Berger Paints India Ltd

NSE:BERGEPAINT

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Q1 FY '24 Earnings Conference Call of Berger Paints India Limited hosted by MK Global Financial Services. We have with us today Mr. Abhijit Roy, Managing Director and CEO; Mr. Kaushik Ghosh, Vice President and CFO, and Mr. Sujyoti Mukherjee, Vice President, Finance and Accounts.

As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation.

[Operator Instructions]

Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Nitin Gupta from MK Global Financial Services. Thank you, and over to you, sir.

[Nitin Gupta]

Thank you, Carol. Good evening, everyone. I would like to welcome the management and thank them for this opportunity.

I shall now hand over the call to the management for opening remarks. Over to you, gentlemen.

[Sujyoti Mukherjee, executive]

Good evening, ladies and gentlemen. A very warm welcome to Berger Paints India Limited Earnings Call for Q1 FY '24.

As has already been mentioned, we have with us today Mr. Abhijit Roy our MD and CEO; and Mr. Kaushik Ghosh, Vice President and CFO.

The management presentation on the performance has already been circulated to the exchanges and uploaded in the company's website for your information. So without spending any more time, I will now hand over to Mr. Roy for his comments, followed by your questions. Over to Mr. Roy.

[Abhijit Roy, executive]

Thank you Sujyoti and a very warm welcome to all of you. It's been a good quarter for us in spite of a very strong base that we had. We managed to have double-digit volume and value growth. Value growth for the stand-alone was 10.1%, operating profit was 37.5% and PAT growth 39.2%.

If we look at the volume and the value growth picture for a 2-year CAGR, 3-year and 5-year. We can see for this year, volume growth was 12.7% overall, with the decorative growth was higher at about 14-odd percentage. In terms of the 2-year compounded growth rate, it was 25.5% in volume terms, 3-year 39.6 and a 5-year compounded growth rate in volume is 18.5%.

If you look at value sales growth for this year, it's 10.1%, 2 years compounded is 30.1%, 3 years is 49.1% and 5 years is 18.9%. So if you look at the 5-year growth rate, more or less, this is at par at 18.5% and 18.9%. The last 2 years and the 3-year growth rate, if you look, they are higher in value terms largely because of the price increases that we put in this interim period.

Now going to the next issue in terms of our performance for this quarter. We had the highest gain in market share in the industry in quarter 1, and we had the highest profitability growth which is the operating profit growth in quarter 1 of this year in the industry, in the listed space, the results of which have been announced already by all the other players and therefore, they can claim with certainty that the highest gain in market share and the highest gain in operating profitability growth rate-wise is there for us in quarter 1 for this year. So that's something which we are happy about.

If we look at the market share, it's been moving up quarter-on-quarter and year-on-year almost every year from 2020 onwards. And we have shared this with you moved up from 18.3 to 18.6 then on to 19, then on to 19.3 and now this quarter on to 20.2 which is an increment of 0.9%. Now this is based on the announcement of results by all the listed companies. This takes into account Berger stand-alone of this business, plus Saboo Coatings and STP, which operates out of India. And so this is added on to this stand-alone results and we look at the Indian operation. And if you look at that, this is where we stand, which is 20.2% in terms of market share.

If you look at only stand-alone also, there has been an increase by about 0.9%, which is the same as you see in the India operations. If you look at the decorative business on sustained, if you just analyze only the decorative, it's been a fairly good growth rate in quarter 1. As I said, a healthy double-digit volume growth and a value growth, which is also in double digits, higher than the overall growth rate. So the industrial divisions grew at a slower pace than decorative in quarter 1 for us.

Waterproofing business continued to show strong growth, both urban and rural markets showed improvements in the quarter. We added about 1,300 plus Colorbank machines in this particular quarter. We introduced a few interesting new products. One of them was the WeatherCoat Anti Dustt Kool. Our WeatherCoat Anti Dustt is a leading product in that particular segment. And we introduced a variant called Anti Dustt Kool which not only protects from dust, but also keep the house cool. And in areas where it is predominantly remains hot and slightly dusty this product has started doing quite well.

Another product which we introduced in the luxury interior emergent space called Silk Glamor Dazzle. This is a high shield product which is much in demand in the eastern part of the country where we are reasonably very strong. And this was a product which was demanded in the marketplace because there is an affinity for very strong shield finish and we introduced this product, and it has been a reasonably good success so far in the East.

We also introduced a few products in the waterproofing range, for the roof coatings, we have a few Elastoseal, which is a solvent-based polyurethane with 600%-plus elongation. And then we have Polyurea brush applied and spray applied which we have introduced in the segment of waterproofing.

We also completed the range in the tile adhesive range and introduced two products there. Two of them are Epoxy Tile Grout. We are still going to launch PU Adhesive [indiscernible] as well. So this will -- we are going to introducing slowly one or two products every quarter to complete the range in the tile and stone adhesive range and they add to the waterproofing and construction chemical space, and fill up all the gaps that are there.

On the industrial side, in protective coatings and general industrial business continued its steady growth for the quarter, though lower than that of decorative, as I mentioned. But we had good price realization and improved the profitability in these businesses. Automotive business had a modest growth on account subdued growth in the 2-wheeler industry. So we are predominantly present in 2-wheelers and commercial vehicles and tractors. Therefore, our growth rate in the automotive category was modest in this quarter. Powder Coatings business line continued to degrow a little bit in this quarter, due to high base effect and downturn in the fan industry. However, it has already turned around in the second quarter in July, which registered double-digit growth and we expect the business to turn around in quarter 2 financial year '24.

The gross margin, as we see it, we had indicated last time that the gross margin had jumped up from 33.8% to 39.6%, and we are maintaining it at those levels. And we have indicated that we will be hovering around these levels only between 38% and 40% is what we had indicated, and we have held on product at 39.4%. As a result of that and last time also, I had also indicated that the EBITDA growth rate should have been higher, but due to some one-off expenses like the Sandila factory kicking off where we had massive overhead and some advertising expense, which we have taken as a one-off, this time, such expenses were not there, and therefore, the operating profit ratio improved to 18.8%, which is a fairly decent improvement from earlier level.

In terms of our debt position, it has improved considerably and if you look at the net debt situation, it has come down to INR 243 crores. On a consolidated basis, it is even lower. But this figure is going to become -- net debt will become 0 nearly by the end of the year. On a consolidated -- if you look at the consol results, we grew by 9.8% on the revenue front. Operating profit growth was 37.5% and PAT growth was 39.9%.

If you look at all the subsidiaries that we had and the performances of them. Bolix Poland had a strong quarter of both topline and profit improvement. The basis were weak and also it had a very good performance in the U.K. business. Overall, therefore, the growth rate was quite robust. Companies overseas subsidiary, BJN Nepal had another quarter of degrowth in topline and profitability. This is largely a country effect. Almost every company there is suffering because of issues related to the general economic situation there, very high inflation, very high interest cost. And there was a slowdown in the market, but things are looking up now and slowly improving.

Company's subsidiary, STP showed marginal topline growth due to a high base and it had some issues related to one of the factories where one of the lines had to be stalled. So the OEM supplies got impacted a little bit. However, there was a strong double-digit profitability growth created by improvement in gross margin due to softening of raw material prices. We expect double-digit value growth of STP in quarter 2 financial year '24.

As far as Saboo Coatings is concerned, we had a marginal degrowth in the topline due to a high base and adverse impact from the Fan segment, and the export segment. However, profitability recorded robust growth in the back of softening RM prices. We expect double-digit value growth in this business line as well in quarter 2 of financial year '24.

Company's joint venture, Berger Nippon Paint Automotive Coatings had a very robust quarter of topline and profitability growth aided by uptick in passenger car and SUV sector. This, of course, doesn't -- we don't count this into our results as it is. We have only 49% of this, so it doesn't come in the revenue at all, but it has a 49% impact in the profitability figure.

Company's joint venture Berger Becker Coatings had a degrowth in both topline and profitability in the quarter on account of capacity constraints due to fire in one of its manufacturing facilities in Goa in quarter 4 of financial year '23.

This also the topline doesn't come only the bottom line gets added up as we have a 49% share in the business.

Road to sustainability is very important. The ESG is gaining importance. We have also focused heavily on to this area. Project Jal where we saved 2.88 lakh liters of water. In terms of solar power, we actually have now 66,00,000 KWH (sic) [ 66,41,152 KWH ] of solar power capacity, which is a 35% increase from what we had in last year. We also had a reduction of SPC in financial year '23 against financial area '22 of 4.34%.

If you look at the carbon footprint reduction, year-on-year, we have been improving. And last year, we had 19,635 MT of CO2 reduction, which happened last year. Company expects to end the year with double-digit revenue growth as the demand outlook remains good in view of positive monsoon progress infrastructure spends and extended festive season. And profitability, we expect it to sustain at current level. If the raw materials, which we expect to remain at these levels, sustain at this point, and probably, the profitability also will be at similar levels. So we have always said that it will hover between 16% to 18%. Currently, it's ahead of 18% at 18.8%, this should be around this figure, if nothing untoward happened.

That's all that I had to say for quarter 1 results. And I'm open to give whatever questions you have. And that's it from my side.

[Operator]

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.

[Abneesh Roy, analyst]

Congrats on a very good set of numbers. My first question is on some of the one-offs, which you had in previous quarter. If you could update what is the status on that? For example, from Andhra Government 10% of the receivables were still left. What is the status on that?

Second is, definitely, there was a fire loss in one of the factories and you had provided already INR 25 crores and insurance claims, et cetera, what is the status on that? So those were the quick -- and there was one more provision. So if you could update on all three.

[Abhijit Roy, executive]

Thank you, Abneesh. And so yes, for the fire loss that you mentioned, we have already applied for insurance. It's normal process, we should be able to get it in the next 3 to 4 months. And once it comes back, then we'll obviously reverse the provisions that we have made earlier. As far as Andhra Pradesh Government payment is concerned, we have provided for it. Some part of it is still pending, a small portion from the -- for the school projects which we had done, is pending, and that has to come through. We had to submit certain documents, which we have just completed about 4 days back.

Now they will go through the process. In a month's time, we are expecting that with this school project balanced amount of money out of about INR 300-plus crores. We've got almost INR 278 crores or INR 280 crores and balance INR 21 crores, INR 22 crores is left, which has to be received by us in which we should receive in the next few. I would say 1 month maximum time frame is what I would place it at, and we should get that amount.

[Abneesh Roy, analyst]

Sure. My last question is on the volume growth. So another paint company, which also saw very strong numbers, it's a smaller company. They said that in July, the earlier trajectory, what they had seen strong volume growth that has sustained in July month also. Plus all paint companies are saying because of the festival season, which is delayed this year which gives a reprieve between the monsoon ending and the festival season. That's supposed to be good, but a lot of that benefit will come in Q3 rather than Q2. But on an overall basis, it will be better. So I wanted to understand July month and festival season, how are you looking at it?

[Abhijit Roy, executive]

Probably, a lot of these things depend on the basis of different companies. I won't get into the detailing of it. If you study you will find that sometimes the basis are weak, and therefore, you certainly have a bigger growth rate in certain months or quarters. But overall, consistently, if you look at it, you should look at from the market share perspective, is there a gain or a loss of that particular company or companies is concerned in particular quarters. So that will give a better indication of things. The second part of it is related to what will happen in the third quarter or in the second quarter?

Yes, Diwali is delayed this year. So the chances are that we will have a much better third quarter. Again, in the third quarter, basing on the lower side because last year, most companies haven't done well. So on that weak days, relatively weak days, there will be better growth rate in the third quarter, a much more robust growth rate should be there, especially if the Diwali is getting delayed. So that situation is likely to arise in the third quarter. So the second quarter, because of the monsoon being there a little bit impacting in July quite a lot. Many of the companies wouldn't have had very strong growth rates in July. Exceptions are there always, depends, as I said, on the basis. And then second quarter will be moderate for most companies. The third quarter will be far more robust as far as most of the companies in the industry is concerned.

[Abneesh Roy, analyst]

Sure, thanks. That's all for me.

[Operator]

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

[Avi Mehta, analyst]

I had a few questions. First, sir, what I'm not -- I wanted to get an update on the level of regional competition and whether the benign input cost has resulted in that kind of increasing.

[Abhijit Roy, executive]

So regional competition had reduced a little bit, if you recall, in the COVID period, and people used to ask -- were also that whether you think is this -- you are gaining out of them? And is this going to sustain? And I had always said that there is a possibility of them gaining once the prices start reversing. And for some amount of the stronger players have remained, and they have come back. The weaker players, of course, they gave up and they're as good as gone. So therefore, some amount of regional bounce back is there both in the industrial side and also in the decorative side, but not very significant, I would say.

[Avi Mehta, analyst]

Okay. So it would not be concerning enough to kind of consider price reduction or passing it on. This is -- I was essentially trying to understand, is there a reason?

[Abhijit Roy, executive]

No, I don't think that is required at this stage. Though I think one, you must remember that though the prices come down of raw material. This is a very competitive industry. The related discounts tend to move upwards in such a situation because every company knows that the margins are there to play around. And therefore, ultimately, if you reduce the price, you will tend to reduce also the price discounting and the rebating to balance out to some extent, and therefore, I don't see this price drop happening immediately. Though to a large extent, it depends on the leader and how it takes it up in the near future.

[Avi Mehta, analyst]

Okay, sir. But essentially, demand is strong, competition is not a concern or then the other part -- the last part is the uncertainty. Okay. I hear you.

The second bit sir, I wanted to understand is the Sandila plant now. Is it fair to say that this quarter represents almost the entire cost and additions? Or by when do you see the costs, whether it's in terms of higher employee cost, depreciation and even the benefits in terms of lower freight costs to start flowing through from the Sandila plant? Or is it largely reflected just trying to understand how should we build it in as we go forward, sir?

[Abhijit Roy, executive]

So it's still a work in progress, not fully operational that way. It's not an -- operating efficiency is still, need some amount of improvement. We have moved up somewhat so on a scale of 1 to 10, I would say we are somewhere around 5 to 6, at those levels. It can go up further in terms of improvement. As the season comes off, we are going to see significant improvement there in the Sandila plant.

[Avi Mehta, analyst]

And sir, the depreciation is largely done, right? The depreciation cost of that unit is broadly done or there might...

[Abhijit Roy, executive]

Yes. Yes. Yes, that's there. That is done.

[Avi Mehta, analyst]

That is done. So it's only going to be any operational benefit as they kind of scale up, we will only see benefits going on because...

[Abhijit Roy, executive]

You are right. That's right.

[Avi Mehta, analyst]

Okay, sir. And sir, lastly was on the ad spend to sales. Could you -- it's just a bookkeeping. If you could give us a sense on where we are in first quarter and how do we see it behaving going forward? Or what is our target internally for FY '24 and probably a steady state?

[Abhijit Roy, executive]

So we have more or less maintained the spend to sales ratio at wherever we were last year, approximately at similar levels we are. And then we see this trend continuing going forward. We may accelerate a little bit from end of third quarter, depending on how the prices of raw material are. We may want to spend in the third and the fourth quarter slightly more than what we are doing in the first and the second quarter.

[Avi Mehta, analyst]

Okay. But that, sir, 3.5%, 3.3% was the number last year. 3% or so. But the steady state or prior period was more like earlier years, you've almost gone to 4.5%. So you think the number should be more in the 3% level on a yearly basis?

[Abhijit Roy, executive]

So it will be around 3.5% to 4% towards the end of the year. At current levels, it is at the 3.5% level approximately.

[Operator]

[Operator Instructions] The next question is from the line of Shirish Pardeshi from Centrum Broking.

[Shirish Pardeshi, analyst]

So I was just reading and I was more curious at 20.2% market share, this is All India. What would be the market share where our core market which is north will be similar range would have gained or will it be higher?

[Abhijit Roy, executive]

So we gained across the board actually. Obviously, the market share to begin with is higher in the North and the East. But the gains have been higher in possibly we would have gained definitely slightly more. Also in the North, the gains has been more or less similar to the national average. The West gains would have been slightly on the higher side.

[Shirish Pardeshi, analyst]

Okay. So one follow-up here. Largely, this market share gain we were under-indexed into the exterior, and we have seen a lot of product launches. So that's where we have gained our pure play, the decorative inside 4 walls. That is the segment where we have gained the market share.

[Abhijit Roy, executive]

So more of the -- again, it's a combination of all the factors, Shirish, but it's also a distribution gain, which is happening in the West and a little bit in the South as well, where we had said that we are relatively weak, and we will focus on expanding on the network. That -- there is an opportunity there for further expansion and that growth will continue.

[Shirish Pardeshi, analyst]

Okay. My second question is on the decorative slide. You mentioned that there are new product innovation, which has happened. So generally, how much time a new product gets settled a year or so you get a full revenue or it takes a little longer time to get the distribution gain and then it starts showing? And what are the gross margins, you have the benchmark inside the company that any new product you will launch will have some gross margin impact on?

[Abhijit Roy, executive]

Yes. So in two parts, you mentioned how long does it take? Normally, if it is a product which is in good demand in the market or we have read the demand situation correctly, then it should start reflecting in 4 to 5 months' timeframe. It doesn't take that long to impact on the ground.

It is a slow phased rollout, and therefore, that much of time is required for the rollout to happen. If we find that in the initial market, we see good traction, we roll out much faster and therefore, it should take, as I said, 4 to 5 months. If we find that we need to tweak the product a little bit then it may get delayed a little bit in that sense.

As far as we know, the gross margin is concerned, it depends on the product category in which the product is being introduced. More or less, any new product which is introduced in a particular category, say, it is luxury emulsion then it will be close to the luxury emulsion and slightly higher around those levels of the existing luxury emulsion products. However, if we produce a very economy range product then the margins will also be correspondingly similar to that type of a product category.

[Shirish Pardeshi, analyst]

Okay. My last question on the outlook slide. You said that you are expecting a double-digit revenue growth. Directionally, what we read from the market and other players, that price element is going to be sub-minimal. So I mean, another 1 quarter, you will have, by November, you will have price anniversary [indiscernible]. So in that context, do you think the volatility in the raw material prices is there and we will still build volume double-digit revenue growth in terms of value? And maybe if you can spell out what is the volume growth targets you are setting for FY '24?

[Abhijit Roy, executive]

So as I said, Shirish, our value growth in the first quarter has been double digit. Volume growth also has been double digit. First quarter also was quite tough on a very large base, we had a very big base of last year. In spite of that, we were able to grow in double digits. As I said, in the third quarter, we see a possibility of a stronger growth rate. Second quarter will be not as strong as the third quarter. It would probably be similar to the first quarter. And therefore, overall, we see that we should be able to comfortably deliver the double-digit growth rate by the end of the year.

[Operator]

Next question is from the line of Keshav Bagri from VT Capital.

[Keshav Bagri, analyst]

So my question is on margins, actually. So is it fair to assume that margins have topped out? And I think I have 2 reasons to support this. One is I think crude will take away the [ sheen ]. And if it doesn't take away the [ sheen ], then maybe you will have to increase your rebate and all. And plus the competition is also coming from Q4. So what is your outlook on this?

[Abhijit Roy, executive]

So we have always maintained that the margins will be around these levels, right? Whether it has topped out or whether it can further improve somewhat or whether it will remain at these levels, it's difficult to say at this stage. We are also doing a lot of -- we're taking a lot of initiatives from our side in terms of further improving cost efficiency. Both in terms of formulation efficiency, also in terms of raw material buying efficiency, this should reflect in some improvement in the margin.

Now if that can be neutralized or gets neutralized by increasing competition that may happen. And therefore, if that happens, then we will be restored back to the current levels of margin. Otherwise, we would have possibly improved a little bit from current levels.

[Keshav Bagri, analyst]

Sir, my second question would be if we look at the leaders when they are focusing more like they want to be a full-blown home improvement company. So we are also into decorative, industrial paint, exterior paints, plus we're also into -- the recent -- the tile segment, I mean. So are we also planning to go into some deeper or some agencies?

[Abhijit Roy, executive]

No. We are very clear in our head that we have no intention and I have repeated this that we are not getting into other categories. We are going to remain in paint and waterproofing segment. In that waterproofing on construction chemical space are the tile adhesives which are very similar products like cement-based [ adhesives ] that they says are epoxy adhesives, which is like paint only. So we are going to remain in this space only. We are not going to move into, say, home decor or furniture or furnishings, et cetera. We will remain concentrated around the space of paints, waterproofing and construction chemical.

[Operator]

The next question is from the line of Aniruddha Joshi from ICICI Securities.

[Aniruddha Joshi, analyst]

Just wanted to understand the -- about market share, the 20.2% market share, is it in paints or it includes all the categories like paints, primer, putty, and waterproofing, et cetera. Or if you can specify the market shares in the -- each of the categories separately, that will be good.

[Abhijit Roy, executive]

So Aniruddha, this is based on published results. I do not have results of other companies of paints kinds of putty, et cetra. So it is not possible for me to be able to project market share based on that. What we have done is we have taken the stand-alone results of all the companies. To the stand-alone results, we have added our STP and Saboo value, which is basically in India, and therefore, we call it the India operation. We have added in case of Indigo, the recent purchase of Apple Chemie and there that turnover as well and then have seen where we planned in terms of market share. There, if we see it, it is at 20.2% for us, an increase of 0.9% has happened in this particular quarter. But I can't tell you what the market share of individual categories are because there is no one publishing that data. And so how do I tell you anything about.

[Aniruddha Joshi, analyst]

Sure, sir. Understood. Understood. Sir, second is now projects is becoming a major segment, and we see definite strategy from almost all the paint companies. So what is Berger's strategy in case of projects business? And roughly, how do we see it panning out over a period of next 2 to 3 years?

[Abhijit Roy, executive]

So we have always been in the project business present there for long years now, and we have a fairly decent size of operation there in the project segment. It is growing, it keeps growing and adding depending on the builder segment and how it moves. For the last 1.5, 2 years, it's been growing. In the COVID period, it had sunk a little bit. So it has [ ebbs, troughs, ] and then peaks. But as of now, it is on the growth path, doing well, doing slightly better possibly than retail. And we think that this trend might continue a little bit into the future. This segment has -- it is -- profitability is on the lower side compared to retail. But balance sales growth has been slightly higher than that of retail in the last 1.5 to 2 years.

[Aniruddha Joshi, analyst]

Okay, sir. And last question. The trade discounts have increased, but what would be the indicative quantum in industry and as well as for our company also. So let's say, if the trade discount was x percent in Q1 FY '23. So what it would be now, maybe x plus 5% or how much it would have gone? Yes, that's the question.

[Abhijit Roy, executive]

It depends on product category-wise, it is not a uniform saying it depends on my mix compared to someone else's mix. So what has happened is in certain categories of products the discounting has increased, whereas in certain other categories, which hasn't increased so much. The overall impact will depend on the product mix. For example, in enamels, the discount went up substantially, whereas in some of the other luxury emulsion products, it hasn't moved so much at all.

So therefore, it will depend on the proportion of these products in the overall mix. And then the situation changes with quarter-on-quarter. So in this quarter, enamel plays a very critical role because it is a wholesale period. So typically, people tend to rebate excessively in this category. Whereas in the next quarter, it will be more of an emulsion place. So it will depend and keep [ gaining ], but overall, the discounting has gone up a little bit marginal.

[Aniruddha Joshi, analyst]

Okay. Sure, sir. That's very helpful.

[Operator]

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

[Tejash Shah, analyst]

Congrats on good set of numbers. And also thanks for a very detailed initial presentation and remarks. A couple of questions from my side. Sir, when we look at FMCG company's numbers in their commentary, it has been subdued and the consumer sentiment has been very, very tepid. And on retail side, it has been very emphatically very tepid. So between those two buckets when we see our numbers and then I'm talking about the whole industry, somehow we continue to outperform our kind of drift away from the broader consumer sentiment. So just wanted to understand when you talk to your sales people, what is working for us and industry at large, which is not visible in any other consumption basket in India?

[Abhijit Roy, executive]

This has been happening in the paint industry. It has been growing at a slightly different pace than the FMCG category. Probably a few reasons are there. And those reasons are peculiar to the industry at large. One is that the organization level is still at a low level, it continues irrespective of what the economic situation is. The organization keeps increasing, right? We are currently sitting at about 34% and if you look at any moderately advanced country, say, China, for example, it's about 60%. We go to Europe, U.S., it is about 80%, 85%.

So as soon as these houses get constructed, they get painted after every 5 years, they get repainted again. So there is this possibility of advantage of growth, which is available to this particular category. The second is in terms of premiumization also. As the income increases, people tend to move upwards. So that's also helping in some amount of movement away from unorganized towards organized, towards more advanced products is happening. So these two factors, irrespective of what you do is not true in case of FMCG. The other factor also is that we are slightly underpenetrated. As a category itself the number of dealers, if you look, there are still places that we are not able to reach.

And so we, as a company, specifically, if you look at it, there are many areas where we don't have our products available. Though brand is known, our product is known. We have a very good quality product. But somehow we have not been able to reach those locations. Now if we increase that reach, we have a chance of improving our growth rate. So the more we do that, the more we penetrate the market, in a growing market and then underpenetrated in our case, at least it is -- there is a lot of scope for penetration. We see an opportunity for growth for us, irrespective of what the market is behaving like.

[Tejash Shah, analyst]

Sir, second question pertains to that only on distribution expansion that you spoke about. So first, what is the annual run rate that we'll target for this year? And second, you mentioned that we had added some 1,300 Colorbank machine. So just wanted to clarify technicality. These are always a fresh installment, right? So I'm assuming that some machines that you would have installed 5 years back also must be coming for replacement. So these are fresh installments.

[Abhijit Roy, executive]

No, these are all fresh replacements. The fresh new installations. There is no replacement machine in that. That we will handle it separately, and we don't count into the new expansion category. These are all new machines which have been put into new counters, which were not dealing with us or were dealing with us without missing.

[Tejash Shah, analyst]

Okay. And sir, dealer expansion number?

[Abhijit Roy, executive]

Dealer expansion number will be slightly more than this. So it depends on how you look at these dealers. So there are retailers or wholesalers or distributors who are there. I'm not counting that. So we will probably be around that 1,300 number only. If you look at the dealer expansion also because some of the existing dealers also would have taken machines.

[Tejash Shah, analyst]

Okay. And sir, last one on tile adhesive, you said that we are expanding our product range. Just wanted to understand what is the route to market? Are the same paint dealers are selling tile adhesive or it requires a different kind of group to market than the usual traditional one?

[Abhijit Roy, executive]

No, some of them -- some of our paint dealers are also tile dealers. So there might be some overlap there. But basically, it has more of tiles distributors who are appointed separately who know -- who cater to this market, but they are into this building material trade. We understand the nature of this business reasonably well. And we have been fairly successful in this category so far.

[Tejash Shah, analyst]

Okay. So that's all from my side, and all the best for coming quarters.

[Operator]

The next question is from the line of Amit Purohit from Elara Capital.

[Amit Purohit, analyst]

Congratulations. Sir, on the project side, would you be -- just wanted to understand, are we cross leveraging some of the consultancy waterproofing solutions that we have, which is SPL? And is that also helping us to sell our paint products along with that? Or that's largely on the industrial side?

[Abhijit Roy, executive]

Yes. So there are advantages for us. We are fairly strong in the project segment on the protective coatings area and also a strong presence in the decorative project business. So in the project business where we sell paint, we also pushed our construction chemical and waterproofing products. And if we get lead the construction chemical and waterproofing, then we push our paint as well into those segments. So it goes into the same area, same builder, same [indiscernible], basically same specifiers, except that sometimes for waterproofing, we have to get the specific [indiscernible] done separately through consultants, et cetera. for which we have to have a separate team, which works on them and we try to get our products specified.

[Amit Purohit, analyst]

Okay. And sir, just on the project side, what would be the salience of project business in our overall business?

[Abhijit Roy, executive]

I can't hear you, Amit.

[Amit Purohit, analyst]

What is the salience of project business in our overall sales and it should not include the SPL that we already have, right? Excluding that, what would be the sales...?

[Abhijit Roy, executive]

There's always been around that level of 8% to 10% for the last 2, 2.5 years, we've been hovering around that. So sometimes it increases, sometimes it goes down, depends on the performance of this category.

[Amit Purohit, analyst]

And sir, you indicated in the beginning that West and South are on the markets where you want to scale up. Is that the market where the project business is slightly over index or under indexed for us, I mean above 8% or less than 8%...

[Abhijit Roy, executive]

Yes. It is similar, though in the West and the South, our retail presence is weak, so our projects tend to be slightly more. So it is slightly over-indexed there. As and when the retail keeps improving and the distribution penetrates and goes up, it will fall back to the normal levels.

[Amit Purohit, analyst]

Okay. And sir, one on waterproofing. So you've been expanding into new segments like now tile adhesive as well and grout as well. So are we now complete range available? Or there are some more pockets where you think there will be some new product launches, which will keep happening in the waterproofing space?

[Abhijit Roy, executive]

Some more product launches are due. We are more or less around, I would say, 70%, 75% of the products have been introduced. But a few more products are going to get introduced soon to keep completing the range that is required in the marketplace.

[Amit Purohit, analyst]

And this would be done over the next 1 year or so? Or it should be even more?

[Abhijit Roy, executive]

Yes. In the next 1 year, we should be able to close most of that. Whatever sales in growth quantities, we should be able to launch such products in the market.

[Operator]

[Operator Instructions] The next question is from the line of Mihir Shah from Nomura.

[Mihir Shah, analyst]

And congrats on a good set of results. First, I wanted to just check with you on the seasonality impact on the gross margins. If you can just jog our memory usually exterior paints which have higher margins and more in the first quarter. And during the festive season, usually do we have a higher saliency of more economic paints getting sold and the margin can get suppressed? Or if you can just, quarter-to-quarter, if you can highlight how the seasonality moves and remind us, please, sir?

[Abhijit Roy, executive]

So typically, in the paint industry, the first quarter is good in terms of our margins. The second quarter has a mix which is more towards an annual primer distemper in the first July and half of August sort of a situation, and then it starts improving and moves towards more of emulsion, especially in the month of September when interior emulsion picks up quite a lot and along with some exteriors as well. It's in the third quarter, that it becomes more oriented towards exterior and interior emulsion.

So that is also a very good quarter in terms of margins and profitability. And fourth quarter, also, margins are there, the volumes in our case, tends to drop because that's the quarter where the South India starts to dominate overall and we need to improve our presence there. So the fourth quarter, we have a lesser sale comparatively in that particular quarter compared to some of the other players who have much stronger presence space there.

[Mihir Shah, analyst]

Understood, sir. So keeping this in mind, and you had mentioned last quarter that on an operating margin level, while I understand you reiterated that on gross margins, you will hover around the 30% to 40% mark, and that is well understood. And so on the operating level, I wanted to check, last time around you highlighted on a steady state, it will be around 16% to 17-odd percent. And this time, we've done very well. Do you think that we should revisit that guidance? Or you think that range still holds up quite well?

[Abhijit Roy, executive]

No, I think we are possibly within that range, we will operate 18%. 18.8% is a bit of on the higher side because the raw materials have been relatively very benign, whether that remains at these levels or not is a question. Sometimes it's difficult to predict this part. We would prefer to remain at this hover around this 16% to 18% is what I had indicated probably, now it is 17% to 18% where we would be more comfortable. And then that's where we will be in the second quarter and possibly in the third quarter as well, up to which the visibility is there. After that, it is difficult to call.

[Mihir Shah, analyst]

Got it, sir. That's all from my side and wishing you all the very best.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments. Thank you, and over to you all.

[Abhijit Roy, executive]

Thank you all for joining us, and it was great interacting with you. Hopefully, I've been able to answer most of the questions very transparently and to your satisfaction. Thank you once again for coming to this meeting.

[Operator]

Thank you. On behalf of MK Global Financial Services, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.