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Asian Paints Ltd
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Ladies and gentlemen, good day, and welcome to the Asian Paints Limited Q3 FY '18 Earnings Conference Call hosted by Motilal Oswal Securities. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Gautam Duggad, Head of Research Institutional Equities, Motilal Oswal Securities. Thank you, and over to you, sir.
Thanks, Morita. Good evening, everyone. I welcome you all on behalf of Motilal Oswal Securities for the third quarter conference call of Asian Paints. We have with us Mr. K.B.S. Anand, the Managing Director of Asian Paint, along with his team. Without much ado, I will hand over the call to Mr. Arun Nair. Arun, over to you.
Good evening, everybody. Welcome to Asian Paints Q3 investor call. We have the management team here led by Mr. K.B.S. Anand, MD and CEO; we have Mr. Manish Choksi, who is the President of International, IT, HR and Chemicals; we have Jayesh Merchant who is the CFO and Company Secretary and also President of Industrial JVs; we have Mr. R. Jeyamurugan, VP, Finance; Mr. Parag Rane, Chief Manager of Finance; and myself, Arun Nair, from Corporate Communications. Now I request Mr. K.B.S. Anand to take the call forward.
Good evening, everyone, and welcome to the Asian Paints Q3 FY '18 Conference Call. The Indian economy, which had witnessed disruptions on account of demonetization and GST rollout, seems to be on a recovery path. GDP growth for the September quarter was up at 6.3% as compared to 5.7% in the June quarter, arresting the slight weakness for 5 straight quarters. Demand conditions for the paint industry, though, recovery still remain a little subdued. The overall global economy continues to show strong resilience and continues to expand ahead of expectation. Advanced economies have been doing well, and we are also witnessing broadening recovery in the emerging markets. Farming commodity prices are also heading growth of the export-oriented emerging countries.Financials. Consequent to the introduction of goods and service tax with effect from 1st July 2017, central excise, value-added tax, et cetera, have been subsumed in GST. In accordance with the Indian Accounting Standard 18 on revenue and Schedule 3 of the Companies Act 2013, unlike excise duties, levies like GST, VAT are not a part of revenue. The figures and growth percentage has suitably adjusted to make the revenue from operations for the period up to 30th June 2017 comparable. For the consolidated financials for Q3 FY '18, revenue from operations has increased by 10.9% to INR 4,267.49 crores. PBDIT increased by 17.7% to INR 891.18 crores. PBT increased by 19.7% to INR 858.55 crores. Net profit after noncontrolling interest from continuing operations increased by 21.6% to INR 554.64 crores as compared to INR 456.18 crores in the previous corresponding period.The consolidated financials for the 9 months FY '18. Revenue from operation increased by 10% to INR 12,351.46 crores. PBDIT increased by 3.5% to INR 2,357.68 crores. PBT increased by 2.2% to INR 2,284.87 crores. Net profit after noncontrolling interest from continuing operations increased by 1.9% to INR 1,488.24 crores as compared to INR 1,460.69 crores in the previous corresponding period.Stand-alone financials for Q3 FY '18. Revenue from operations increased by 11.3% to INR 3,587.43 crores. PBDIT for the period -- for the quarter increased by 21.9% to INR 818.1 crores. Net profit increased by 24.2% to INR 528.97 crores. Stand-alone financials for the 9 months FY '18. Revenue from operations increased by 10.6% to INR 10,378.36 crores. PBDIT for the period increased by 5.1% to INR 2,135.27 crores. Net profit on stand-alone basis increased by 3% to INR 1,403.37 crores.Within the decorative business. The decorative paint business registered single-digit volume growth in the current quarter. On a sequential basis, material prices have been inching upwards. There was no price revision in the quarter. We had effected one price increase in the month of May '17 of 2.68% on the back of a price increase in March '17 of 3%.Doing the industrial business. The Automotive Coatings JV, PPG-AP, witnessed good growth in the Auto OEM and general industrial business on the back of strong performance of auto, 2-wheeler and commercial vehicle sales. The auto refinished segment also saw a good uptick in the third quarter. The Industrial Coatings JV, AP-PPG, registered decent growth in the quarter led by strong performance in the powder coating segment.Business review, internationals. In the international markets, units in Bangladesh, Oman, Bahrain and Nepal witnessed good growth. The greenfield manufacturing capacity in Indonesia was commissioned in the second quarter of the year and the business has picked up well. However, the international group performance was affected by adverse exchange rate fluctuation, especially currency devaluation in Ethiopia and Egypt. Raw material procurement continues to be a concern in these markets due to ForEx unavailability.Financials of the current quarter include the financial of Causeway Paints Sri Lanka, which was acquired on 3rd April 2017, hence the numbers are not comparable with the financials for the previous year.Business review for the Home Improvement. Both the segments within Home Improvement business, the Kitchen business and the Sleek, and the Bath business under ESS have registered good rates in the quarter. In December 2017, the company acquired the balance 49% of Sleek from the erstwhile promoters. Sleek is now a wholly owned subsidiary of the company.CapEx. The CapEx plan for the stand-alone company for the current year is about INR 1,200 crores. This includes about INR 1,000 crores under 2 new paint manufacturing facilities being set up at Mysuru and Karnataka and Vizag and Andhra Pradesh in South India. The first wave of both those plants will be commissioned in the next financial year.Going forward, the initial hiccups of the rollout of GST have settled at the trade channel. However, we need to see a smooth rollout of GST reporting requirements, e-way bill, et cetera, to avoid any further disruption in the supply chain. Raw material prices for some key raw materials continued to inch upwards. We are reviewing the trend very closely and will take appropriate pricing revisions. The ForEx situation in the markets of Egypt and Ethiopia continue to be a key cause of concern.Thank you, everyone. We are happy to take any questions you may have.
[Operator Instructions] We take the first question from the line of Avi Mehta from IIFL.
Sir, versus our expectation in the second quarter of a pickup in decorative demand in the second half, it seems to be more. Do you now expect it to be more back-ended? And if you could kind of help clarify what has been that reason in terms of the miss that you have said. Was it lower stocking frequency? Was it something else? If you could help clarify that.
See, when you compare 2 years, there are the impact of Diwali, monsoons and other factors. Last -- this year, the Diwali was much earlier than last year. So there is -- the Q2 and Q3 of both the years are not strictly comparable from the demand context. So while we have seen an uptick in demand over the -- after the impact of GST, we still maintain that demand is not as good as we would like it to be. It has not reached the levels of the pre-GST period, in our opinion.
It has not yet reached. And sir, why would you say that? What has been the reason in your opinion? I just wanted to kind of understand that, sir.
We think the overall economic growth has still not reached the numbers it was reaching earlier.
Okay, okay, sir. And sir, secondly, you highlighted towards a sequential increase in input cost fluctuation. What is the thought over there? Is there any capacity link or any one-off reasons for such increase? Or do you expect this to -- if you could share your thoughts on that as well. And would we need to kind of then take price increases?
The raw material prices are dependent largely on the movement of commodity or the key chemical commodities, which are based both on crude, which where we are seeing an inflationary trend over the last 2 quarters as well as certain key raw materials like titanium dioxide, MMA, butyl acrylate, et cetera, which are worldwide-traded commodities and their worldwide prices have gone up.
Okay, okay. And sir, like last time, you had indicated there was a possibility of some one-off capacity shutdowns that had happened, which is why this increase may not sustain, there's nothing like that?
Actually, in the case of MMA, it's still has not come back onstream.
Okay, that has not come back. So is the expectation now of a former input cost? Is that how I should -- how we kind of -- obviously, barring any unforeseen change in crude. But as of now, would that be a fair estimate to take that we expect input costs to remain not -- I mean, remain more hard? Or I mean, inflation going to remain very strong. Is that some understanding that we can take away as of now? Is that...
As of now, we have seen an increase is what we are telling you. How it will be next year or next quarter, we cannot really predict.
Okay, sir. Okay. And what would be the -- okay. That's all from my side, sir.
Next question is from the line of Manoj Menon from Deutsche Bank.
A couple of questions. One, just to understand the thought process behind the pricing decisions here. Given the significant level of inflation that we have seen in inputs, what is that stopping you from taking some price increases given your market dominance? Is it competition? Is it the macros? Is it just the fact that GST has been just implemented 6 months back? Just trying to understand what the -- just the thought process, just that -- or it's just that maybe the margins were too high for comfort? It could be -- it could probably be all the reasons, but just trying to understand the thought process behind the delay in price hikes.
Right. It's all the reasons.
Sorry, I couldn't hear.
You're right. It's all the reasons.
Okay, okay, okay. Fair enough. Secondly, just a financial sort of a question. So as per the Section 171 of the GST Act, it's very clear that any input benefits -- rather, input tax benefits as well as tax reductions needs to be passed to the consumer through reduction in prices. Now obviously, in Paints' case, there has been no reduction in tax assets, but I'm assuming that there's a certain level of input tax credit, which every company would have got including Asian Paints. Is it that some of the gross margin pressures could be mitigated by -- as long as you don't profit here at an EBITDA level, is that the destination, which will be appropriate to make?
We have not taken that definition and there is no significant chunk of input tax credit that we were -- are getting way earlier than we are getting today.
Okay. So you mean to say that -- so what we see now is that what little ITC you would have got would have actually got passed on to the consumer or the customer?
No, Manoj. What we are saying is there is no significant defense in the input credit, which is under GST scenario. I'll come back to that.
We take the next question from the line of [ Arihant Bhatia ] from [ Capitalist Global Equity ].
My question is regarding the Home Improvement business. I see you acquired the balance of Sleek. Is there a renewed push towards -- to grow the Home Improvement business?
Yes, definitely.
Definitely.
We are -- the business grew well in Q3 itself and we are quite confident of growing this business in Q4 and the years to come.
So from an overall strategy perspective, I'd like to understand, would you be adding more pieces to the Home Improvement business?
As of today, we are focusing on these 2 segments, Kitchen and Bath. Once we believe we have attained a certain size, and certain scale and a certain manner of working in this business and we see that the models that we are putting out in the marketplace are working for us, then maybe there is a question of doing anything at that point of time. As of this point of time, in the near term, we don't think we are going to add any new categories.
Okay. With regard to GST, I know now things are settled a bit from last quarter. Do we see that the unorganized players are actually losing some sort of a market share? Or are they geared up and complying?
Since this conversation is recorded, I cannot answer.
We take the next question from the line of Vivek Maheshwari from CLSA.
My first question is the way in which GST is accounted versus the earlier regime. There would be some impact on the revenue. So is 11% your like-for-like revenues for stand-alone or India business?
Yes, Vivek.
Yes.
We have given the details also in the notes to the results.
They are like to like.
They are like to like.
But let's say, in the base quarter, the expenses will be inclusive of taxes, which is getting offset under GST from the top line. Shouldn't your top line be a bit higher than what you have reported?
No. So anyway, the 10.9%, 11% growth that we are reporting is net of excise in the last quarter for the previous year. And as we mentioned a few minutes back, the input tax rate element is not much of a change between that and GST. So the expenses were also not be too different from what we had reported
Not a big difference.
Okay, okay. And what is the reason your -- the other expenses are down like 6% y-o-y?
So we mentioned during the Q2 call also that we -- there was some tightening on the belt that we had undertaken on some of the expenses. Plus there have been some investments on renewable energy, which was also helped up in part by fuel costs. So all these things add up to that 6% sort of negative number versus last year.
Okay. So this -- and this is something, which should be sustainable?
I would not...
We will see, Vivek. I don't want to commit...
Really I'm seeing -- my view, my reading and my understanding still is that there is another -- there is a tax element toward there, which is offsetting the revenues as we have seen in case of other companies.
No, no, no.
Well, as I mentioned, Vivek, there have been some costs which we are trying to control this year. Like I mentioned, foreign fuel and processing costs and some other costs. Apart from that, even I think the marketing spend this quarter have been lower as compared to last year.
Okay, okay. And another bit on -- I know this has been asked, but on the volume growth side, I remember a couple of years back when you did around 11%, 12% or early double digit, you said you were not impressed because it is much lower than your expectation. And at that point of time also, things micro was not very conducive. Things were, in general, not that good. How do you think about this volume growth just around -- you have not even returned high single-digit, so it is probably worse than that. So how do you think about -- again, we've seen concise number -- sorry for asking you this again, but concise number you've again seen double-digit growth. So doesn't that worry you as Asian Paints?
We are definitely not happy with the volume growth we are getting and we want a higher volume growth. However, if you see our value growth, it is still reasonable. So I mean it's not as if we think we are losing market share, but we think the growth of the paint industry has not been good enough for us to grow significantly higher.
We take the next question from the line of Harit Kapoor from IDFC Securities.
Sir, just wanted to check on this other expenses line again. I know you had said that the marketing costs also would have been lower this quarter. But there should not have been a major difference, right, because in the base quarter, we had demonetization where overall marketing spend including yours would have been a bit lower. So would this still be -- would this entire cost reduction, and since you said there's not a major impact of the input tax part, so would this almost entirely be attributable to the belt tightening or cost management that you were speaking about?
Both reasons, belt tightening as well as marketing spend being lower than last year.
Yes, you are right.
Okay, okay. And just from a -- the second question was on the pricing front. So has there been any change on the pricing front even in select SKUs in the last maybe month or 2?
No.
None at all, right?
No, none at all.
[Operator Instructions] We'll take the next question from the line of Latika Chopra from JPMorgan.
Just stretching a bit more on the demand side. Could you help us with any differential trends that you would have noticed across geographies, across product segments, where you're probably more worried that the demand is not picking up?
So if you see, we feel the demand in the South was not very good, partially because of an extended monsoon that lasted later. We have seen it revive in the month of December, so it's very tough to put these things really down. Demand in Northeast, et cetera, has been fairly good. That's how I put it.
And in terms of your mix, any particular trends you would want to quote?
Not really.
And when you say the Home Improvement segment has actually done better, it seems it's purely because you're probably gaining share or you're increasing your distribution, right? And at a category level, it's still difficult to say whether the Home Improvement segment has done better than paints?
I mean, from a market perspective, yes. As we are growing and our presence in that segment is pretty low, obviously, our growth had been much better. Has the segment done better? Just like paint was a little better off in Q3 than Q2, I think the Home Improvement segments that we have presented now also have been a little more buoyant, though I would say that there is not -- it's not that big an impact in that sense of the word.
All right. And just, lastly, your profitability for overseas business seems to have been hit more. Or is it the JVs, which have also seen -- taken a hit on the profitability more because of the difference between consol and stand-alone?
Well, both have taken a hit vis-a-vis last year. Last year was probably our best year from a material cost standpoint and we definitely faced more headwinds in the industrial business, the B2B business, so it takes time to recoup any raw material price increases we've got. And then our international business, in many markets, we face significant competition and so it's not very easy to increase prices. Obviously, we are impacted by the exchange fluctuation in Egypt and Ethiopia very, very significantly, which produces its own set of challenges in terms of the absolute contribution of profit -- the absolute contribution of sale and profit from those geographies.
We'll take the next question from the line of Kunal Bhatia from Dalal & Broacha.
We knew we would be carrying inventory to some extent, so what's your visibility of raw materials for the next couple of quarters because we've seen, on a quarter-on-quarter basis, we've seen a little bit of improvement on gross margins, yes. And on the other side, we have seen the raw material prices on a rise. So at least from the company's visibility side, how do you see the gross margins going forward?
We really can't give you a gross margin guidance because...
I'm not asking for a guidance per se. I understand your side, but...
So there is a -- what you have seen, on an increase in gross margins is a mix of the inventories we are carrying and the change in product mix quarter-to-quarter we continually had. The same products don't sell in an identical manner throughout the year. The seasonality, so to speak, our different products vary. So the gross margins vary depending on the sale of those products in that time of the year.
We take the next question from the line of Anshuman Atri from Haitong Securities.
So my question is regarding the water-based paints. With the new plants, which will be commissioned, I assume these will be having more proportional water-based paints. What would be the share going forward? And what is the current share as of now of water- versus solvent-based?
The new plants are 100% water-based. We don't disclose these shares.
Okay. And for the industry, sir, how are you seeing this in the last 5 years, the next 5 years going forward?
It's a worldwide trend. And in India, water-based as a percentage of sales is increasing substantially all over the world and India.
So what would be a rough estimate of India's overall water-based?
IPA sells market share analysis, I suggest you buy it from them.
Okay, sure. Yes, no problem. The second question is regarding Home Improvement. After the GST implementation, have you seen increased, say, approach to organized players by, let's say, more B-based players to do more JV wherein they could supply the products and use branding of Asian Paint in terms of, say, other products in the portfolio of ESS more of outsourcing? So is there any such trend emerging in the industry after GST?
No, no. As far as the basic trend, whether GST would help the sales, it's too early to say anything on that matter. And whether there is a structural shift in industry where organized players would buy from unorganized players and sell into the market, that I don't know about, so there is nothing for us to comment on that matter. Our sourcing and our sort of manufacturing, what we are doing and those trends, we are not going to -- at this point of time, there is no change, massive change, that we expect in that behavior.
We'll take the next question from the line of Anubhav Sahu from MC Research.
I had this -- sorry.
Sorry, I'm not able to hear you.
Is it [indiscernible], hello.
Yes, it is.
Sir, I had a very specific question regarding titanium dioxide. So we have seen the peak of international prices, say -- in, I think, June, July. It has bit eased off, it looks like. So how has been for the company, I mean from a realization point of view, sequentially? And what is the outlook you see for the international sites?
Continues to remain on site. I don't think we have seen any easing in that sense of that word here.
Okay. But could we see a similar kind of pricing that's -- which was prevailing, if you want?
Might be easier to follow the international conference call from the TiO2 manufacturers there. It's difficult for us to comment on that.
And sir, can you give us an idea what mix the titanium dioxide has on the raw material mix -- I mean, on the price side?
About 20% of our raw material.
The raw material cost, yes.
Yes.
The next question is from the line of Tejash Shah from Spark Capital.
Sir, in last 3, 4 quarters, you have done your best to explain the slowdown and you've not pointed towards one particular region -- one particular region on that. But if I see the commentary, all your commentaries for last 2, 3 quarters, you are outlining South India as one of the lowest-growth territories for us. So is it the right understanding that our exposure to that region is higher relatively and that's why the slowdown is much more pronounced in our numbers versus computer's numbers?
There's an element of truth to that.
Sure. So second question pertains to your commentary that marketing spends were low Y-o-Y. Now I can understand that the value was in second quarter this year. But in the base quarter after 8th of November, roughly 40, 50 days were lost because of demonetization. So even if I take average number, which is sequentially -- or historically your December quarter number, the number should have been higher versus the base quarter. So is there a change in the strategy on the spend part?
No, no. It's -- we really don't go by number of days and things like that. It's the time of the year when you think paint demand or paint consumption is higher. In Q3, especially for a late Diwali, you don't advertise very much because cold weather is not conducive to much exterior painting or otherwise. So there are all factors that come in like this that decides the quantum of our advertising you do or don't do. I don't think demonetization had any drastic effect on the quantity we spent on marketing last year.
Okay. But sir, as a consumer, if I see Kansai has stepped up activity on equity run funds so they sponsored all the major cricket tournaments in the last 2 quarters and [all the] functions. So just wanted to understand, as a market leader, don't you want to outspend them on that front?
We outspend them as a whole. We use different avenues of expenditure. We have not found cricket to be necessarily the best way to get what we want to achieve.
Sure. And just a [ fling ] to the previous question. Sir, are we losing market share in South India because we believe Nippon is very aggressive in that region in particular. So if you can share some color even qualitatively.
Well, they have been aggressive and any new player is going to affect us for a short term. We'll handle that in due course.
Sure. And sir, lastly, if you can give us some color on dealer addition in the year so far?
It's been a normal trend. We add about 3,000 dealers every year and it's more or less than in line with that.
We take the follow-up question from the line of Avi Mehta from IIFL.
Sir, you have mentioned that the other expenses, there was a decline because of initiatives, costly initiatives, that you had done. Is there a number that you could share? What has been the kind of trajectory that you [indiscernible]?
No.
We're not able to share any specific number here.
Okay, sir. And secondly, sir, titanium dioxide, is there any increase -- is there any local sources that are developing for manufacturing of titanium dioxide that -- would can be of scale which can help us contain? Or that remains an international commodity for -- even from an import point of view?
For all practical purposes, an international commodity, there is one large manufacturer, KMML based in Kerala with a limited capacity who bases its prices on the landed price in India of the imported commodity.
Okay. And there's more capacity addition that is happening on India on that front, right?
[indiscernible] India is talking about working with KMML to enhance their capacity, and they have promised to enhance their capacity over the next 2 years, but there's nothing immediate.
Okay. Okay, sir. And lastly, sir, while -- in terms of -- I understand that there was partly marketing-related spend. But as you have highlighted, 3Q is traditionally -- while the value was one of the reasons why there would be a possible reduction, but otherwise 3Q is not a very marketing heavy. So would it be fair that -- because you're seeing a declining trend even in the growth rate of other expenses. So is it that increasing these initiatives are coming on [ fully ] and more opportunities likely to come? Or has -- how should I look at this, sir? Because there is certainly a significant change in the trajectory. So what have you done differently versus -- because I'm just trying to understand that in more detail, sir, if you could help me.
So there is basically cost-saving initiatives across-the-board in terms of some costs and some variable costs in that sense of the word. I don't think there is any major bucket of expenditure that I would like you to go on target. I think we have done and across-the-board look at where we were spending, where we could conserve, what we could do a bit differently. So it's a combination of all of these. I don't think there is really one big bucket that I can other than the 2 things that were called out earlier on the call. There are strong structural savings on account of use of renewable energy in our manufacturing and maybe a little bit of a drop in spends on marketing that we might -- would have done this quarter vis-à-vis the quarter last year.
Okay. Let me rephrase, would most of these initiatives have [indiscernible]? Or is there more that we are kind of material -- more addition that you are still working on is what I was trying to get at because the trajectory has been very, very stark. It's been very healthy, that's why I was just trying to understand it more.
You're talking like my board now.
We take the next question from the line of Chinmay Gandre from Future Generali.
Sir, in the earlier part of the call, you had referred that due to better product mix, also margins on a -- gross margin on a sequential basis were like better. So can you throw some light on this, like what are you earlier referring to?
If you studied the paint industry over a period, you would understand this 10% much more prior to Diwali. They have a lower gross margin in terms of absolute value. Post Diwali, it is much-- they sell much more than this 10%. They were much higher. They were much higher per rupee, per liter gross margin than this. It is as simple as that.
[Operator Instructions] We take the follow-up question from the line of Harit Kapoor from IDFC Securities.
Yes, just one quick follow-up. I wanted to understand how the run rate has been. So you said that demand has not been as adequate. But towards the end of the quarter or exit, has it been November and December have been better vis-à-vis the earlier months? Just wanted to understand how the exit's been.
They have been, but I won't like to quantify that permanently. I think we need to see one more quarter to really see if demand is an uptick. One month up and down is due too many factors to be able to assess frankly. It can be due to factors of competition slipping rather than me doing well, anything. I mean, it's really demand uptake. Let me see for 1 or 2 quarters continuously to be able to assess the demand, if it has gone up or not gone up.
[Operator Instructions] We take the next question from the line of from Anubhav Sahu from MC Research.
Sir, I have one question regarding sales. So you mentioned about demand. But on the supply side, all the issues are over, right? So I mean, there is no supply constraints so -- that somewhat we have seen in the last quarter, so nothing on that side, right?
In India, there are no supply constraints.
In last quarter also I'm not aware of any supply constraints.
No, there's no constraints at all.
No, no, I mean, because of the implementation of GST and...
No, no.
No supply constraints.
Okay, sir. And in terms of demand, sir, you mean on a Y-o-Y basis, if you can give any qualitative comment on urban versus rural divide. If you see any turn or any pickup happening from your rural side or you see that there's still to be something which we have to watch for, for a couple of quarters how things are?
We have already seen rural demand grows better than urban demand even in the past 3 years.
And sir, in the base quarter, was it that more impacted rural demand in that sense? And you see a big pickup in this quarter?
Q3 was better. I mean last year, Q3 was always bad because of demonetization impact. There is no trend here that you are sort of seemingly wanting us to give. There is no trend, which is big enough for you to comment on that.
Okay, okay, okay. So what I mean, sir, I meant, sequentially speaking, so is there any incremental change in terms of -- you mentioned about South having a reasonable basis, but on other verticals that you can mention? Anything?
There is no change.
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 Q3 FY '18 conference call. Good day, good night and a good year ahead.
Thanks.
Thank you very much, sir. Ladies and gentlemen, on behalf of Motilal Oswal Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.