Berger Paints India Ltd

NSE:BERGEPAINT

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, welcome to the Q4 and FY '22 Results Conference Call of Berger Paints India Limited, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Saaksha Mantoo Emkay Global Financial Services. Thank you. And over to you Saaksha.

[Saaksha Mantoo, analyst]

Thank you. Good evening everyone. I would like to welcome the management and thank them for this opportunity. We have with us today Mr. Srijit Dasgupta, Director Finance 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 gentleman.

[Srijit Dasgupta, executive]

Thank you Saaksha. Good afternoon ladies and gentlemen, and a very warm welcome to the Q4 FY '22 Earnings Call for Berger Paints India Limited . As usual, I'll commence proceedings with a few preliminary comments about the stand-alone and consolidated quarterly results, and we'll then invite questions from the participants.

On a stand-alone basis, I'll just read out some growth numbers. Total income from operations for the quarter was 7.3%, for the year was 28.6%. PBDIT was 2.8% for the quarter and 8.1% growth for the year. PBT was 0.9% and 7.7% and PAT was 9.7% and 10.1%. I'll talk a little bit about the stand-alone numbers and then go on to the [ consol ] figures.

The stand-alone growth for total income from operations for the quarter at 7.3% certainly looks a little lower than the competition numbers. The only explanation I can offer for this is that there was a significant effect of a one-off project-related business in the base quarter, meaning Q4 FY '21. This is typically a feast and famine type of business. And last year, we did have these numbers, which were there in the quarterly results.

If we exclude this effect, the top line growth for the quarter would have been marginally above 19%. On a 2-year CAGR basis, which is probably a little more relevant because it sort of equalizes the project business effect. The growth would have been 28.1% on a stand-alone basis for the quarter. On a 2-year CAGR for the year would have been about a little less than 17%. There was -- on the margin front, there was a gross margin contraction of around 5.5%. This is, of course, considering only RMC percentage to total income for the quarter of the expense, which would otherwise have been marginally about 3.2%, meaning the contraction if we excluded this one-off project income effect.

Typically such projects include the application charges and margins in the top line as well. So the pure RMC component of such project income is really much lower than the normal RMC percentages. The same effect is also observed in other expenses. I think a couple of quarters back, I did speak about the effect of project income and project business on both top line and overheads. So just to explain, once again, these other expenses have reduced significantly over Q4 FY '21 as a percentage to total income by approximately 5% mainly on account of this effect, meaning if we excluded the applicator charges and margins from other expenses, then the decrease over Q4 FY '21 as a percentage to sales would have been only about 0.7% as against the 5% drop that you currently see. Of course, my remarks are limited to the quarter.

The quarter was also affected by continuing raw material price increases, which were only partially offset by the effect of price increases up to December 2021. The gross margins were also impacted negatively by the lag effect, of course, compared to decor business of selling price increases versus raw material input costs for industrial business, particularly the automotive business. Compared to the trailing quarter, there was an improvement in gross margins on account of the price increases as well as some lower rebating in the commodity type of products.

Further price increases have been taken from April to June 2022 of approximately 3% of decor business, the impact of which will be felt partially at least in Q1 FY '23 because of the staggered timing of the price increases. In terms of [indiscernible] sales in cities, the highest growth in the quarter was seen in the Tier 1 cities, the larger cities and towns. And this, to some extent, also, hopefully, we will take steps to improve our presence in these towns, but also partially explains the slightly lower growth.

The newer products, including WeatherCoat Long Life Flexo. This is one of our newer products, and we have an advertising campaign planned for this which should be launched fairly quickly did very well as did construction chemicals and of course, the normal slew of advertised products, which include interior paints as well the Silk Glamor range and the Easy Clean range. The initiatives on formulation savings and raw material substitution development, we spoke about this in earlier quarters, continued in this quarter as well and gave us pretty reasonable gains, which helped offset some of the RM price increases.

Coming to the consolidated numbers. Total income from operations for the quarter went up by 8% and for the year by 28.5%. PBDIT went up by 4.3% and 12.6% for the quarter and year. PBT went up by 4.6% and 14.7% and PAT went up by 5.6% and 15.7% for the quarter and year, respectively. Going to the subsidiaries and JVs, which get consolidated in our consol accounts, Bolix S.A., Poland, which is our external insulation business out of Poland, showed a robust top line growth on the back of hugely improved sales in U.K. and France, have spoken about this in earlier quarters, but now the projects are coming good. It's essentially a project-driven business, but we have a number of projects in the back.

The profitability growth was very good, even with some degree of raw material cost input pressure. BJN-Nepal had a modest top line growth in the quarter, mainly on account of heavy rainfall and some impact of the third wave of COVID leading to some loss of business days. We expect to be able to make this up in subsequent quarters. BPIL Russia, it's a small operation, but had a strong top line growth leading to an improvement in gross margin contribution, significant one, though the mark-to-market ForEx losses versus 31st December 2021 position of the ruble led to a net loss for the quarter. It may be noted that the ruble has since appreciated versus the USD and the sanction imposed exit of MNC paint players in Russia have resulted in increased demand from local players, which include BPIL. So significant opportunity, I think, in Russia coming out of the sanctions imposed by the Western countries.

The 2 JVs have also shown an improved top line growth. These are the JVs with Nippon Paints. So Berger Nippon Paints, Automotive Coatings that's BNPAC. And of course, Berger Becker in the field of coil coatings, it had improved top line growth for the quarter and consequently, improvement of the profitability numbers. This pretty much includes my summary for the Q4 performance. I now invite questions from the participants in the -- on the results of the quarter. Thank you.

[Operator]

[Operator Instructions] First question is from the line of Shirish Pardeshi from Centrum Capital.

[Shirish Pardeshi, analyst]

How are you sir, good?

[Srijit Dasgupta, executive]

I'm good. Go ahead, Shirish.

[Shirish Pardeshi, analyst]

Just 2 questions. Could you comment something on the volume growth for the quarter and full year, if you have the numbers handy? And in the given context, I think this decorative paint is seeing a lot of competition, and there are a lot of new items which are taking it's toll. So would you comment in the short term, how one should look at in the industry? What is the direction it's going to head for?

[Srijit Dasgupta, executive]

Okay. Two quite different questions. So let me deal with the volume question first. The quarter was pretty much flat in terms of volume, but that's why I explained that we had this one-off project business in the quarter. So maybe that's not a right way to see the numbers. Probably more useful to see the numbers on a full year basis, where approximate growth for the quarter -- for the year in terms of volume is a well little below 20%. So that's how the volume panned out. Obviously, there was a significant impact of price increases in the year and definitely in the quarter, more so in the quarter. So that explains, to some extent, the difference in the performance of the quarter and for the year.

Regarding the comments, and I don't think I can react. It is really for the markets to absorb this and respond. But all we can say is that we have our own plans, our own strategies, our own plans for additional capacity. And of course, we will build on our strengths, which we see as focus on product attributes and innovation, very strong R&D focus and of course, the network and distribution strengths. We are also looking clearly at alternative distribution channels, including digital. So this is really our response. Early days yet. Let's see how things pan out.

[Shirish Pardeshi, analyst]

Okay. That's really helpful. My second and last question on the price increases. You did mention, and it was very helpful that you have taken about 1% in April and May, and you're affecting another 1.2%. So effective 2.2% price increases, which is gone in quarter 1. So I just wanted to understand on a sequential basis versus quarter 4, what is the inflation we have seen as of today?

[Srijit Dasgupta, executive]

Still, we haven't finished the quarter, and I really can't comment in great detail about the quarter. It's outside the scope. But just to give you an indication, some of the raw materials have cooled off a little bit, and I'm talking of oils and talking of rutile, but of course, the solvent prices continue to increase, and that's something that has to be provided for in terms of either change of mix or an improvement in the pricing. So there is perhaps if things remain as they are, there is perhaps a case for a marginal price increase going forward if we are to come back to earlier margins. But having said that, it's not a million miles away.

[Shirish Pardeshi, analyst]

I got you with that. But while speaking to channel and the [ intermediaries ] we had a very steep round of price increases in FY '22 and the inventory is impacting. So if the pricing is fluid, that will also to somewhat may impact the trade inventory also. So in the context that I'm asking, is this phenomena, according to your lens, will continue for some time? Or we'll have to take it and say that, okay, this is enough?

[Srijit Dasgupta, executive]

I think we saw the worst of it. This is purely a sort of opinion. I think we saw the worst of it in terms of the inventory effect at the dealers and playing out in Q4. So because there was -- as you saw a very, very high round of price increases in November and December. So a little bit of building up inventory happened and that probably affected the quantum of -- at least volume-wise, the quantum of sales in Q4. So I think the worst is over. And if April and May are anything to go by, we are quite optimistic.

[Operator]

[Operator Instructions] The next question is from the line of Avi Mehta from Macquarie.

[Avi Mehta, analyst]

I actually wanted to just understand the demand environment a bit. Have you seen any impact on volume growth coming through after these sharp price increases? Is that part of the reason why we are being a little more cautious for the next round? Or I mean, any sense on that, please? Because overall, there is inflation across the board. Are we seeing some impact on the incremental customer there.

[Srijit Dasgupta, executive]

Actually not, Avi. So we -- as I was just mentioning, April and May have been very encouraging, even with the smaller price increases in April and May. So we are hopeful that the worst is over in terms of the effect of the very high price increases last year and that the demand will now continue to unfold.

[Avi Mehta, analyst]

Got it. Got it. Perfect. And the second is essentially on the industrial. I'm sorry if I missed the earlier part of this -- so I'm sorry if there's a repeat, but if you could give me a sense on how that business is kind of panning out, we were kind of highlighting that some of the price increases are coming through last quarter. So has that happened? Are we in a comfortable state now? While there is a lead lag that does happen. Now going forward, has most of that inflation also passed on? That's all.

[Srijit Dasgupta, executive]

Okay. I'll restrict my comments essentially to what happens in Q4 and maybe just a bit about what we can expect in Q1 but not a whole lot, as you can imagine. In Q4, as I mentioned, the automotive business prices, and we do a lot of two-wheeler business. And this kind of definitely lagged behind our raw material price input cost increases. And that typically happens while negotiating pricing with large OEMs but we have taken 2 rounds, which were completed by, I think, March of 2022, 2 rounds of price increases and another third round to follow the effect of which should be felt at least partially in Q1 of FY '23. And this is automotive business.

Similarly, we've also kind of been a little picky and choosy in terms of selling in our powders business, which is also very sensitive to raw material price increases. But good to kind of let everyone know that our -- we protected our margins and the cost of a little shallower growth rates in powders. Our Protective Coatings business and the General Industrial business were quicker to bounce back in terms of the price increase securing exercise. So if this helps you, we then give you some color of what to expect in Q1 as well.

[Avi Mehta, analyst]

That's perfect, sir. Sir, just on this follow-up on the powder coating business, is that selective price hike also because the competitive intensity there has not -- has been a little high? Or if you could just kind of elaborate on that part as well.

[Srijit Dasgupta, executive]

It's just that we kind of not sold at those low margins as a matter of policy. And therefore, the top line suffered a little bit, but I think it was necessary, at least the strategy internally was that we must protect the margins. and sort of improve the quality of the business overall, and this is a very good opportunity to do it, basically tell customers I'm sorry, if you don't increase prices, we can't sell. It works partially up to a point, but that's what we did.

[Operator]

[Operator Instructions] The next question is from the line of Nitin Jain from Fairview.

[Unknown Analyst]

So I just wanted to understand the one-offs that happened this quarter. So if you can just elaborate a little more on that?

[Srijit Dasgupta, executive]

Yes. Okay, Nitin, I'll go ahead. As I mentioned, these project-related business in institutional decorative, particularly, happens in a sort of sporadic manner, meaning one in a particular year, one could have a very good project, a large project which is being secured and serviced. And a similar project may not emerge in the following year. This is what pretty much happened in our case. So I think it was important to point out that the core business grew at a very healthy pace, probably pretty much at the pace of marginally below the market leader.

But because of this effect of one-off project sales or other project business, the quarter numbers look a little -- growth numbers look a little less impressive. Of course, business includes project and dealer or retail business, and that's why I made to offer the comment that maybe on a 2-year CAGR basis for the full year, for example, the growth rates are not so bad and look reasonably good, I think, at around 17% for a 2-year CAGR growth rate. And I'm talking about, of course, the stand-alone business. So that was the comment relating to project one-off income.

[Operator]

[Operator Instructions] The next question is from the line of Amit Sachdeva from HSBC.

[Amit Sachdeva, analyst]

Sorry. I'm sorry I joined late, and my apologies if this question has already been asked, but my question is on the competitive scenario that you envisioned for the industry in future given that we have seen cement players make announcements of their CapEx. And I'm sure this has been asked several times of you, but I just wanted to have your views around three things.

One, even if there is theoretically large capital being deployed, what is the lead time to build capacity that can happen? And would it create excess capacity situation in the industry, given the volume growth is there where the volume growth is, but if so many players trying to build capacity, would that mean the long run excess capacity, hence prospect of price war enhance margins? And how do industry participants decipher this? And do you worry about it that pricing environment can deteriorate over time or there is no pushing the pricing environment? There's enough scope for everybody to survive. There are all kinds of conjecture we can make at this point, but as an industry participant, when new people make an announcement or entry? How do you react? And could you give us your comprehensive views around this so that we all can sort of document it in our way?

[Srijit Dasgupta, executive]

Yes. Thanks, Amit. But obviously, some of the response strategy-wise, we can't spell out in great detail for obvious reasons, I mean, we don't obviously want the entering company to be listening to us, but just generally, I think, and this is what I covered in my earlier comments as a response to the question from someone else. It's very important, I think, to build on our core strengths. As you can see, we have done reasonably well over the last 10 years or so in terms of improving our market share or improving our brand equity and our pricing and our margins.

I think that's there for everybody to see. And the reasons for that were very, very conventional and very obvious kind of reasons. We had focused on product innovation, concentrated on introducing products that would have been of interest to the consumer, the painter and the dealer and focus on the branding of these products. We've built some very large brands in the last 3 or 4 years and more to come. I spoke about WeatherCoat Long Life Flexo the new product on the block.

And we sort of focused on the distribution and network strength as well. So in terms of adding machines, for example, or tinting machines, tinting systems. We've been probably adding machines to our core bank of machines by about 14% to 15% every year and plans to grow this percentage in future and concentrate on all alternative channels, including hardware.

Look at backward integration, look at and we now make our own emulsions, our own colorants. These are incremental gains, which have improved our gross margins and we made service and distribution that much more efficient. I think this is what we've concentrated on. So basically, stick to the knitting. Of course, there would be some disruption if some market for centers and drops prices. But typically, certainly as the value-added part of the paint spectrum, price is not really the deciding factor. Essentially, it's quality, service, reputation, brand. So of course, we are concerned, but not perhaps unduly worried.

[Amit Sachdeva, analyst]

Sure. That's very, very helpful. My only worry was that typically, what I have observed over a period of time over the industry in the long run, eventually, somewhere excess capacity gets created that just invariably triggers price or even though theoretically during the growing industry, there is no reason for a low-margin industry to have a price war. But at the moment, there is an excess capacity in some regions, it invariably distorts pricing. That's what my biggest worry is, but I definitely wanted to probably ask you that if somebody theoretically is endeavoring to build that plant, what could be the lead time to build such a capacity? One can make, given your experience, can it take 5 years, 6 years, 7 years to build like equivalent capacity such as yours or it could be [ lengthier ]?

[Srijit Dasgupta, executive]

I think the company that you're referring to has stated that over a period of time, they'll build 5 or 6 factories. Given the complexity and the labor that it takes to design and erect the factory, it's unlikely that you're going to be able to do it in 1 year, 1.5 years, even with the best resources. But we'll have to see how it goes, unless somebody is prepared to add capacity and leave a lot of it idle because you can't build the numbers that they are talking about and expect to sell all of it on the first day, that's difficult to do. But yes, the prospect of a price war may emerge, particularly in the commodity or mass market end of the products.

[Operator]

[Operator Instructions] as there are no further questions from the participants, I now hand the conference over to the management for closing comments.

[Srijit Dasgupta, executive]

Thank you. Thank you for your participation, everybody. It's been quite insightful. The questions that you have kind of offered to us. Hopefully, as we have explained, if April and May are anything to go by, I think we are looking at demand unfolding in the coming quarters and so. And with -- I mean, certain measures, which have already been taken by central banks and government, we can see inflation to smooth down a bit going forward. And we look forward at better times and to come out with hopefully, better numbers with -- in the coming quarters to you. Thank you.

[Operator]

On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.