Analyzing...
Thank you so much, sir. Ladies and gentlemen, we will now open the call for question-and-answer session. The first question is from Mr. Vivek Maheshwari from Jefferies.
Hi, good evening, team. Two questions, the first is, you mentioned price hikes of about 10-11%, can you just highlight if you were to pass on the total cost impact, including the rupee depreciation.
Have you passed on the entire impact, or what will be the shortfall? You did mention another round of price hikes. What are your thoughts on that? So that is the first question.
As I said, we have only passed on some necessary increases. We feel that the impact is much higher, maybe closer to about 20% or so. We have passed on around 11%. We are looking at further price increases, which might happen in the market, as we go ahead. And at the same time, we do not intend to look at passing out the entire impact so that we can maintain a balance between inflation in the market and what we can really absorb.
At the same time, we are also looking at a lot of measures from our side, which would be in the area of cost excellence, looking at what we can do around material sourcing, efficiencies. That part of the inflation which we are not passing out is something which we can work around and see how we conserving those costs and seeing that we are still able to maintain our margin guidance.
And just a follow-up Mr. Syngle, when you say 20% versus what you have taken, that is the basis of the previous quarter, or that is the basis where the spot prices are as well as where the rupee is?
Largely, we look at the inflation, which is affecting the quarter. And from that point of view, we have looked at evaluating it, and that is how we have looked at passing the price increases.
And the second question is on volume growth. This quarter and the last, you have been doing well for the last two quarters. Part of this is essentially the base. But what do you think about the intrinsic demand in the sector? What is your outlook? And would love to know your thoughts on the competition. Two parts. One is the outlook on volume growth beyond the base. And the second is, the competition bit.
What we see is that, as I mentioned, the demand has been good both from the point of view of the rural demand as well as from the point of view of the urban centres. We expect at least some part of this demand to sustain in the market. And we have been seeing some early shoots in the months of April and May.
And we basically believe that going forward, we are still looking atleast a high single-digit volume growth in terms of what we would kind of achieve.
Sure. And any comments on the competition?
Yes, the competitive intensity in the market is going to be strong, and we feel that it is something that will continue. We have the consolidated players now who have been trying to align and come out with a unified strategy. We also have newer competition in the market, and the existing players are also equally intense in the market. We feel that the competitive intensity will continue to grow in terms of how we see the year ahead.
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Got it. Thank you. Wish you and your team all the very best.
Thank you.
Thank you so much, sir. The next question is from Mr. Mihir Shah from Nomura.
Hi, sir. Good evening. Thank you for taking my questions, and congrats on a great set of numbers.
Sir just wanted to understand how you see the volume growth trajectory as we go through the quarters during the year? How are you seeing the 4Q and 1Q volumes? Are you seeing dealers buying more than what they bought in the past, and they're stocking up due to the 10% plus price increase that you have announced?
And secondly, post 2Q, you will be having a higher base, unlike a favourable base that we had seen over the past few quarters. Can this upstocking that we are seeing in 4Q and 1Q maybe, and a higher base from 2Q, impact volume growth trajectory for the year? So that's my first question.
Yes, even in Q4 towards the fag end, we have seen some increased stocking, which would have happened because of the price increase announcements. But in quarter one, we would expect that the pipeline stocks to go up to some extent as and when a price increase is announced. But at the same time, we are also very clear that today we will look at the liquidation of the stocks in the market and the demand conditions being there in terms of how it is going, because the market can really stock up to only a certain limit.
So, while there could be a little bit of upstocking, which could happen because of the price increases, we are still confident that demand conditions should continue giving us closer to high single-digit volume growth in the band of about 8 -10%, as we predict going forward.
As far as bases are concerned, in Q2, we have a longer Diwali. We have a larger period, which is there both from the point of view of Q2 and Q3 as compared to the previous year. We are also looking forward to the monsoons being quite okay, not full, as what the IMD predictions are coming in. We are looking at good, fairly okay demand conditions, and a longer festive season also. The only worry in the segment is the geopolitical scenario, which is going on. If that really prolongs, it will have a different set of calibrations of what we will have to look at from the point of view of inflation and other things hitting the demand conditions.
Understood. That is very clear. Thank you for that. Sir, the second question is on the margins again. The price hikes that you have taken will cover a part of the Gross Profit per ton, but margins, on a percentage basis, will see some impact. However, the commencement of your backward integration projects from 1Q or 1H, which you have called out now, is also quite timely. So, how should one think about the benefits that you will probably get from these backward integrations plus which the peers will not see, but you will see the benefits coming in. And how should we see the impact of the margins as we go along, because in the past upcycle of crude, we had seen margins going down by 500 to 800 bps also. Any colour on the percentage margins with the benefits of backward integration over the coming year will be helpful.
Two things, one, as I said, we will continue to take some more calibrated increases, which we think the market can absorb, and we are also aware of the fact that we should not really look at suppressing the demand by too much of increases, which happen in the market. That's one part of it.
Second, as I said, we have been working very strongly in terms of our cost frameworks, how we conserve material prices, how we bring more efficiency with respect to how we consume material, and how we manufacture products. That's a strong initiative, which we think would give us definitely some cover from the point of view of margins.
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The third area, as you rightly mentioned, is backward integration. However, as I see it, we'll have to see the whole impact of backward integration over the year because today a part of it is coming in H1, as I said, and therefore, we will definitely get benefits, but we'll have to observe these benefits over a year, rather than getting those benefits immediately in Q1. But with a set of things which we are doing and some passing of some more price increases, we should see how we can retain our margin guidance going forward.
Sorry, so you said you'll maintain the margin guidance, sir?
Yes.
Understood. Got it. Thank you. Wishing you all the very best.
Thank you.
Thank you so much, sir. We now move on to our next question by Mr. Amit Sachdeva from UBS.
Good evening, sir. Congratulations on a great set of numbers, sir. My question is to your comment when you say competitive intensity will remain high, or at least that's what I could hear. But last year we saw competitive intensity show up in a manner that there was a free volume to consumers and there were higher discounting and even higher margins for dealers as well by new entrants. And that persisted for a while. Now we are in a very volatile environment of commodities, input prices. Things look uncertain on many fronts. When you say competitive intensity remains high, do you still allude to that discounting will remain high or do you think that it will show up in more product innovation or A&P spends and so on and so forth? I would assume that in such an environment, perhaps discounting-led competitive intensity would have reduced. How should we interpret your comment on this front?
First of all, despite the inflationary environment that we are seeing and despite the price increases that we have taken, we have not seen any let-up in terms of the discounting in the market. I must make it straight that today the discounting intensity stays whether it is retailers, whether it is contractors, whether it is other stakeholders, and therefore what we see very clearly is that, whether it is existing players, whether it is new players, the intensity of that continues and people calibrate how much they need to really spend.
Maybe there could be some rationalization around the A&P spends, what we could see in the market, but when I mentioned competitive intensity, I meant about the whole area of discounting, which, according to us, will continue.
Got it. Very well understood, Amit. Thank you so much. My very quick second one would be where the 10% price hike that you mentioned that you have taken on a cumulative basis. Has some part of it reflected in Q4 as well, or is it largely for Q1? I would assume that some inventory buildup was already there.
How should we think about the pricing playing out in the revenue line in this quarter or the next and if you take incremental price increases? Just to help understand a little bit on the pricing side.
You are right because some part of the inventory is always with us. It has not majorly impacted us from the point of view of any things which are hitting the margin because the existing inventory has helped us tiding over the inflation which is there and therefore the larger impact we will definitely see in Q1 and Q2 which is going to happen.
The other thing is that, in the last quarter, we also had the benefit of a deflation, which we saw and that is why we are also seeing higher PBDIT margins and even higher Gross Margins. And as I said earlier, we are looking at recovering some of these things through the price increases already taken, some we are in the
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process of taking, coupled with the whole area of cost excellence and other areas of how we want to calibrate our spends going forward, so that we are able to play this game of driving top line as well as balancing the bottom-line margins.
Just to understand clearly that in doing so, you would like to maintain your margin guidance, which has always been 18-20%, there is a high single-digit volume ambition as well for the year. I assume when you say high single-digit, you mean FY27. And also the pricing whatever will build up on top of it. Is this a way to interpret what you are saying?
Absolutely right. We are maintaining our margin guidance, which is there. We are looking at the price increases that are happening and trying to see that we get into that area of 8-10% volume growth.
Excellent, Amit. Thank you so much. Excellent set of results. Congratulations once again.
Thank you so much, sir. The next question is from Latika Chopra from J.P. Morgan.
Hi. Part of my question was answered, but Amit, I just wanted to check again on the competitive intensity. It seems all the players, including the new entrant, took double-digit price increases, and it seems that the pricing levels are now coming at least at par, but you mentioned that the discounting levels remain high. Is it right to assume that the new player pricing is still below yours?
Just to reiterate what I said earlier, finally, what we see is that everyone adjusts to the overall pricing at the same level, which are the apparent rates of the market in terms of what pricing is pitched at.
But finally, today, what matters is what discounts you are giving to various stakeholders. And as I said earlier, today, the differentials in terms of the discounting between the various players are the same as they were earlier. There is no change at all and therefore, the intensity of competition still remains going forward.
Assuming the raw material prices come off, in such a scenario, do you think a part of these price increases that the industry has taken will be sticky, basis your experiences from the past?
As I see it, if there is a prolonged situation which really happens today, we will have to really think of what part we can really pass further in the market from what we have already done. And therefore, some of those will be sticky till the time the situation carries on, there is no going back on it. And it is going to take some time before softening is going to really happen, all depending on how the geopolitical environment behaves.
And last bit, Amit, we have wrapped up FY26, you had a good exit quarter. Basis your understanding of the secondary sales environment, how would you read the market shares for Asian Paints in FY26 versus last year?
All the results are out in the market, all of you can calculate the shares in terms of where we have moved from where we were.
All right. Thank you and all the best.
Thank you so much. The next question is from Percy Panthaki from IIFL.
Hi, sir. Thanks for taking my question, I just wanted to understand this. When you are saying that you will maintain the margin guidance of 18-20%. Does this in the backend imply an assumption that the macroeconomic situation or the geopolitical situation will get resolved and the commodity prices will come
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down pretty quickly? Or would you say that even if crude remains in that $90 to $100 band for the rest of the year, even in that scenario, the margin guidance would remain intact?
As we see it, in these conditions, it is very difficult to really predict for over three to four quarters. Clearly, if we were to look at the next two quarters as something which we are seeing, the inflation levels are not going to come down so easily. It depends on where the whole war situation goes and how it really fructifies, what further impact on raw material prices it really caters. In the given scenario, we need to work very diligently, looking at maintaining our margin band. It will be a combination, as I said, of working on cost efficiencies. It could be a combination of the mix that we are able to sell in the market and at the same time, looking at a very disciplined approach, in terms of how we really look at our spends in the market as we go ahead.
Understood. The context of my question was, if I look at the last crude cycle which was FY22, at that time, also, on a Y-o-Y basis for the full year, there was about a 14% average price increase. At that time, we had finished the full year at a margin of 16.5%, FY22 consolidated. If I compare it to FY20, because FY21 was exceptional because of cost savings, etc., FY20 was about 20.5%. There was about a 400 bps contraction in FY22 despite fairly high price increases. What is different this time which gives you the confidence to say that we have closed this year at 18.8%, you are saying the contraction would not be more than about a 100 bps?
See, first of all, the current context is that, we are looking at the first six months at this stage because it is very difficult to really predict for the full year. And as I see it, for the first six months, possibly yes, we are still open to more price increases we need to take from the current levels where we are, and that would really compensate for some deficit what we are seeing.
The second different thing this time, is the whole area of the premiumization story and other areas of bettering the product mix we want to set up in the market. And the third area is backward integration, and in some of the areas of our cost efficiencies we are looking at. It is not going to be an easy one, it is going to be tough, but the endeavour is definitely that you try to remain in the margin band given.
Understood. My second question, sir, is on demand, in any product, there is a certain price elasticity of demand. If you take pricing up, it affects demand. How do we look at this price elasticity for paints? Just for example, in the last cycle again in FY22 we did not see any impact, but the construct was different there in the sense that people were spending more time at home and therefore, looking at their houses and feeling that we need to make this better and spending more on home improvement anyways there were not too many avenues to spend on at that point of time. But that is not the case right now.
People right now will have to pick and choose where to spend, and very frankly, the last big crude inflation cycle, apart from FY22, that I can see where you have taken a double-digit pricing is only FY12, where the demand scenario itself was very buoyant and robust. In a way, we are at a position today where this question is difficult to answer, empirically speaking. What is your take on the price elasticity of demand for this product, and how do you think the price increases will impact volume?
If you look at it from the point of view of the paint industry, when we speak of the final cost to the consumer, it is a combination of the material prices and the labour prices. The material component in terms of the per square feet of what lands to the customer, is only about 35-40%. The larger area is of labour.
What we are seeing is that the increase in the material prices gets a little bit nullified in terms of per square feet prices. The impact which we see from the percentage terms doesn't come to the same thing and that is why in each cycle, which we see that the impact might be limited unless obviously the things go haywire of everything turning very different from the point of view of crude prices or from the point of view of dollar strengthening. We will have to watch out for that from the point of view of looking at it, but we feel that
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today, given the fact that one the spend on paint is discretionary and sometimes it is occasion and maintenance led, also which is there.
From that point of view, the elasticity is definitely there. But it all depends on the quantum of increases you take and that is why I said we need to calibrate those increases in such a manner that the final landed cost to the consumer is something which is still tenable, and we do not really ruin that equation of the prices becoming too high, which becomes untenable for customers to get their homes done.
Just a couple of very quick hygiene questions. One is, what is the impact of upstocking on this quarter? I know it is difficult to exactly calculate, but whatever you think is the best estimate, we will go with that. Or even if that is not possible, what is the growth in Jan and Feb, only these two months, and we will go with that as the substitute. Second question is the other expenses line has grown only by 2% this quarter. Any reason behind that?
When you look at the current quarter, the good thing is that all the three months have grown by double-digits. That has been very strong. Some uptick from a point of view of upstocking has happened in the fag-end of March in terms of what I see. The impact of that would be for the month of March, the March growth rates would be higher by 3-4% mark, which would be the impact of the upstocking which would have happened in the month of March. But the good part is that both January and February have been very strong in terms of what we have been able to achieve from the point of view of sales, which has happened this quarter.
And the other expenses?
The other expenses growth is largely in line with how we have seen the full year, where the various cost initiatives have actually worked for us. Also, it helps that we have a higher revenue scale this year in this quarter, which has also helped the overhead absorptions.
Okay sir. I will take this offline. Thank you very much, sir.
Thank you so much. The next question is from Aditya Bhartia from Investec.
My first question was again on VAE and VAM project. While I understand that these benefits would be felt over the course of the entire year, could you give us some indication of what could be the benefit in terms of costing and in terms of Gross Margins? I understand that it will also help formulations and improve the quality of the product, help us differentiate, but what could be the impact on Gross Margins over the course of the year?
As I said, it is too early to say because there are several factors at play. One is the extent of usage and production of this emulsion across various products of what we can take, and the other is how do we ramp up the capacity of what we are able to make. And therefore, at this point, it will be very difficult to really give a quantum to that because the whole thing will vary from quarter-to-quarter, and it is only by the last quarter that we would be able to come to know, what would be the larger impact across in terms of what we would be making.
Understood, sir.
Also, the fact that what we are commissioning in this first half is only the VAE part, the entire VAM-VAE project as such will still take some time, and that is when we will start realizing the whole anticipated benefits. We will have to phase it out over the next one and a half to two years.
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Understood. That is very clear. My second question was on the mix impact that we saw in this particular quarter, which was only minus 2.5%. If I recall, it was almost a similar trend that we had seen in Q3 of FY22 as well, which is again a period wherein we had taken very sharp price increases. Is it a case that when we take sharp price increases, there is upstocking that happens specifically for paints and therefore, paints proportion goes up in the mix and that's why we get to see a lower mix impact as well, and we should be back to whatever 4.5-5.5% range in the next few quarters.
See Q4 is also a month where you have larger, higher value contributions, which really happens.
That is one. Second, yes, because of the price increase, there is definitely an upstocking which happens in high-value products, especially as I said that in the month of March, we would have seen some upstocking happening there. And we feel that over a period of time, it is good to maintain that 3-4% gap, which would remain from a point of view of overall direction between volume and value.
But we are now speaking about a 3-4% gap versus, let's say, 5-6% that we used to speak earlier. Is that on account of the confidence that we are having that premium and PreLux categories are doing better?
Currently, it looks like that. We should really be able to look at that gap of about 3-4%.
Sure, sir. That is very helpful. Thank you so much.
Now, we will be taking the last question. The last question is by Mr. Pratik Gothi and he is from HSBC.
Thank you for the opportunity. I just have one question, please. In terms of mix, you already touched upon this. Any more colour on the performance of the PreLux category and whether economy range continues to outpace them on growth?
No, as stated earlier, the contribution from the economy range remains significant. It is not a trade-off where growth comes only from the premium or PreLux segment at the expense of the economy range. That said, there is a clear and strong strategic focus on driving growth in the PreLux segment. This is not limited to emulsions but extends across categories, including waterproofing and wood finishes.
Premiumization, therefore, remains a strategy, with an objective to outpace overall category growth, even as the economy emulsions segment continues to grow.
Got it. And a related question is the volume value gap. The volume value gap of 3-4%. Did you mention that?
Yes, I did.
That will remain over the next few quarters as well, even while the price hikes are being followed through.
Yes, because the price increases might not be at a regular interval. But, we think that this trajectory of 3-4% will remain as we go ahead.
Got it. Okay. That helps. Thank you so much.
Thank you, sir. On behalf of Asian Paints Limited, this concludes today's conference. Thank you for joining us. You may now disconnect your line and exit the webinar. Thank you once again, everyone, for participating.