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Asian Paints Ltd
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Ladies and gentlemen, good day, and welcome to the Asian Paints' Q3 and 9 months FY '19 Investor Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Arun Nair from Asian Paints' Corporate Communications. Thank you, and over to you, sir.
Good evening, and welcome to Asian Paints' Investor Call for Q3 FY '19 Results. On the call, we have Mr. K.B.S. Anand, MD and CEO; we have Mr. Jayesh Merchant, CFO and Company Secretary and also the President of Industrial JV; Mr. R. Jeyamurugan, VP of Finance; Mr. Parag Rane, Chief Manager of Finance.May I now request Mr. K.B.S. Anand to take the call forward.
Good evening, everyone. The increased volatility and challenging business conditions marked the quarter gone by. On the domestic macro front, growth trends still remain uncertain, and the volatility in crude prices and exchange rates have only added to the uncertainty. After witnessing a significant increase in crude prices and a sharp fall in the rupee until the middle of the quarter, the latter part of the quarter saw respite in terms of declining crude prices and the rupee appreciation.In the consolidated financials. Revenue from operations has increased by 24.1% to INR 5,294 crores in Q3 and by 16% to INR 14,331 crores in 9 months. PBDIT increased by 15.3% to INR 1,103.6 crores in Q3, an increase by 12.7% to INR 2,906.7 crores in 9 months. PBT increased by 13.4% to INR 973.5 crores in Q3, an increase by 12.5% to INR 2,570.4 crores in 9 months. Net profit from continuing operations increased by 14.1% to INR 647.2 crores, an increase by 12.6% to INR 1,724.5 crores in 9 months.For the standalone financials. Revenue from operations have increased by 26.4% to INR 4,536.1 crores in Q3 and by 17.1% to INR 12,156.5 crores in 9 months. PBDIT increased by 18.7% to INR 1,052 crores in Q3, an increase by 16.6% to INR 2,745 crores in 9 months. PBT increased by 17.1% to INR 940.2 crores in Q3, an increase by 16.7% to INR 2,460 crores in 9 months. Net profit increased by 19.3% to INR 631 crores in Q3, an increase by 17.9% to INR 1,655 crores in 9 months. Please note that the figures for the previous year have been suitably adjusted to bring them in line with post-GST financials.Business view for the decorative business. The decorative business registered high double-digit volume growth in the third quarter and delivered a strong performance across regions. Post reduction of GST rates from 28% to 18% effective July, we immediately passed off the entire GST benefit to consumers and decided not to pass on the raw material inflation to be in compliance with the anti-profiteering provisions. However, with continued input cost pressures due to the fall in the rupee as well as increases in raw material prices, we have taken 2 price increases in the third quarter: 2.35% from October 2018, and another 1.7% from December 2018 to recover gross margins to an extent.Reviewing the industrial business. In the industrial businesses, the Automotive JV, that is PPG-AP, witnessed good growth in the general industrial segment. However, the Auto OEM segment witnessed subdued growth on back of fall in production across Auto OEMs. The Industrial Coatings JV, AP-PPG, continue to grow well, led by good performance in protective coatings and powder coatings segment. Both the businesses continue to face pressure from rising raw material prices, and the prices increases implemented in the market have not been enough to recover the margins fully.Reviewing the international business. In the international portfolio, major units like Egypt, Bangladesh and Sri Lanka continue to face challenging business conditions. In Ethiopia, the third quarter saw a bit of a pickup as the unit was able to secure ForEx for its raw material imports. The greenfield operations in India -- Indonesia continue to progress on its planned trajectory. The home -- both our businesses in the home improvement space continue to scale up at planned levels with expansion in network and enhancement of the product portfolio and have done reasonably well.CapEx. As we informed in the last quarter, the first phase of the plant at Mysuru, Karnataka was commissioned as we have planned in September 2018, and the plant is progressing well on its stabilization. The first phase of the plant at Vizag, Andhra Pradesh is almost set to be commissioned this quarter. The total CapEx planned for the standalone operations for the current year is about INR 1,000 crores, including spend of about INR 800 crores of the 2 new plants. Going forward, as mentioned earlier, the fall in crude prices and appreciation in rupee towards the latter part of the third quarter has provided some respite on the raw material cost trend. However, we will need to monitor the demand conditions, which continue to remain uncertain given the upcoming will be election season.In the international markets, difficult business conditions at some of the key units continue to be a 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.
Sir, in Q2, distemper had done quite well because of the GST rate card. Now in Q3, normally, emulsion does well because of the festive-related seasonality. So if I take off that, the festive-related impact, has the buoyancy in distemper been maintained or has it slowed down?
As we maintained to an extent, you've got to remember, there's a later Diwali this year compared to previous year. So comparing quarter-on-quarter is not perfectly okay in our business.
And sir, in terms of the region-specific, you have been saying East India is growing the fastest, while South India was a laggard. So obviously in this quarter, Kerala would have benefited you a lot. So my question is, has Kerala seen, in terms of percent of revenue, a double-digit kind of contribution?
All the regions have done well. And I don't think Kerala has done exceptionally better than any other region.
No, but in terms of growth, it will be quite high, right? Because lot of the construction, repainting would have happened. So on a Y-o-Y basis, wouldn't Kerala have outperformed the overall reported volume growth?
No.
And sir, lastly, on the Home Improvement. Ess Ess, I'm seeing the last 4 quarters has been in that INR 46 crores, INR 49 crores last 3 quarters. And quarter-on-quarter, there's a dip. So are you -- what used to happen, Ess Ess used to grow faster than Sleek. Now, last 2 quarters, Sleek is growing faster. And quarter-on-quarter, dip in Ess Ess, in spite of festive -- and the other home improvement companies which have come out with numbers, they have seen a very strong volume growth. So what's happening in Ess Ess? What is the issue?
There is no real issue. The growth is reasonably good, marginally lower than what we expected in this quarter, but we are reasonably confident that the trajectory continues.
Could you update on the distribution expansion there? Has the [ property ] intensity gone up? Because the competition seems to have done slightly better, and you said that your expectation is a bit lower.
In Ess Ess, you are saying?
Yes.
I don't think there's any real difference.
And sir, lastly, rural acceleration, any data points you can share? Has rural grown faster than Q2 on a Y-o-Y basis, taking [ into consideration ] all those, yes...
Prior to Diwali, rural always grows faster than other percents. Diwali was later in November. Rural growth has been good.
The next question is from the line of Avi Mehta from IIFL.
Sir, I was just referring to your comment towards the end about, "Demand environment remains uncertain." This, despite a very good quarterly performance that you've seen, would it suggest that there are more one-off factors like festive season, timing, price increase announcements, Kerala floods, et cetera, which have driven this improvement in this quarter? Because -- I mean, I'm just trying to understand why those 2 contrasting data points: one is the data point and one is your commentary. Just if you could explain that, please.
There is definitely a factor of a delayed Diwali helping this quarter. We are a little uncertain about the future quarters because of elections and other things: the uncertain raw material prices, rupee volatility, et cetera. All these play a role overall in demand situations.
So would this be a more medium-term-ish kind of commentary that you are trying to indicate? Or because elections would happen -- okay, so you're saying that is the reason why you're uncertain calling out -- willing to call it out despite the strong growth.
Yes.
Yes.
Okay, sir. Sir, the second bit was if you could help clarify, how was the growth across different categories? Distempers' growth versus -- has there been any divergence in the growth rates that you've seen specifically?
I think growth has been good across all categories in this quarter.
So there is no salience of distempers rising the way you had called out in the last quarter, right, sir?
So if you say compared to the previous years, yes. Compared to the last quarter, no.
Okay. But sir, is that -- the previous year because of the festive timing only, you think? Or is there an underlying shift? What I'm trying to get is, do you feel there's a shift on market shares on the back of the GST rate reduction? Or would you be willing to call that out or no?
Give me another year and I'll tell you.
Okay, sir. And sir, lastly, there was the other comment about -- despite the 2 rounds of price increases, we are able to recover gross margins to an extent. Do you -- are you -- does that imply that in the current level of input cost, is -- it doesn't need another round of price increase? Is that what you mean? Or what exactly are you saying?
It's not -- when we did the price increases, we didn't do what we really wanted to do to the full extent. Since then, raw material prices have fallen a little bit. The rupee has strengthened a little bit. So the situation is volatile and uncertain. It's quite true. We really need to see how it goes in the months coming by.
Sir, to that comment on -- to an extent, it's more because of the uncertainty of raw materials rather than the current level of raw materials, right, sir?
At the point we did price increases, we should have done a higher price increase. We decided not to do so because we were uncertain on how the raw material prices are going to went. Fortunately, they dipped a little bit. That helped us. If they rise again, we will probably have to do a price increase.
The next question is from the line of Aditya Soman from Goldman Sachs.
First question, has there been a meaningful contribution from your new products such as waterproofing? So we've seen a number of SKUs go up meaningfully in the last year. So has there been a meaningful contribution coming from that?
Yes, but it's probably not that significant in the overall value of business.
And with these new products, is this also generating higher volumes for your paint business? Or is this a big competitive edge if it's not -- in a sense that if it's not very meaningful from a revenue perspective?
We expect it to become meaningful from a revenue perspective. And yes, it definitely lends an edge to our overall paint business.
I understand. And secondly, in terms of depreciation this quarter, we saw a significant increase. Is this just a function of the commissioning of the Mysuru plant? And should we expect that could be even higher in 4Q given that Vizag will also come onboard?
Absolutely right.
So a number a little bit higher than what we saw this quarter would be fair to assume for Q1 then, thereafter?
Yes.
Yes.
And for next year, we are done with the CapEx, right, now largely in terms of the big hump of CapEx. So INR 800 crores on this plant and INR 1,000 crores overall. So should we expect a lower level for next year? Or would...
A much lower number.
The next question is from the line of Arnab Mitra from Crédit Suisse.
My -- well, I just have one question. Despite very high revenue growth, there doesn't seem to be any major operating leverage that has played out on staff and other expenses. So what is the reason for that sharp step-up? And would you expect leverage to play out if growth rates remain reasonably high?
No. Staff costs in this quarter, you see a slight increase because of our new plant which has come up. That cost of the employee is included in this quarter. As far as the retiree benefits are concerned, you see the increase because of the falling yields on the gravity and relief liability. As far as the operating leverage is concerned in this quarter, you can't compare this quarter to the previous quarter, because this quarter, the trajectory of growth in the top line has contributed to some increase in variable costs. To an extent, there is an [ overhead ] percentage, but the percentage through sales, if you look at it, is still lower than the previous quarter.
Okay. So partially, it had to do with the new factory costs, basically?
Yes, yes.
The next question is from the line of Vicky Punjabi from JM Financial.
This is Richard here. I got 2 questions. One is, has this price cut due to the GST rate cut, in any way helped in lifting your demand condition and your volume growth? In a sort of higher-priced activity like painting, did something like a 10% price cut actually help lift demand significantly, considering that labor costs wouldn't have fallen?
Well, let's put it this way. It definitely helped to the extent that when we increased prices, the budget on people didn't increase. And maybe it helped, to some extent, with the unorganized sector in balancing out the price expenses.
And would you attribute that to be a key reason for this high double-digit volume growth? Because I don't remember seeing such a positive description of volume growth from you in recent times.
Give me another year, like I said. I don't like to jump the gun based on 1 quarter.
Okay. And my second question is on margin. If I expelled this -- the rebating impact that you had in Q2 because you wanted to avoid stickering new prices, et cetera, et cetera, the gross margin compression in Q2 was probably 80 bps or so as per my workings, even though the reported number showed 140 bps compression. Now versus that 80, 90 bps, whatever that may be, the gross margin compression, given what we saw this quarter is about 120 bps. And you took 2 rounds of price increases in Q3. I'm just wondering why you didn't take up the 2 opportunities of the 2 price increase to fully correct the gross margin pressure that you faced. And Q3 margin compression actually turned out to be sharper than Q2's.
So you have to understand, there is always a little bit of a lag when we purchase raw materials there since a fair quantity is also imported and dependent on crude and crude derivatives. So there's always a lag between international prices and actual consumption average, as we call it. That is one aspect. Two, we were reasonably clear, given the slowdown that everybody talked of in China, et cetera, that the raw material prices are going to be volatile for some time to be. And we will be in a very vulnerable position if we took the entire price rise that we required. I mean, we always tended to pump for growth over actual profitability quarter-to-quarter.
Okay. And are you as sanguine about growth post Q3? Or you think that was just a period of very good activity that happened? And are you sanguine about this level sustaining?
So if there were no elections due around in the first quarter of next financial year, I would say yes. But elections are always a factor of uncertainty. Let's see what happens.
The next question is from the line of Alok Menon (sic) [ Manoj Menon ] from ICICI Securities.
I think it's about driving -- this is Manoj Menon here. Sir, just a couple of questions actually. The first actually on the Sleek business. If you give some comments about Sleek, it would be helpful. Is it about 1% of revenue, 2% of revenue? How is it growing? What's the business plan there?
About 1.5%.
1.5% of revenue.
Sorry, it's about?
1.5% of revenue.
Okay, okay, okay. That's helpful. And is it -- what stage of evolution it is in? That you have completely understood the business, [ the run ups ] are over, it's ready for an expansion, some color on what's the thoughts on that market per se.
This year, we have been growing consistently well. So I would say we understood the business better than we did in the previous years. But it is also being offset by, relatively, a slowdown in the construction boom. And lot of the Kitchen business also goes to fresh construction. So it's a combination of things. I think we should be able to grow in both the Home Improvement businesses consistently for the next few years.
Okay, understood. Understood. Just second question on the overall decorative business, or maybe very specifically, on the paints business. Would it be fair to say that the top players outperforming materially in the bottom end of the market versus the unorganized peers?
Let's see how all the top players do. I think if you ask the last top player's account, you will get a better version. There's a little bit of that, but it's very difficult to judge because the unorganized sector is not very really measurable.
Okay, okay, okay. Understood. I'll take that bit offline. There's just one -- on the third one, if I look at the capacity expansion plan that you have, which is, frankly, quite steep actually. So would it be fair to say that the next 3-year outlook the management has is materially different than, let's say, what it was for the last 3 years of actual performance?
See, it's -- the whole process of setting our plant, getting approvals and constructing it is -- I mean, if you start from acquisition of land, it's actually a 3- to 5-year process. So when we plan for expansion, we look at a little longer term. Yes, to safeguard our bets, we generally don't construct the entire plant at one shot. But we still like try to make it an economic size so that we get the full benefits of efficiency and automation from the factories. And also, we have set these factories for, I would say, a 5- to 7-year time frame on how we are going to expand. And this was done almost 4, 5 years back, so to speak. So I don't think we take year-to-year phenomena in terms of determining our capacity expansions.
Okay. Now the only reason I asked is because it's almost like 0.5 billion kl capacity coming up [indiscernible]. I understood the timing factors. So -- but just -- the question actually came from -- the genesis was more to do with the absolute numbers being very high in terms of the percentage increase on your current capacity.
I agree there.
The next question is from the line of Harit Kapoor from IDFC Securities.
Sir, I have 2 questions. First is on the subsidiary part. So if you look at the subsidiaries, which include the international business and AP-PPG, the margins in the subsidiary business over last 2, 3 quarters have been stable at about 7.5%, 8%. If you could just give some outlook on how the international cost structure and margins are panning out. And have they kind of bottomed out in the first 9 months of the year?
I hope so. It is -- in most of the international markets, we are not really the market leader. And in an inflationary scenario, especially where currencies are depreciating and raw material price is increasing, if you're a market laggard or have a much smaller market share, it's extremely difficult to pass on the entire raw material price increases to consumers. And that has adversely affected us. Simultaneously, 2 markets: one, Ethiopia, we had a severe foreign exchange crisis where, frankly, selling the material is not a problem, but getting the raw material is a severe problem because you don't have foreign exchange; and Egypt, where the economy has stuttered a little bit, and that has continued for some time. Whether it has bottomed out or not is not very easy to say.
Okay. I mean, if I can just ask that differently. Is there any incremental pressure you've seen in any of these markets in the last, say, 1 quarter or 1 -- or 2 quarters or so that makes you believe that there is still uncertainty there? Incrementally, is there any pressure?
I don't think there's any incremental pressure per se or more competition or any other factors. Only -- the incremental pressure that came in the beginning of Q3 was raw material inflation that spiked up.
Got it, sir. Got it. On the PPG-AP part, which kind of reflects in your associate profit, there has been a big -- there's been a fairly good jump up from Q2 to Q3. So would that be a reflection of certain price pass-through that you've been able to get, where the profitability has improved in that business?
A little bit. But the Auto OEM sector, the pass-throughs are much more difficult. There's a big lag between negotiating prices with the big auto players. They themselves -- not all of them are doing too well and are reluctant for price increases at this point of time. So that takes a little bit of time. The other businesses have been able to recover some element of the raw material price increase.
Got it, sir. Last question was on the capacity expansion. So any tax benefits on this? And in which line item are we to see this? Whether it's in the form of a refund or it will be just in the form of a lower tax rate on either Mysuru or Vizag. If you could just help us with that.
Mysuru, there is a industry loan benefit, but we are to get the entire process and documentation executed with the government. So it may not impact the financials per se. It will come as a balance sheet item. As far as Vizag is concerned, yes, we have a tax benefit similar to what we have in Marahashtra, but that will accrue when we start getting the market, maybe later part of the year or next year.
Okay. And it's a similar kind of thing, 0% for first 5 years and stuff like that?
No, no, no. It is a refund subsidy. Whatever the tax current -- whatever the tax you collect, then government pays it to you later.
Okay. Which would be reflected in operating -- in other operating income?
Yes, other operating income. Other operating income.
The next question is from the line of Pulkit Singhal from Motilal Oswal Asset Management.
Sir, my question has nothing to do with the quarter over term. I was just looking at our year-end revenues over the last -- revenue growth for the last 10, 12 years in the standalone business. Now we had a phase of around 6, 7 years of 20%, 25% kind of growth rate until FY '12. And the last 6 years until FY '18, it's been in the 10%, 15% kind of growth rate range. I just wanted to understand -- I mean, what in your view were the reasons for the -- there's a clear step down in terms of the growth rates by 10%-odd from those high levels. I just thought I will understand from you what could be the possible reasons for the change.
8% -- I don't think it was exactly 10%. Maybe 7%, 8%, but you're not far off. There were 2 essential reasons. The first was, in the earlier period, you are in a high inflationary scenario. Prices were increasing by 3% to 5% every year, while most of the period you're talking of, the last 5 periods, except for this year primarily, has been a deflationary period where prices have actually dropped in the middle. The second is the GDP growth, well, definitely it seemed to be higher with a much higher growing middle class in India in that decade. And a higher GDP growth or higher number of earning people with households and a good construction business definitely spurred pace of growth to a greater extent.
Okay. Sir, is there an element also of new real estate construction? I mean, we know that the real estate scenario have not been particularly great for the last 5, 6 years. Does that sentiment impact repainting cycles [ per se ]?
It doesn't impact repainting cycles, but it definitely impacts the quantum of repainting feasible. So if you have less houses, they're not -- less houses are going to be repainted. In the sense, you had a growth because the construction was heavy in that decade and there were a lot of houses that are repainted. A lot of the fresh houses actually go for rentals. And the great thing with rentals is those houses get painted every 3 years.
Just another question is on the pricing strategy. I mean, given that this -- in this new phase of growth of -- I mean, 10% to 15% versus the 20%, 25%, I believe we were probably more of a volume growth-driven focus back then. How do you decide on the pricing? Is it based now on volume, gross margin or EBITDA margin targets? I mean, how do you look at how much to -- or take a price hike? Because now we see more of premiumization happening in the last 5, 6 years.
Well, I think premiumization was happening either 10 to [ basic 10 ] so I don't think there's any real difference on that end. If anything, in the last 5 years, there's been more sale of lower value or value products like [indiscernible] -- this year, this [indiscernible] which has had an impact at the lower end.
[ I'm afraid so ]. Sir, I mean the question was, I mean, how do you decide how much pricing hike to take? Is there a margin target on gross level, EBITDA level? Or how do you...
Yes, something at the EBITDA level, gross level and net profit, again, distributed to shareholders, all that.
The next question is from the line of Rahul Maheshwari from TCGAMC.
Two questions. One, the new factor which has been -- which would be adding the capacity. So currently, before the factory even -- had not started, what was the outsourcing percentage which you used to give to the third-party contract than in-house? And what was the percentage? And now once the new factories come into play, how much the percentage of outsourced contracting would be reduced? And that, how will it be impact on the financials that in terms of the margins, how the cost savings or the margin accretion will be taking place? One is this part. And second, what is your current number, distribution number, of dealers which is taking place? And as compared to the percentage increase, which you're planning out on a yearly basis, I'm not talking of quarterly. Would it be in line with the industry growth rate and not in terms of the absolute amount? But as compared to industry, what distribution dealers are growing? And for your company, what it's growing?
About 25% -- between 25% and 30% of my volume is outsourced, but these tend to be lower-value products where we look for upgrade advantage in terms of sourcing all over the country. If the growth of these products so that -- actually, the products we make in our factories are a little different from the products we outsource. So the percentage outsourcing may not change significantly if the growth rate of both are technically not similar. So hence, it will not directly affect cost. Yes, the factory in South India will increase costs because we have many additional plants operating, but it will decrease costs because of the freight boost for the South India demand will reduce. The second question was we add roughly between 300 to 3,000 dealers a year. We have about 60,000, 65,000 dealers. I have no idea what the competition numbers are, so I would rather not comment on that.
Third, just to -- when you said the new factory, which is building back purely towards the water-based solvents, which is a high-margin product. So what kind of margin trends or differential between the -- your base value segmented there? And that definitely it will take upon time -- it will take time to increase the capacity in the -- those new factories. But any quantum or color on either what is the pricing differential in terms of number of times -- x times? Can you...
I don't think -- I think on that, the margins [indiscernible] margin. If you remember, we are a raw material-intensive industry, and the actual manufacturing cost is a very small element of our selling price. So actually the difference in freight costs, et cetera, will probably be more substantial than the differences in manufacturing costs.
Any range? What freight cost savings would be taking...
We don't like to give that at this point of time.
The next question is from the line of Abneesh Roy from Edelweiss.
Sir, a few follow-up questions. One is for Indonesia. We saw in Q2 also natural cause of [indiscernible] floods, et cetera, Q3 also [indiscernible], so could you update on the demand side? And emulsion launch, what is the update in distribution expansion? How much has been done in Q3?
That's tough for me to answer offhand. A few years, we are still such a small player, but we are not really hit by the calamities, et cetera, et cetera, to some extent. But in some of these places that are in island in this world of global warming, we can expect this to happen all the time or anytime. The growth has been good, and we've expanded the network. We have...
[indiscernible] 100 this year. We had 175 a year.
So we had -- I think if I go roughly by the key emulsion selling edge we had, we had about 175 color infinities, as we call them, in Indonesia. We have added a little more than 100 this year and expanded the network across many islands, where we still added 3 more distributors this year and increased the networks they're catering to, but yet we are very small.
And so what will be, in any words, to understand what is the rate of expansion? To understand the total [ universe ], both distributor and color thing, which you said.
You see, it's not entirely comparable because every company is adopting a different policy. There are 2 companies that operate -- 2 large companies that operate directly through their own distribution centers and through the dealer network that is Ameron and Nippon. And 2 that operates through distributors, [indiscernible] and [ Akzo ]. So you remember, we are also new. We are understanding the market to a great extent. And it's a highly -- there's 1,000 islands there. It's a highly dispersed market. I don't think I'm in a position to give you very accurate data on this.
But they continues to meet the internal benchmarks, right? The internal targets?
Yes, yes. We didn't give an ambitious set of targets.
Sure, sir. And since Tamilnadu market share, has it come back for you? Any comment on the Nippon because I am seeing them again becoming very aggressive on media expense.
Yes, they are. But I think they've held their own this year.
And sir, when I see the pricing, you have taken 4 rounds of price hikes in the calendar year, the last one in December. So total hike of around 7% to 8%. So in the premium end and lower end, will the hike be similar 7% to 8%? Or fair to expect that at the higher end, it will be more and lower end will be subsidized?
It will be similar. It won't be grossly different. But there could be marginal differences here and there. I don't think we've taken inherent policy that premium has to get more premiumized. We kind of maintain a certain minimum gross margin across categories, and we are trying to maintain that.
And the last question, we have seen discretionary slow down differently in a lot of the categories. So my question is in the metro cities, has the growth tapered down now? Again, don't see Q3 versus Q3 there abnormal quarter because of 1 or 2 reasons. But are you seeing pockets of slowdown in Mumbai, Delhi or some of the bigger markets?
Not really.
The next question is from the line of [ Preetham Roy ] from [ Stuart and Malkovich ].
Sir, I have only 2 to 3 questions. First of all that how much percent volume is coming from the real estate segment in your top line? And what is the view that is there any significant demand they're speaking of? Because after the GST and [indiscernible] there is also [indiscernible] segment. So if you can give me some idea of what is the contribution. Has it gone up from the real estate segment demand?
So I would say our market share in the real estate segment is a little lower than the normal repainting segment. So it has been consistently going up every year. And so I will say it's gone up, although I think the real estate segment has not been that well. I don't think GST has had that much of an impact from the real estate segment.
And demand? Demand, I think is also there, right? So that, that impact -- that impacted the real estate segment in a large way but the main question exactly, isn't paint demand is going up, so the entire real estate segment demand is going up? Then also the opportunities so that the paint demand is also going up. I just want to [ mend ] these things. Is there any?
At the [indiscernible] level, I think the real estate segment would be maybe about 20% to 25% of the paint demand, and repainting would be about 75% of the real demand. So the impact of real estate going up or down doesn't that grossly affect the overall paint demand.
Okay. So -- okay. And one more thing there, is that the reason that expansion, the Vazig expansion? What is the capacity utilization that you are expecting in the next 2 to 3 years?
The capacity utilization will be entirely on how much we can sell. So I can come back to you [indiscernible] on what our plans for the following years in terms of what it will be. But frankly, I've not calculated it on that point of view as well.
.Okay, okay. And is there a volume growth? If you can give me the exact number what is the volume growth here on this sequential quarter? Is the quarter-on-quarter last year same quarter?
We don't give exact numbers on volume growth. We give you exact value growth.
The next question is from the line of [ Tratir Purda ] from Magnolia Financial.
Sir, I wanted to ask if you could give me the...
May we request you to use the handset, please.
Yes, I'm on the handset as well. Hello?
Yes, yes.
Sir, I wanted to ask what is the current capacity utilization that you're working on?
80%, 80%.
Around 80%.
Around 80%. Okay, so -- and as in the last question, you said that you don't give exact volume growth. But if you could just help us with -- if it was in the high teens or in the low 20s?
I said high double-digit volume growth. I'll leave it at that.
Yes, so double digit -- it can be...
I'll leave it to you to analyze.
Okay, okay. And another -- the other way around here. I just wanted to clearly understand. In Q2, we faced lower realization due to the rates given because of the stickering costs. So I just wanted to clarify, is that reversed in that -- in this quarter?
It wasn't just the stickering costs. It was the fact that we were not yet -- we did not want to appear to take benefit of the GST reduction by not passing on the full benefit to the consumers. So as a result, in spite of a steep rise in raw material prices, we took a conscious decision not to increase prices there for 2 months. The very sharp increase in raw material prices, we didn't increase prices for more than 2 months, and hence, we suffered.
Agreed, sir. Agreed, sir. Sir, what I intended to ask you is actually, apart from the realization of price hikes that we have taken, apart from that, is there any reversal of better realization that we have found in already products -- in the products which you have lesser of the temper share and that's how the realization is much higher than the price hikes we have taken?
No, no.
It will be -- as a matter of fact, when we took the price hike, I tried to say, that we didn't -- we're not able to recover the entire impacts of the raw materials cost increases. Fortunately, after that, raw material prices have fallen a little bit, and we are in a little more comfortable position. Otherwise, we probably would have another price hike by now.
Okay, okay. Sir, the last question that I have is over the last 4 quarters, we are facing a lot of margin pressure in the international business. So do you think that the situation will improve going ahead in the next year, not in the Q4 immediately, but in the next year?
It should because we always -- we tend to face margin pressure in the international business as well as in our Industrial JVs because in most of these businesses, we are not the dominant market leaders. And whenever there's a sharp increase -- inflationary pressure, we are not immediately able to pass on the raw material price hikes to consumers. There is always a lag. And in a period where inflation continues over a period of time, you have a price increase, but there are further inflation. You're playing a catch-up game for some time. Secondly, some of the markets, Egypt and Ethiopia, over the last couple of years have definitely had high extent of inflation, foreign exchange crisis, currency falls, et cetera, which has compounded the problem.
So FY '20 should be better, though.
Market movement is better.
Sorry, sir?
Market movement is [indiscernible]
The next question is from the line of Subhash Chander from S&P Global.
Sir, just wanted to understand just mix regarding the water-based and solvent-based products. So are we at 50-50? Are we getting better of that mark? Since you had earlier highlighted that the water-based is growing at much higher pace. What are your comments on that?
Well, it is much more than 50.
Water-based is much more than 50, right?
Right.
Okay. And one more question. How is the traction that -- are you -- you are seeing in the Home Improvement business? Is the traction present? Or you're actually making losses there, right?
No, we are making losses at the moment, but that is also -- essentially because of expansion of the distribution system and setup. We are seeing good growth. So in a few years, we should become profitable.
The next question is from the line of Abhijeet Kundu from Antique Stockbroking.
My first question was -- you said that for FY '19, why did we -- we have seen higher sales of December. So for this quarter also, the same would apply? That there were inferior product mix as compared to the previous year's quarter?
Compared to the previous year's quarter, yes.
Okay. Okay, so the -- essentially, the overall realization growth would have been impacted? So price growth would have done...
Quite higher than that.
And you mentioned, the actual -- yes, so the actual realization would be lower than the price growth, the price hike that you have taken?
Correct. [indiscernible], yes.
Okay. And so the move you have been increasing your distribution in new geographies. What should we -- how much of your growth would be coming from this new distribution expansion, is this on a constant basis even if you see 11%, 12% of the volume growth? So I mean, does it come from -- how much of it would be driven by your new distribution initiatives? I don't want it to be quantified, but...
It's very small. So we have 60,000 outlets, and we opened 3,000. That is 5% -- and these tend to be smaller because there are pressure. The impact is very significant in the short term. In the longer term, this multiplies and becomes very significant as the years go by.
Right. So I was just -- sorry. I should have put it in this way. How much of this would be -- would have been contributed by your -- the distribution that you have done for the last 3, 4 years? I mean -- because as you rightly said, the contribution improves and becomes sizable over a period of time.
I mean, frankly, I will have to calculate. I can't give you a rough answer. But if you're increasing 5% net worth over the last 3, 4 years, probably it might have a 5% impact at the overall level.
In a year? Yes?
Over the last 3, 4 years, the impact of the net worth would be 4%, 5%.
Okay. And sir, we have seen increase in staff costs as well as -- I mean, close to 20% increase in staff costs and over 25% increase in other expenditure. Majority of that would be primarily due to your new capacity addition during the quarter. Now post Q4, when the other capacity also comes in, so now on an overall basis, we should see higher increase in your staff costs as well as your other expenditure, right?
You're right. It was partially due to the commissioning of the Mysuru plant, but probably a higher factor was the drop in interest cost for casualty and unpaid leave. So there are a number of variables that are to employment costs -- employee costs. So that -- it's a combination of other factors. But you're right, when the next term comes, that plan will also come into manpower costs.
Yes. So primarily why I'm asking that is your other expenditure has gone up by close to 25%.
So I think quarter-to-quarter, we aren't going to look at other expenditures because we'll always have a same -- for example, this quarter, we have higher marketing expense because of the specific ad that we run this quarter. So maybe marketing is the right sense around the average.
The next question is from the line of Abhishek Bhandari from Macquarie.
Sir, I have 2 questions. First, I remember in one of the calls earlier you had said that you don't want to cross a certain threshold margin as it might attract domestic competition. So do you think if I look at the trailing 9 months margin at 20.7-odd percent -- I don't know the number. But do you think are we around that number? There's still some more scope before we can hit that threshold?
I really can't answer that question because the raw material pricing is so volatile at the moment. It changes month to month at the moment what is my margins. And I don't like changing prices every month, so I take a little bit of a gamble and try and look at the next quarter before I decide on pricing.
Okay. Sir, my second question is around your huge capacity, which are coming up both in [indiscernible] this quarter. You might have some internal plans to set out your assets with certain threshold you placed. So beyond the usual ramp-up, 30%, are there any incremental distribution plans or extra marketing efforts you're trying to do, especially for South India where these capacities are coming up?
I wish it was so easy to sell more just by putting up capacity. We are in a competitive scenario where all our competitors are also putting up capacity. But you've got to take it, while these plants look huge, the current capacity we are putting up is probably -- will be fulfilled in the next 4 years or 5 years. It's not that [indiscernible] and given the time frame we have to get to set up plants and the difficulty we get in setting up plants, we are comfortable with this.
Okay. [ But in agreement to asking you this ], do you think the initial cost of the employees and the other expenses will be covered by the sales plan, what you have internally for those in next 1 year?
If you remove the previous year, definitely. If you take -- if you include depreciation, then it's a little difficult, I agree.
The next question is from the line of from Rahul Maheshwari from TCGAMC.
So I just wanted what is the progress on AP homes and how well it has been trended during the quarter, and what's your plan going forward for AP homes? Because you have planned that once it start progressing, you wouldn't be opening other branches to that.
So the 4 we had our operating fairly effectively and well, selling other categories quite differently. We are planning to open up 4 more by the middle of -- by, say, July next year.
Okay. And what percentage it would be contributing?
Oh, very small yet.
Okay. And second thing, I just -- I know it will be difficult. And you have current capacity at 1.1 million kl, and you are -- you added the 0.6 million kl, which is 58% of the current impact to you. So I just wanted the -- what kind of demand is on the overall outlook would be there or whether there is sufficient demand, whether one would be grabbing the market share from the peers? And the next phase would be coming more 0.6 kl. So -- and you have too also just found out the area entire capacity would be -- full capacity would be taking place in 4 years. So is there -- how big is the market so that the entire industry can grow? Because it's acquired the capacity as a percentage is almost combining [ all of the tiers ], it's very high, sir.
I agree. We are reasonably optimistic about the future.
But the same kind of trend can be maintained, sir? And do you think you would be gaining the market share from others by being more aggressive from -- right now from your onwards what you were facing from last 2 years?
So let me put it this way. If we don't have the capacity, we definitely cannot gain market share. If you have the capacity, you have potential to gain market share.
But sir, just to squeeze a little bit. Once you are now with the capacity ready, and you have -- demand is there. And if to gain the market share, would you play on the volume front more, a little bit compromising on margins? Or you would impact the margins in the place, even though the capacity doesn't ramp up in the way what you want?
I'm not going to give up my entire strategy in that.
The next question is from the line of Pulkit Singhal from Motilal Oswal Asset Management.
Just coming back to the -- I mean, the same last 5 to 6 years that you mentioned was a deflationary cycle, to that extent -- I mean, obviously the lever costs has gone up, and it probably forms a larger chunk of the overall painting costs at this point, maybe around 60%-odd. To that extent, do you think your ability to -- I mean, take price hikes is not better than it was 7 to 6 years back and therefore to manage it over to your price volatility because the overall paint costs to the consumer will not change as much as it would have on you?
Yes, you're right, absolutely. But there is also a channel in between. And the painting contractor in many markets is, for example, Bombay, the painting contractor determines the rate that is being charged, et cetera, with the consumer. And to them, the actual price makes a significant difference. For the small household, you're absolutely right. It's much easier to pass on, but in larger projects, such as painting contractors, it's much more difficult to pass on price hikes.
And so what would be your sense in terms of the consumer -- I mean, price inflation over the past 5, 6 years? I mean, a combination of these 2, how much would the consumer be facing?
In materials or in...
Overall. Overall, I mean, as the painting for the same like-for-like job.
Let's see, this GST reduction has definitely helped the consumers because it reduces by about 10%, but still about a 10%, 15% increase in painting costs will be there for the household.
Right. And this home solutions business, I think, you started at some point as labor costs. I mean, I don't know whether you would endeavor to do-it-yourself kind of painting because you're so used to servicing. Do you think that this home solutions business could be a big one for you, give it, say, 10 years down the line? Or is that what we're getting into because you start competing with your own?
So we are never competing with our own shopkeepers because we're always sourcing the materials for the shopkeepers. But the model is a higher-cost model because it is being done through company, you end up paying all the taxes, et cetera, et cetera. So we have launched a new model about 2 years ago, which is doing exceptionally well, which we call Paint Total, which is through a dealer network. We train the painters and painting contractors and the supervisors to carry out a job very similar to paid home solutions but at a much lower price. So this model is doing very well as a matter of fact. And we plan to propagate and extend this extensively all over the country. It's already operating in more than 150 cities and towns in the country.
And that's allowing you to keep a tab on the painting costs to the consumer in a better way, that -- this model?
Yes.
Ladies and gentlemen, we'll take the last question from the line of Indira Badrinarayan from Morgan Stanley.
Just one bookkeeping question, please. Any guidance on the overall tax rate for the next 2 years?
Sorry. Guidance on the tax rate?
Yes, the overall full year tax rate, please.
There's no [indiscernible] in the highest marginal rate, I don't think -- there are some benefits in [indiscernible] in the current year, but that's overall for the current year [indiscernible] is insignificant.
Understood. So it'll pretty much remain in the same range.
Yes. The first year, you'll get some benefit but it is not very significant to look at the overall tax, what we paid to the government.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. K.B.S. Anand, MD and CEO, Asian Paints, for closing comments.
Thank you, everyone, for participating in our conference call and pushing me very far on many areas. Thanks a lot, and meet you next quarter.
Thank you very much. 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.