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Kansai Nerolac Paints Ltd
Earnings Call Analysis
Q1-2025 Analysis
Kansai Nerolac Paints Ltd
In the first quarter of FY '25, Kansai Nerolac Paints reported a slight decline in revenue, down approximately 1%. Despite this, the company successfully expanded its gross margin by 170 basis points to 37%. This improvement showcases the effectiveness of their cost-saving measures and a positive shift in the product mix, which has led to an increase in premium product sales.
The automotive coatings segment experienced robust demand, particularly for two-wheelers, which have shown a strong recovery over the past quarters. While automotive coatings remain a stronghold, the non-auto Performance Coating segment suffered from subdued demand due to political elections but is expected to rebound as infrastructure spending gains momentum. Despite challenges in the decorative division from adverse weather conditions, there was notable growth in new business areas, including premium wood finishes and construction chemicals.
Looking ahead, the management expects an overall gradual improvement in demand driven by typical seasonal factors and improved economic conditions. For the full year, they anticipate a high single-digit volume growth for the decorative segment as consumption patterns stabilize post-election. Similarly, they project the automotive segment to maintain production growth around 6% to 7% annually, supported by government infrastructure projects.
Kansai Nerolac is increasingly focusing on premium product offerings, which have shown to grow faster than the overall market, even amidst a backdrop of muted demand for traditional products. The company aims for high double-digit growth in project sales, currently a smaller portion of their business but one they plan to expand. Moreover, innovation in automotive coatings also positions the company well for future market share growth.
Despite competitive pressures, Kansai Nerolac strives to sustain double-digit margins in both decorative and industrial segments. The company has noted that cost inputs remain stable and are managing potential raw material inflation through strategic pricing and enhanced product offering. This is critical as they navigate increased competition from new entrants to the market, like Grasim, which could influence pricing strategies.
For investors, Kansai Nerolac presents a story of resilience. The ability to manage margins while navigating a challenging environment is commendable. The forward-looking initiatives in premium products and project sales growth promise potential upside. However, investors should remain vigilant about external factors that might affect demand and pricing strategies moving forward. Overall, the outlook balances cautious optimism, particularly with anticipated improvements in the auto and infrastructure segments.
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Ladies and gentlemen, good day, and welcome to Kansai Nerolac Paints Q1 FY '25 conference call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.
On behalf of ICICI Securities, we welcome you all to Q1 FY '25 results conference call of Kansai Nerolac Paints. We have with us today senior management represented by Mr. Anuj Jain, Managing Director; Mr. Prashant Pai, Director, Finance; and Mr. Jason Gonsalves, Director of Corporate Planning, IT and Materials.
Now I hand over the call to the management for initial comments on the quarterly performance, and then we will open the floor for question-and-answer session. Thanks, and over to you, sir.
Thank you, Aniruddha. Good morning, everyone, and greetings to all of you. Grateful, as usual, for your continued support and participation in such calls. Thanks for joining this call of Kansai Nerolac for quarter 1 financial year '24, '25.
For the quarter, as you would have seen in the results, the top line is down by approximately 1% and gross margin expanded by around 1.7%, 170 basis points. And profit before tax is up by 6.2%. If you look at the segments. In Industrial, there was a good demand in automotive coatings, especially the passenger vehicle witnessed decent demand. And two-wheeler actually witnessed a strong growth. The last few years, two-wheeler was not doing so well. But from last year, third quarter, two-wheeler picked up and that trend continued.
The Performance Coating, which is a non-auto segment, which is dependent on infrastructure growth, witnessed subdued demand due to elections in this quarter, but picked up in June '24. In Decorative, overall demand was muted due to unprecedented heat wave and elections. However, during the quarter, new business, which includes premium wood finishes, construction chemicals, waterproofing, witnessed strong growth. Also project sale, institutional sales, which is one area under our strategy where we are focused, also witnessed good demand growth.
Despite the muted demand, the premium saliency has increased, which is also reflecting in our gross margin part of it, reflecting our gross margin expansion. If you look at urban market and rural, urban market is still doing better. Rural, there are green shoots; quarter-on-quarter basis, some improvement, but still rural is behind urban.
During the quarter, we started seeing raw material prices trend going up in some of the key raw material categories. But I think during the quarter, we were able to manage it judiciously through product mix, marginal advantage of inventory, and the cost-saving initiatives. If we talk about some of the initiatives related to Industrial business, specifically in the automotive, our approach continues to focus on some of the unique high-end technology solutions, which is in line with our strategy of launching sustainable products to reduce resource use and carbon emissions, because that is also one of the requirement of our marquee customers.
New technology customer base has been expanded and the new products have been deployed at more number of customers. So the highlights are like low bake epoxy CED is introduced at more number of customers. This really helps in terms of bringing down the baking schedule, the temperature, and therefore indirectly helps in energy saving and the emission savings, so cost and emission environment, both.
Under technology, sustainable low flash off, which is a single stage compact 3 coat, 1 bake roof system also implemented in some more customers. And this also will help reducing the painting cycle at the customer end and therefore increasing the productivity and saving energy and the emissions.
Direct to metal coat monocoat was again introduced in some of our customers. And this also is a monocoat system. Traditionally, there are 2 coat system or 3 coat system. It's a monocoat system, again, helpful to increase the productivity. Then there are some more technologies in the area of low bake and emission free, including tin-free CED, which is high solid and it's devoid of heavy metals. We have launched it sometime in the last year, but now we have started expanding it to more number of customers. Some new segments which were introduced, which we have been speaking about, which includes seam sealer, underbody, and alloy wheels. There continuously, quarter-on-quarter, we are seeing a good traction and the salience to business is going up.
Electrical vehicles, which has been a focus area from the government also in the auto industry, the penetration in four-wheeler of electrical vehicle as of now is low, it is 2%. So maybe from last year or last 2 years, it has gone up from 1% to 2%. In two-wheeler, now is around 7%. And in three-wheeler, it is more than 50%. And in this EV emerging trend also, our market share is in line with the overall market share what we have in auto. Because this is a future trend, so we are conscious of ensuring that our market share is also high in this segment.
Coming to the other part of Industrial, which is Auto Refinish, after-finish market. There, in terms of our strategy, we are focusing on adding more and more number of A-class body shops to basically consume more premium, high-end PU polyurethane coating, and that's what we are doing. So we have further expanded A-class body shops and our salience of this premium polyurethane coating within Auto Refinish has gone up significantly.
In Performance Coating, which is mix of liquid and powder. So one of the focus area was also to concentrate on high-tech premium items, which include like bridges, wind mills, appliances, construction equipment, helmets. And there, again, our saliency last year also has gone up in the first quarter also, the premium saliency has gone up. In powder coating, premium items include rebar, pipe coating, alloy wheels, construction equipment, which is upcoming trend, and these are like the growth drivers for the future also.
Coming to some of the highlights in Decorative. So one, we have been discussing about the Paint+, which is our range of products which are different or has a democratic nature. So we have introduced more number of products and resiliency of Paint+ product is continuously going up. In this quarter also, it has gone up. Paint+ also helps the premiumization. And even in this quarter, the saliency of premium range of products has gone up if I compare with the last year.
Some new products we have introduced in the market. So one is the texture range, designs. These are very, very niche, unique premium designs, which give you different kind of textures and designs on the wall, which comes from Japanese culture or Italian culture. So this is one range of products which we've introduced. We have introduced one new product, Excel No Dust. That's a long-lasting paint with excellent dust pickup resistance. We've also introduced Wow White. So Wow White is a range of whites, which are introduced in some of our products. So they are in the premium category or popular category. And it has very good whiteness and higher coverage, almost 15% higher coverage if we compare with any of the products which are available in the market.
In construction chemicals, we have introduced membrane. That's a new introduction what we have done. And in wood finishes, two-component polyurethane, one-component polyurethane, some of these products we have introduced. There are some more introductions in the wood finish range which has happened in the first quarter. So a lot of products we have introduced. And the contribution of this new product is higher, more than 10%, more than double digit, and in the pipeline, we have more number of products.
This Paint+ or the products that we are launching, the challenge is always that how do you explain to the relevant people. So we do connect with the architect/interior decorator where we explain about the features of this product. But in the last quarter, we have initiated one more platform, which is Master Class. So it's basically a platform for dealers and distributors and the influencers. So we invite dealers and we do a class where we demonstrate how these products are different. What are the features of these products, what are the benefits of these products. So we are trying to educate the dealers and painters or contractors through the Master Class. And every time we take 1 or 2 products and we are doing multiple classes to educate the people about the differentiation of these products.
In this process, we also introduced one more initiative, which is Nerolac Knows. So for the customer today, it is very difficult to decide the right product based on his requirement, the property, the surface, the problem, and the special features. So you can visit our website and you can see the column Nerolac Knows, where it's very easy to navigate. If you try to put your requirements there that what is your need and requirement, problem, solution, and you can navigate through this process and see that how the recommendation of the product comes in. So this is in the area of Paint+, what initiatives we have taken.
In the area of influencer program and services, we have been talking about the paint as a service and architect/interior decorator through digital and through separate feet on street we have been approaching them. So continuously, our service business is going up. And I can say that now it has stabilized, and all the actions which were to be implemented are implemented and are stabilized. And therefore, now we are scaling up in terms of generating more leads and more businesses.
In AID also, the number of architects are continuously going up. So every quarter we are able to increase our number of architects who are participating. And generally, we get good contribution of premium business, whatever business comes through the lead from the architects. We have also started taking testimonials and these testimonials are put on the digital platform, where the architects are talking about using our products, Paint+ products, and the benefit what they are getting. We are also providing need-based on-site support to the architects. So this is in the area of architects.
In retail, earlier we spoke about our NextGen Shoppee, which is the kind of experience model which has been implemented at the dealer's end. So by end of June, we crossed about 100 dealers where this Shoppee is already installed. There is a smaller version of the Shoppee, which is called Shop in Shop. There also more than 100 counters we have installed. And both these, Shoppee and Shop in Shop includes innovative mix, we call it mix sensor, but it is ultimately artificial intelligence-based color recommendation device, where, in fact, the customer can interact and the system can recommend the colors. So this is a part of this retail experience.
In new businesses, the growth is strong and continuously our saliency is going up. Similarly, in the project business, we are almost there in 78, 79 towns now. And there also, the growth is good and saliency is continuously going up.
In terms of our visibility, in fact, last year, we increased our marketing budget. And in terms of absolute, we are maintaining a similar kind of thing. Rural and urban, I mentioned that the urban is still doing better, but rural we are seeing some kind of catching up.
In terms of capacity, our capacity expansion project in Visakhapatnam and Jainpur, we are on track, and we are adding the capacity in water base, which is more than 30%. Overall deco addition is also in that particular vein. So most of this capacity addition is happening in the area of Decorative, because Industrial, we already expanded our capacity, and today we have additional capacity available to cater the requirement of the customers. Overall capacity utilization in the quarter 1 is around 60%.
In terms of ESG, in the last 2 years, we have been recognized by CRISIL and the different agencies. One more, Morningstar Sustainalytics is one of the leading ESG research, ratings and data firm that supports investors around the world with the development and implementation of responsible investment strategies. We participated in that, and we are ranked 16 amongst 577 companies in the chemical sector. So this is our ranking, which is a good ranking and which is one of the better ranking if you look at within the industry. And also in terms of the risk rating for ESG. So we have been rated in the low and is again better than the industry standard. We continue to be water positive. We became water positive last year. So we'll continue to do that. And in addition, we have identified the climate change risk from the TCFD framework and mapping actions in place to mitigate the implications.
In terms of our digital initiatives, a lot of our Decorative influencer programs or architect programs, all are completely digital, end-to-end digital. There's no manual intervention there. And many more digital initiatives we have taken, including migration of CRM, S/4HANA and RISE is the most advanced platform which we are going to transit to. And Concur, which is for expense management and basically bringing more efficiency in our cost management. These initiatives are expected to help provide operational agility and efficiency. So that's the advantage which we are anticipating from some of these initiatives.
Overall outlook. The monsoon is expected to be good and we hope that the Decorative demand will see the improvement. And given the continued thrust on infrastructure growth and the new projects and order pipeline, we believe the demand for Performance Coating would be strong. Also, it goes with our initiatives and the work that we were doing for the last 1 year or 2 years.
So this is the small commentary on what we have seen in the first quarter, and you can open the floor for the questions now.
[Operator Instructions] Our first question is from the line of Abneesh Roy from Nuvama.
I have 3 questions. My first question is on the competitive intensity. So any pushback you are seeing from your painters, architects or dealers in terms of any more demands or any shift from you to the new player, Birla Opus. And because they are offering, say, 1-year extra warranty or 10% extra grammage, or digitally connected tinting machine, what will be your specific response to these 3? Why I'm asking this is market leader in the media interview said that the initial response to the launch by the new player seems to be underwhelming. So what will be your take on that in your markets? These 3 will be helpful.
I think earlier also we have been talking about it, because there cannot be an overnight solution to these things. It takes time. So I think I've been maintaining this statement that this industry is a good size and we welcome any new competitor to this industry. But the progress cannot be very fast. It can be slow. So I think they have already rolled out in the market all the initiatives. And we expect it to take time. So I think it's early to talk about it.
As of now, you can say that there's not much impact on the existing players. But I think it takes time. So it's not I'm undermining any efforts. So it takes time. It's a gradual process that where you connect with the consumers through the advertising, you connect with the painters and dealers, you have to demonstrate your product. So we still believe that it's a gradual process, it takes time. It will take its own time. These are good companies who have entered and they have entered with some of their commitment. But I think the market is such that it will take time.
And extra warranty and grammage, no change from you or the legacy players, right, till now?
Extra warranty. In some of the products, we already have extra warranty. So that is not...
4 years.
Yes. Some of the products we have. And as I said, some of the new products which we have introduced, these products are there with the extra warranty. And in terms of tinting machine also, in fact, because direct linkage ultimately means that all the formulations, what is there in the system, need to be updated timely. So we have a strong system that whenever the new products we are adding or the new shades we are adding, those recipes are entered in the system effectively. So that's also very much in place. No problems related to that.
The extra material, as of now, not much feedback or pushback from the market, because, again, it's a matter of whether the customer knows about it. Secondly, if the customer requirement is specific, then whether he needs the extra quantity. So as of now, the pushback from the market is not there.
And the digitally connected tinting machine, do we need that? Does it really add value?
As I said, that the only requirement of that digital connection is that whenever you put new formulations or new products or new recipes, so you can do it fast. So we already have a system in place where we are able to implement changes in the recipes instantly. So there's no gap related to it.
Understood. My second question is on the interesting thing you said on the EVs. You have a very strong market share in the auto paints, historically, because of your strong relationship with the Japanese auto players. But in two- and three-wheelers in the EVs, many new start-ups have come. And you said that the market share here is very similar to your overall auto market share. So how you are able to manage this, because these are start-ups, and these are new companies. So is it product superiority? Is it the kind of track record you have? What's really helping there, if you could tell us?
So in this Industrial, apart from the relationship with the Japanese customer, what is more important is the technology. And more important is the implementation of the technology at the line of the customer. So I think there we have a clear moat and clear unique advantage of our understanding of the customer lines and what can work on the customer line. So it's a mixture of technology, the implementation at the customer line, and entire supply chain, because all these new players who are coming up are estimating the market demand, what shade will move. And it's very kind of volatile. So we have that capability of supply chain and also backed with the multiple plants. Otherwise, in most of the cases, there is one source of supplies, but we have multiple sources of supplies. And the combination of all these things really help us to get this business.
And EV is an emerging trend. So any emerging trend in the Industrial area, because that is our forte, we are very conscious that even if the market is small today, but we participate aggressively in that, so that whenever this market emerges, that we are at advantage.
My third and last question would be on the rural demand. So if I see some of the FMCG companies in Q1, already rural is faster than urban. And same is true for the Nielsen FMCG data. So here question is, have you seen, in historical time period, any kind of correlation between your rural versus urban versus FMCG? And second related question is market leader has come out with Virat Kohli as the brand ambassador for their Neo Latex. Obviously, that's at the lower end. So would you also need such a product at such pricing for the urban and rural lower end? Is that needed for you?
So first question was? Before Virat Kohli, what was it, Abneesh?
So rural demand you think should also start inching up versus urban for you also with some lag, because FMCG is already there.
So like in our case, in Industrial, we see the trend in two-wheelers. And there already the trend is seen in terms of pick-up. But in Decorative, as of now, in our case, it is still lagging behind if you compare with the urban. But if I compare or if I see the trend of last 2, 3 quarters, it is inching up. So it is definitely giving the direction that in the coming quarters, maybe rural will do better. And our contribution, if you compare with the industry, our contribution from the rural is better. So when the rural starts contributing, I think that advantage also we should get.
And this new product that you're talking about, yes, it's interior and exterior, there's a new product which is introduced. And so it happens in the industry. I think it's a good -- so sometimes a new product comes in and if it goes with the market requirement and the consumer insight. So we are also ready with -- the interior product, it's already tested in the market.
Our next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.
Sir, first question is on the demand for the decorative paint. So you mentioned 2 reasons for slower demand in Q1. Now most of them behind, like heat waves or election. If you can just talk about how our exit was or how Q2 is going as of now? That is first question.
Second is if you can just throw some more light on the Industrial, both auto and non-auto? In the backdrop of auto volumes and the infra spend, should we assume in both those subsegments high single-digit to low double-digit kind of growth?
So Q1 was affected by election and these are some of the reasons. But I think if you compare Decorative, even last year if you see, the growth of the industry, the paint market was in line with the consumption growth. So I think across FMCG or other sectors, the consumption had some stress. So I think the improvement will definitely happen. It will be a gradual improvement. For the year, as we said earlier, maybe a single high digit volume growth is definitely looking possible, and there would be a gap between value and volume. So if we go back in earlier years, where the growth used to be double-digit kind of thing, value, volume, that may not be there. But I think now onwards, definitely, the demand will pick up. And I expect that the second half would be better. Because even in the first quarter, the number of marriages were also less, and whatever we keep reading now, July onward or second quarter onward, even that season is looking nice. So this is about Decorative.
In industrial, auto, I think at the start of the year, we estimated that the production growth of the auto manufacturers would be in the range of 6%, 7%. So I think that is maintained. There may be some differences on a quarter basis here or there. But I think annual this number is probably intact and in line with the projection. In the Performance Coating, the non-auto, I think the outlook is better. So maybe last quarter was not so good because of the CapEx movement or election definitely got impacted. We have already seen that this situation has changed in the month of June. And based on the new projects which are there in pipeline, also the order pipeline, I believe that, that trend would be strong.
Noted. Just one question. You talked about some innovations in the Industrial paints, both auto and non-auto. Just want to understand that those innovations which eventually help client in some kind of savings or efficiency, how is it visible in our financial statements. Any measurable parameter, whether in terms of, I mean, higher wallet share or higher margins or any other parameter? So how do we track our benefit because of those innovations?
One is that continuous innovation helps us to maintain our market share or to grow our market share. So that is very important. Second, obviously, when we come up with this technology, part of it definitely gets reflected in the margins. So margins, then you can say premiumization, the story what I was talking about, so these are the 3 things, which really help you to maintain your market share or grow market share. It helps you to increase your margin. And also, it helps in premiumization, which is also linked to the margins.
So one more point to that. Generally, in auto customers, there is a trend of these guys almost ask for price reductions, right? So when a product is introduced, over a period, the price goes down. But when you keep on innovating newer products, you can command a better price and you are able to protect your margins. So that is our strategy going for all these years, which has helped us to maintain our margins.
Our next question is from the line of Mihir Shah from Nomura.
Sir, this is Mihir from Nomura. So firstly, congrats on good margin management versus what we have seen with the market leader. I wanted to check with you, would it be fair to assume that all the low-cost inventory that you had would have been exhausted. And given the raw material prices are going up, the margin pressure, would it be visible from 2Q onwards on margins getting contracted? I know you've taken 2% price increases, but would it be sufficient? Or would that impact margins from 2Q onwards?
Mihir, I think the advantage was marginal. And I think in the Q2, as you rightly said that we have taken a price increase, and one price increase is already done, and there is another price increase which is in pipeline. So I think as of now, whatever trend is there, we should be able to offset that. And if there is a further inflation, then we may have to think about it. But I think whatever visibility is there as of now, that price increase is decided. In fact, there are some of the products which are in the Paint+ range, we have taken extra price increase.
Understood. Sir, how about price hikes in the auto and non-auto Industrial part of the business? Is that also needed? And have you been able to push any of them?
Mihir, the auto, generally what we do is that whenever we see the stability. So if you remember that the last 1 year, there has been a deflationary trend, but still the situation has been volatile in terms of geopolitical situation, crude prices, the currency, and therefore, there was a pressure in terms of reduction to the prices. So we were not very clear about that how the trend is going to set. So I think the initiative was more in terms of holding the price reductions or not going for that kind of price reduction, so that if this inflation happens, we are -- because in the auto, now we have been talking about it, it's always taken a lag. So I think it was in that direction that till the time the stability does not come in, don't get into price reductions and all this thing, and that is how we are trying to manage it.
Got it. Sir, secondly, I wanted to check with you on the seasonality of sales. We've done close to about INR 2,100-odd crores of sales in June. Would the coming quarters have more slower or more seasonality that will impact for you to sustain this kind of number? Or do you think that you can achieve this or sales around this number basically?
If you're talking about the absolute number, generally, in our case, the first quarter and the third quarter absolute numbers are higher. And one of the main reason is that in this quarter, the contribution of Decorative business is higher. So because we have a different mix. So second quarter and fourth quarter, the more contribution comes from the Industrial business. And first quarter and third quarter, more contribution come from Decorative business. So these 3 quarters, you'll see a higher number. And generally, second quarter and fourth quarter absolute numbers are lower.
Yes. No, it was just an extension to what Keyur had also asked, because when we are modeling, we are thinking that you can at least do high single to double digit for the remaining part of the year now. So we wanted to understand, is there a risk to that assumption, because you've been very guarded in your commentary also.
So you are talking about the growth?
Yes.
Talking about growth, I think, as I said that growth in the coming quarters in Decorative will improve; and Performance Coating, we are expecting a better demand. So overall, you can see then better growth.
Got it, sir. Sir, my last bookkeeping question is on employee cost. Wanted to check the increase is more than average. What is driving this? And will this be the new cost level, or any adjustment that needs to be done on this employee cost line item?
One element is this RSUs, which we have given to our select talent pool. And with the help of that, the attrition in the talent pool is very, very low. I think we are able to hold that strategic intent and the people. So that's one area of the cost. The other area is of the initiatives what we have mentioned in the area of Performance Coating division and the Decorative, there, we have added manpower.
Our next question is from the line of Percy from IIFL.
Sir, I just wanted to understand the gross margin expansion a little better. Is it primarily coming from the Decorative segment or the Industrial segment?
It is a mix of both. I think our mix has improved in Decorative and Industrial also, and some of the cost-saving measures that we have taken. So it is quite a balance between both.
Understood. Understood. So roughly, same kind of basis points increase in both of them.
Yes.
Okay. And whatever has led to the gross margin expansion, those factors are sort of here to stay. It is not something reversible or anything like that, right?
Yes. That is what our endeavor is.
Understood. Secondly, just wanted to understand on your EBITDA margins. So on a Y-o-Y basis, the EBITDA margins have been flat this quarter. Should we be looking at similar kind of flat EBITDA margins for the remaining 9 months? The reason why I asked this question is, last year from quarter-to-quarter, your EBITDA margins were very volatile. So just wanted to understand that even in this market when other companies are actually seeing EBITDA margin decline, if you are maintaining a flat level also, it is quite creditable. So is that how we should model it out for the remaining 3 quarters?
I think earlier also we said that -- because generally, as you rightly said, quarter-to-quarter our mix changes, and therefore, you see this volatility. And that's why generally we comment on the annual basis. Annual basis, our target or endeavor is to maintain our margins.
Maintain versus FY '24, right?
Yes.
Our next question is from the line of Lakshmi Narayan from Tunga Investments.
Few things. Sir, we talked about kind of warranty. Just want to understand how many people actually exercise warranty? If you look at either in terms of the liters of paint or in terms of number of customers, 100 people buy the product, how many actually exercise warranty?
Maybe less than 1%, because it's more of kind of verbal assurance. When they go to the counters or dealers, there's a warranty on the product, more of a verbal assurance, but in actuality, very, very less number of people.
Got it. So that means that it's like whether you increase this warranty or not doesn't really make a difference. The second question is that when you actually expand your distribution, do you find it more difficult to expand your distribution than what it was like 2 years back? Or how things have changed in the last 2, 3 years, especially post COVID?
Last 2, 3 years, not much has changed, but I can probably say that when the number of players increase, then the expectation of the dealers obviously change. It's like maybe their expectation goes up to some extent. And therefore, your offerings get tweaked. So maybe, to some extent you can say, your discounts goes up, or to some extent, the packages what you're offering in terms of machine, there the changes happen. So to that extent, there is some change where the expectations of the market is a little higher. So opening is not difficult, but I think more negotiation or more expectation, that's the change.
Can you just quantify it or can you just dwell deeper here?
No, difficult to quantify, but I'm just saying like, traditionally, the industry is placing the machine at the counter, charging some money, giving a target. More number of players are there that the offers are available on a competitive basis, so there people start negotiating. In terms of when you are opening the new counter, you are offering a particular discount, let's say X discount, maybe their expectation goes up. So to that extent, the team has to spend more time to explain the benefits.
So somewhere there could be little implication of the cost, which has already happened in the last 1, 1.5 years. And somewhere it is more time spending to open more number of dealers, and therefore, maybe some requirement of the manpower goes up.
Got it. What is the kind of distribution expansion you plan for the year?
Generally, we target in the range of 8% to 10%.
Got it. And the second question is related to demand of premium, because you mentioned that the premium saliency is strong. What has been the price growth or the volume growth in the premium segment for us?
I'm talking about the saliency which has gone up, so which means that the growth in the premium is, unfortunately, in the first quarter, if you see Decorative, it's a negative, overall growth is negative. But in the premium, that it is not negative. So that's the point. And that's why the saliency has gone up. So premium is doing better.
Like by what percentage, sir? Price volume. Any color, anything you can...
We don't talk about that, but saliency has gone up, so you can say that the trend in our case is that the growth in the premium is better. So generally, let's say, example, that if the market is growing at the rate of 0%, maybe the premium is growing at the rate to 2%, 3%.
Okay. Okay. And you talked about project business. You have already reached around 79 towns or so. What kind of growth on a rolling 12-month basis you are seeing in this segment? And what kind of contribution it makes to your business now?
We are looking at high double-digit growth. Last year also, we achieved this. This year also, we are looking at that. And because the general market, repainting is sluggish, but the project market, the growth is still there, and that's why our saliency is going up. So we are looking at high double-digit growth.
And for you, in terms of the overall Decorative business, how much it would be. You're looking at what, 10% of your Decorative will come from project business or what kind of mix...
As of now, it is lower. You can say, it is higher single digit. As of now, it is lower. But for the industry -- so we are under-indexed on projects, because initially or earlier, our focus was not there. It is only last 1.5, 2 years, we are putting focus on project and now the saliency is going up. As of now, we are under-indexed if we compare with the industry, but our trend is positive. So maybe over a period of time, we'll catch up, we'll get into a double digit. As of now, we are not in double, we are single digit.
My last question is you talked about Performance Coating business. I just wanted to understand how large is the Performance Coating business product and what are the applications we cater to? And what kind of market size it has? And who are the people who actually compete within this segment, which is non-decorative and Performance Coating.
So market size is quite large, actually, and the growth is good. In fact, Performance Coating division, the growth has been higher because of the government focus on the infrastructure. And actually, the market size is now very close to the auto market size. And that's a market where our market share is lower. In Auto, we are a market leader, but there it is lower. I am talking about that relatively. And therefore, for us, the growth prospect is high, and now we foresee a sustainable growth.
Some of this segment, I said, is infrastructure-related, which is bridges and railways. And there are many segments there. If you look at drums and barrels, EV, railways, construction, construction equipment. There are many, many segments there, and glass, electrical. So there, in fact, in some of the areas, foil coatings are there. So some segments are big, some segments are niche, but it makes sense, if there is a niche segment, maybe your volumes are lower, but your margins are better, and that's the technology advantage you have to take. And it's not easy to play in the niche segment, because how do you manage the forecast versus delivery. So that's the capability which we have worked upon.
It also depends on a lot of approvals, which we started almost 1.5 years back. And today, we have a lot of approvals in our hand. So that's what -- I think the market size is quite good and attractive.
And how consolidated is this market, sir? Like who are the large players? Like is it like as consolidated like as Decorative?
There are actually larger number of players in this market. If you compare with Decorative, Decorative there have been traditionally 4 or 5 players. In this market, already 10 players are there, and they have been there for quite long. So who's who of the industry. They are all big names of Indian industry like PPG, Akzo, Hempel, Jotun, Nippon, all are there, and there are many more niche players who are international players, they are available.
Our next question is from the line of Amnish Aggarwal from Prabhudas Lilladher Private Limited.
Congrats on good numbers. I have a couple of questions. First is how should we look at the volume growth in 1Q. So is it, you can say, positive both Decoratives as well as Industrial? So what sort of volume should we, you can say...
It is positive. About mid-single digit is the volume growth.
Overall.
Yes.
Okay. And Decorative is also on the positive side?
Yes, on the positive side. Slightly lower from Industrial, if you compare, but positive side.
On the positive side. Okay. And do you see a possibility that with the now monsoon being normal, are we heading for, say, any probability of double-digit volume growth coming in the coming few quarters?
Difficult to comment, because as I said that last 1 year, we have seen that the Decorative linkage is -- earlier we used to clearly link it with the GDP, but I think in the past, the GDP and the consumption growth used to be very close. But now the GDP growth is good, but consumption growth is lower. And I think paint is a discretionary item. So it is directly proportional to the consumption growth. So high single-digit possibility is there. And I'm not saying every quarter, but I think overall for the year, high single-digit volume growth is possible.
Okay. And sir, my next question is, again, I think a couple of people have also asked earlier, on the margins. Because if we look at, say, first, the gross margin, Q-o-Q, we have shown an expansion, whereas the market leader has shown a decline. So is it purely due to mix? Or is it due to some low-cost inventory, you can say, sitting with us. So how can we explain that? That is one. And secondly, with 37% gross margins, does it mean that in Decoratives, we have gone north of 40% during this quarter?
So margin, I already said that it's a mix of -- the product mix definitely is better, because it is better in Decorative also, it is better in Industrial also. We also have got some advantage of the low-cost inventory. And then there are a lot of cost measurements which we have taken and which have worked for us. So I think that is the story about the margin. What was your second question?
Decorative margins are always higher than Industrial margins.
Okay. And sir, my final bit is on the other expenditure part, because other expenditure has actually gone up by 70 bps. So any big, you can say, spends on advertising or any...
Yes, it is mainly in the area of advertising.
The increase which has happened?
When I say advertising, it is more of a marketing. So some of the initiatives what I mentioned, those are properly supported with the marketing initiatives and these expenses are related to that.
Our next question is from the line of Avi Mehta from Macquarie.
Sir, I understand your comment that it is too early to take a call on Grasim's entry, but wanted to just get a sense versus a few quarters back when there was complete uncertainty around the launch. Now with Grasim actually on the ground, has your confidence or your concern changed?
I think, Avi, this is a validation that what we were saying that this market, difficult to turn it around overnight, it's a gradual process. I think it's a validation, that is getting validated. And if you say the concern was more earlier and concern is less, yes, you can say that we are feeling more confident about our strategy today.
Okay, sir. That's extremely useful. And sir, the second bit was on the competitive situation in the Auto and Performance Coatings. Has that changed? Or if you could just give us an update on how does our market shares stand versus -- if you have any comment over there?
So in auto, in fact, last 2, 3 years, and now also, continuously, we are increasing our market share that is there. And in the Performance Coating division, which is the opportunity area for us. And in the Performance Coating, there are 2 parts, liquid and powder. Powder, we are market leader. And there is a good category growth which is expected in powder also. And in the powder, there's a premium category where we are under-indexed. That's the initiative we have taken. Technologically, we are very strong.
In the liquid, market is very large. Our market share is low. Earlier we used to play in the lower segment, economy segment, where the margins were the issue. Our first target was to come out of those categories and get into the better categories, better product mix, where the margins are also decent. And that bridge we have crossed. Today, in fact our business is -- we have already upgraded the business, and whatever growth we are getting, we are getting at good margins. And that market is good.
So technologically, we are well placed. So I think that we feel competition is there. In fact, in this market, the competition is there for many years. And I think any international player, if you really look at it, he is available in the Indian market. But I think there we have a confidence that over a period of time, we have built the moat and the differentiation in this particular business, and that is helping us to keep us very optimistic.
Perfect, sir. And sir, with your permission, just the last question on the margin front. I mean, you've given us a very clear, how you look at the margins from an FY '25 perspective. Just wanted to check whether would any increase in competitive intensity, say, in the festive period because of the new player entering in, is that something that is already baked into the numbers? And if that doesn't pan out, because as you said even earlier, these things take time, from an industry perspective, it may not be. So would that be an upside risk if what we're assuming kind of pans out? Is that how I should see the margin commentary? Clearly, there has been a...
Whatever is visible as of now. And obviously, as you asked your first question, although visibility is better, so to that extent, it is structured in numbers.
Our next question is from the line of Mrunmayee from ACL.
Sir, I have a couple of questions. Firstly, I think you mentioned that the overall capacity utilization is at 50% and that you have capacity headroom on the Industrial side. So is it possible to quantify what is the utilization of the Decorative and Industrial segment?
No. Generally, most of our plants are common plants. So generally, we look at the utilization at the total level, and total level it is around 60%.
Okay. All right. And on the auto segment, so in the last few years, we have entered like various new segments to increase the addressable market. So is there no scope to increase the TAM in the auto segment? Or will more of the incremental growth come from the non-auto side?
So within auto, from the new segment which I spoke about, seam sealer and alloy wheels, and there are 1 or 2 more segments where we have entered. So there we are getting some uptick. They contribute not very significantly, but even if you get more than 1% or 2%, I think that's good enough. So that's one area within the auto. And the Performance Coating, which is non-auto side, in the liquid area, that's a big market, and there we have a good opportunity, and that is what we are targeting.
Our next question is from the line of Tejash Shah from Avendus Park.
Congrats on good set of numbers. Sir, just wanted to double click on your remarks that we are more confident and optimistic than, let's say, what we were 6 months before on the competitive landscape. Are you more confident that we can protect our share? Or are you confident that growth is enough to accommodate 1 big player? And are we confident that because whatever you spoke so far, it looks like the cost of doing business is actually going up on marketing side, on dealer side? So are you confident on margin as well?
Yes. So generally what happens is that we have taken a route in the strategy, and the confidence always goes up when you see that your strategy is working, the initiatives are working, because the production of market share or growth of market share depends on two parts. One, that whether you're getting to the initiatives, the other sometimes you have to push for the sales. So when your initiatives help, it is good, because that gives you a sustainable thing.
Related to our competition, I definitely feel that in the long run, competition is good for this industry, mainly reason is it will help in terms of increasing the per capita consumption, it will help in terms of faster shift from the informal to the formal. It will also help when you see more visibility. So ultimately, paint is a low-involvement category where the consumer involvement is high only when he does the shade selection. When there's a paint selection, the role of the influencer becomes more important. But we have more number of players, more visibility. There is always a possibility of consumer becoming closer to the category. And that's also a very good sign for the industry that if the consumers become more closer to the industry, then the more premiumization happens, and therefore, it also helps in the margins.
So I think it's a mix of both that the strategy what we have followed. Also, the market size is big that because the players who are entering are very reputed players, and they have a good capacities, they have good capabilities. So when the players are entering, I think we have to accept it that the market is going to have more number of players and the market is big enough to absorb the players. So I think my answer to this in this regard is the mix of both the things.
Sure. And I've long been a bit late, so apologies if I'm asking what you've answered already. But did we take any price hike recently?
Yes, we have taken one price increase already and another price increase is in pipeline, which is already announced in the market.
So sir, just a follow-up question on this. So all the paint players who are listed, they have kind of indicated that they are at the upper end of the margins in FY '24 exit. And to combat the competition, perhaps it's very normal to expect that margins will go down. So how should we see this strategy, because at one level, we are actually increasing consumer price when consumer will get one more option to choose from. So how should we think about where we are at the upper end of the margins, we are increasing prices also, and consumer has one more choice also coming to choose from?
So it depends ultimately how much consumer knows about the price? Is the price the criteria for the consumer? Certainly not. Because today, unfortunately, the consumer is not aware of -- today, even if you want to do painting in your house, I don't think you'll have some figure in your mind. You will have to depend on somebody to guide you. So pricing is not important from the consumer. Maybe at the lower end, it does help, but in the popular range and the premium range, it doesn't matter.
So what is important is that whether your distribution or the dealers are convinced about your product, whether they are ready to put in that extra effort. The painter initiative, the influencer initiative, how much you are in touch with them, and whether they are confident about -- and typically, in this market -- and that's why I say that any change happens gradually, because if you have seen for last many years, the market shares are kind of unchanged, or maybe for some period, the share of some company goes up, in other periods, some other company goes up. So it becomes a habit based industry.
So changing from that habit to something else is a difficult task. So I think you have to choose your areas, you have to choose your niche, you have to choose your regional thing. And there you get a better result. But if you have to go whole, then obviously, it's a costly affair and how much sustainable it is, one has to see.
Our next question is from the line of Nikunj Gala from Sundaram AMC.
I have a question on the Industrial side. Can you just help us with what will be the contribution from Industrial for us say, FY '24? And within Industrial, how big auto will be for us?
On the yearly basis, it is 55:45. 55% comes from Decorative and 45% from Industrial. And within that 45%, approximately 70% would be auto. And this is on an annual basis. Quarter-wise, it changes.
And how this number would have changed over the last 5 years? Because I remember like a few years ago also these numbers were pretty much same.
Yes. So it keeps changing. There were years when 55% went down to 52% to 53%, but then again came back to 55%. So it's in the same range.
Okay, sure. And in auto segment, like you mentioned you are gaining market share, but is it possible to give us some sense on how big is the size and what's our market share in that?
Our market share in auto is close to 60%, 6-0.
Okay, sure. And just lastly, how we should be looking at this segment in the next 5-year period? Like is it still a scope for us to gain more wallet share from the existing OEM or new OEM coming on to the board, or more of a premium offering to the existing OEM? How one should look at the growth trajectory?
Next 5 years, the outlook is good, because, again, the penetration of the passenger vehicle and two-wheeler in India is very low. If you compare with any of the country in the world, it is very, very low. And it is always proportional to the infrastructure growth which is happening in India. So in the past, this was more cyclical that some year it does well, some year it doesn't do well. But that cyclic nature is also becoming low. So therefore, the market is becoming more tactical or more stable, you can say. The technology is emerging and a lot of new technologies are coming up, and we have a pipeline of technology available for next 3 years, 5 years.
So therefore, continuous upgradation and therefore, continuous premiumization also. So for the next 5 years, I do see the volume impact and value impact, positive impact in both the scenarios.
Okay. And how big is the market today, sir, like overall?
Market is overall [indiscernible]. Generally, like India is INR 70,000 crores of industry, out of that 30% is Industrial. So you can say around INR 20,000 crores could be the market size.
Okay. And within that, whatever is our contribution from auto, the same contribution will be at industry level also, right?
No, I'm talking about 30% of the total size is related to Industrial, which includes auto. Our contribution of auto would be higher because...
Our next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.
Just one question on the Industrial side. Have we seen -- I mean, just in case of Asian Paints, after the disclosure, we can see aggressive growth for their industry part of the business. So have we lost any sales either in auto or non-auto industrial, or have we seen cost of doing business going up or competitive intensity going up in that part of the business?
No. In auto, we are increasing our market share. And in the non-auto, as I said earlier also, that we exited some of the business, which is at the lower end. And in the segments where we've decided, there we've started doing well. And the cost of business has not gone up. In fact, we are now playing into the segment which are more technology solution-oriented. And therefore, in fact, in the non-auto business, actually, we have improved our margins. Earlier, we used to work on very, very low margins. I think last 1.5 year, we worked on it. And we are working on decent margins now.
Okay. Just last one follow-up. So probably back-end calculation suggests that, as you mentioned, margins had gone down in the Industrial part of the business. And probably we were at much higher levels in FY '17, '18, '19 level -- FY '17, '18. Where we would be in terms of, say, profitability in terms of Industrial paints from our earlier highs, if you can just give any qualitative or quantitative idea on the margins of the Industrial business?
Industrial margins generally have been volatile. So if you say '17, '18, maybe there could be one small period where the margins are higher. I think generally, the B2B business, which is more volume kind of thing. I think what is good for us is sustaining double-digit margin. That is how we look at it.
So right now, EBITDA level, the margins would be in double digits?
Yes.
In the Industrial business?
Yes.
And based on your commentary, with the input mix, probably that should continue to be the case going forward as well?
That is what our endeavor is.
Ladies and gentlemen, that was the last question for the day. I now hand the conference over to the management for closing comments.
Thank you, everyone, for participating. And as usual, your questions always help us, we get some insights. Thanks for supporting and thanks for joining this call today. And as we discussed about that the first quarter was muted, but with this monsoon, we expect gradual improvement, integrity demand. Auto has done well. And the non-auto Industrial, we feel that going forward, strong growth based on the government's thrust on the infrastructure.
Some of you are obviously eager and conscious to know about the competition. So whatever steps we could have taken, we have taken, but I think more important is that our balanced portfolio of Decorative and Industrial positions us well to navigate these competitive challenges or changes effectively. So our idea is basically to use our strength and addressing any type of challenges to drive sustained growth and value for our stakeholders. Thank you for your participation.
On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.