Kansai Nerolac Paints Ltd

NSE:KANSAINER

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to Kansai Nerolac Paints Limited Q2 FY '23 Earnings 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.

[Aniruddha Joshi, analyst]

Yes. Thanks, Seema. On behalf of ICICI Securities, we welcome you all to Q2 FY '23 Results Conference Call of Kansai Nerolac Paints Limited. We have with us senior management represented by Mr. Anuj Jain, Managing Director; Mr. Prashant Pai, Director, Finance; and Mr. Jason Gonsalves, Director, Corporate Planning, IT and Materials.

Now I hand over the call to the management for their initial comments, as well as the quarterly performance. Then we will open the floor for question-and-answer session. Thanks, and over to you, sir.

[Anuj Jain, executive]

Thank you, Aniruddha. Thanks. Good morning, namaskar to everyone, and wish you all a very Happy Diwali and prosperous New Year, New Samvat 2079. Thanks for joining this call of Kansai Nerolac for quarter 2 of 2022-'23.

During second quarter, we recorded top line growth of 19.3% and EBITDA level, the growth was 19.8%. The top line growth is led by passenger vehicle. Decorative growth is double digit in terms of value and volume is flat. Raw material prices are gradually cooling off, but at a YTD level, still the inflation continues, and it is about 7% to 8% inflation is there. So far we have taken approximately 3% price increase.

Giving you some highlights of industrial, we continue to increase our market share in automotive. The -- one of the strategy, what we have been working upon is how do we increase or better our margins in automotive, so that initiatives to increase the margin continued. One part is the price increase, which we have taken around 3% price increase on a weighted basis in industrial. Some of the customers we have been able to conclude, some customers still the discussion continue.

Some other initiative in terms of margin improvement, which could be somewhat short term, medium term and also long term is the introduction of new technology products in the market. So we have been introducing tin free and low bake. So obviously, these are some new technology, which the approvals are required from the customers. And in some of the cases, the customers have to make certain changes in their lines, but it has a potential to upgrade the business from the existing systems to these new systems. So this is what we are trying to expand.

We have also developed one new product and which is successfully -- that introduced also in the market, because the government is taking the initiative of blending the petrol with ethanol. So as of now, it is the mix of 15%, but the potential is to go to 30% ethanol also. So especially in 2-wheelers that if you -- if the percentage of ethanol goes up, then the existing bookings will not be able to take that. So we have devoted the product, which can take the blending of this petrol with the ethanol. So that product we are ready with and whenever the ethanol blending goes up, we are ready to shift to these products.

Some of the other initiatives that we have taken in this area, growth initiative, is related to some new markets. So one is this decal detail market, which is on the 2-wheeler. So on the decal, generally there is a clear which is used, we were not there in that market. So we have developed a good technology product, and now we'll be able to service that decal market.

The other new area in automotive is the PVC sealer and under body, which basically goes under the car body. So that's also a good size market where we were not there. So we have introduced products in that market also. We are also getting into alloy wheels market, and for that also the technology and the products are ready. And we are also making -- made some entry in the high-end anti-corrosive coatings for auto fasteners, a zinc-based coating, so this is also a new market for us. So these are 3, 4 new areas, which in auto, we are expanding.

In Performance Coatings, which is a non-auto-industrial part, as we discussed last time, that here, again the focus is basically to increase the mix, the premium business and partly, we are exiting the business, which is very low profitable or the traditional products where we are not able to get the margins. So some percent of the business we have exited, which we spoke last quarter. And obviously, the salience, we are increasing of the premium. So even at H1 level, the salience of premium has increased by more than 1% in Performance Coating.

Performance Coating business is also dependent on a lot of approvals. And for this premium coatings, we need approvals from, say, infrastructure, the oil & gas sector, so those approvals we have been trying. And we have made a list of that, how many approvals do we need. And we are making a progress, so 40% of the approvals we have already got. And therefore, to some of these sectors, that we will be in a position to pitch for the business.

Just to name a few approval like we got, Mumbai-Ahmedabad bullet train approval; we got Vande Bharat Express approval, so the orders have also started flowing. So, some of the approvals we have taken in the case of refinery also. So these are some of the examples.

In coil coating, which is again a part of non-auto business, where the margins have been very, very low in the last year, and we took the approach of shifting to higher-margin technology. And these segments, the appliance segment is a better place in terms of margins, while the roof coatings are not. So we have exited a lot of non-profitable business and increase our salience in the premium or appliance segment to around 10%. So also, we have got some approval from the leading appliances in the country.

In Powder Coating, also, we have been a market leader in Powder Coating, but our focus is to increase our share in premium. So there also our salience has increased by about 2%. And we have got some new accounts, which are going to give us some good advantage. So this is about industrial.

Coming to decorative, one of the part of our decorative strategy is related to a Paint Plus differentiated products with future-led additional benefits. So we spoke about Beauty Gold washable was the first product, then Mica Marble Stretch & Sheen. And last quarter, in fact, we introduced Nerolac Impression Kashmir. And so these are all part of this Paint Plus super premium category, where we are one -- part of our strategy to increase our salience and share in super premium category.

So Impression Kashmir, we have taken up aggressively and we got a good response from the market. In fact, we did a fast national rollout, and we did a scale up. So across the country, we have been able to launch the product in the last quarter. This was expected well by our network. So this one product, which is that -- where we have increased the visibility also and we are getting a good response. In fact, to support this Paint Plus products, we also ran a consumer promotion, Har Din Diwali during the Diwali period, which is still continuing on the premium products. And this was one way to enhance the interest and the preference in the brand category.

We were also looking at adding more products in the premium and super premium category. And because our -- as we discussed earlier, that our sale from popular and economy is fine. But if we compare with the market, our salience in premium category -- super premium category is low. So what we are looking at is that, how do we increase our distribution, the existing distribution, who are buying my other range of products, but not buying this super premium.

So there, we are looking at expansion of distribution. So the salience has increased by 2%. In fact, our growth is definitely better in super premium category. And some of the products which we expanded is in the wood finish also, in the super premium and the polyurethane category. And some other niche products we have introduced in last quarter, which is our TermiProtect epoxy metal primer.

Also, in SOLDIER, we have introduced Trusheen Emulsion, which is a superior finish at a mass premium price point. In the SOLDIER in fact we had economy rain, but some of these products which we are introducing, which are at different price points and different proposition and little premiumization in SOLDIER also.

Also, we have started introducing a range of product under NEXTGEN. So there's a next-generation range of products, which are basically meant for select distribution, because the competition in the market is quite high. So obviously, some good select dealers, retailers that who want to focus on selling a specific range of products. So for them, we are launching this next range -- next generation range of products.

In communication, we said that we will be increasing our communication through advertising and digital marketing. Our focus is on Pain Plus Japanese technology and jingle. And share of voice, we said that we'll be maintaining around 15%, which we are continuing. Even in the last quarter, all our main markets that we had a share of voice of around 15%. And one additional point here is that, a return of Ranveer Singh to our campaign.

Ranveer Singh has been our Brand Ambassador last year, in between we have taken a break. But Ranveer Singh is back to our campaign, and we launched the Kashmir campaign with him, Impression Kashmir, no paint [Foreign Language], so no smell, which we felt is one of the insights from the consumer that there is a segment of customer that who is sensitive to the smell of paint. So this product is highlighting that proposition. We have gone for high visibility for Impression Kashmir. We have participated in Asia Cup Cricket, Indian Idol and some of the other important programs what we have taken.

The other part of our plan is related to influencer program, where we have taken some aggressive approach in terms of digitalization and the app. And obviously, the challenge is that how do we get more and more digital adoption, because the entire incentive -- all communication we are shifting to the digital medium. So it is important to get the higher digital adoption from the printer fertility. So app downloads have gone up by 35% to 40% if we compare with the last year. And therefore, we are able to reach out to more number of painters.

In terms of distribution, where we -- in select markets, we also have put some dedicated team to open the direct distribution and some new distribution models, which we are working upon. So we have added about 3,000 new retail outlets at the YTD level so far in this year. The other part is the project business where in fact we had a presence in the select market. So they are -- in fact, we are increasing our presence across key towns. And within the year, we'll ensure that all the emerging towns, we are available where the market potential is decent.

In new businesses, our salience was around 5%, which I said last time. So it has increased by 1% or it is around 6%. And we are introducing gradually, not that we are getting into every product, but we are settling with the existing products that we have introduced. And then with the time, gradually we are introducing more number of products.

For economy products, a complete range we have launched. In fact, whether it is emulsions or primers, a lot of products have been introduced. And in the last quarter, at least we have seen cannibalization and shift towards value of money products, which, to some extent, is understood because there have been almost 23%, 25% increase in last 2 years' time, and therefore, the prices of the products have gone up. So there has been some shift towards the economy range products.

The other part was, we said we'll be launching -- we have launched the services with 5 days painting proposition, 5 days industry pending proposition. So the quarter 1 we piloted, introduced in 6 cities. And in the quarter 2, we have expanded the services to almost around 50 towns, and we'll continue to spread that in more towns in the coming quarters. This was also linked to our market development structure where we said that we are placing the team for the market development who will also be handling the service part.

So the structure of market development team is put in place. Obviously, the hiring is on, but it's put in place and more than 500 team members is on ground now. This team related to a services, so far, we have serviced more than 15,000 sites in those select towns. And obviously, in all these sites, we are driving the product upgradation, the pain plus and the new products that we are talking about and also helping consumers to take the right decision or giving the right solution to the consumer for the problem what he face when you want to decide about the paint.

We are also investing in the digital ecosystem to ensure complete information available and seamless coordination across stakeholders. So the work is in progress, some work is completed, and we are making a progress. And we have a time line to see that this ecosystem is ready within a particular time line. Overall, in decorative, we feel that in the quarter 2, the market growth is driven -- volume growth is driven largely by putty and new businesses. In paint, volume growth is very, very low. So that's our understanding.

A few other updates is that we initiated the process of setting near-term science-based target with Science-Based Target Initiative Institute because that's a process that we need to follow, which we have initiated. As a part of our risk management, risk mitigation, we commenced implementation of RDR. Last time we spoke about our initiative related to the ESG, where we are working on to Scope 3 inventorization and the TCFD framework. There, we have initiated the process for setting near-term science-based target as we said earlier.

One qualitative point, which we mentioned that what we are working to improve in the organization is basically to scale up and sustaining momentum, the speed to scale up and sustaining momentum. And under that, we are focusing on some long-term value creation through internal initiatives. So, some of the initiatives are that we have taken the approvals in the process of taking approvals for ESOPs for performance and retention for key employees and the final scheme is still not announced, shortly we'll be making the announcement of this scheme. But we are definitely taking care that it is majority towards performance, and it is linked to the performance. But for the key employees, it is also retention based.

We are working on the capability building on the current situation and the way the platforms are changing. So we have introduced [indiscernible] digital platform for skill enhancement of our employees, and we are running a structured program to see that how do we make the continuous improvement in the capability building. The other area is brand building. In fact, we are -- the initiatives, some of the initiatives as spelled out we've taken, and we'll continue on that. And the services and building influencer connect.

Also that we have added as a part of -- this is a last mile service improvement. So the introduction or increase in the number of products, the number of categories are going up and real estate the prices, so sometime the dealer is not able to increase his warehouses space and per SKU inventory actually is going down. So we are mindful of the fact that service needs an improvement. So we are working on that. And overall, our direction remains that we have to increase our profitability in Industrial and increase investment in Decorative.

So these are some of the highlights related to the quarter, from my side. And now we invite the questions.

[Operator]

[Operator Instructions] We take the first question from the line of Mr. Abneesh Roy from Nuvama Institutional Equities.

[Abneesh Roy, analyst]

I have three questions. My first question is on the Deco business. You mentioned share of voice is around 15% is what you're targeting. What was it, say, 3 years back? And how does this help because your Deco market share is also not very different. It might be a bit lower, your share of voice is a bit higher. It's not a very marked difference. So how does it help in the overall scheme of things in terms of gaining market share, given you're introducing so many new premium products also?

[Anuj Jain, executive]

Yes, Abneesh. So we said target of 15% share of voice. So it used to be 3, 4 years back when we were spending good amount in marketing. It used to be in the range of 15% to 20%. And then it came down to, say, 6%, 7% level. And now we are seeing around 15%. How it helps is that it helps in terms of maintaining the visibility. And when we are introducing the products, so that how do we communicate the introduction of that product. Now the efficiencies that how we are building is that if you see our campaign, there are some common elements like Paint Plus, Japanese Technology and Jingle. So that last 2 or 3 campaigns what we have introduced, the product changes, but the format of the campaign remains same. So ultimately, there's a continuity. And we keep introducing and therefore, that when we come out with a new product, at least all these products, we are able to communicate with the right propositions.

[Abneesh Roy, analyst]

One follow-up on this, the drop from 15%, 20% -- to 20% to 6% to 7% is very stark, normally we don't see consumer companies do that. And now you're coming back to 15%. So my question is why dropped -- why did you drop to 6% to 7%? Is it linked to your overall health of business in the industrial part of business? And can that again recur, for example, would that problem if it comes back. So this 15% can it again come at risk?

[Anuj Jain, executive]

So Abneesh it's the -- in fact, one that, okay, we were spending that amount for a few years. And partly, I would say, during the COVID time, because generally, during the COVID period, initially, we lost the season time and other times. So obviously, this percent has come down there. And then obviously, we wanted to see. And I think in the last sitting also we said that maybe we have taken some decision, which we felt later on that hindsight, it may not be right. So there is some minimum kind of thing which you need to support in terms of advertising. And in our businesses, now we obviously look at these businesses separately. And therefore, the Decorative requirement is around this percentage, which we'll maintain irrespective of that -- what business pressure comes for other categories.

[Abneesh Roy, analyst]

Sure. That's helpful. My second question is on your Nerofix adhesives. I understand the growth is 40%. Of course, that will be on a small base. Here my question is, now when such a large player is going to come in paints in the next 4 quarters. Does it make sense for you to do a non-core business, especially given market retail paint has also tried adhesives, they are still there in additives, but I don't think it has met the initial expectation, which I think markets would have or the player itself would have. So could you address this bit, from a 1-year, 2-year perspective, does it make sense to focus on adhesives also? Or it will be more of just riding on your existing distribution, not too much of advertising and sales support?

[Anuj Jain, executive]

Yes. So you're right, so not too much on -- focus on this particular thing. We are riding on our existing distribution. And this is like a joint venture, which we have a Nerofix. And one part is industrial adhesive, which that there is a synergy with our industrial business. And in the consumer business, just riding on our existing distribution, there's not going to be any specific focus.

[Abneesh Roy, analyst]

Right. And last quick question. On the distribution side, you mentioned you're trying to target new distribution models. You also mentioned YTD, I think you added around 3,000 retail touch points. So could you elaborate on this, how much of this is able to cater to the core Deco?

[Anuj Jain, executive]

All are Deco only, but 3,000 overall outlets. And one point I want to add is that, last time also we said, one of the business model is, now we had given a name to it. It's a Next-Generation Premium Shoppe. So last quarter, we finalized almost around 50, and all 50 we have executed, these stores are up in the market. And in fact, we have finalized another 25. So this is one of the model, and there are a few others which we are working upon.

[Abneesh Roy, analyst]

Could you elaborate on this? Is this more of a perfect store which, say, HUL has, really more of branding, point of sale within that dealer?

[Anuj Jain, executive]

It is -- yes, it's like an experience store you can say where there's a branding and also like our proposition in terms of demonstrating the products that how products are better than the other products. So that's the attempt we are doing. So wherever the customer footfalls are higher, there we are setting this kind of experience. And from these stores, our focus is to increase our premium sale.

[Operator]

We take the next question from the line of Mr. Aditya Bhartia from Investec.

[Aditya Bhartia, analyst]

Sir, you mentioned that in Q2 so the industry growth was driven by putty and some other low value products. I just want to understand how has Kansai fared on that front? And has there been any divergence for Kansai vis-a-vis the market leader?

[Anuj Jain, executive]

So in fact, in our case, as I said, in Decorative, our volume is flattish and in fact, the putty is slightly negative. So to certain extent, excluding putty, there would be small growth. And putty, our approach still remains selective, because there is a pricing pressure in the market and the margins are not there. But obviously, to satisfy the -- our distribution network, we have to keep in certain markets and for certain time frame. So we are not looking at a high growth in putty segment. As of now, we are just trying to hold to some extent and selectively basis that we are participating. So that is related to putty.

And for the new products or the new businesses, obviously, it is not comparable with the industry because we have our own approach in terms of what products we are choosing or what range we are choosing, we are not trying to get into everything. And our salience in the new business, as I said, is about 5%. While for industry, it may be more than 10%, it would be 12% also. So even if we have a similar growth, the difference will come because of the salience. And as of now, we'll say that in the paint, we are narrowing the gap and putty, as of now, we'll continue to be selective till the time we get the right situation. And new business gradually will improve.

[Aditya Bhartia, analyst]

Understood, sir. And secondly sir, on waterproofing side, are we faring on the waterproofing and construction chemical businesses? How large these businesses would be for us and at what pace are they growing?

[Anuj Jain, executive]

I talked about this 5%, 6% salience, it is from new business. One of the business is construction chemical, and that would be a large part of it. So we have chosen the product, which we felt that goes with our strength or our understanding. And at least on those products, now we have caught up with the market growth, but we are not getting into full range which market has introduced. The market is good. I think this has -- definitely has a potential because after the paint companies have started construction chemical and waterproofing, I think the market also is expanding, because earlier, this was basically, if there is a problem, then as a solution it is given. Now it is given as a preventive solution also, that when you're doing a paint, you can apply the waterproofing under it, so to that extent, the market is expanding. And this has definitely become an integral part of paint. And I think the prospect going forward in the future is good.

[Aditya Bhartia, analyst]

A couple of quarters back, sir, you had indicated that we now have pretty much a full range of waterproofing solution. Does it mean that we want to restrict our self to certain solutions and we are happy with the kind of range that we are having today? Or does it mean that over a period of time, we may still see ourselves getting into areas wherein other competitors are there?

[Anuj Jain, executive]

So we started with -- that time also I said that, the first is that we have a distribution and whatever product that distribution is keeping, we have come out for those products. So that range we have completed. And because since we were late entrant, so obviously our distribution was also buying from others. So last time I said that 30% of our distribution has started buying from us, now the trigger is around 35%. We are just trying to expand within our distribution, those range of products which retailers are selling. And as we become a little mature on that, and our understanding is completed, we do have a pipeline of the products which are like specialty products.

[Operator]

We take the next question from the line of Mr. Avi Mehta from Macquarie.

[Avi Mehta, analyst]

Just 3 questions. First, the leader has announced a very aggressive CapEx plan, not only to kind of expand capacity, but also backward integration. Do you see a need to kind of have a similar focus on capacity expansion? Or do you see this impacting us in Decorative or even in the other Industrial verticals? Would love to hear your comments.

[Anuj Jain, executive]

So it's like, it depends company to company, a little difficult to give an answer to that. But I can only tell you like if you look at, say, Industrial, which is our important area, there the backbone of the paint is resin and almost more than 90% resins you know that we make it in-house. So -- and in fact, in the recent past also we expanded the capacity of resins. So whatever like this automotive market is cyclical, assuming that the market will have a good run for next few quarters, a few years, I think we are prepared for that. So that's first part. There are certain other areas where there may be a potential, but as the time goes, we'll evaluate.

In the Decorative, again the largest part is the emulsions, which most of the emulsions we are making in-house. There are also like in the recent past in our Amritsar factory we have expanded our capacity. Now this area is a new area, which is -- I don't think it's our expert area, because there are a lot of experts in the market and sometimes it depends on the scale also. So this is completely a different game. So there was a time and some of other companies where there are into chemical businesses. And we feel that we may not be right people to get into these kind of things. But otherwise, the emulsions and the resins where we already have the backward integration.

[Avi Mehta, analyst]

Got it, sir, got it. So basically, no impact on Industrial and Dec we'll wait and watch, and see how business will respond. Okay, sir, the second bit is, just kind of picking up where you indicated last quarter that in the Deco market growth was also led by Tier 1 and metros last quarter, which is first quarter, the growth was impacted by us. Now with upcountry growth picking up, should we expect the growth rates in the Decor market to be broadly similar? Or do you think it's too early to call out a upmarket recovery?

[Anuj Jain, executive]

The only change from that time to this time is in the quarter 2 we have seen that Tier 2, Tier 3 growth is coming closer to the Tier 1. But if we talk about Tier 4 or the rural as per the census, like we say population less than 20,000, there the growth is still very low. We -- our data says that small market or rural market is still under stress.

[Avi Mehta, analyst]

Okay. So that pressure for us may continue for some time? Maybe we need to…

[Anuj Jain, executive]

We are little hopeful that, maybe because with the monsoon was good, so maybe post Diwali or fourth quarter, it may pick up, because at least we have seen some positive change in Tier 2, Tier 3, Tier 4, so it may get there down to Tier -- these smaller markets also, but we'll have to wait and watch.

[Avi Mehta, analyst]

Okay. And lastly, sir, on the Decorative market itself, are you concerned about the growth? Because your comment on the third quarter was of growth rates likely to remain under pressure. So would you -- is it that now we are -- the inflation is starting to bite and hence growth rates per se in the Decor market are likely to moderate on a run rate basis? Do you see that as a concern, sir?

[Anuj Jain, executive]

Short term, yes, because if you see last year Diwali was in the month of November and this time, Diwali was early and the rains were continuing till almost 15th of October. So generally, what happens is that people paint after rains before Diwali. So that period after rain before Diwali was hardly a 1 week. So actually, you need a window of at least 20 to 30 days. And that window was not available. To that an extent, business is down. And in the month of November, if you remember, recall that last year, there was a -- the price increase -- the highest of the price increase has happened in the month of November. And therefore, a lot of stocking has happened in the market.

So subsequent months, the growth was not very high. So therefore, that the only optimism could be that post-Diwali, if people have not painted before Diwali, whether they'll resume the painting post Diwali, we'll have to wait and watch. But I think because of these reasons, the basis for last year, the third quarter demand could be muted. So we believe that like first quarter was good. Fourth quarter also would be fine because of the reasons I said, the subsequent months growth was -- the base was not so very high, but this quarter, the base is higher.

[Operator]

We take the next question from the line of Mr. Shirish Pardeshi from Centrum Broking.

[Shirish Pardeshi, analyst]

So to start with, you gave an interesting remark that the growth -- the volume growth was driven by putty. Now is the similar trend you are seeing in the month of October?

[Anuj Jain, executive]

Similar trend you are saying?

[Shirish Pardeshi, analyst]

Yes. I'm saying, Anuj made a comment saying that the larger growth was driven by putty and ex of putty, the Decorative volume growth was flat to marginally positive. So is the similar trend -- where I'm coming from because you did mention that there's a downtrading, which is happening for low-end emulsions. So is the volume growth in the quarter 4 or quarter 3 when we look at, of course, quarter 3, understandably, you have a high base. But is that the trend, which is a structure we've seen in the market?

[Anuj Jain, executive]

No, specifically for October, if you're asking maybe by and large, a similar kind of trend. But for the quarter, difficult to comment. But yes, because that trend is ultimately Diwali period is like this July to October. The only thing what happens, in July, typically, people stock say items like in enamel, distemper and then other economy and kind of thing. By the time September comes, the premium range gets some kind of a traction, but by and large, similar trends.

[Shirish Pardeshi, analyst]

I just want to little more clear in my mind. You did mention that Diwali has happened in the month of November. But is that the impact we have taken a sharp price increase and that's why people are moving to the lower price points?

[Anuj Jain, executive]

Yes. So as I said that, there is a price increase. If you would look at 2 years basis, the price increase is almost 23%, 24%. So that is visible in the market that people are shifting to the popular or economy range of products, so there is a shift happening. So to a certain extent, as I said, cannibalization that some of our popular products, the growth is not so good. But in the economy range or like the products what we've introduced, for example, the primer at a lower price, some of the products like we introduced like Little Master and Beauty. So there's a shift in sales from the popular to the -- this economy side.

[Shirish Pardeshi, analyst]

Okay. Just to clarify, you said that we have taken a 3% price increase weighted. So what is the price increase for first half total?

[Anuj Jain, executive]

So that is for the first half.

[Shirish Pardeshi, analyst]

So total is, what, 3%?

[Anuj Jain, executive]

Yes, yes, 3%. For Decorative also 3%, for Industrial also 3%.

[Shirish Pardeshi, analyst]

Okay. My last question, if you can split the growth, your stronger markets versus non-stronger markets? Or maybe to my understanding, South has done better in quarter 2, while the North and Central had a lot of challenges, maybe extended monsoon is one of the reason. And also liquidity is also one of the things which consumer companies are at least highlighting. So maybe in your thought, in your lens, how do you think and if you can help me, how the -- your stronger markets, non-stronger market, the growth…

[Anuj Jain, executive]

Our strong markets are North and East and weak markets are South and West. But in terms of growth, what we have seen higher growth from South, followed by North, followed by West, followed by East.

[Shirish Pardeshi, analyst]

West -- east was lowest.

[Anuj Jain, executive]

Yes.

[Operator]

We take the next question from the line of Mr. Mihir Shah from Nomura.

[Mihir Shah, analyst]

I have a few questions. So firstly, it seems like your mix did not deteriorate as much as the market leader. But given the seasonality and also your rural growth did well, can we say it had some impact on margins? So margins were impacted due to inferior mix? So that is one. And can margins get better sequentially with a better mix going forward?

[Anuj Jain, executive]

So generally, in Decorative what happens is that, if you compare the second quarter, which is a Diwali period with the, say, quarter 1, there is always a deterioration of the mix. And it happens mainly because of the contribution of salience of the item like in enamel, distemper, low end primer goes up. So approximately 2% deterioration, we always find. So that changes here. So that is one reason. Otherwise, within the Decorative, as we said that our Super Emulsion salience has gone up, even Emulsion saline has gone up.

And the other part is the change in the business mix, because the growth is higher from the Industrial. So our salience of Industrial has gone up and where the profitability in comparison to the Decorative is lower, and therefore, that also has affected the margins.

[Mihir Shah, analyst]

Got it. Very clear. Secondly, on the difference between the Deco margins and Industrial margin you had highlighted, it was -- there was a 7%, 8% gap. That gap would have seen some improvement, of course, but can you share any indication of how much it has contracted and the trajectory going forward as well?

[Anuj Jain, executive]

So industry margins definitely have improved based on -- as I said, the inflation is still continuing, but with the price increase what we have taken, that has helped in terms of improving the margins. But in Decorative, one, as I said, the mix change; the other is also we have increased our investment as we spelled out earlier in Decorative. So that is how it is, the mixed bag.

[Mihir Shah, analyst]

Okay. Would that be -- now would that difference be about like 5% or still like 6%, 7% or -- any target that we have to reduce the gap?

[Anuj Jain, executive]

It is bridged. It's a definitely base. So 1% or 2% now it is bridged. And as we have been saying that, because of the Decorative the investment also is going up, so somewhere that it is balancing out. But industrial margin definitely have improved.

[Mihir Shah, analyst]

Got it. Sir, lastly, on -- if you can talk a bit more on your non-auto Industrial performance. Past few quarters, we had seen a strong pickup in non-auto Industrial sales. Is that sales momentum continuing? And if you can share what is the mix of volume and pricing in Industrial, would it be like 2/3, 1/3 volume pricing or like 50-50?

[Anuj Jain, executive]

The non-auto industrial, there are like general industrial, high-performance coating, powder coating, coil coating. So there in fact our approach is basically to increase the business in the premium and the momentum is definitely continuing. The only thing is that sales get compensated to some extent as we said, that some of the non-profitable business that exiting in the sense that we are increasingly price and sometimes we are not able to hold up that business. So we are increasing the business of the premium, but the lower side business is becoming lower, but the growth momentum continues.

[Mihir Shah, analyst]

Got it. And lastly, one bookkeeping. Any one-off on staff cost? It has shot up quite dramatically by 17% this quarter on a Y-o-Y basis?

[Prashant Pai, executive]

Because we have our increments in the month of July, so that is the reason that has gone up.

[Mihir Shah, analyst]

So pretty much standard. So no, no one off of that?

[Prashant Pai, executive]

No, nothing on that.

[Operator]

[Operator Instructions] We take the next question from the line of Mr. Jaykumar Doshi from Kotak.

[Jaykumar Doshi, analyst]

So three questions. The first one is, what is -- sorry, I may have missed, what is the Y-o-Y growth in value terms for Decorative business?

[Anuj Jain, executive]

What is the…

[Jaykumar Doshi, analyst]

Y-o-Y growth in value terms for the Decorative business, Decorative paints?

[Anuj Jain, executive]

It's a double-digit growth, value.

[Jaykumar Doshi, analyst]

So one thing which I unable to understand this when we think about pricing, on a Y-o-Y basis, pricing is up about 20% or maybe more than 20%. And you called out that volumes or maybe marginal volume growth, excluding putty. In your case, you're not -- your volume growth is not driven by putty. And why is it that on a Y-o-Y basis the gap between value and volume is just 10% point, but pricing is up 20%. And we understand that some of your peers, there is a significant deterioration in mix on a Y-o-Y basis, so we can understand the narrowing the gap. But in your case, we would have expected volume value gap to be somewhat similar to pricing?

[Anuj Jain, executive]

Yes. So one of the reason is that there are some economy products that we've introduced, like in Beauty emulsion, Suraksha, the primers, and there is a shift from the popular range of product to the economy range of product, and therefore, the average selling prices of that range has come down significantly.

[Jaykumar Doshi, analyst]

Understood. So essentially, it's down trading?

[Anuj Jain, executive]

Yes, yes, down trading.

[Jaykumar Doshi, analyst]

Have you also seen increase in rebates and discounts versus last year? So one is -- is that also another reason for that? Or that has been stable?

[Anuj Jain, executive]

Yes, yes. During the second quarter, the July to September, there have been definitely the increase in the rebates.

[Jaykumar Doshi, analyst]

Understood. Now at current spot prices, based on your inventory with RM pricing easing a little bit, how should we think about gross margin trends over the next 2 quarters, the third quarter and fourth quarter versus the current 2Q gross margin?

[Anuj Jain, executive]

So I think obviously, this trend of cooling of raw metal price is there, but some volatility now because the rupee is depreciating, so what impact of that will come on the inflation. So situation is not 100% clear. But I think if the same trend continues, we may see some reflection in the quarter 4. Quarter 3, I may not be very hopeful. But quarter 4, we may see some reflection on that.

[Jaykumar Doshi, analyst]

And when you say some, is it like 100 basis point, 200 basis points or can it be better? Is there any chance it can get better?

[Anuj Jain, executive]

See, margins will definitely improve. But again, it depends on, as we said, that our strategy is basically to improve the margins in Industrial and invest in Decorative. So as we improve the margins, we'll be increasing some of our investments in Decorative.

[Jaykumar Doshi, analyst]

Sure. And final question, good to see marketing spends in Decorative business, increase in marketing spend. What is the benchmark or what's the ballpark A&P spend as a percentage of sales that we should model going forward?

[Anuj Jain, executive]

Actually difficult to comment upon that. Because, to tell you very frankly, as of now that we make some assessment of the figures, and we'll start doing that. But what we do that, what activities we are doing, what is the response and whether we are able to get the desired response and therefore, some moderations required to be done. So as of now, as I said earlier also, I think we are not going to look at what we have been doing 4, 5 years back. But obviously, we are increasing. And also, as that we increase our profitability in Industrial or increase our mix because our focus is super premium. So that give us some better mileage. So accordingly, then we'll see that some of the areas whether we can invest more.

[Jaykumar Doshi, analyst]

Understood. So is it reasonable to assume that it won't be as high as FY '17, '18, '19, but again, higher than FY '20, '21 as a percentage of sales or looking at FY '22?

[Anuj Jain, executive]

Yes. Yes, you're right.

[Jaykumar Doshi, analyst]

From that in-between 5. That's it from my side. Good luck.

[Operator]

We take the next question from the line of Mr. Abhijeet Kundu from Antique Stockbroking.

[Abhijeet Kundu, analyst]

So sorry if I have missed on this, wanted to get your understanding on auto volumes have seen a significant recovery, one of your key clients has posted very strong volume growth. How much of that has benefited you in this quarter? Or should benefit you in the coming quarters? And also what happens is that, when auto recovery happens, then the OEMs also give you a better pricing. I mean the prices also happens. So you have alluded to that 3% has been the pricing on the overall Industrial change. So just wanted to get an understanding on the sales part coming from the recovery in auto OEMs and also on the profitability part. So could we see better profitability because of better passage of -- or I mean, price hike and also better volume growth going ahead or the better volume growth is already factored in the current quarter. Just wanted an idea on that?

[Anuj Jain, executive]

Yes. So in automotive, it is basically passenger vehicles then your 2-wheelers, 3-wheelers and this CV and tractors. So this growth is led by passenger vehicles. 2-wheeler growth is still muted, though is better than last year, but it is still -- so one has to say that passenger vehicles in this year may touch the pre-COVID level. But 2-wheeler still would be down if you compare with the pre-COVID level. Tractor demand is also subdued. So primarily, it is led by the passenger vehicles. And I think that run as of now, we feel -- whatever information is published in the market, we feel it will continue.

On the price increase, from some of the customers, we have already taken the price increase. And for other customers, we are continuing. And you are right that when the performance improves, then because when last year the inflation was very high and we have not been able to take full price increase, but situation is better with the customers now. And I feel that we'll be able to get more price increase.

[Abhijeet Kundu, analyst]

Okay. And so the significant recovery that we have seen in passenger vehicles that is already factored to an extent in the -- during the quarter?

[Anuj Jain, executive]

Yes.

[Abhijeet Kundu, analyst]

Just confirming that.

[Anuj Jain, executive]

Yes. Yes.

[Operator]

We take the next question from the line of Mr. Sanjaya Satapathy from Ampersand Capital.

[Sanjaya Satapathy;Ampersand Capital;Portfolio Manager, analyst]

I just wanted to understand from you that this Industrial segment, how much did it grow on a year-on-year and sequential basis, is there something which you can share?

[Anuj Jain, executive]

Generally, the segment wise growth, we don't share. But obviously, you can say that the production growth of passenger vehicle is higher than, say, 20%. And I'm talking about the H1, quarter 2, it was further higher. So the growth of passenger vehicle is specifically higher.

[Sanjaya Satapathy;Ampersand Capital;Portfolio Manager, analyst]

Understood. The reason why I was asking is that, your overall revenue performance in Q2 compared to Q1, is lesser than market utilization in pains and this is despite the fact that you have a bigger contribution of automotive, which has done so well. So where exactly was the drag for you in terms of market share loss?

[Anuj Jain, executive]

We said that we track it on 3-part paint, putty and new business. So this putty, I think earlier also I said that we are keeping it restricted. The market growth is driven by putty and the new businesses. In paint category, our understanding is that the growth is very, very low. So to that an extent, we have narrowed the gap and closer to it. But putty gap continues. And new business is not comparable, because we are making our own choices that which business, how many products to be into, so that is not comparable. So comparable is basically paint.

[Sanjaya Satapathy;Ampersand Capital;Portfolio Manager, analyst]

Understood. And we are a market leader in Industrial and Automotive and whereas you are not in Decorative and at this point of time, there is a new entrant, which is coming into the Decorative side. Of course, you're trying to defend your position by increasing branding spend there. But in the process, are you going to be again kind of neglecting the Industrial side of it?

[Anuj Jain, executive]

No way. In fact, Industrial, because every business is a separate business unit thing. And in this kind of situation, I think that we'll be increasing our focus on Industrial also, because these are separate business units. So one focus does not affect the other focus. And fortunately, like passenger vehicle, the run is good as of now. The non-auto-industrial paint where market share is not that high, there, in fact, some of the initiatives in terms of product, technology, premium, the putting up approval team. So some of these initiatives we are taking so that we can look at more business in that area.

[Sanjaya Satapathy;Ampersand Capital;Portfolio Manager, analyst]

Sir, last thing, I just wanted to check with you, around new business, while you were guiding to a little bit subdued performance in December quarter. So will there be -- I mean, will you continue to kind of see some kind of a margin decline on a year-on-year basis as well? Or the margin has kind of hit the floor and will keep on improving from here on?

[Anuj Jain, executive]

Margin, I think are on the lower side now. So if I just purely say about margins, margins will improve. But as I said, that we are also in the process of increasing our marketing investments in Decorative. So I think you have to keep that in mind.

[Sanjaya Satapathy;Ampersand Capital;Portfolio Manager, analyst]

So my question is that, despite all that, has the margin reached a level where -- from where it can only go up, even though it may not really reach the kind of level which -- in the past?

[Anuj Jain, executive]

I think the margins are closer to the lower level only. And from here, the margins will improve. But again, I'm repeating the point that margins may improve, but we may increase our investment in Decorative. So therefore, you may not find any effect.

[Operator]

We take the next question from the line of Mr. Ajay Thakur from Anand Rathi Securities.

[Ajay Thakur;Anand Rathi Shares and Stock Brokers Ltd;Lead Analyst, analyst]

Sir, I have two questions. First one was obviously on the margin front, which other participants also have been trying to kind of get a sense on. So if I were to look at the current prices of, say, crude oil and the rupee, current rupee, so what kind of a gross margin, excluding of your marketing spend, what kind of a gross margin expansion can we look at, say, in Q4 or maybe over the next 1 year? What kind of improvement can we see on a ceteris paribus basis?

[Anuj Jain, executive]

Prashant, do you want to answer this question?

[Prashant Pai, executive]

So at gross level, overall, as Anuj mentioned, that we are focusing on improving the Industrial profitability, we can see at least 2% to 3% improvement in gross -- at gross level, right? So that's possible.

[Ajay Thakur;Anand Rathi Shares and Stock Brokers Ltd;Lead Analyst, analyst]

That's quite helpful. And second question was more on the Painter app. So we are talking about innovative channels to reach out to the painters and also to increase our distribution or the kind of offtake from them. So sir, what kind of similar kind of innovative channel can we reach out to drive growth, which can actually help us kind of not being affected by the distribution muscle of the Asian Paint and the leader of the segment. So what kind of other innovative channels can we also look at such as e-com channels, which can obviously -- can diversify our growth basket and kind of help us in terms of faster growth? Any kind of a broad outlook or a sense would help?

[Anuj Jain, executive]

So there are some thoughts about it, but as of now, we'll not be able to spell out completely. But I can only say that one area is the service area, which is like emerging area now, at least there is some traction that some decent part of the business started coming from services, which is dependent on the lead management system that how do we generate the lead and how do you conclude that lead. In the area of e-commerce also there are certain opportunities, but maybe at the right time, we'll discuss about it.

[Operator]

We take the next question from the line of Mr. Rishi Mody from Marcellus Investment Managers.

[Rishi Mody;Marcellus Investment Managers;Analyst, analyst]

So just to get some context on the numbers. So Asian Paints has announced that they are backward integrated into VAM and VAE. So how much of your Decor paint cost can -- is a VAM component, the enamel cost or the total cost, how much is VAM as a component or -- so just trying to assess if that backward integration makes any sense for them?

[Anuj Jain, executive]

Almost 0, I think.

[Rishi Mody;Marcellus Investment Managers;Analyst, analyst]

All right. So is it like a new technology that they are -- or new type of paint that they want to use this VAM or VAE for? Or like what is your view on this backward integration?

[Anuj Jain, executive]

So what happens is like, there are some standards of VOC, which are like European standard and American standard, and we are in compliance of those standard like for this low VOC, less than 50 gram per liter is this standard. So this VAE technology helps in terms of bringing down the VOC, but then there are some other technologies also which can help in terms of bringing down the VOC. So these are some in the areas of sustainability. As I said, that whatever compliances are there, we are complied to that. And there are means and ways to achieve further lowering the -- this VOC level.

[Rishi Mody;Marcellus Investment Managers;Analyst, analyst]

Okay. All right. And sir, on the putty business…

[Anuj Jain, executive]

Standard that we are following is the European standard. Sorry, I missed saying that America, but it's a European standard.

[Rishi Mody;Marcellus Investment Managers;Analyst, analyst]

Okay. Got it. And sir, on the putty business, right? So just trying to understand this industry a bit better, like how big is this industry size? And do you think like the strategy that's being employed by Asian Paints of lower pricing, is it the way to go? Or do you think this is not really a commoditized market?

[Anuj Jain, executive]

This is like, I don't know how to say the size because there are a lot of non-paint players into this, but you can say that every 1 liter of emulsion 5G of putty. So if you say market size is INR 40,000 crores and emulsion would be 50% so INR 20,000 crores. And so if you divide it by 5. So maybe INR 4,000, INR 5,000 approximately, just a rough idea I'm just trying to give you. There's a lot of non-putty players -- non-paint players. And this is a commodity product. The average selling price is just about INR 18 a kg, INR 18, INR 19 a kg, and it is sold on discounts. So obviously, the discounts have gone up in the market. And therefore, it's a commodity product which basically led by discounts.

[Rishi Mody;Marcellus Investment Managers;Analyst, analyst]

Right. And like do you think the backward integration of putting up plants in Saudi Arabia helps or to get any margin extraction? Or it's just to get lower pricing and pass it on? Like, what do you think is the rationale behind such backward integration in such a commoditized business?

[Anuj Jain, executive]

There may be some advantage, because ultimately the main raw materials in the putty is white cement and RD powder. And the RD powder also consumed this VAE and VAM and the white cement. So these are two key raw materials, two out of three key raw materials and there could be some advantage in terms of pricing.

[Operator]

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

[Anuj Jain, executive]

Thanks, everyone, for posing questions. Your questions always highlight and trigger some of the thought processes also. Thanks for making contribution to us. And as we spelled out that it's our long-term value creation, the building of the initiative, the business building what we are embarking upon, not getting everted with the short-term things. So I think that we have made our way and we are working on it and let's see that how it goes in the long-term basis. And thanks for attending this call. I wish you again the seasons gating for the coming December and Christmas and New Year, and have a good time and have a healthy and wealthy time. Thank you so much.

[Operator]

Thank you. On behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.