Kansai Nerolac Paints — Call Transcript 2023

Feb 9, 2023

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9th February, 2023

1. Corporate Relationship Department 2. Manager – Listing BSE Limited, National Stock Exchange of India Ltd. PhirozeJeejeebhoy Towers, Exchange Plaza, C-1, Block G, Dalal Street, BandraKurla Complex, Bandra (E), Mumbai - 400001. Mumbai - 400051.

Sub.: Q3 FY 2022-23 Financial Results Conference Call – Transcript

Ref.: 1. Regulation 30(6) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 2. Scrip Codes : BSE - 500165, NSE - KANSAINER

Dear Sirs,

This is further to the intimations done by the Company on 31st January, 2023, 4th February, 2023 and 6th February, 2023 with respect to the Conference Call hosted by the Management of our Company on Monday, 6th February, 2023 at 11:00 hrs India Time to discuss Q3 FY 2022-23 Financial Results of the Company.

We are enclosing herewith the transcript of the Conference call for your information and reference.

For KANSAI NEROLAC PAINTS LIMITED

G T Digitally signed by G T GOVINDARAJAN GOVINDARAJ Date: 2023.02.09 AN 17:00:59 +05'30' G. T. GOVINDARAJAN COMPANY SECRETARY

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“Kansai Nerolac PaintsLimited Q3 F Y '23 Conference Call” February 06, 2023

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– – MANAGEMENT: MR. ANUJ JAIN MANAGING DIRECTOR KANSAI NEROLAC PAINTS LIMITED – – MR. PRASHANT PAI DIRECTOR, FINANCE KANSAI NEROLAC PAINTS LIMITED – MR. JASON GONSALVES DIRECTOR, CORPORATE – PLANNING, IT AND MATERIALS KANSAI NEROLAC PAINTS LIMITED

– MODERATOR MR. ANIRUDDHA JOSHI ICICI SECURITIES

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Moderator:

Ladies a n d gentlemen, good day, and welcome to the Kansai Nerol a c Q3 FY '23 Conference Call host e d by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode an d there will be an opportunity for you to ask questio n s after the presentation conclude s . Should you need assistance during the conference call, pl e ase signal an operator by pressing s tar and then zero on your touchtone phone. Please note th a t this conference is being recorded. I now hand them over to Mr. Aniruddha Joshi. Thank you, a nd over to you.

Aniruddha Joshi:

Yes. Tha n ks, Mike. On behalf of ICICI Securities, we welcome yo u all to Q3 FY '23 Results Conferen c e Call of Kansai Nerolac Paints. We have with us senior m a nagement represented by Mr. Anu j Jain, Managing Director; Mr. Prashant Pai, Director, Finance; and Mr. Jason Gonsalve s , Director, Corporate Planning, IT and Materials.

Before I h and over the call to the management, we remain enthused by the strong recovery in auto sect o r and the related paint recovery also. We believe that seg m ent is likely to grow very well in c o ming quarters. Now I hand over the call to the manageme n t, and then we will open the floor f or question-and-answer session. Thanks, and over to you, s i r.

Anuj Jain:

Thank yo u , Aniruddha. Good morning, all of you, namaskar. First o f all, let me wish you and your fam i ly a happy new year, and thanks joining this call of Kans a i Nerolac for quarter 3 of financial y ear 2023. For this quarter, as you must have seen, we rec o rded our top line growth of 1.4% o ver the same quarter of the last year and EBITDA de-gr o wth of 10.2%. Last year, other ope r ating income included some nonrecurring income. And if y ou exclude that, then the net reven u e is up by 4% and EBITDA is up by 14%, PAT is up by 13.5%.

If you lo o k at the nine month period, the growth is 20.7% over the c o rresponding period of the previous q uarter. And EBITDA growth is around 13.7%. During t h ird quarter, the growth is led by au t omotive, but within automotive, also the growth was high e r from passenger vehicle and com m ercial vehicles. The 2-wheeler growth remained muted. D ecorative, the growth is slightly n egative. Raw material prices, though softening, is still b eing carefully monitored given the volatility in crude and forex coupled with geopolitical chan g es.

Pricing i n decorative so far is 3% YTD level. In fact, it was taken ea r lier itself in quarter 1 and quarter 2. But we have taken some additional price increase in ind u strial. And overall, price increase i n industrial is the range of 8% to 9%.If you look at gross margin in comparison to quarter 2 , they have improved by 170 basis points. And mainly it i s on account of, one, the product m ix where, in fact, one of the initiatives what we have t aken is shifting towards premium i n all our businesses, especially in the non-auto industrial a n d the decorative.

So it is p a rtly on account of product mix and the price increase of in d ustrial, partly on account of that, a nd partly on account of raw material prices. But we are still carrying high price inventory because in industrial, the supply chain challenges a re still continuing. The geopoliti c al situations are still not stabilized. So one of our strengt h area competitive edge is the servic e .

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And ther e fore, to continue with that kind of service level, we are s t ill keeping a high-priced inventory . And therefore, the effect of raw material prices, even i n the coming quarter will come gra d ually.Just to give you some colors related to our industr i al business, in auto, as I said, that we have got the price increase and almost all key custom e rs, we have been able to conclude the price increase. We continue our path of extending technologically superior product. S ome examples I gave earlier also monocoat, medium solid, to more customers. So that part w e are continuing. But some more initiatives what we have t aken during the quarter is that we h a ve started underbody sealant. I

So basic a lly, our attempt is to increase the TAM in the autom o tive business. So it's an additiona l market, which we are entering and the technology in-h o use and we already got approval from the leading automaker.The fastenercoating we w e re exploring earlier, the commerc i al supply of fastener coating just started. And now, again, a new technology, the new products, and we have started making inroads into key manufactu r ers. There are some new additiona l business areas, which we are also exploring, and as I said, that our attempt is basically t o increase the TAM in auto business.

Coming t o non-auto, which is performance coating business. As we h ave said earlier also, our focus is t o wards high-technology order, premiumization. And so basically related to that, some of the bu s iness, which is a very low profit business, we have been e x iting. And salience in the premium item is going up quarter-on-quarter basis. For this premiu m ization, we are actively working t o get approvals across key infrastructure segments. S o because the market is expandin g , we are also expecting a good growth in infrastructure.

A lot of f ocus is there on the government side on the infrastructure. So we are bullish on the infrastruc t ure segment. And therefore, we are aggressively workin g in terms of getting the approvals, a number of approvals have increased even in the last q u arter. Some examples of these app r ovals are like bullet train, Vande Bharat, Mumbai Coasta l project and construction chemical -- construction equipment and air conditioner segment also, we got some of the new names.In coil coatings, where we started the business three, four yea r s back, but we were there in the basic product category, and now we are ready with the h i gh margin -- technology products a nd started getting into the appliance segment.

We also g ot some approval from the appliances manufacturers. An d here also, our premium segment has gone up significantly. And some of the basic categor i es where the profitability was very low that we have exited. So this is in the industrial area.C o ming to the decorative, if you can r e call that in the last meeting, we said that what has happen e d in the third quarter, we had a vis i bility of that because last year, Diwali was in the mont h of November, this time, Diwali w a s early. And generally, we have seen the last two, three ye a rs, the rains get extended, monsoon get extended.

And also b ecause last year, in this quarter, there was a very heavy p r ice increase. Probably we have nev e r seen in the past that kind of price increase. And therefore, typically in this situation, dealers g o for a higher stocking and therefore, we did not expect gro w th in decorative. But we continue o n our strategy. One was Paint Plus, which I spoke in las t two, three quarters also.

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And in t h e Paint Plus, our idea was to basically come up with the differentiated product or democrat i ze products.

So in the key categories, like waterproofing wood paints, whateve r products we had part of pipeline, m ost of these products are now launched in the market an d to that extent, our Paint Plus range, what we said is completed. In fact, in the last quarter, we introduced one more product, w hich is Everlast 12, which is basically a self-cleaning pai n t. So after every rain that the paint l ooks good, more beautiful.

We also s tarted the next-generation range of products. This is bas i cally for safety network. And this r ange has a better white. So the white is non-gelling and in terms of quality is far, far better, an d these products also have a better coverage. So by and lar g e, our Paint Plus range is in place n ow. As I said, this is a part of our strategy to differen t iate and democratize the product o ffering in the market. We have got a good response to quality, proposition and pricing, a n d salience has gone up. We are now in a position to ra m p up our distribution and salience o f these products.

The next p art, which we have been working for last few quarters wa s in the area of influencer. The role o f influencer is very, very important in paints, and these i n fluencers include painter, contracto r s, architects and interior decorators. So our strategy is to f ocus on key painters and architects and interior decorator and demonstrate advantage of Pai n t Plus products to them. The infra s tructure in terms of feet on street and call center progress w ill be completely in place by, say, n e xt quarter.

The num b er of active users are going up gradually when we loo k at all these influencers. Digital a doption is progressing well, and number of downlo a ds have also increased substanti a lly. Our reach to influencers, which used to be there in the past through the distributi o n has become direct now. And we have started sharing gen e rating business leads and sharing b u siness with these influencers.The next part of our plan is the distribution.

So focus is basically to increase the counter share. And the initi a tive related to that next generatio n shop, which here I spoke about, that is getting stabiliz e d now. We have already crossed m ore than 50, and we are looking at growing aggressively going forward. The next generatio n service counters, as I spoke about that we started the NEXTGEN service, and therefore, this -- related to the service, we are attaching it with the counter, so that they can supply an d service the demand.

The excl u sive range of products was the distribution and some cust o mized activities. So as of now, the distribution expansion is in double digit. This is only a direct reach. Indirect is different. As of now we don't track the indirect reach. We have now s tarted tracking primary to secondar y conversion of sale. And in the last quarter, in fact, more t h an 40% now, we are in a position to track that whatever material we are building to the ma r ket, how much is getting converte d to a secondary sale.

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Going fo r ward, it will help us in terms of ensuring that how we keep increasing, and therefore, how do w e get the advantage in primary sale also.We also initia t ed actions, not initiated, actually, i t is already actioned for faster replenishment of stocks in the market and last mile delivery b ecause in last 1 year, 2 years, the number of SKUs have gr o wn in decorative market. And whil e many of our dealers still have the same kind of warehous e facility. So therefore, the service is becoming very important, and we have introduced some p r emium services to ensure that the r e quirement is taken care of.You know that our market sha r e is single digit, and that also give s us the opportunity.

So there a re certain weak downs. As a company, we have a good m a rket share in Tier 2, Tier 3, Tier 4, but Tier 1 towns that we are not so strong. So because when you are not strong, then obviousl y , the distribution support also is weaker. So in these wea k er towns that we started working w ith the strategy of project, the services and word finishe s . So because in all these businesse s , you can get access directly to the influencers and the co n sumers. So basically, the users.

So project is one area where we have expanded earlier, we were th e re in 33 towns. Now we expanded our reach to 48 towns. And accordingly, we expanded t h e team. The pipeline of warm sit e s is being built gradually, and within the project because t h e margins are lower than the retail , but we are focusing on the quality of business so that the margins are also not affected. N EXTGEN services with the proposition of 5-days dust f ree painting, which is a differenti a ted proposition if we compare with the industry. This has now expanded to 100 towns wh i ch are greater than 5 lakhs population.

Till last q uarter, we expanded to 50, but now we expanded to 100. Consumer acceptance of branded s ervice is on rise. That is the learning what we are getting f rom the market. And the digital ca m paign to generate this kind of leads has given us a good advantage. And as of now, 27,000 si t es, we have service. So basically, with this initiative, now w e are able to understand this busi n ess pretty well and service team and structure accordingly , we have expanded. And which is a lso getting supported with architect and interior decorators c ontact program.

The third part of this big towns is a wood finish applicator, again, i t is a user-based business. So projec t NEXTGEN service and wood finish applicators where w e can reach out directly to users is o ur plan to increase our business in the weaker towns.In w aterproofing and wood, salience i s now close to around 77%, and they also started doing w e ll. So quarter-on-quarter, we are se e ing the progress in these businesses.For brand related, as w e have been saying in the past, our share of voice, we are maintaining at 15%. And w e have also started our communi c ation in the retail markets.

Digital e c osystem to ensure complete information available and sea m less coordination across stakehold e rs is progressing as per our plan, and our digital perform a nce marketing drive also have incr e ased and more than doubled our organic reach via soci a l media.So some of this pertains t o decorative, which we have started in this particular year, a nd we have been piloting the same.

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And now onward, we go for this scale up on some of these activ i ties.A few other updates related to this as a part of our IT backup, the FDR implementation i s complete. We have been working o n the capability building for the people and online progra m is gaining traction, and we are i m parting a lot of trading to our teams so that skill enhance m ent can happen. We have started c o nducting management development centers for our key m anagers. We have done some stra t egic workshops for top people, top managers with some o f the innovative sessions and comi n g with the ideas that can answer some of the problem to t he customers and we can come up w ith a better product and the better process is to give better s olution to the customer.

Our capa c ity utilization YTD level, it is more than 60%. And capacity addition, in fact, last quarter, w e have announced the expansion, which is in the -- mainly the water-based decorativ e because the growth market is in water-based. And in terms of water-based, the capacity e xpansion, what we announced is about 42% of the water-b a sed.

And for t h e industrial, we have a capacity. So whatever this growth m arket is seeing, we are in a positio n to cater the demand of the market.So these are some of t he other points related to things. A n d obviously, as we said earlier, we have also issued R S Us to senior and middle management employees.So this is the brief from my side on the res u lt and some of the points that we h a ve been working upon and we'll be happy to take the quest i ons now.

Moderator:

We have t he first question from the line of Avi Mehta from Macquarie.

Avi Mehta:

I wanted to kind of just understand this on the decorative side mo r e from a near-term lens. While the initiative is very clear and I'm hoping to kind of -- hope it k ind of works the way you are looki n g for. There are signs of weakness in urban discretionary. D oes that not concern you from a near-term sense on the demand trends in the decorative side? I would love to hear your thoughts o n that.

Anuj Jain: So Avi, t h e trend does not indicate that because if we see quarter-on- q uarter basis, Q1, Q2, Q3, the urban growth has been doing well. I think the stress was there in the rural, but we have seen imp r ovement on every quarter basis. And if that trend continu e s, probably from the next quarter, w e may see some uptick from the rural demand also. S o as of now, there's no indicatio n like that in the coming quarter, near term, we are seeing a b etter demand.

Avi Mehta: Sir, you m ean near term as in Jan, is what do you mean by that, sir?

Anuj Jain: Yes. I me a n one or two quarters here.

Avi Mehta: Okay. O k ay, sir. And sir, the second bit was essentially on the margin side. And could give us a sense w h at -- it seems like margins have bottomed up. And if you c ould kind of comment on that, whe t her that is the understanding is correct? And what levels do you see in the steady state over here?

Anuj Jain: So as I said that this quarter, the margin expansion -- gross margin e x pansion was around 160, 170 basis points, which is based on the product mix, the price incre a se and industrial and also the decli n ing trend in the raw material prices. So we hope that this d eclining trend in the raw

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material p rices, though we remain a little cautious because geopol i tical situation or what is happenin g in China, we'd like to wait and watch. But largely, the p o ssibility is that this trend may cont i nue, some advantage of price increase what we have take n also would come in the coming q u arters.

The only t hing that we have to keep in mind is that generally in the f o urth quarter, our business mix is ve r y different. It goes quite in favor of industrial business. An d therefore, because of the change i n the business mix because the profitability is lower in the i n dustrial business, we see some im p act of that. But otherwise, that at the segment level, if yo u see, I think the margins will impr o ve based on the factors, what we spoke about.

Avi Mehta:

And sir, t his should flow through to EBITDA also, right, logicall y ? Barring, as you rightly said, ther e is a fourth quarter impact because of mix, but otherwise, t h e trend is towards on the segmenta l level, EBITDA margin improving from here on.

Anuj Jain:

Yes. Sim p ly the gross margin improvement reflects in the EBITDA. The only thing is that we are maki n g some investments in the marketing on the people front. S o to that extent, there may be some g ap.

Avi Mehta: And sir, steady state, what would you expect these EBITDA margin trajectory or levels to be? And -- so r ry, when do you expect this steady state that could be... Prashant Pai: See, as A nuj has mentioned, the raw materials are showing a decli n ing trend. but we have a high-cost inventory. So that has to get liquidated. Hopefully, in the Q 1 of next year, definitely, this will b e liquidated. And post that, I think we should get the mar g in improvement also. So minimum one or two quarters has to happen before we liquidate all t h e inventory, and the new inventory starts flowing in. Avi Mehta: Okay. Pe r fect, sir. And any level, sir, that you would want to indicate Prashant Pai: It's very d ifficult to make a statement on that because the way competition is coming we have to react t o competition also. Accordingly, we'll wait and see how t h e margins change in the coming t w o quarters. And accordingly, we can comment after that. Avi Mehta: Perfect, s i r. And just one last, if I may. On the -- you recently did a s a le of land, which kind of has result e d almost 600 crores kind of flow through. Could you give us any idea of what is the thought o n this cash that is generated? Anuj Jain: So we ar e just looking at supporting the growth initiatives in the com p any. Moderator: We have t he next question from the line of Archana Menon from Mo r gan Stanley. Archana Menon: My first question is on the decorative segment following up from the earlier participant question. Now with all the initiatives and improving the market sha r e, should we think of the decorativ e segment growth in line with the industry growth for FY '2 4 , given that most of your

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peers are talking about a double-digit volume growth. Is that w hat you would be also expecting?

Anuj Jain: So intern a lly, yes, that is what we are working upon. But just to p u t some color on that, so today, th a t making a comparison is not absolutely fair because so ma n y segments, people have entered i n the paint industry. And it's not that everyone is there in ev e ry segment. So to that an extent, th e comparison has become difficult because we generally lo o k at where exactly we are working, w hich segment, which markets we are working. But havin g said that, yes, whichever market w e are working in, how do we increase the growth fro m there, that is what our endeavor is. And definitely, we feel confident that going forward, we ' ll be doing better. Archana Menon: Okay, go t it. And sir, on the industrial side, the comments that you made about exiting a few nonprofit a ble businesses. Where do you think you are in that journe y , most of it's done or is -- should w e be expecting that to continue for the next 6 months? Anuj Jain: So most o f it is already done. In fact, this we started from Q1. And by and large, that we are through w ith that. Archana Menon; Okay. So going ahead, we expect a growth on the current run rate?. Anuj Jain: Yes. In f a ct, this initiative will be through. So going forward in th e coming years, we'll see better. Archana Menon: Okay. Si r , my last question on the margin bit. Where do you think is the differential margin right now between the industrial and the decorative business? And as investment keeps picking up, how m uch could that gap really narrow to? Anuj Jain: Well, ge n erally, we don't give that breakup, but industrial margins h ave been very, very low for the v e ry single-digit low. But I think as a part of our plan, we m ade progress on that with the price increase and high-technology products. So our idea is tha t how do we reach out to maybe a d ouble digit. So we are still a little far from that.. And so t o that extent, we are working on this new technology o r the optimization of the formulati o ns and some of the initiatives. So otherwise, the differ e nce in this industry will always re m ain. Even in the non-auto as we said, that we are looking a t the premiumization. So margins w ill definitely improve, but it will still not be closer to decor a tive. Archana Menon: Okay. So sir, last quarter, you had mentioned the difference of aroun d 500 basis points. Would that be si m ilar even for this quarter? Anuj Jain: I don't k n ow whether we have mentioned anything on this particul a r part, but it would be a little mo r e than that. But the gap has bridged because in indust r ial because of the price increase, w e have made some progress. At one point of time when we started the year, the gap was huge. In fact, the margins are very, very low, single-digit lo w . So obviously, we are making p r ogress quarter-on-quarter basis.

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Moderator: We have t he next question from the line of Tejash Shah from Spark C apital.

Tejash Shah: A couple of questions from my side. Sir, looking at the initiatives t h at you spoke about under various a s pects of the business on the intervention that we have made be it product, pricing and plans an d also distribution. Should we assume that going forward w ill be disproportionately focusing m ore on non-rural market versus rural? Anuj Jain: You're sa y ing focusing on non-rural versus rural, right? Tejash Shah: Yes, yes. Anuj Jain: No, it is n ot like that. So basically, that -- as I said, that we are stron g relatively in Tier 2, Tier 3, Tier 4, which include rural. So that's the market that we have rel a tively a better share. Our efforts th e re will continue in terms of some of the initiatives which I s poke about. But there are certain m a rkets where our market share is very low. And like this one question keeps coming when the new entrants a r e coming in the market, actually, f or those markets, we are also like a new entrant. So the o n ly thing is that when you are wea k er in certain towns, maybe the traditional convention approach of getting the distributi o n does not work, and that's why we are working differentl y there at how do we reach out direct l y to the users. But the initiative in terms of growth would continue for the rural and non-rural both. Tejash Shah: Sure. An d sir, in terms of under-index session for us in market shar e , would you like to share some insi g hts on any regional initiatives, let's say, where you are hi g hly under-index, and you are worki n g to correct the same as well. Anuj Jain: So we ar e like -- our strong markets are North followed by East. And South and West are weaker m arkets for us especially South, which is a very large market in our country. And there, we are under-indexed, and where we would like to improve ou r situation. Tejash Shah: Yes. Sur e . And sir, you spoke about a softening raw material goi n g ahead. Looking at the competiti o n, current competitive environment and then, what will e m erge by next year, would you be a b le -- and I'm asking it for industry level also, if you can h ave shared some insight there as w ell, do you think that industrial will be able to retain som e of the price hike that we have tak e n? Or it will get reinvested be it in form of better cons u mption from a consumer promotio n or influencer promotion or even dealer trade promotion as well? So just if you can share wh e ther you have that kind of pricing power.

Anuj Jain: From the industry point of view because the margins are still not b a ck to what it used to be. And the m argins have -- that it's coming down. So I think this kind of situation will continue and the i n dustry would be able to sustain the pricing because as I said that when the prices were incr e ased, there was a doubt in the mind that how much impac t we'll see in the demand. So if yo u see last one year also, maybe there has been a kind of i nconsistency in terms of quarter-t o -quarter. But for the YTD level, I think the growth has bee n maintained.

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And to t h at extent, we believe that the industry should be able to sustain the current pricing levels. B u t this industry, even in the past, if you see -- if we are abl e to see that we are going back to t h e original margin level where company or the industry w o uld like to operate upon. Then obv i ously, the industry has taken the initiative in the past to p a ss on that pricing benefit to the co n sumer provided we feel that this will give a flip to the gro w th. So whatever growth is being ex p ected if the growth is going to be higher on that then the i n dustry may decide at the appropria t e time, but at least for next the -- few quarters what visi b ility we have, I don't see that possi b ility.

Tejash Shah:

Sure. But sir, versus -- just a follow up on that, versus past cycle t h is time that is one more relevant t o consider as changing competitive landscape. And now n o t only time will tell how serious t h at turns out to be. But looking at how competition is ex p ected to turn out or the complete entity is expected to pick up, do you think that industry will attempt to retain the benefit? H ypothetically assuming that raw material corrects material l y from here. How do you think that you will prefer to pass it on to retain or gain market share f o r future?

Anuj Jain:

It is diffi c ult to answer this question because as of now, we don' t know that what kind of approach this new competition will come in. So hypothetically, if y o u say that they will give more dis c ount, but then whether it is sustainable, because I'm su r e that all of you would question t hem also that we have seen that this is like an industry w here a lot of people have tried in t h e past. And whatever success is we have seen that if some b ody is trying to get to the mass scal e , whether it is sustainable, that's a big question mark.

So wheth e r they will take that approach, because any player who c o mes into this market and they wan t to be a strong player in the longer run, would have t o work more in terms of establishi n g the network, the influencer or the marketing rather o f playing the discounting game. So it all depends on the competition. It's difficult to read th a t whether somebody will take a discounting game. We probably see more in the area of buil d ing the brand, which will take a period, some good amount of period.

Moderator:

We have t he next question on the line of Amnish Aggarwal from Pra b hudas.

Amnish Aggarwal:

So first q u estion is, I don't know if I have missed it. So what has be e n the -- your volume and price real i zation in decorative and industrial in 3Q.

Anuj Jain:

So we di d n't talk about the volume. But as we said, that the growth , if you exclude that nonrecurring income, it is about 4.1% and auto growth is good and de c orative growth is slightly negative. But there is a difference that volume growth is -- there's a difference of 3% to 4% within de c orative volume and value.

Amnish Aggarwal:

Okay. So it means your decorative realizations are up by 4%.

Anuj Jain:

Sorry, w h at did you say?

Amnish Aggarwal:

Does it m ean that decorative realizations were higher by 3% to 4%.

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Anuj Jain: Yes, the d ecoratives are higher than the volume growth. So that i s basically on account of product m ix and kind of the area which we have discussed earlier als o patti growth is -- patti is a de-gro w ing. Amnish Aggarwal: Yes, yes. Okay. So looking at the fact that now the raw material prices have more or less softened. So if we look at a slightly longer term, say, 4Q and beyo n d into that, say, into FY '24, so wi l l we be having positive realizations in decorative paints? Anuj Jain: Yes, so t h e trend what we're looking at and also the -- some of the initiatives that we spoke about, ye s . The only thing you have to keep in mind is going forw a rd, as we have been very selective in terms of patti, because of the margin situation and a l l those things, and it's a competiti v e product. So at some point of time, if the comfort level comes in because today, what we are trying to do in the patti, just trying to hold our exi s ting dealers because the customer s , but at some point of time, if that leverage is given, we ma y try to utilize it. Amnish Aggarwal: Okay. A n d sir, my second question is that, for example, in this quar t er, if you look at, say, all the decor a tive players, the numbers have not been that great. And w e have been taking several initiative s . So if you look at the past 12 months kind of a scenario , -- so what could be our market share? And have we gained a lost market share in the decorati v e segment? Anuj Jain: So I just spoke about it. So obviously, we have not gained market share. But today, what is happenin g is that there are so many segments. Paint is not a paint, e arlier also I spoke about patti proj e ct business, new businesses. So it becomes very difficult t o comment upon because the diffe r ent players have entered into different kind of categori e s. So it is not a simple comparis o n. But having said that, you are seeing the result. Our gro w th is still -- overall, this is still laggi n g the market growth. But I think if we see the trend, I thin k it's being bridged. Amnish Aggarwal: And sir, m y final question is that -- now we have done this land sale for our land in Thane. So what could be the taxation impact in that, Prashant? Prashant Pai: It is a lon g -term capital gains tax, which is 20%, 22%. That's the onl y thing which will be there because t h e book value is less, very, very marginal. So the entire wo u ld be capital gains. Amnish Aggarwal: Okay. A n d sir, any plans to, you can say, sell our land in those of fi ces or what could be the area of th a t land? Anuj Jain: No plans. Amnish Aggarwal: Okay. Bu t area of that land parcel, if you can share? Anuj Jain: It's about 4 -- around 4 acres. Moderator: The next q uestion is from the line of Percy Panthaki from IIFL. Percy Panthaki: This is a f ollow-up from one of your earlier answers where you said that in some of the towns you your s elf are a new entrant and the traditional ways of sort of pe n etrating those markets is

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difficult a nd you're trying out newer ways of going in there. So can y ou elaborate a little bit on that point ?

Anuj Jain:

So what I said is that our market share is actually weak in Tier 1 to w ns, and obviously, in the weaker t o wns, today, when you go and you want to build your position from the existing distributi o n, it becomes difficult because the response to that is not so strong. So ultimately, it is becaus e our brand is strong. So, one of the questions, which one o f the persons was asking related to our new competition also, I think this market has time a n d time again shown that people se l ect from the strong brands. So we have that strength also.

So if we g o directly to the users, the users are ready to accept. But if we remain completely dependen t on the current distribution system and in the weaker to w ns, you may not get the response. So a few things that what I spoke about is like project busi n ess because the project is an emerg i ng business, the growth rate is higher than the retail gro w th in those Tier 1 towns. The seco n d is the service part, where also the digital performance marketing can reach out directly t o the consumer and generate the business and route it to you r applicators.

And the t h ird party is the wood finishes where we have entered in t h e premium category with the Eco b rand. And there also, we have quite a good premium ran g e of products and that is also user b ase.So basically, the change in the approach is that the route to market approach is going dir e ctly to the users and create a direct demand and then ser v ice the demand. So these are some o f the things and maybe a few more things we are going to e xplore in the future.

Percy Panthaki:

And the s ervicing of the demand will be done through a traditiona l model only? Or is there some oth e r innovative model that you're looking at?

Anuj Jain:

So we ar e exploring some models, which I'd not like to talk at this s t age. But what happens is that it's n o t that we have a 0 distribution in this town. We have a li m ited distribution, so when you creat e the business demand, you can route that through your li m ited distribution also. So basically, the same-store growth goes up. And so this is what we are trying to do. And when you start getting good response in the market, then you have a po s sibility or opportunity to increase y our distribution also.

Percy Panthaki: And this t argeting the end users directly, that is only through digit a l? Or are you looking at some oth e r ways also of doing that?

Anuj Jain:

It's more o f a phygital. So we have placed a large number of team in the marketplace. So it's a phygital.

Percy Panthaki:

But how d o you reach out to an end consumer directly? Do you like d o door-to-door marketing or what d o you do exactly?

Anuj Jain:

It is not d oor-to-door marketing. So what -- basically what happens is that one is through the digital m a rketing, you generate the lead. The other is that you get the references from your distributi o n or from the influencers who has become a part of our network. So you get the

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Moderator:

reference s from there, and there you reach out to the consumers. So it's not door-to-door, but based on t he references, you reach out to the many more. We have t he next from the line of S. Bachhawat from LIC Asset Ma n agement.

S. Bachhawat:

Moderator:

So questi o n is relating to the... Bachhaw a t, if you will closer to the microphone? Your voice is a bit l ow on the call.

S. Bachhawat:

Yes. So m y question is relating the allocations for railways in this bu d get was very impressive. So what w ill be the implications of that on our business, if any?

Anuj Jain:

So it's a p art of our performance coating business. And there, the inf r astructure and the part of the infras t ructure is also a railways. And typically, in India, the ra i lways market earlier, the coating w hat they were using was very low quality of coatings. But n ow with this new project coming li k e Vande Bharat, the bullet. The coatings are also being u sed are very durable and high-perf o rmance coating. So we definitely see the good impact of th a t going forward.

S. Bachhawat:

Is it possi b le to quantify in any way?

Anuj Jain:

No, diffic u lt to quantify it, but I can only say like performance coati n g business size is as good as proba b ly auto business. And in the automotive, what happened, i t's a cyclic. But in the -- probably t his infrastructure or performance coating business, maybe t he country will be able to see a mor e consistent growth.

Aniruddha Joshi:

Aniruddh a here. I have a couple of questions. One -- can you indic a te the performance of the waterpro o fing and the LID businesses, how it is shaping up? And w hen they are going to do the distri b ution expansion, whether the only change will be initiall y distributed, or the entire book of p roducts will be distributed at one go? That is question n u mber one. And secondly, how is th e performance of the international subsidiaries -- so how d o you see the performance for these c ompanies also shaping up in FY '24?

Anuj Jain:

So Aniru d dha, in waterproofing, waterproofing has now become an i n tegral part of paint. So it goes tog e ther. But within the order booking also, there are many s e gments. So if I just talk about the waterproofing segment, which is like a liquid paint, a liquid product that goes handin-hand w ith the paint product. But then there are some other busin e sses like ad mixture, the sealants, w here the market is a little different, and therefore, to hand l e that, we are placing the different i nfrastructure of different teams.

But other w ise, mostly contribution come from the waterproofing an d that goes hand in hand. Our rang e for the retail is complete. In fact, now we have introd u ced some product in the project b u siness also. And we have been able to stabilize, and we a re getting a good growth from wat e rproofing. Also, the wood finishes, the things have be e n stabilized, and we are getting a g ood traction from wood finish also.

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Coming t o the international in Sri Lanka despite the country had a p roblem, but we feel that maybe in the coming quarters, it may get stabilized. Actually, we h ave been able to increase our mark e t share in Sri Lanka. In the Bangladesh, the growth has b een decent, double-digit growth. A nd only Nepal last quarter, there was a significant substa n tial de-growth because of some kin d of instability. But as we see now, probably things are g etting stabilized, and we don't see t hat this kind of negative growth, which has happened in thi r d quarterwill continue.

Moderator:

We have t he next question of the line of Keyur from ICICI Prudentia l Life Insurance.

Keyur Pandya:

Sir, just w ant to understand on the industrial side, you mentioned t h at passenger vehicles and commerc i al vehicles did well versus 2-wheelers. I think in this kind o f business, we have some kind of v i sibility from the clients. So if you can throw some light on how the visibility has been give n from the client for next one or two quarters or whicheve r way the cycle works. So if you ca n just throw some light on the near-term visibility on autom o bile as well as industrial - - other in d ustrial paints.

Anuj Jain:

Whatever we keep hearing through the media from the clients, the y are optimistic as of now for the c o ming quarters in terms of automotive. The challenge in b e tween, they felt that this chip shor t ages are able to control. But of late, again, there are certai n problems and therefore, they still h ave a backlog. But for the coming quarter, I think they re m ain optimistic in terms of good gro w th in the passenger vehicles and commercial vehicles and also in the tractor segment.

The 2-w h eeler segment, which has not been doing so well, what we are hearing is the kind of some opt i mism. Now not necessarily that it will come in the next quarter. But in the coming quarters, I think it is also expected to do better. And also with this c urrent budget, I think the focus of t h e government, what we have seen on the capex and cons u mption both and some of the rural i n itiatives.

So once t h at momentum picks up, they feel that the growth is going t o be better in the coming quarters o r the coming year. So that is what we are hearing. Fo r this non-auto business, infrastruc t ure business is -- the going is good. And there also the - - there is optimism in the year that t he business will be doing well in the coming quarters.

Moderator:

We have t he next question from the line of Archana Menon from Mo r gan Stanley.

Archana Menon:

Two que s tions. Firstly, on the deco side, you mentioned increasing s hare within your existing paint co un ters. So what are the measures that you're doing there ? And is there a need to increase t h e dealer commission to drive that growth? And the secon d question is, what is your current e m ployee attrition rate? And how does it compare versus the p ast?

Anuj Jain:

So same- s tore growth, as I mentioned, that it's not only discount b e cause ultimately, what is important is the earnings of the dealer. So one initiative with our n ext-generation shopping, which is like, you can say, touch and feel experience center, We have already crossed 45 stores. T h en the service business, what we have started.

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So we ar e setting our next-generation service counters where all t h e lead generated can be passed o n to this counter. So the business sharing of thelead is mor e important because when you give thelead automatically the profitability goes up. Also, th e re is a range of products which are exclusively meant for these counters.

So when you have a large distribution in the market, sometimes t here's a competition and therefore, the margins get affected. So that's another thing.

And also , depending on market because every market has become very different, there are certain c u stomized activities, what we are looking at. So this is th e initiative related to our same-store growth.

Attrition l evel is in the range of 15% to 20%. We don't have any fi g ure of the other industry players at what is the attrition level. But obviously, last one or two y e ars, we have seen a little uptick in the attrition level, but some of the internal initiatives w e have taken, and we are trying to s ee that we keep it at the reasonable level.

Moderator: Thank yo u . We have the next question from the line of Hitesh Taunk from ICICI Direct.

Hitesh Taunk: And sir, m y question is about our capex plan. Sir, you said about our water base capacity, you're go i ng to expand 42%. Can you please highlight what is ou r current capacity, overall capacity? And what is the capex plan for FY '24? Anuj Jain: Over cap a city is approximately 50,000 kl per month. So that's the ca p acity. And capex, in fact, INR 290 c rores is what we announced earlier, which will be spent ov e r a period of next 9 to 10 quarters.

Hitesh Taunk:

Okay. A n d sir, my next question is on a distribution point of vi e w. What are our current distributi o n networks, sir, total count? And whatever -- and ho w much distributions are covered fo r the -- with the tinting machine -- and how much growt h are we planning for the next 10 y e ars.

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Anuj Jain: So distri b ution, generally we'll speak about year-end, but appro x imately in the range of 28,000- 3 0,000. 80% is covered through the machine penetrati o n. And going forward, obviousl y , we are looking at increasing our pace of expanding the dis t ribution.

Moderator:

We have t he next question from the line of Harsh Shah from InCred C apital.

Harsh Shah:

Sir, just w anted to understand more on the decorative gross margin a bit. At one time, we're talking a b out not focusing more on the low-margin products like p atti, and then we're also talking a b out increasing our focus on products, which I would ass u me that would be a low margin b u siness, right? So how do we look at the gross margin bit going ahead for Eco business?

Anuj Jain:

So projec t business, see, if you look at some of the Tier 1 towns in s o me market, it contributed 20%, 30 % , 40% also. So to a certain extent, it cannot be avoided. S econd is, as I mentioned that we a r e focusing on big quality. So what happens is there are t w o approaches in project. You can s ell any product. And therefore, whatever project your pri c e is low, you can sell it, there is a b asket approach that you are selling a range of the products .

So one p r oduct margin would be lower. The other product margins will be higher. So we are looking a t a different approach. And just to comment on the margins o f the project also, maybe at the gro s s margin level, the margins could be lower, but the project s ale if we convert it to the EBITDA level, then the difference would not be that much because i n the retail, you'll have to do a lot o f activities, a lot of promotion, which is not required in the p roject business.

And within the project also, in fact, our focus is in the premium p roduct category. So that quality o f focus we are keeping in mind so that it does not affect th e margin. Related to patti, it's more a commodity and competitive gain where you cannot completely leave it also. When we say w e are not focusing much, our idea is that we are not focus i ng on the growth of that. But we st i ll have to sustain and maintain our existing dealers that is w hat we are trying to do.

And if th e prices goes down and it becomes a little more because t he industry has accepted now that t he patti will continue to remain the low profit thing. So if y ou get some advantage in terms of p ricing, then you may like to pass it on to the market and s ee that can improve your growth b y some points.

Harsh Shah: And seco n dly, sir, just to clarify, we said that our decorative volum e declined marginally this quarter, a n d we had a 3 to 4 percentage mix benefit, right?

Anuj Jain:

So value g rowth is slightly negative. And between value to volume, t h ere is a difference of 3% to 4%.

Harsh Shah: So in that case, even our industrial growth would be in mid-single di g its.

Anuj Jain:

So in aut o , it would be higher. As I said, in auto, it was driven by pas s enger vehicle and not the 2-wheele r . 2-wheeler growth was low. Auto -- passenger vehicle gr o wth was high. And in the performa n ce coating business, again, the growth was muted.

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Moderator: As we h a ve no further questions, I would now like to hand it ov e r to the management for closing c o mments.

Anuj Jain:

Thank yo u all for all of your questions, and I hope we are able to a nswer the questions. And wish you all once again the very happy New Year, and let's hope th a t this year does far better than for - - last year for each one of you. So thank you so much for at t ending this call, and we'll catch up w ith you in the next quarter. Thank you.

Moderator: Thank yo u very much. On behalf of ICICI Securities, that conclud e s this conference. Thank you for j o ining us, and you may now disconnect your lines.

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