Sirca Paints India Ltd
NSE:SIRCA
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Sirca Paints India Ltd
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Ladies and gentlemen, good day, and welcome to Sirca Paints India Limited Q4 FY '22 Earnings Conference Call hosted by TIL Advisors. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors. Thank you, and over to you, sir.
Thank you, Peter. Welcome, everyone, and thanks for joining the Q4 and FY '22 earnings call of Sirca Paints India Limited. The investor updates have already been mailed to you and are also available on the website of the stock exchange and sircapaints.com.
To take us through today's results and management commentary we have with us Sanjay Agarwal, Chairman and Managing Director; Mr. Apoorv Agarwal, Joint Managing Director; Mr. Shallu Arora, Chief Financial Officer; Mr. Suraj Singh, Company Secretary and Compliance Officer. We will be starting with a brief overview of Q4 and FY '22 performance followed by a Q&A.
I want to remind you all that everything said on this call that represents any outlook for the future that finally construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. Some of these risks and uncertainties have been mentioned in our prospectus and follow up annual reports.
I would now like to hand over the call to Mr. Apoorv Agarwal. Over to you, sir.
Thank you, Sayam. Good afternoon, everyone, and thanks for joining our earnings call for Q4 and FY '22. It is my absolute pleasure to be taking all of you this afternoon. I would like to begin by expressing my gratitude to my team...
[Technical Difficulty]
Ladies and gentlemen, unfortunately, we have lost the connection for Mr. Apoorv Agarwal, please stay connected. Ladies and gentlemen, we've got the line for Mr. Apoorv Agarwal connected again. Sir, you can proceed.
Thank you. I would like to begin by expressing my gratitude to my team, the investors and everyone associated with Sirca Paints India Limited for your continued faith and trust in us. I would like to quickly take you all through the performance of this quarter and the full year, post which we can open the floor for questions.
I am pleased to present that we have reported another robust quarter despite some disturbance faced in the month of January 2022, especially in the northern part of India due to partial lockdowns in the NCR region. This, coupled with a temporary ban on spray paintings in NCR during the winter season that had an impact on our December 2021 sales as well, which affected our performance to an extent in Q3 FY '22.
Our Q4 sales at INR 54.10 crores grew by 13.7% year-on-year and were flattish quarter-on-quarter with a marginal increase of 1.7%. EBITDA margins for Q4 witnessed some compression, which was majorly due to some additional year-end dealer compensation coupled with marginally higher employment benefit expenses due to some new hirings that we have done at new branches and studios and a slight reduction in the gross margins due to turbulence in the raw material market.
I would like to mention that despite inflationary environment, we are present in the -- currently your company has being able to preserve its profitability, we would continue to do our best to keep our margins intact. If you look at the annual top line for FY '22, our business has clearly changed its trajectory. We have reported our highest ever annual sales at INR 200 crores, this is a significant growth of about 40% over the previous year's INR 143.18 crores. The company has also come back strong on the profitability front in FY '22 with the EBITDA margins of 18.9% during FY '22 compared to 15.2% in the previous year. PAT for the year also stood at INR 27.73 crores, up by 67% year-on-year.
Now I would like to share some operational highlights and developments. Firstly, we are pleased to announce that the company is adding a resin manufacturing line at its existing Sonipat facility in the same premises where our Unico products are manufactured. As you all know, resins are the key starting raw material for wood coating industry, and it is the single biggest sector affecting the quality at our end product.
Of late, we are noticing some inconsistencies in the quality of resins available locally. Thus, as a strategic move, the company decided to manufacture all these key resins in-house. These resins will be used to manufacture our Unico range of products, all the productivity from NC, melamine and the mass market of Indian PU. We also expect this project to contribute to better margins. The expect extent of the benefit will be known post commercialization of the project.
Secondly, we have postponed our South Indian wood coating facility by a couple of quarters. First, we would like to have a superior distribution and some aggressive marketing activities in our target markets, post which we will go ahead with the plan as communicated earlier. Till that time, our Sonipat facility is going to cater to these markets.
I am also pleased to report that in our efforts of optimizing debtor days, channel financing has been successfully introduced with a couple of big distributors and dealers on board initially. The company plans to add about 50 dealers and all is distributors in the coming few quarters. We have received good response from the dealers and the distributors we have on board so far. On the product portfolio side, Unico has fared well during the last quarter. We expect Unico to increase its revenue contribution in the coming quarters and the financial year. We are also receiving an exceptional response on our wall paint category, which has performed well in the year gone by including our premium category textures, finishes from San Marco.
For Durante & Vivan, our plan is to launch these products in a couple of upcoming trade shows and exhibitions. As communicated earlier, our first priority move is flagship product category that is hot melt in our existing OEM channel.
With this, I would like to open the floor for the questions. Thank you, everyone.
[Operator Instructions] Our first question is from the line of Mohit Gangwani, an Investor.
Hello?
Yes. Yes, sir.
Yes. My first question was how are we planning for the future competition given the fact that JSW has access the speed. And in 1, 2 years, Grasim next year plans like they have set aside a target of INR 10,000 crores of entering the paint business. And my second question was like how -- when can we see significant contribution from like our adhesive glue business and Marco paint business?
Yes. So to answer your first question, JSW and Grasim as of now is not a big question of competition for us. Reason being that their target product is the decorative, which is the wall paint. For now, Sirca Paints India Limited is focused mainly on the PU products, the wood coating products and our more than 95% of our turnover comes from the wood products.
As of now, JSW and Grasim has not announced their key entry in the wood care products or the polyurethane coatings. So for now, I mean, we are seeing it more as an opportunity because the market is going to open up in the decorative segment. And going forward, it is not a serious area of concern for us or a threat reason being that we don't see any announcement yet of their entry in the wood coating segment.
Answering your second question for Durante & Vivan we are launching our glue in the trade fair called Indiawood, which is happening in the Bangalore from 2nd June to 6th June. So officially, the launch of Durante & Vivan is happening there, where we are looking for the channel partners and the distributors and the product will be launched in the market by end of July, as mentioned during my speech, the first product that we are launching are the hot melt and the urea for melt high glues majorly in the furniture industry. And for San Marco, the sales have already started. We are working with almost 4 distributors and 6 dealers currently for San Marco sales and the product has shown a decent momentum starting the third quarter of last financial year, and we are expecting very good numbers in this year from San Marco range of products.
Okay. Also, is there any plans for Sirca, you being the shareholding in the company as talked earlier?
Yes, absolutely, their visits happened in the month of May with the primary objective of increasing their shareholding here. So hopefully, we should hear some news in the coming quarters. The reason -- major reason of current delay was the situation with the Russia because for Sirca Italy, Russia is a very big market, and they are trying to resolve certain remittance in certain product issues with Russia, which is their main area of concern as of now. So hopefully, once they are able to resolve all their tendency with Russia, the focus towards increasing their shareholding in India should happen.
Our next question is from the line of Akshay Mathur, an Investor.
Sir, my first question is if you can help us better understand as in how tricky it is to manufacture resins as against what we've been doing, like manufacturing wood coatings? And secondly, if you can also help us better understand as to why we are not directly importing resins from -- we continue importing resins from Italy as I understand that Sirca Italy is already doing it.
Yes. So see, the manufacturing resin for what we have understand from last 3 months, when we were discussing this project with our chemist and Sirca Italy is much more easier than manufacturing the finished products. The reason of manufacturing the resins here is mainly to come over the challenges of supply chain, which we have experienced for the last 3, 4 months. And also, it brings down the cost significantly and increases the quality very -- I mean, by almost 20%, 30%.
We are going to manufacture the resins for our Unico and economical range of products. But when it comes to the Italian PU, which we look forward to manufacture in India, for those, the resins are going to come from Italy only. Here, we are going to manufacture the resins, which we will use, which we currently use to manufacture NC, melamine and the economical range of PU. So these 3 products together uses almost 7 different kind of resins, which we are buying from different suppliers where we were facing a lot of disruption in last 3 to 4 months because of the turbulence in the raw material market, with the quality also with the supply also and the price.
With this project, we estimated that we will be able to reduce the cost on the resins by approximately 15% and the quality would go up by 20%. So we are going to manufacture for the current range of economical products for the Italian products, the resins will come directly from Italy.
Got it. Got it. This is helpful. Sir, my second question is on the margins front. Now I do see a consistent decline in terms of our EBITDA margins, part of which is kind of explainable due to high inflationary environment and the raw material cost increases. But I'm trying to get a broad sense here and will it be possible for us to -- after things normalize, revert back to our original margins of north of 20%, 25% in terms of EBITDA margin? Or should we start considering 17% to 18% band as the new normal?
Yes. See, around 20% to 21% is what we i.e., as a sustainable EBITDA margins because we expect the situation of the raw material and inflammation to actually slow down a late and with -- once the raw material situation actually settles down we -- in past, we have never seen the price decrease calls coming from the company. So we will be able to actually I mean use this opportunity to increase our EBITDA by 3% to 4%.
So it should -- the sustainable EBITDA that we expect going forward considering the external factors is about 20% to 21%. Also, the cost of employment, the staff cost, which has increased in last couple of quarters going forward, I think with the current staff cost, we are eyeing to increase our revenue significantly. So from there also with the right proportion, we will be able to increase on our margins going forward.
Got it. Got it. And sir, 1 last question from my end. So again, this is a bit more hypothetical. But if this kind of inflationary environment going to continue for, say, probably for the next couple of years, I think internal strategy, what would we be aiming at like would we be looking to keep our market share or probably we would guide more on the profitability terms. So that is one. And secondly, also, if you could highlight that in the last maybe a couple of years is forayed into various categories. So the next 5 years, how would you probably see Sirca evolving as a company? So these are the last questions from my end.
Yes. So yes, going forward, obviously, considering the environment and the inflation situation right now, the company is focusing on the -- very strongly focusing on the high-value product because we have always seen that -- in that segment, we never see a kind of recession even after the inflation things happening. So the company is strongly focusing to nurture to look forward to the sales through the -- our high-value products, the luxury range of products, which is the Italian PU and the HQ Series range. Besides this to ensure our growth this year, we have done a lot of horizontal and vertical expansion of our product range which will enable us to reach to the desired growth this year despite of the fact that the inflation remains or keep on increasing in this financial year.
[Operator Instructions] Our next question is from the line of Kavish Jain, an Investor.
My first question is on the postponement of South Indian facility. Are we not referring to, of course response from this market since we have already been in the market for 12 years I think. Why you said that we have not been able to create a strong full year?
Yes. So with our new experience team coming on Board, Mr. Narinder Mediratta and Upendra Kaul, who came from the existing PU market and wall market. The focus for this couple of quarters where on the north and the west market, the reason being that here, we found our entry very easy because we already have a very strong footprint and the incremental sales that we are expecting this year could have come much more easily and much with the less expenses this year, so the focus after the Board meeting shifted towards the north and west for this year because the scope of growth from these existing states where we already have a decent infrastructure was remarkable was -- there was a big opportunity.
So that is why the project of the south was delayed by 2 -- couple of quarters. The reason being that we are seeing an enormous scope of growth in the north and the west where we are already performing very well. And if we are able to focus and put our energies and money in these states, the results will be much, much, much more faster. And with these results coming in by the end of, say, this year, we will be able to hit the South market as well.
In the South, yes, I mean the sales are showing the positive trends, especially the Kerala market, for which we wanted to place our new facility in Coimbatore to manufacture the economical range of products. But besides this, keeping in mind the inflation and the external factors for this year, our focus again is going towards the luxury range of products, which still contributes to about 88% of our total revenue, where we are expecting a huge growth from the West in the North Indian market this year.
Perfect. Again, can you roughly give us a split of how much is the non-Italian PU sale this year out of the total INR 200 crore top line?
Sorry. Can you repeat how much is the?
Non-Italian PU sale.
Yes. Non-Italian PU sale is the sales from the Unico range of products and the wall paint and which is approximately about almost 14% of our total revenue.
Okay. And like can you give us the bifurcation as to how much is the San Marco and wall paint and other categories?
Yes. So total sales from wall and all, were actually on the lower side, I mean it was approximately about INR 15-odd crores and the rest was coming from the Unico PU.
Okay. And just a follow-up question on this. How do you see this non-Italian PU business shaping up in the coming years? And like what is the top line target you have in the mind for coming?
Sorry, sorry, can you repeat?
How do you see the non-Italian PU business are shaping up in the coming years? And what is the top line target for the same?
Yes. So yes, non-Italian PU -- so just a small correction that the non-Italian product contribution this year was approximately about 20%. And going forward, with the facility of Sonipat, we are going to actually focus on manufacturing the PU range rather than the NC and melamine where the average realization is more and the product is meant for the quality product. So we are expecting that this year, the contribution of the economical range of products, especially the Unico and wall paint would increase to about 30%, 35% of the total revenue.
All right. Lastly, sir, I just wanted to understand the competitive scenario, I mean, like since recently after the wood coating industry and acquisition. What is the kind of competitive intensity change in the -- wood coating industry in last 1 year. But the other thing is when you give us the suite of competition on the premium wood coating side?
Yes. So the actual acquisition that happened also was of the wall paint company. So majorly, all the action that we have seen in last couple of years with the announcements of JSW, Birla Wall as well entering into the -- or buying out a wall paint company, is more towards the decorative side. And we, as a company, as I told you, it's still focused or currently into the revenue segment coming from the wood coating products. So we have not currently seeing any competition or any threat from these big giants entering into the decorative segment because our presence is more towards the wood.
All right. And are there any price hike in the immediate coming months or 2? And if yes, what is going to be the quantum of the hike?
Yes. So there are hikes, which are scheduled for the month of -- from the month of June -- for the month of June and July between 4% to 6% approximately.
[Operator Instructions] Our next question is from the line of Vijay Chauhan with White Horizons.
So I just would like to understand that we are seeing huge opportunity in north and west side. So which kind of like top line growth we can see in next 3 to 4 years? Also like we are doing lots of initiative on the resin side as well. So what is the kind of like top line we are expecting from a longer-term perspective, maybe 3, 4, 5 years down the line?
Yes. So we -- now going forward, I mean, we are expecting about 50% to 60% of our revenue growth every year. So this would come from our existing range of products and the expansion of the range of the products that we are doing and primarily the main -- the majority of the share of the increase in the revenue will be contributed by the Indian made and the Italian PU. The Indian made PU for now, which we call as the Unico PU, we expect that by a maximum 1.5 to 2 years, the plant will be operating at its max capacity, which will contribute to almost about INR 240 crores to INR 250 crores of additional revenue coming from the polyurethane products. So yes, to be conservative, yes, we are expecting 50% to 60% of our top line growth for next 3 to 4 years.
Right. So roughly, we will be around INR 400-odd crore company in next 3 to 4 years. Is it safe to assume?
Sorry, how much?
INR 400 crores top line in next 3 to 5 years.
No, no. Next 3 to 5 years is much more than that.
Okay, okay, okay. Yes, yes. And secondly, on the dealer addition side, so what is the kind of strategy that we are adopting to increase our dealer network? And is there any like program has been done on specifically on this side. So if you can just throw more light on this part?
Yes. So as companies, we are very strongly focusing on increasing our distribution network, which is the -- which will be the key factor of our growth, revenue growth this year. So the company has implemented first to fifth day of every month as the NDO days where all the teams are focusing on only new dealer openings, which we call as the NDO days. And we are expecting to add almost about 150 to 200 dealers every month on pan-India basis, where we are targeting our all the range of products from the Unico to the Italian to the San Marco and the wall. So with certain range of products, we are adding dealers every month between first to fifth. And like this, we expect that by the end of the year, we will be adding not more -- I mean, not less than 2,000 to 3,000 new dealers this year.
Yes. Yes, that's quite helpful. Yes. So thank you, and good luck for the future.
Thank you.
[Operator Instructions] Our next question is from the line of Rajesh Gupta with SBI Capital.
Yes. Sir, I missed out your opening remarks. I just wanted to understand the growth driver for your industry. I heard that you're expecting 50% to 60% kind of growth per annum on the sales side. But I just wanted to understand the margin profile going forward, the kinds of product that you're looking. And also the demand environment in totality. Hello? Am I audible?
Sorry. Yes. So yes, you rightly heard us that we are expecting to grow at least by 50% to 60% every year on the top line with the margins getting better by every year. So we are expecting that the expenses that we are doing towards the infra side and on the manpower will actually balance our expenses going forward compared to the revenue and the margins would get better in the coming years when the expenses are not growing in the same ratio as the turnover is. So yes, going forward, we expect that the margins in the coming years should get better and we would be able to sustain our EBITDA of about 20% to 21% going forward.
Okay. And sir, the demand environment, can you just throw some light on that, because the growth is quite proper start in -- while your base is very small, but the growth itself is very robust. So just wanted to understand the kind of demand climate that you are seeing in the wood coating and the decorative paint where you are trying to enter into?
Yes. So the demand side, we have seen -- I mean, there was a strong pent-up demand in the Q2 and Q3 of the last financial year. In fact, the Q4 also performed very well. In fact, if we talk about current, despite of this tough environment and inflation, we are not seeing any downside towards the demand at the luxury product side where our major revenue contribution is coming from. But going forward also, as you see a lot of big players like JSW and Birla and Astral are entering into the decorative segment and the market is getting more organized and the demand towards the paint -- in the paint industry itself is increasing quite aggressively. We see a lot of scope for next 3 to 5 years. The demand even after strong external factors, should increase. I mean, there is a lot to do in next 3 to 5 years when it comes to the construction and the building segment.
And sir, if you can give some details about the CapEx plan, the revenue addition from those programs that you're looking -- going ahead. I heard that in next 1.5 year, you were saying that new plants will get commissioned and that you provide to INR 240 crores to INR 250 crores of revenue going forward. So if you can just give us what is the kind of CapEx plan that actually expected to happen from your side? And how you look to finance those CapEx?
No. So yes. So the -- what we mentioned that INR 240 crores to INR 250-odd crores revenue was from the existing plant that we should reach there. We should be able to utilize the maximum capacity of our existing plan to reach the INR 250 crores to INR 240-odd crores turnover by this year, 1.5 years. So this was for the existing CapEx that we have done.
Going forward, yes, we are going to do a net small CapEx of about INR 5 crores to INR 6 crores for our South India operations, which should happen by end of this year. And right now, we have done a small CapEx to develop our resin plant, which is being developed in the existing Nathupur facility, which will allow us to manufacture all our key resins in-house to ensure the better quality and the better prices and avoid the disruptions in the supply chain.
So sir, you were saying that with the existing capacity, you will be having the revenue of INR 250 crores, INR 260 crores for the current year, right? But how you will grow? I mean just wanted to understand if INR 5 crores to INR 6 crores as CapEx they're going to do, then how you will grow 60% per annum going forward?
No. So the majority of the growth also is coming from the trading business where we are importing the products from Italy, which is the luxury PU side are still our majority -- the majority share of the business comes from the trading business where we are importing the products from it and distributing it in India, which we expect to grow quite aggressively also in the coming years.
Besides this, we are expecting our revenue to grow from the Unico range of products, which is the Indian made PU, which is made in India from the technology of Sirca Italy, wherein we expect that by 1 year, 1.5 years, we will reach to the maximum utilization of our current facility, which will give us a revenue of not less than INR 250 crores to INR 260 crores with the mix of product, but can reach to up to about INR 300 crores going forward, if we manufacture more of PU. Besides this, we are also expecting our revenue to grow at the wall paint side, at the texture business from San Marco and the adhesives which is a new line, which is -- which will be launched in India in the next week and the products will be out by the end of July.
[Operator Instructions] Our next question is from the line of Vijay Chauhan with White Horizons.
Yes. And I just wanted to understand more on the resin initiative that we have taken for in-house manufacturing. So what kind of margin improvement or something that we are looking at by doing in-house manufacturing?
Yes, we are expecting at least on the resin side, which contributes to almost 20% to 30% of the product. We expect that the prices of the resins should go down about -- by about 10% to 15% and the quality would also be much, much, much on the better side than we manufacture it in-house.
Okay. So is there any number that translates into the overall margin, like on the operating margin side, maybe 1% or 2% kind, something like that?
Yes. So approximately like -- no, we will be reducing our COGS by INR 4 to INR 5 a liter. And with the average pricing, I think it will, in the percentage should be about 4% to 5%.
Right, right, right. Yes. And lastly, on the -- like there was some impact due to the COVID disruptions in December and January months opening this year. So what kind of a run rate or what was the contribution coming from February and March, if you can throw some light like in terms of sales contribution on the current revenue for the current last quarter?
No. Sorry, can you repeat?
So monthly run rate in February, March because we had lost a lot of, I think, 20, 25 days of sales in January as well.
Yes. The average run rate was about 20, 21. The March to October, March was a bit better. So average you can see it was about 22.5.
Right, right, right. And the traction is continuing in this inflationary time as well like mostly the April, May like where we have seen spikes in the inflation number.
Yes. Yes.
[Operator Instructions] As there are no further questions, I would now like to hand the conference back to Mr. Apoorv Agarwal for closing remarks.
Okay. So I would again like to thank everyone of you for joining this conference. And just to close, I would like to update that we see this year again as a year of opportunities. We have a lot of experienced team coming on board which is giving us a lot of excitement this year to grow quite aggressively, to grow as per our plans. And we hope that this year will be much more exciting because we can remain, we can avoid the COVID lockdowns, which we were facing for the last 2 years. So this year, the team -- the whole Sirca team is quite excited to reach to its numbers and I mean, reach to the final target.
So once again, I would like to thank each and every one of you for having the trust in Sirca Paints and its management, and we would be assured that we would actually reach your trust, your continued trust in the future. Thank you.
Thank you. On behalf of TIL Advisors Limited, that concludes this conference. Thank you for joining us today, and you may now disconnect your lines.