Berger Paints India Limited (509480) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to the Q3 FY '20 Results Call for Berger Paints India Limited hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashit Desai of Emkay Global. Thank you. And over to you, sir.

Yes. Thanks, Ali. Good evening, everyone. We would like to welcome the management of Berger Paints, and thank them for giving us this opportunity. For the management, we have Mr. Srijit Dasgupta, Director, Finance and CFO; and Mr. Sujyoti Mukherjee, Vice President, Finance and Accounts. Now handing over the call to the management for opening remarks. Over to you, Srijit.

Thanks, Ashit. Good afternoon, ladies and gentlemen, and welcome again to the Berger Paints India Limited Quarterly Earnings Call for Q3 FY '20. As usual, I'll start with some growth numbers for both stand-alone and consolidated performance for Q3 and 9 months FY '20. On the stand-alone front, the total income from operations grew by 2.9% in the quarter and by 8.5% for 9 months. The PBDIT, excluding other income, went up by 16.6% in the quarter and 18.7% for 9 months. PBIT went up by 18.9% and 21.6%, respectively, for Q3 and 9 months. PBT went up by 21.2% and 22.8%. PAT went up by 39.1% and 44.3%. Looking at the consolidated numbers. The total income from operations grew by 4.9% in the quarter and 9.2% for 9 months. PBDIT, excluding other income, went up by 18.4% and 20.1%. PBIT went up by 20.1% and 23.6%. PBT, and this is after the share of profit and loss from JV, went up by 21.1% and 24.1%. And PAT went up by 36.5% and 44.2% for Q3 and 9 months, respectively. Some comments on the performance for the quarter. On the stand-alone front, the decorative business growth was, of course, impacted by a late monsoon and some states' early Diwali and the effect of certain slowdown in the economy. The automotive business line continued to be affected by the slowdown in demand. We have seen this slowdown now for a few quarters. Those protective coatings business continued to show robust growth. On the positive front, there were a number of new decorative, known also as architectural products, which were launched during this quarter and at the back end of the earlier quarter, which fared quite well during the quarter. There was a gross margin expansion mainly on account of raw material price decreases and, of course, some mix effect. There were price decreases in titanium dioxide, solvents, monomers. The effect of raw material decreases was partially offset by paint price decreases in May, July, September and December of 2019, the combined effect of which, of course, along with the price increase in December 2018, was a little over 1% in terms of overall decorative business. On the overhead front, advertising expenses grew significantly compared to Q3 FY '19. Of course, this was consistent with our overall policies and budgets. The tax provision for Q3 FY '20 was, of course, significantly lower. I think we mentioned the reasons in detail in the earlier quarter. So there's no need to go over that again. On the consolidated financial front for the quarter, our subsidiary in Bolix -- that's the Bolix subsidiary, showed good top line and profitability growth during the quarter. SCPL, which was earlier known as Saboo Coatings, continued to show improvement in contributions and robust growth in profitability. BNPAC, which is the JV with Nippon Paints, continued to be affected by the severe slowdown in the automotive industry. Our JV with Becker, Berger Becker Coatings, made a one-time provision against possible bad debts during the quarter. This is more a housekeeping issue and most likely a one-off, as otherwise, they would have been better profitability during the quarter. The consolidated numbers, I should mention also, include 2 months operations of STP Limited. That [indiscernible] performance in the quarter. I now invite questions from the participants. Thank you.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Sir, my first question is on the gap between you and the market leader in terms of gross margin. Sir, 3, 4 years back also, the gap was around 300 to 400 bps. And now also, the gap is similar. So one, why in spite of premiumization you're not able to close the gap? Second, is the market leader now more aggressive in terms of the consumer discount or the dealer incentive? So if you could comment a bit on the industry, I know you don't want to comment too much on the other players, but some insight into...

[ I'll start it ] with you, Abneesh, as much as I can within the confines of what is permitted to me. I can just offer one comment. A significant part of our business includes, of course, the industrial and also the automotive and general industrial part of the total offering that we have in terms of business lines. As you can imagine, the profitability in this particular segment is lower. And therefore, it is unfortunately going to impact the difference between ourselves and our company. And I'm, of course, comparing stand-alone numbers, which will affect the difference in the margins that you see. Having said that, it is likely that we will, of course, improve on our contributions and our gross margins. We've continued to show some improvement. If you see our results over the last 10 years, the gap has narrowed considerably. May I offer that our decorative business would not be that far off in terms of margins compared to the leader.

Sir, my second question is in J&K, there was some impact because of disruption. Is it still continuing? And you had launched a lower-priced emulsion last quarter. So how is the response for that?

The answer is yes to -- well, the J&K, of course, it is impacted a little bit, getting a little better. Some -- most of our business is really outside the valley, though we do have a significant now presence in the valley. So yes, it is impacted a little bit. And in terms of the economy end of the market, yes, we have launched some products at the economy end as well right through the range actually in both external and -- exterior and in interior paints and which have done well. And I should name a few brands which may really do well going forward. One is, of course, WeatherCoat Champ. There's also Walmasta Lite. There's Walmasta Glow. There's Bison Glow. These are all newly introduced products at various price levels, which are doing pretty well.

And sir, last question, distemper and putty, if you could update us. Is that outperformance still continuing? Any insights into as a percentage of sales, how much has it -- how much it has moved?

Distemper has actually de-grown a little bit this quarter.

Because of competition?

Sorry?

Is that because of competition?

It's probably more to do with competition a little bit, yes. But putties have grown very, very strongly.

And you will obviously respond to the distemper, right?

Sure. Sure. Absolutely. Yes.

The next question is from the line of Kunal Shah from IIFL.

This is Avi here. Sir, this time, you've not mentioned any outlook on the industry like you typically do. Could you simply share any comments on this?

We wanted to stay away. Avi, I think your guess is as good as ours. We are hoping that over the next 2 or 3 quarters, the fortunes of the automotive business revive a little bit. You know that we do have not a lot but a significant exposure. And we want that to hopefully perk up a little bit. And then of course, hopefully all the negatives of early Diwali and late monsoon and everything else will be over and then done with. So we were, I think, hoping that we have the optimism going forward but felt it wouldn't be appropriate to articulate in a presentation. I hope you don't mind.

No, that's okay. I just wanted to kind of -- so would you say that this kind of question -- as you said, I understand of the auto space. But decorative, are you seeing the demand trends kind of improving, remaining steady or any sense on that? Or what would happen?

Unfortunately, I can't comment, Avi. I have to restrict my comments to Q3, so do excuse us.

Sure, sir. The second bit is on the recent disruptions in China because of the coronavirus. Wanted to understand, as an industry, we would procure some [ shared products ] in that side, from that geography. Would you be able to kind of quantify what kind of procurement comes from that for the industry as a whole? And do you see any inflationary pressures because of this?

It is slightly outside the scope of this call, Avi. But I think it's fair to mention that we do have multiple suppliers for most raw materials. It will need a little bit of adjustment. Perhaps it could have impact price but not significantly. This is what I'm given to understand.

Okay. Perfect. And lastly, sir, on the employee expenses, with decline that I see from 2Q to 3Q, is it more actuarial-linked? Or is there a...

It's housekeeping. We take some liabilities, which we have to recognize when we pay out performance incentives or at least recognize them. We have to comply with Indian Accounting Standards. They don't permit proration usually. And we have to recognize the liability when it happens. So it's purely a housekeeping issue and things will even out. So this is evening out.

Okay. And sir, if I may, the last bit of the provision you've mentioned there, which has taken Becker Coatings, would you be able to quantify how much was it, sir?

We can't, but it was a large one. So hopefully, going forward, that unit will show vastly improved results.

[Operator Instructions] The next question is from the line of Tejash Shah from Spark Capital.

Sir, the first question, if you can give some qualitative comment on demand, I mean, in terms of fresh building demand versus replacement demand.

I think we've gone through this before, Tejash. So I will repeat, it's still, to our understanding, an 80-20 situation. The low-income group housing has revived a little bit. I think we are referring to some of the schemes by government. But nothing significant to change the overall numbers yet is my reaction.

Okay. Sir, the reason I asked this question now, this is fifth or sixth year of a very slow real estate market. Now that inventory gets converted into replacement demand or rebuilding demand at some point. So are you seeing that sluggishness showing up in rebuilding demand as well? Or it's still holding up well?

For sure, the Tier 1 cities are holding up less as can be expected. So I think if that helps you a little bit, I think that, that's really how we understand what's happening.

Sir, second, on waterproofing or construction chemical network that I saw your -- some of your ads -- I saw your ads on construction chemical or waterproofing on social media. So what's the plan there? And how is the distribution expansion of the same in our nonexisting network?