Kansai Nerolac Paints held a conference call on 08 May 2024 to discuss the results for the quarter ended March 24 and way forward. Mr. Anuj Jain, Managing Director, Mr. Prashant Pai, Director Finance & CFO and Mr. Jason Gonsalves, Director – Corporate Planning, IT & Materials of the company addressed the call.

Highlights of the Concall

• Decorative paints volume grew in double-digits in Q4FY24 led by ongoing growth initiatives. Tier 3 and tier 4 markets (rural) demand conditions have shown some recovery which is more evidenced in the industrial compared to decorative paints, but continued to lag tier 1 and tier 2 markets (urban markets).

• Industrial segment growth slightly moderated given some reduced activity in the election period.

• Decorative-industrial segments contribution to topline stood at about 55-45 (probably slightly changed, with better growth in industrial paints over the past year)

• Automotive demand was good during the quarter. The company mentioned that automotive penetration in India is low and demand was almost cyclic. However, as the country is progressing and the infrastructure is also progressing. It believes that going forward, the demand is not going to be that cyclic and it is going to be stable.

• The company mentioned going ahead in FY2025 for decorative paints growth will be volume-led. Product mix is not expected to deteriorate further from the current levels. In medium-to-long term, the company is hopeful of sector reestablishing its growth relationship with the GDP growth (industry to grow at around 1X GDP growth), akin to trends witnessed over last 20-30 years.

• The company maintains a positive outlook for industrial division in light of encouraging trends in automotive production activity and increased government spending, and expects growth to track current year growth levels with auto segment growth slightly moderating and industrial segment compensating that growth shortfall, despite some slowdown in the high performance coatings over the first two quarters amidst ongoing election season.

• Raw material prices were stable. Gross margins improved over the corresponding quarter last year due to the benign raw material cost.

• The company witnessed gross margin expansion of 320 bps in FY2024 due to stable RM prices. However, this gross margin expansion was not entirely translated to EBITDA margin increase as gross margin expansion was offset by increase in other expenses due to elevated marketing spends to improve visibility and mind share, higher investments in digital initiatives and increase in staff costs on account of additional manpower recruitment to support growth initiatives.

• Going ahead, the company intends to maintain industrial segment margins at current levels (10-12%), as these levels are deemed to be sustainable. In the decorative paints segment, given the increase in competitive intensity, margins can remain under check in the near term.

• The company has introduced more than 15 products in the last year. New Product saliency is around 10%. It has also launched 4 new products in paint plus category for which saliency increased by 150 basis points.

• The company has scaled paint as a service to more than 250 cities and has developed capability to do 5000 plus sites in a month.

• The company promotion team actively engages with influencers such as painters (trains/incentivizes them), architects (5k+), interior designers, contractors (for projects business) to promote the advantages of paint plus products.

• The company intends to increase its distribution by double-digits. KNPL highlighted that 25% of its dealers are exclusive in nature, while the rest are multi-brand dealers

• Projects business continues to do well and has grown slightly better than industry in the last year. It has expanded its project business to 75 towns and increased salience by 100 bps in FY2024. They have also launched separate brand for project business and expanded portfolio in the last year. The projects business’ salience is below 10% for the company, while at industry level it is at 15%.

• The size of domestic paint industry is estimated at around Rs. 75000 crores as of March 2024. The good growth in infrastructure, core sector as well as automobile and real estate is likely to have a positive effect on the overall demand of paint for the industry in the long run.

• The company expects capex of Rs 3 billion for FY2025, of which Rs 1 billion is attributed to normal capex, Rs 1.5 billion for expansion capex and Rs 0.5 billion for backward integration capex. The company current capacity stands at 610 million liters per year and is further expanding decorative paints capacity in Vizag (greenfield capacity for which commissioning is in Q2FY25) and Jainpur (brownfield capcaity for which commissioning is in Q3FY25). Together, they can increase decorative paints capacity by 25-30% (overall capacity can go up to 700 million liters per year). The company intends to execute back-end integration for its automotive paints segment, by adding resins capacity in Sayaka and Bawal.

• The company has a net cash of Rs 1550 crore as of FY2024. Going ahead, it intends to utilize these funds for capacity augmentation, backward integration, rewarding shareholders through special dividend (Rs3.75 in FY2024 versus Rs2.7 in FY2023), maintaining liquidity in a hyper-competitive environment and exploring business opportunities.