Berger Paints India Ltd

NSE:BERGEPAINT

Earnings Call Analysis

Berger Paints Q2 Growth Amid Challenges

Berger Paints India Limited noted a moderate standalone revenue growth of 2.8% in Q2 FY '24, with half-year growth at 6.5%. The Indian business, including subsidiaries STP and Saboo, is expected to surpass a 20% market share, estimating an increase of 0.7%-0.8% from the previous year. The volume growth was significant at 10.9% for the quarter, but value growth lagged due to the extended monsoon affecting sales of premium products. Despite these headwinds, the company achieved a robust EBITDA growth of 26.7% for the quarter, reaching 32.5% for the half-year. Profit after Tax (PAT) increased by 27.9% for the quarter and 34.1% over the half-year. Gross margins peaked at approximately 40%, and operating margins expanded by 310 basis points. The consolidated business outperformed standalone results, posting a top-line growth of 3.6%, EBITDA growth of 30.1%, and PAT growth of 33.1% for the quarter.

Performance Summary for the First Half of the Fiscal Year

The company observed a steady performance in the first half of the fiscal year, marked by a top line growth of 6.7%. EBITDA, a measure of a company's operating profit, grew significantly by 34%, while Profit After Tax (PAT) surged by 36.7%. The overseas subsidiary, Bolix Poland, contributed to this growth with a strong performance, particularly in the UK market. Despite a degrowth in top line for BJN-Nepal due to a slowing construction sector, the subsidiary managed a modest profitability growth thanks to better gross margins from improved raw material (RM) prices.

Subsidiary Performances and Growth Expectations

The company's subsidiaries exhibited mixed results. While STP showcased healthy double-digit top line growth as well as strong profitability growth, BJN-Nepal faced negative growth. Saboo Coating (SBL) also displayed robust top line growth and profit growth, driven by higher product realization and softening raw material prices. The automotive coatings joint venture, Berger Nippon Paint Automotive Coatings, achieved a very strong quarter with growth expected to continue. For the upcoming third quarter, the company is predicting a continuation of the double-digit value growth trend for several of its subsidiaries.

Capacity Expansion Plans and Market Optimism

In terms of capacity, the company is planning to start work on a new plant in Panagarh, expected to come online by the end of 2025 or early 2026. This will cater to the industrial paints and construction chemicals segment. Additionally, there is a greenfield facility planned in Bhubaneswar for the manufacturing of decorative and industrial paint, set for completion by the end of 2027. The company remains optimistic about demand, anticipating an upswing in decorative demand in the third quarter due to an extended festive season and a normal monsoon boosting rural demand. The automotive business is expected to maintain its double-digit growth, and the protective coating segment is also set to do well thanks to increased government infrastructure spending. General industrial and powder coatings are also forecasted to record strong double-digit growth.

Forward-Looking Statements and Concerns

For the third quarter, the company maintains a positive outlook with the expectation of sustained double-digit growth and profitability, leveraging the moderation in raw material prices. However, there is an air of caution regarding the potential impact the geopolitical situation may have on commodity prices which could be a concern for the company's cost structures moving forward.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Berger Paints India Limited, 2Q FY '24 Earnings Conference Call hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nitin Gupta, Emkay Global Financial Services. Thank you, and over to you.

[Nitin Gupta]

Hi. Good evening, everyone. I would like to welcome the management and thank them for this opportunity. 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. I shall now hand over the call to the management for the opening remarks. Over to you, gentlemen.

[Sujyoti Mukherjee, executive]

Good evening, ladies and gentlemen, and festive greetings to all of you. A warm welcome to Berger Paints Quarter 2 FY '24 Earnings Call. And as you all know, we have with us MD Mr. Abhijit Roy; and our CFO, Mr. Kaushik Ghosh. Now before I hand over to Mr. Roy for his comments, followed by your questions, I would like to say that the management presentation on the performance has been uploaded in our website and on the exchanges. Just a standard disclaimer that the questions should be restricted to the performance of the quarter. With that, I hand it over to Mr. Roy for his comments.

[Abhijit Roy, executive]

Thank you, Sujyoti, and a very welcome to all of you. And we will be discussing today the quarter 2 on the half year results, which we have declared a few minutes back.

As you can see from the chart that we have already sent to all of you the top line which we registered in quarter 2 was a bit moderate. We had a growth of about 2.8% on a stand-alone basis. However, we registered strong growth in the 2- or 3-year compounded basis of 12.2% and 16.7%, respectively. In terms of the half year, half year is better. We had a growth of 6.5% on a half yearly basis in terms of value. And if you look at the 2-year and 3-year CAGR, they are 20.7% and 29.9%, respectively. If we look at the Indian operation, we -- Berger Paints and -- in the consolidated, we have 2 companies, STP and Saboo, which operates out in India. If you add up all these 3, the market share that we -- so far, 2 companies have already declared. We are the third. And we've estimated for the 4. And approximately, what we feel is that we would have gained market share with a tune of about 0.7% to 0.8% in the half year of this year. So we had closed last year at about 19.3%, and we expect that the market share should be above 20% level at the end of half year of this year.

In terms of the volume growth we registered a volume growth in quarter 2 of 10.9%. The full year CAGR is about 10.6% and a 3-year CAGR is about 14%. On a half yearly basis, it is up 11.8%, 2-year CAGR is 18% and 3-year CAGR is 23.7%. Though we maintain double-digit volume growth for the quarter, the value growth was much lower. The extended monsoon resulted in low offtake of exterior and interior premium emulsions. And it was much more of the sale of economy category, economy emulsions, primers, distemper, putty, which was the result of that, that the value sales growth was relatively lower. We also sold much less enamels first quality in this quarter, which is a high ASP product, and therefore, the value chain looks a little bit lower than normal. So that's the explanation for the volume value differential, though we did have a decent volume growth given the situation, which was quite tough with the extended monsoon due to the postponement of the season, is slightly delayed. And also, of course, the fact that there was a relatively higher base because of the price increases which had happened last year.

So now if you look at stand-alone profit, we registered a decent EBITDA growth of 26.7%. On a half yearly basis would be even stronger at 32.5%. There was very strong growth in the gross margin. It is the highest now in the last few quarters at around 40%. Operating margin, however, expanded by 310 basis points. The margin expansion was somewhat moderated on a conscious call taken by us to increase ad spend, especially in the digital segment, which we have been working on diligently this year.

In terms of the financial results, if you look at, which we have posted there. We did a sale of about INR 2,439.8 crores for the quarter with a growth of 2.8%. EBITDA grew 26.7% and PAT growth of 27.9%. On a half yearly basis, the corresponding figure for revenue growth 6.5%, operating growth 32.5% and PAT growth of 34.1%. If you look at the decorative business. The decorative business growth, even though muted, was better than the industry average. Lower growth, as I have mentioned already, was on account of extended and sporadic monsoon; festive season, which has been delayed; and some impact of a high base effect.

Decorative business improved as the quarter progressed from July to August to September. Construction chemicals and waterproofing business had another quarter of very strong and stellar performance. Aggressive network expansion also helped to some extent and is going to help us further in the future. We added 2,000 plus retail touch points in quarter 2 of this year, and installed 1,700-plus color bank machines in this quarter.

Some initiatives which we took on the digital side. Some very interesting work is going on. One of them is we introduced 1 app, which is the Berger My Colour app, AI-driven, very interesting app, which has had very strong downloads already. Company is also working with sales force for increasing the efficiency in lead generation and better customer management. And Express Painting service which was there earlier in all the major towns is now being extended across many more smaller towns and upcountry market, and we expect very quick results in this as well.

As far as products are concerned, we have introduced some interesting products in the last quarter itself. Glamor Dazzle, which is doing quite well in the East, specifically. Long Life 15 with a 15-year warranty, PU ELASTOSEAL; Anti Dustt, which continues to do well; Easy Clean continuously be a leader in its segment. Long Life Flexo, which we have started advertising. Of course, in construction chemicals, we have DAMPSTOP, which we are being advertising very heavily now, both on the TV and the digital media as well. Even in the cricket matches, we will get to see that. Of course, we also participated at festivities [indiscernible] with Durga Puja in West Bengal. We have a very interesting program called Berger Priyo Pujo, which we sponsored and which just got concluded and we are now on to the Diwali period now. The Diwali season is coming up. So far, it looks quite good as far the Diwali belt is concerned. Sales has been quite good. Protective coating maintained a steady, consistent growth in the quarter. Automotive and General Industrial business had double-digit growth in the quarter even against a high base in the corresponding quarter due to the growth in commercial vehicles and 2-wheeler industry, which has improved from what it was earlier.

Powder Coatings business line saw a turnaround with robust double-digit top line growth, aided by some uptick in the [ fan ] industry. If you recall earlier, this has been a troubling factor in the powder coating business. So now that situation has reversed and therefore, we are getting stronger growth.

As far as the gross margin is concerned, I had mentioned that it is in the last few quarters, the highest at 40%. However, the PBDIT is at 16.5%, but given an indication that it will hover around the 16% to 17% range, and that is where we are. Deliberate spending on advertisement, especially on the digital media will continue in the future.

As far as consolidated business is concerned, that is actually -- it has outperformed the stand-alone on the back of strong double-digit top line growth and even stronger profitability growth across all subsidiaries, except BJN-Nepal. Nepal has been struggling, as you know, the country is going through an economic downturn for the past few months. And I don't see that improving immediately. So that Nepal remains a negative zone, but all other areas are doing very well, all the other subsidiary companies.

If you look at the figures, the top line has grown by 3.6% in the consolidated business. EBITDA growth is 30.1% and PAT growth is 33.1% for the quarter. For half year it is 6.7% top line growth, 34% for the EBITDA growth and 36.7% for PAT growth.

Company's overseas subsidiary, Bolix Poland had another quarter of strong top line and profitability growth, driven by good performance in the U.K. business. Company expects to show good growth in quarter 3 as well.

Company's overseas subsidiary, BJN-Nepal had another quarter of degrowth in top line, as I mentioned earlier, as the slowdown in the construction sector continued in an inflationary environment. However, it recorded modest profitability growth aided by gross margin expansion on the back of improved RM prices. Growth likely to remain negative in quarter 3 as well. Company's subsidiary STP showed healthy double-digit top line growth. It also recorded very strong profitability growth and operating margin expansion, aided by improvement in gross margin due to softening raw material prices and substantial improvement in product mix. We expect double-digit value growth to continue in quarter 3 financial year '24.

SBL, which is Saboo Coating, showed a strong double-digit top line growth and a robust profitability growth aided by higher product realization and softening RM prices. We expect double-digit value growth to continue in quarter 3 of financial year '24. The joint venture Berger Becker Coatings, which doesn't get consolidated in terms of sales, et cetera, experienced a decline in both its revenue and profitability, primarily at -- this is attributed to the capacity limitations resulting from a fire incident which happened, as you know, in our -- one of our manufacturing -- the main manufacturing facility in Goa in the fourth quarter of financial year '23. That is being restored, and we should see back-to-normal work there in quarter 1 of financial year next year.

Company's joint venture, Berger Nippon Paint Automotive Coatings had another very strong quarter, a robust top line growth and profitability growth, aided by uptick in passenger car and SUV sector, and we expect the strong growth to continue in quarter 3 of financial year '24 as well.

As far as capacity expansion is concerned, work at the new plant in Panagarh will start in the next 6 months in West Bengal for industrial paints and construction chemicals with a capacity of about 3,500 scale metric tonnes per month. Expected completion is by end of 2025 or beginning of '26, maybe. Further greenfield facility to come up in Bhubaneswar in the state of Orissa for manufacturing of both decorative and industrial paint. We have just been allocated land, expected completion by end of 2027. Some brownfield expansion in existing facilities in Vallabh Vidyanagar, Hindupur and Rishra to be completed in financial year '25. Company expects improvement in decorative demand in Q3 on the back of extended festive season and improvement in rural demand aided by a normal monsoon. Automotive business expected to continue with double-digit growth in quarter 3 on the back of sustained demand. Protective coating business to do well on account of high government spending on infrastructure. General Industrial and Powder Coatings business to show strong double-digit growth in quarter 3 of financial year '24 again. We maintained double-digit growth outlook for quarter 3. Profitability expected to sustain in quarter 3 on moderation of raw material prices. However, impact of geopolitical situation on commodity prices can be a concern.

And thank you. And now I can get to the question-and-answer session.

[Operator]

[Operator Instructions] The first question we have from the line of Abneesh Roy from Nuvama Institutional Equities.

[Abneesh Roy, analyst]

Congrats on double-digit volume growth in stand-alone and 10-quarter high gross margin. My question is on the 20% plus market share. So if you could tell us in this very competitive industry, what are the 2, 3 steps, main steps which are driving this? And second is 10-quarter high gross margins in a quarter where the emulsions, both exterior and interior are low, which are the higher margin, plus you did say that lower end grew faster. So how come the margins are higher than Q1 and Q4 also? Because broadly, last 2, 3 quarters, raw materials are in a tight range.

[Abhijit Roy, executive]

Right. So the 20% market share first. Primarily, 3 areas which we are looking at, which is helping us: number one is, in terms of distribution expansion, the network expansion itself. As you saw the figures, it was quite strong, and this has been going on for some time now. Expansion of network is one of the major drivers for us. And I think even now, there is a lot more scope to improve on this area because there are a lot of gaps in many states where we can do much, much better than what we are doing. The second part, of course, is in terms of the Construction Chemicals business, which is growing at a rapid pace, which is helping us to actually accelerate our growth because now it has reached a level which is significant and growth on that is helping us to overall -- helping the overall growth rate.

So these 2 major areas which are definitely helping. Of course, some of the new products are doing well. In certain pockets of the country, it has picked up momentum quite a lot. And therefore, that is also adding to the overall gain in market share. Now coming to your second question, which is a very relevant one that, how come that even though the luxury emulsion sales and the premium category sales has been a bit muted, how have we delivered on the gross margin? There are 2 or 3 reasons for it: one, of course, is that the raw material prices has reduced and the benefit of it, it is coming to us a bit late, I had mentioned in the last quarter also that the full benefit had not come in the previous quarter to us because we were carrying a bit more inventory and that is old inventory at the price -- old prices which is helping us. The second is in terms of the low sale of enamel. Enamels are typically a very low-margin product. As I mentioned in my comments, this time, enamel sales have been considerably muted, which is why the value sales actually did not rise to the extent of the volume growth. And thus it has a very low margin. In fact, enamel whites are negative in terms of profitability. And therefore, the gross margin tends to move [indiscernible] when enamel sales are on the lower side. And the third reason is some of the products, as I mentioned, some new products are doing very well. Two of them, which is WeatherCoat Long Life 15 and Glamor Dazzle, Silk Glamor Dazzle. These are very highly profitable, and they are growing at a very rapid pace in certain markets, especially in the East, which has helped us to shore up the margin.

[Abneesh Roy, analyst]

Sure. Understood, Abhijit, very helpful. My second question is on the competitive intensity, and this is not from the market leader. My question is, last 2 years, a lot of -- few cement players have acquired small, small paint companies. So any ramp up until now? Second is in FMCG, 5, 6 categories, we have seen local players become more aggressive on advertising spends and promotions. In paint industry also, the gross margin for the entire industry is at a 2 to 3 years' high. So in terms of local players, and you said lower end is growing faster, so if you could tell us in your key markets, the local competition, is it higher versus, say, last 2 years average? And what are you doing in terms of being proactive and the cement companies, which have already come. I'm not referring to the big daddy, which will enter in Q4. I'm referring to Astrals of the world and some of the paint companies, which have acquired -- small, small paint companies, the cement companies which have acquired.

[Abhijit Roy, executive]

Right. So as far as the cement companies or other building material companies which have jumped in, we haven't seen much of an impact so far. Maybe it may have an impact later on. But as of now, it hasn't impacted us. Some of these companies that you mentioned, like Astral, which they acquired Gem, the main market is in Karnataka. We are not a very strong player in Karnataka, so I won't be able to comment. But it hasn't impacted us in any which way in any of the markets where we operate or we have a stronger presence. The second part of the question which you asked is related to the unorganized players. How are they doing?

So in certain parts, we have revised, especially in certain products like primers, water thinnable primers or solvent thinnable primers, which is in the lower end of the spectrum, there is some amount of revival from these local players. But at the same time, we have got competitive products now in this price range, both in terms in the emulsion category and also even in the primer. So though they may have revived and some gain might come to them from other companies, as far as Berger is concerned, we have remained more or less unaffected so far by this unorganized segment.

[Abneesh Roy, analyst]

Sure, understood. Last quick question, which is a bit negative in terms of numbers. So if I see volume growth versus the value growth, there is 8% difference. And here, you mentioned that economy segments grew faster. So what you take on economy segment growth in H2 because generally what we are picking up rural slowdown is still continuing. But you have mentioned that in H2 because of whatever reasons, you expect that rural should recover. Second reason seems more of a Q2 only because that was linked to the monsoon, the emulsions not selling well. So in Q3, when the emulsions issue will not be there, would you expect that the 8% gap will be a much lower gap, say, insignificant kind of a gap between value and volume?

[Abhijit Roy, executive]

Yes, in short, the volume value that will get much reduced in Q3, and it will be very clear when the results come out. Definitely, not at these levels because luxury category tends to sell much more in Q3 and Q4 as well. So therefore, the gap which you are seeing, also the enamel bases are not that strong in Q3 or Q4. So therefore, we will tend to see a much closer volume-value equation. So the growth rate -- the value growth rate will go up, even though the volume growth rates may not climb so much.

[Operator]

The next question is from Avi Mehta from Macquarie. .

[Avi Mehta, analyst]

Congrats on the performance. Sir, I just wanted to build up on the last question asked by Abneesh. If we're seeing a mix improvement that would pan out, would it be rational to also argue that it would flow through to gross margin as well?

[Abhijit Roy, executive]

So as I explained -- it is difficult to say like that. I don't think there will be too much of an impact on the gross margin because there are 2 things which will happen: one is that there will be an improvement in the mix, which is for sure, that -- but at the same time, the enamel which has decreased quite a lot in corresponding figure if you look at, it was not doing well, will do slightly better in this quarter. And overall, therefore, I don't see the margin increasing too much. It will be hovering around the same point. Of course, the raw material prices also is impacted a little bit because of the climb in the oil prices to some extent. There were 2 increases which were announced in the oil prices earlier in the [indiscernible] prices. So the raw material prices have gone up. Luckily, it has been reduced again day before yesterday to some extent, again giving relief. But there is still an increase which has happened from it was earlier. The second is in terms of we have a fairly substantial basket of imported items and rupee has depreciated somewhat from earlier level. So that will also impact negatively. So I think overall, the margins will be at similar levels to what we were at in Q3 in gross margin terms.

[Avi Mehta, analyst]

Got it, sir. Got it. Fairly clear. Sir, the second bit was on the subsidiaries. From your comments, it did suggest that the performance was more of a mix improvement and there's genuine recovery. But the profitability pickup has been much starker -- very healthy. Would it be fair to say this is something that will continue because maybe the mix of STP doing well as improve the way I should look at the difference between stand-alone and consol? Or is there anything that is more one-off? I'm just trying to understand how I should look at this quarter from a template point of view? Is this what I should kind of consider going forward or...

[Abhijit Roy, executive]

So Indian subsidiaries -- it's sort of going to remain, I think, the improvement that you see is likely to continue. The STP, there is a mix change which is happening in the positive direction. They were more into the [indiscernible] category, but now much more into admixtures and more waterproofing products and repair products, which are much more profitable. And therefore, that is going to continue. So the margin improvement will remain as far as STP is concerned. It may not improve from hereon by huge amounts, but it is likely to remain at this elevated levels and marginal improvements from here can -- will happen. As far as Saboo Coatings is concerned, industrial raw material prices have decreased. And that has helped it to restore it back itself to the earlier higher profit margin level. And if the raw material prices remain at this level, it is likely to be in a similar fashion.

[Avi Mehta, analyst]

Got it, sir. Perfect. And even for the international, sir -- even Nepal...

[Abhijit Roy, executive]

In the international, Nepal, the value growth itself -- it's negative this month, this quarter also. I don't see this improving the way things I'm hearing from the team there. I don't think it's going to improve much. So it's going to remain muted. And as a result, margins also -- margins are there which is fairly decent, but it will not improve for sure because when such a situation arises, people tend to relate and try to get sales. So I don't think margins are going to improve there. As far as we know, the international operation of Bolix is concerned, that will have a margin which will be similar to what we had in Q2. But the sales will be actually bit muted than what we were having in Q2.

[Avi Mehta, analyst]

Perfect. Very clear, sir. And sir, just the last bit from a book keeping question. You have now been aggressively adding capacities. Is there any CapEx plan or number that you could share with us, which you could kind of build in for the next few years? Or is this something that is not very material, these brownfield expansions...

[Abhijit Roy, executive]

So CapEx plan is not very heavy in the immediate future. One is the brownfield expansion which is well within -- whatever the cash we are generating, it will take care of both the Panagarh and the brownfield expansion. So that's very easily done, and I don't see that impacting us in any which way. As far as the Orissa plant is concerned, the work will begin year after next. So at that point of time, it will be better -- I will be in a better place to tell you how much investment is there. As of now, it's a little bit [ modular ].

[Operator]

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

[Aniruddha Joshi, analyst]

Just one question. We had tied up with UltraTech to sell paint to its certain cement dealers. So what was the revenue collected as a percent of total sales from these outlets? And any outlook on -- with these kind of sales now also -- how do you see the competitive pressure building, means from your internal assessment in which regions we are seeing the maximum impact of the competitive pressure? So these are the 2 questions.

[Abhijit Roy, executive]

So as far as UltraTech association was concerned, we had a relationship with them under the UBS store concept, where we were the paint partner for them. We were working jointly in many of these accounts. It was a very small turnover, miniscule in terms of contribution. And those dealers where we had sales, we have gone direct with them and we are doing business. So we don't see any major impact as far as, or even moderate impact or significant impact or any type of impact, which is material, as far as this part of the business is concerned. As far as competitive intensity is concerned, it remains quite strong even today. Everywhere the furnaces are always on. But some of the markets are doing a little bit -- is not performing for the last 1, 2 months. One of them is Kerala. And I don't know why and what is going on there, but Kerala seems to be slightly down. It's definitely not competitive intensity which is there, but the market itself seems to be on the downturn.

[Aniruddha Joshi, analyst]

Okay. I mean to say, basically, UltraTech, I mean, Grasim probably through UltraTech, it has introduced multiple products, including the waterproofing and distemper plus, I guess, some basic paints are also -- cement paints are introduced through UltraTech. So do you see -- so in a way, there is already some entry done by Grasim into the paint business or paint market itself, so any feedback or any impact on Berger because of that you see or, maybe, color on that competitive angle, if you can share anything?

[Abhijit Roy, executive]

Actually, UltraTech through their Birla White has been on this for quite some time -- that they have introduced this primer type of a product, in which even JK Cement had done earlier, which is a cement-based primer which they're trying push, then they came with a primer itself. But it hasn't worked so far because of the incomplete range and piecemeal approach, it doesn't help. They have been selling primarily [ putty ] in the counters, and not now these other items that we spoke about. So it hasn't impacted so far. The Birla Paints Group, of course, has introduced 1 product, which is wood coatings in some of the markets. But it's too early to say anything about it because not much has happened on the ground so far.

[Operator]

Next question is from the line of from Shirish Pardeshi from Centrum Broking.

[Shirish Pardeshi, analyst]

Congratulations for a good set of margins. I just vouch 1 hypothetical question. Though there are a lot of news around competition and all. To my understanding, paint is a low consumer involvement category. In that, the intermediatory plays a lot of role. And that's why I wanted to understand because about 2 to 3 quarters before you mentioned and highlighted that there is a strong process and there are a lot of recruitment which is happening on the project business. So could you talk something about the project business, how it is shaping up? And what is it that we are trying to develop? And second, in last 30, 40 days, how the demand has shifted up? Because to my understanding, the sporadic rain has spoiled the first half of the quarter too?

[Abhijit Roy, executive]

Yes. So you have 2 questions which you've asked. There's some disturbance in the background...

[Shirish Pardeshi, analyst]

Not from my side...

[Abhijit Roy, executive]

If you don't mind, if you can quickly repeat?

[Shirish Pardeshi, analyst]

Yes. My first question was that about 2, 3 quarters before, you mentioned about the project business, there is a lot of focus around. What is the update there? How far that business has reached? And second I asked, how that last 30 days has happened because quarter 2 first half was bad in terms because of rains. So we understand the demand last 15, 20 days has picked up and even the inventory has gone up in the system. So maybe on the demand side, how it is shaping up, if you can share?

[Abhijit Roy, executive]

Right. Right. So as far as the project business is concerned, it's been -- we have been at this game for some time now. And since the pickup has happened in terms of the building construction, the project business has been doing reasonably well. And then it continues to do well. Of course, it is a very smaller portion of the overall pie. And though it is growing at a slightly higher pace than the retail, it still remains at a low level in terms of the overall sales of the company. As far as the demand situation is concerned, the Diwali belt, as you rightly said, had picked up substantially in the last 20, 25 days. We had a good October as far as the Diwali belt is concerned. The East was a bit muted because of rainfall and then the Durga Puja, which fell right in the middle of the month for 4 days. So this muted as far as East is concerned. South also did okay-ish, but except for Kerala, which had some sort of a problem and which resulted in a downturn in Kerala. So this is the situation as far as demand is concerned.

[Shirish Pardeshi, analyst]

So taking a cue from this, do you think, aspirationally, everybody would like to grow double digit. But since things are in control and -- the festive season also will have a strong effect because of the spread for between Diwali and Dusshera is longer. Do you think second half also, we will be able to do a strong double-digit volume growth?

[Abhijit Roy, executive]

So that's [indiscernible] to do that. It all depends on how markets shapes up. East and South also starts batting well at the levels which is similar to the Diwali belt, then, yes, I would say there will be a fairly decent growth rate in the quarter 3 of this year.

[Shirish Pardeshi, analyst]

Yes. The reason why I am asking because our quarter 3 last year growth was only 7%, so I think the Q3 is favorable. Quarter 4 we have inched up from 7% to 14% growth. So that's why I am saying even if you maintain this kind of run rate in a weaker demand situation, the demand is stronger, you will be able to maintain the higher strong growth.

[Abhijit Roy, executive]

That is right. So that's what our expectation is. I only hope and wish that some of the Kerala or Southern market picks up momentum in November and December.

[Operator]

[Operator Instructions] The next question is from the line of [ Atharva Bhutada ] from [ Purna ].

[Unknown Analyst]

Yes. So I have just 1 question. In quarter 4, how do you seeing the demand will shape up because we're having a long festive season in quarter 3, so do you think that the single-digit demand coming in quarter 4 year-on-year basis?

[Abhijit Roy, executive]

That's a very difficult question to answer at this stage. Frankly speaking, I don't think quarter 3 is going to impact quarter 4 in any big -- in a significant way because the main seasonal month was October and part of November. So it's not that as if December is going to peak and therefore it might impact quarter 4. The quarter 4 on a stand-alone basis, whatever is -- whatever way the demand flows, at that point of time, based on that, our growth rates will come. But going by what we have been doing so far, I think we should have a much stronger growth rate in Q3, that much we can predict compared to Q2. But what will happen in Q4, only time will say, but we expect that the demand should stay at this type of level, and we should have a decent quarter in Q4 as well.

[Operator]

[Operator Instructions] The next question is from the line of [ Varadharajan ].

[Unknown Attendee]

I just wanted to understand what has been the growth in the distribution network with respect to the previous quarter and compared to last year? And how are we trying to see that we have a reasonable growth considering the competition intensity increasing?

[Abhijit Roy, executive]

Yes. So as I mentioned, we had added about 1,700 color bank machines in Q2 of this year and about 2,000 retail touch points, which is a fairly strong number additions which have happened in this quarter. And we expect that in quarter 3 also, we will add a similar number of machines and retail touch points. So thereby, it is going to help us in this year and also going forward in the coming year. Competitive intensity is always going to be there, and it has always been there in the paint industry. Many players have come in, but we need to be focused on our approach. We should continue to grow, and we have to figure out ways and means of achieving our growth rate. And that's something which we are continuously working on. And we are reasonably confident that our growth rates will continue.

[Unknown Attendee]

Just for understanding, how big is paint distribution network compared to cement distribution network, especially with Birla coming in paints and having their cement distribution network.

[Abhijit Roy, executive]

So it is not a very pertinent way of looking at it because the cement distribution networks, all of them are not going to convert into paint distribution network. Only a small fraction will convert and succeed in selling paints. It's not like that we can -- all the paint dealers will finally become cement dealers or vice versa. It doesn't happen like that. So therefore, having -- I don't know what the cement distribution network size is, but we have operated, as you would have heard earlier, that we were a partner with -- in the UltraTech Business Solutions stores, which was a cement network. And I don't think that network is very conducive for paint standards.

[Unknown Attendee]

Okay. So just a last question. How is the ROI for distributors?

[Abhijit Roy, executive]

What?

[Unknown Attendee]

Return on investment for a distributor?

[Abhijit Roy, executive]

So that varies from distributor to distributor. At what price point is he is selling? What is the mix of products that he is selling? You can't have a fixed number there. It varies from one person to another person. It can vary anywhere between 15% per annum to maybe even 40%, 45% per annum. So it depends on the type of products that they are selling and what he is doing? Is he more into premium luxury product type or is he selling completely commodity products? At what price he is selling? Which part of the geography he is present in? So it has many factors. I don't think we can put 1 number to it.

[Operator]

The next question is from the line of Ajay Thakur from Anand Rathi.

[Ajay Thakur, analyst]

I had 1 question on the raw material side with the current crude oil prices? And can you just throw some light on how the crude-linked derivatives are behaving? And also what could be the impact of the same in the coming quarters?

[Abhijit Roy, executive]

Yes. So as I mentioned earlier, the prices had gone up a little bit, especially in the solvent side. But again, there's some correction which has happened day before yesterday, downward. So it will move back again to the earlier levels as far as solvents are concerned. Some of the other raw materials are stable. There has been no major change in terms of the prices, but there has been a depreciation of the rupee versus the dollar, to some extent that will impact a little bit in terms of the gross margin.

[Operator]

The next question is from the line of Archana Menon from Morgan Stanley.

[Archana Menon, analyst]

Sir, 2 questions on the capacity side. So how much do you think in your 12-lakh-odd capacity increase to including the brownfield capacity as well addition? That is the first question. And the second part of the question is, how is your capacity currently split between North, South, East and West?

[Abhijit Roy, executive]

Right. So -- we are currently pretty balanced as far as the North, South, East, West is concerned. There was a lack of capacity in the North earlier, which we put up the Sandila unit, which is operating at around 48%, 50% level as of now on a 2-shift basis, which can be, therefore, scaled up to higher levels. So we are quite comfortable as far as capacity is concerned. Most of our factories are operating at about 80%-odd level, except for this factory, which is operating at a lower level. So as of now, we are quite comfortable. The brownfield expansion will be not very capital intensive and -- but the capacity can go up quite a bit. It would be enough for us to last for at least 2 years going forward. And then, as I said, a year from now, we will start planning for the Orissa plant, which will be a very big plant. That is a time when we will have to, and that will be phased out into 2 years of construction and setting up of the plant. And we will add up approximately another 30,000 to 35,000 metric tons per month capacity once the Orissa plant is set up fully.

[Operator]

As there are no further questions, I would like to hand over the conference over to the management for the closing comments. Please go ahead, sir.

[Abhijit Roy, executive]

Thank you. Thank you all for coming and attending to this conference call. Wish you all a very happy Diwali in advance, and a great festive season. Thank you, once again.

[Operator]

Thank you. On behalf of [indiscernible] Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.