I can request, sir. You are a fairly large company obviously in terms of business but also in terms of market cap. Can we see better disclosure from you? Maybe volume-adjusted -- you give volume growth which is like really abstract. It can be value-adjusted growth. Even multinationals like Unilever, Colgate, Nestle are giving that. It is just a suggestion if you can take on board, because you're -- in terms of market cap, you're one of the leading ones in terms of the world now. So if you can take that on board.

K
Kanwar Bir Anand

We will consider it.

Operator

The next question is from the line of Nikhil Upadhyay from Securities Investment Managers.

N
Nikhil Upadhyay
Fund Manager

Just one question. One of the comments you made like the premium, which basically sells in the metro and Tier 1, the growth rate has been lower. Now if I add -- consider this tax benefit, which we are getting, do you think that the value proposition in -- you mentioned that the value -- we are driving the value proposition at the lower end of the segment but do you think the economy or the premium, and also, the value proposition needs to be passed on? Because if you look at last 2 years when we had the GST benefit, which we passed on to the customer. Now we are, again, getting this tax benefit. So how are you thinking about bringing back or improving the growth rates in the premium?

K
Kanwar Bir Anand

No. So that's not the case because see, if you look at -- it's not that there is anything wrong with the value proposition of the premium products as well because the premium products, they relatively are doing much better if you look at from the point of view of the Tier 2, Tier 3 cities to that extent. So it's not that there is anything wrong in the value proposition in terms of what's coming from the premium and luxury products to that extent. And I think at Asian Paints, we clearly kind of benchmark that saying that we need to have the right value proposition delivered to the customer at any price point, be it economy, mid or premium or luxury to that extent. So the question still very clearly pertaining the points to the fact that the growth -- the demand conditions are relatively weaker and therefore, we feel that just doing anything adjustment with respect to pricing is not going to spur up the demand.

Operator

The next question is from the line of Pulkit Singhal from Motilal Oswal Asset Management.

P
Pulkit Singhal
Associate VP & Analyst

Sir, in the FMCG industry at least, we had observed over the last 5, 7 years that many players were able to drive premiumization by introducing lower price SKUs for the premium products, which, to their surprise, obviously worked quite well. Now I don't know how feasible it is to do in the paint industry given that it's a specific volume-based product, but have you tried pushing that even in areas where you would ideally think premium product would not sell by saying that why don't you just try 1 room with this SKU paint or something like that?

K
Kanwar Bir Anand

So it's not that the premium products don't sell in rural areas or small towns. They sell all over the country. But as a proportion of the total sales, premium products have much higher in the metros. So all our products are available everywhere, in every small town and village in the country. So even Tier 3, Tier 4 cities contribute to a sizable sale of the premium and luxury. It's not that it is not there. So we already have people who do 1 room makeover, they do 1 wall makeovers and so on. So also all those things are there, which we are kind of doing to that extent from what people have been kind of experimenting. We have all sorts of textures and stencils and other kind of inspirational wall finishes, which people are using across the country.

P
Pulkit Singhal
Associate VP & Analyst

Got it. In terms of the metro and Tier 1, I mean, looking at the last 5 years growth rate, so do you think that these markets are now largely saturated in terms of volume growth and it is only in the premiumization which leads to the value growth up here?

K
Kanwar Bir Anand

Not exactly because what we see is that you can't really club the metro and Tier 1 also together, because metros behave differently than Tier 1 behaves certainly to that extent. Relative to basically the Tier 3, Tier 4 cities, there has been definitely a trend, which we see where the metros and Tier 1 have been growing slower. It is not that they are growing. They're growing slower as compared to the Tier 2, Tier 3, Tier 4 cities kind of alone in terms of what we see. So there is that kind of a trend, which is visible. We definitely see that even in Tier 1s, even in metros, there is definitely a growth, which is happening. It is not that there is no growth. See, it's a question of the overall economic conditions and real estate conditions. We see the metros growing vertically. The Tier 1s and the smaller towns, growing more, we can say, horizontally. We also have the metros like Bombay and Delhi growing into NCR, Gurgaon, [indiscernible], et cetera. So there is growth. It's not there isn't growth. But in the current trend plan, the number of -- the construction activity, so to speak, has taken a little bit of a slowdown and as a result, the growth seems to be a bit lower.

P
Pulkit Singhal
Associate VP & Analyst

Okay. Sir, has the construction business from the first half prospective declined on a YoY basis, the primary real estate, I mean, these sales that you do?

K
Kanwar Bir Anand

Our business has gone up, but not gone up as like it was going up earlier. But also what has happened is monsoons have affected projects a lot because all the paint projects where exterior painting kind of happens, I think that has definitely taken a toll this year to that extent.

P
Pulkit Singhal
Associate VP & Analyst

Got it. So in terms of -- now, given that there's this renewed focus on the lower end and, I mean, distemper and putty and also, I mean, you are seeing obviously a higher growth in Tier 3, Tier 4, which tends to have a more product mix in that segment. So over a 3- to 4-year period going ahead, I mean, would it be fair to, therefore, assume that volume growth will obviously continue to lead value growth, going ahead?

K
Kanwar Bir Anand

If you can predict the Indian economy accurately for the next 5 years, I'll predict the paint rate for you, exchange basis.

P
Pulkit Singhal
Associate VP & Analyst

Okay. All right. Sir, and these newer customers that are coming in at the lower end, like how long does it take before they kind of start premiumizing because many of them are coming in the last, say, 1.5 years as opposed to your focus there?

U
Unknown Executive

So it is not as linear as you are kind of seeing. So we don't find that for people will kind of try each category and then move onto only 1 category up kind of a thing. We see kind of a very different phenomena also which happens. We see the extent of consumers kind of graduating onto the luxury product also to that extent and there is also a mix where people who kind of get 1 room done with the luxury product, which is basically the front facing room and the other rooms basically, we might continue to in terms of they are using only onto an economy emulsion. So it is very difficult to kind of say that it will take 10 years or 15 years to kind of finally come to the premium category. So it's bit of a nonlinear kind of aberration which kind of takes place. So very difficult to kind of really predict that this set of customers, which have come into economy will definitely move into say the premium or the luxury over a defined period of time.

P
Pulkit Singhal
Associate VP & Analyst

Thank you for the detailed explanation. Just a last question. Is it possible to share the top line cities contribution to sales?

U
Unknown Executive

We don't know it offhand. Sorry.

Operator

Ladies and gentlemen, we take the last question from the line of Abhishek Bhandari from Macquarie.

A
Abhishek Bhandari
Analyst

First of all, I would like to wish good luck to Mr. Anand and Mr. Merchant post their retirement. And congrats to Amit and Mr. Jeyamurugan on your new roles. So Amit, my question is to you. What about the new priority areas or focus areas for you once you resume your role for the month of April?

A
Amit Syngle
MD, CEO & Additional Director

You are asking a Board question. So I think I'm looking forward to my stint in the new position, but we will talk about it more later.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. K.B.S. Anand for closing comments.

K
Kanwar Bir Anand

Thank you, everyone. It was a very lively discussion, and a happy Diwali to all of you.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of Asian Paints Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.