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Edited Transcript of ASIANPAINT.NSE earnings conference call or presentation 24-Jul-19 11:30am GMT

Q1 2020 Asian Paints Ltd Earnings Call

Mumbai Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Asian Paints Ltd earnings conference call or presentation Wednesday, July 24, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amit Syngle

Asian Paints Limited - COO

* Arun Nair

Asian Paints Limited - Manager of Corporate Communications

* K. B. S. Anand

Asian Paints Limited - MD, CEO & Director

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Conference Call Participants

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* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Aditya Gupta

Goldman Sachs Group Inc., Research Division - Associate

* Amit Purohit

CIMB Research - Analyst

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Ayush Bagla

SBICAP Securities Ltd., Research Division - Associate of Midcap

* Bhavesh Pravin Shah

CLSA Limited, Research Division - Research Analyst

* Krishnan Sambamoorthy

Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG

* Kunal Bhatia

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst

* Latika Chopra

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nikunj Doshi

Bay Capital Partners Ltd - Managing Partner and Director

* Prashant Poddar

Abu Dhabi Investment Authority - Portfolio Manager

* Pulkit Singhal

Motilal Oswal Asset Management Company Limited - Associate VP & Analyst

* Richard Liu

JM Financial Institutional Securities Limited, Research Division - Research Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Asian Paints Q1 FY '20 Results Investor Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Arun Nair from Corporate Communications. Thank you. And over to you, sir.

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Arun Nair, Asian Paints Limited - Manager of Corporate Communications [2]

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Good evening, and welcome to Asian Paints Investor Conference Call. We have Mr. K.B.S. Anand, MD and CEO. We also have Mr. Amit Syngle, who is the Chief Operating Officer. The third person is Mr. Jayesh Merchant, CFO and Company Secretary and also the President of Industrial JVs. We have Mr. R. J. Jeyamurugan, VP Finance; and Mr. Parag Rane, CM Finance.

Over to Mr. K.B.S. Anand to take the call forward.

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [3]

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Good evening, everyone. Welcome to the Asian Paints Q1 FY 2020 Conference Call. Starting with the economy. The Indian economy seems to be in the midst of a slowdown with the GDP growth figures trending downwards on a quarter-on-quarter basis for the previous financial year and improvement not expected even for the first quarter of the current financial year.

The challenging business conditions were reflected in the coating industry as well. Even on the global front, most of the major economies are witnessing lower growth conditions with continued uncertainties around trade wars and tensions in the Middle East region.

Against this challenging backdrop, our decorative paint business did extremely well registering a strong double-digit growth led by aggressive channel push across markets throughout the quarter. This was aided by the fact there was a destocking in trade channels last year due to the reduction in GST from 28% to 18% from 1st July 2018. Material prices remained benign in the quarter, and we took a selective price reduction of about 0.4% in the few solvent-based products to pass on the input benefit. Operating profitability was further helped by lower growth in overhead costs, especially in the area of freight and marketing spends.

The adverse demand conditions also affected turnover of both the JVs and the Industrial Coating space with the automotive JV, PPG-AP more severely affected by the sharp slowdown being witnessed in the entire automotive industry. The Industrial Coatings JV AP-PPG witnessed decent growth in the protective coating segment, while the powder coatings segment was negatively affected with demand slowdown across consumer segments. Lower material prices and contained growth in overhead costs, however, helped improve the profit margins for both these JVs.

The international business performance continued to be a drag on the overall group performance with the key units of Egypt and Sri Lanka not doing well.

The Sri Lankan unit faced a period of market shutdown following the unfortunate events in the beginning of the quarter. Operations in Indonesia continued to scale up though at a pace lower than expected, affected by the elections and related riots in the nation.

Both the segments in the Home Improvement business, the Kitchen business and Sleek and the Bath business under Ess Ess have registered good growth in the current year with continued focus on product portfolio and network expansion.

Consolidated financials for Q1 FY '20. Revenue from operations increased by 16.6% to INR 5,130.6 crores from INR 4,398.6 crores. PBDIT before other income for the quarter increased by 24.1% to INR 1,229.81 crores from INR 991.36 crores. PBT increased by 21.1% to INR 1,010.4 crores from INR 834.6 crores. Net profit after noncontrolling interest increased by 17.7% to INR 655.5 crores from INR 556.8 crores.

Stand-alone financials. Revenue from operations increased by 18.2% to INR 4,380.2 crores from INR 3,706.2 crores. PBDIT for the quarter increased by 25.1% to INR 1,175.35 crores from INR 939.47 crores. PBT increased by 22% to INR 986.3 crores, net profit increased by 20.5% to INR 652.4 crores.

The company has implemented the new accounting standard on leases Ind AS 116 with effect from 1st April 2019 retrospectively. Accordingly, the financials presented for the previous years have been restated. The net impact on account of this reduction -- of this is reduction in PBT of INR 3.75 crores at the stand-alone level. It was INR 1.85 crores on the first quarter of the previous year and a reduction in PBT of INR 4.56 crores at the consolidated level. It was INR 2.16 crores for the corresponding period of the previous year. The CapEx plan for the company for the current year is planned at about INR 700 crores.

Going forward, as mentioned earlier, the overall business conditions and the economy remain challenging with many sectors facing slowdown. This could adversely affect the demand conditions even for the coating industry, and we will need to be watchful on this front.

The progress of the monsoon across the country has been significantly below average so far, and this adds to the uncertainties going forward.

In the international markets, a key concern would be the emerging situation across the Middle East. And with the -- while the Ethiopia unit has been able to successfully manage its ForEx requirement in the first quarter, availability of ForEx for the business on a continual basis still remains a big challenge.

Thank you, everyone. We are now happy to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Abneesh Roy from Edelweiss.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [2]

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Sir, congrats on very good set of numbers. My first question is on other costs in the stand-alone business. So your quarter-on-quarter other costs is down sharply and Y-o-Y also there is only a 10% growth versus revenue growth of 18%. So my question is, Mysore and Vizag factory got commissioned. So is the cost fully showing? And second, we are seeing ad intensity come down in most other consumption because of the in-general slowdown and outlook, et cetera. So is the ad intensity lower in your segment also in the paint industry?

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Unidentified Company Representative, [3]

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So for the Mysore and Vizag, we had some level of production coming out in the first quarter, but not at the scale. It obviously increases going forward. So the cost we have built up. But yes, there is a cost build up because of Mysore and Vizag for this limited production only in Q1.

And it is there both in employee cost and other over there, so that's one thing.

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Amit Syngle, Asian Paints Limited - COO [4]

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The advertising cost, we budget at the annual level and break it up over the year. It tends to be a little lower in the first quarter and increase as the season comes into being.

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [5]

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Yes. And also, this time since the IPL started from March, there was an implication of some ad spend, which went into the last year and, therefore, a little bit of effect with respect to the spend in the quarter 1, but no major thing in terms of the ad intensity coming down.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [6]

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Okay. And the second question is, you mentioned aggressive channel push. So if you could elaborate that. My question is, essentially, if I see your volume growth in domestic business, that's at a multi-quarter high, if I ignore December quarter, which was benefiting from the festive mismatch. So when everywhere discretionary consumption is down, is it because of the aggressive channel push or the putty and distemper eventually firing all this. Could you elaborate how was the core deco ex of putty and distemper done?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [7]

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Well, as we double-digit volume growth there too.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [8]

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So sir, why in spite of your own first comment being economic slowdown in India and in general, you are aware of what's happening, why acceleration is happening because, sir, your base is also quite high, 12.5% base?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [9]

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(foreign language)

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [10]

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And sir, could you elaborate aggressive channel push, what was that?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [11]

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With respect to the channel push, what I think we were there, we were just being more proactive this year in terms of the way we worked with the channel. And we felt that we had a set of innovative kind of schemes working in the market, which possibly we would have filled the shelf space slightly much better this year in the first quarter to that extent and this has been across the markets, across geographies in terms of the work which we have done. We also feel that while the overall economy has been down, the kind of growth which we are seeing possibly in the smaller towns is much higher than what we are seeing in the metro cities to that extent, so that would have led to a bit of kind of a slow in terms of the growth which have kind of happened for us to that extent.

And the third reason being is that given the GST correction, which has happened, we feel that there would be some implications on the unorganized sector with respect to some of the products or some of the share which is coming from the unorganized sector, given the fact that they -- our prices are definitely much more competitive now on the economy side.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [12]

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Sir, 2 follow-ups here. One is most companies are seeing Tier 2, Tier 3 because of the liquidity pressure dealers are facing. There is a consumption, which is not being met essentially so there is a demand slowdown because of that. So are you not facing that? And is that also leading to unorganized or smaller players losing market share because of the liquidity pressure they are not able to manage all this?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [13]

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So as far as we are concerned, we are not seeing that much of a pressure on the liquidity as far as the smaller towns are concerned. Asian Paints is also the first of the persons to fill in the shelf at times at the counter. So to that extent, I think we are fortunate to get -- first of the money is coming from the dealers to us to that extent. So overall we feel that, in our case, we seem to have been still kind of going better in the smaller towns to that extent overall as compared to our metro towns.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [14]

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And regional players and small players, are they facing that liquidity pressure more, so if that also aiding apart from GST cut?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [15]

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So that we don't know in terms of what they are facing, but what we can tell definitely is that given the GST decrease which has happened, there is definitely a better competitiveness at the economy end.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [16]

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And sir, last follow-up on the aggressive channel push, is it at the dealer level also and the consumer and also or is it largely dealer?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [17]

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No, largely it is at the channel level, which is a dealer level.

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Operator [18]

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The next question is from the line of Avi Mehta from IIFL.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [19]

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Just on the first comment that you made that this quarter benefited from a favorable base because the base quarter it seems in channel destocking. Is there any estimate that you can share of the likely benefit that could have come from this? Or if you could help us understand the underlying demand momentum?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [20]

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It's very difficult for us to assess this.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [21]

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Okay, sir. Okay. Fair enough. The second bit, sir, was on the gross margin side. Now just wanted to understand does the current level of gross margin factoring -- does the current level of input cost, is that factored in the current gross margin? Or there was some inventory benefit or higher inventory, how should I...

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Unidentified Company Representative, [22]

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I think our gross margins reflect our current trend, yet price that is with outlook sort of going forward.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [23]

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Okay. Okay. And lastly, sir, the other expenses growth, you kind of alluded towards the fact that there was a divergence in the ad spend. Other than that, all the costs related to the capacity ramp-up are now in the space, right, sir? Is that understanding correct?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [24]

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Correct.

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Unidentified Company Representative, [25]

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There would be some bit of clarity sort of ramp-up Mysore and Vizag per se.

But by and large, all your costs have been considered.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [26]

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Okay, sir. And lastly, sir, in the annual report you had highlighted that the festive timing could be a core source of concern for us. Could you elaborate what -- how does that become an issue? And does the current delay in -- or current monsoon the way it is ramped up changed that comment? Or if you could kind of just comment on that last one?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [27]

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Last year, we had late Diwali in November. So you had a long Diwali season, so to speak. And as a result, a longer painting period post the monsoon. This year with a significantly earlier Diwali, the painting period post monsoon theoretically is much shorter. When the monsoon will actually stop, and we currently don't want it to stop easily because there is a water shortage across most of the country. Obviously, the number of days, which rural India and small town India use for painting for pre-Diwali reduces considerably. This puts pressure on how much can be done prior to Diwali, and we have seen longer Diwali seasons tend to be beneficial for the paint industry. Even if the monsoon does badly, I think everybody is in trouble in rural India, but that's a different question altogether.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [28]

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Sir, yes, but -- okay, sir. So I understood that part, but I'm basically trying to reconcile your comment about rural India being under stress. And your comment about...

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [29]

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We never said rural India is under stress. We said rural India we're doing well.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [30]

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Okay. So for us, rural entities to do well. Any divergence in the growth, as I can see if urban is x, rural will be like 1.5x or anything like that...

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Unidentified Company Representative, [31]

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No comments.

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Operator [32]

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The next question is from the line of Prachi Kodikal from Bay Capital.

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Nikunj Doshi, Bay Capital Partners Ltd - Managing Partner and Director [33]

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This is Nikunj Doshi here. Just wanted to understand how is the industry growing in domestic sector and have we gained market share in that respect?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [34]

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(foreign language), but we will wait the results of our competitors before confirming anything.

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Nikunj Doshi, Bay Capital Partners Ltd - Managing Partner and Director [35]

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Okay. And in terms of the growth, I mean, sir, is economy growing faster, premium growing faster, can you give some insights into the demand pattern where is it coming from, which segment?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [36]

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See economy is much larger, that's a reality, but all segments are growing.

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Nikunj Doshi, Bay Capital Partners Ltd - Managing Partner and Director [37]

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Okay. And again, you mentioned that you are doing well on -- in rural area. So rural mainly would be economy or you are seeing some premiumization trend there as well.

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [38]

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Rural has the entire range of products, including the expensive products. Actually, cheaper products are used in urban centers.

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Nikunj Doshi, Bay Capital Partners Ltd - Managing Partner and Director [39]

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Okay. So premiumization trend you are seeing across?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [40]

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Yes, that's a continuing trend.

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Operator [41]

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The next question is from the line of Vicky Punjabi from JM Financial.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [42]

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This is Richard here. I have a simple question, and it relates to this other expenses line. And I'm referring to the P&L account, be the Ind AS change given that you had quantified that there is about a INR 62 crore impact on EBITDA because of this Ind AS 116. So if I add back this INR 62 crore number to your other expenses line, I get a number of INR 800 crore of other expenses in the way we have known it before the Ind AS 116 impact. This is the number which is significantly lower Q-on-Q. I understand you spoke about this higher AP in 4Q, et cetera, but I'm just trying to reconcile that considering that you had 2 new large capacities, one of which came into being in Q3 and the other one in Q4, how did you manage with such a speed decline in -- Q-on-Q decline in other expenses. I'm just trying to understand that a bit better, that's all?

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Unidentified Company Representative, [43]

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So you're referring to Q1 last year versus Q1...

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [44]

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No, no. I'm referring to Q3, Q4 and Q1 this year. Sir, Q3...

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Unidentified Company Representative, [45]

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Yes. So I think the large issue between Q4 and Q1 is a larger amount of advertisement spends in last Q4 versus the Q1 of this year.

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Unidentified Company Representative, [46]

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Current year.

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Unidentified Company Representative, [47]

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Also with Mysore and Vizag coming on, we have certain benefits on distribution costs, which gets sort of adjusted in the walls, but a larger benefit will be because of the advertising spends.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [48]

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Okay. Sir, if I leave Q4 aside, Q3 the other expenses was about INR 800 crore and this was before the second plant came in, if I remember correctly. I think one of the plants came in, in Q3 and the other one came in Q4. So Q3 other expenses without the second plant was about INR 800 crore. And Q1 on an adjusted basis with both the plant is about INR 800 crore similar number. I mean what can account for such efficient lowering of cost structure?

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Unidentified Company Representative, [49]

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No, no. It's 2 things, Richard. One is Q3 number we have not published under Ind AS...

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [50]

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Ind AS number, sir?

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Unidentified Company Representative, [51]

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Okay. We have given -- see whatever the quarters and the yearly numbers we have published in the results, all are like-to-like basis comparable (inaudible), first.

Second thing is last year, there was a major chunk of foreign exchange impact on the overall trend. But in the first quarter, we also had a benefit because of the rupee versus dollar. There is -- it turned out to be on the other side. Then also there is some kind of benefit this year.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [52]

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Sorry, I didn't understand the last part.

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Unidentified Company Representative, [53]

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See under Indian accounting standard, foreign exchange gains or losses on the whatever the extended credit period accounted as either over that or gain as other income, correct? So last year, there was -- on the overhead side, it was some kind of excess because that overhead (inaudible) Q1 was always fluctuating.

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Unidentified Company Representative, [54]

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In Q1, Q2 of last year, we had an exchange loss versus some amount of gain in current year Q1. So that also sort of deviates the picture on the walls.

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Unidentified Company Representative, [55]

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Other expenses.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [56]

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On just comparing the figure of Q3 last year with Q1 this year because Q3 is when one of your plants -- one of the new plants had come up...

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Unidentified Company Representative, [57]

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So Richard, as I said, the cost for the 2 plants is getting build only to a small extent in Q1. It will get up -- build up progressively as the utilizations increase. So Q1 is lower. I mean while there is a cost on both these plants, it is much on the lower side. That's the only explanation for the 2 new plants that I can give. Otherwise...

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [58]

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But they would not have been some unabsorbed fixed costs which anyway would have been there irrespective of whether you had high production or not?

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Unidentified Company Representative, [59]

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As I said, these are not very big cost hitting us in Q1.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [60]

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So as you ramp up production, you are saying more the cost will come?

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Unidentified Company Representative, [61]

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The cost will go up.

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Richard Liu, JM Financial Institutional Securities Limited, Research Division - Research Analyst [62]

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Okay. And this will be offset by freight gains that you mentioned for...

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Unidentified Company Representative, [63]

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Benefit in Q1, hopefully that continues.

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Operator [64]

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The next question is from the line of Prashant Poddar from ADIA.

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Prashant Poddar, Abu Dhabi Investment Authority - Portfolio Manager [65]

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Congratulations on great set of numbers. Sir, very quickly, we understand there were, in some of the northern markets, higher number of marriage days or seasons or something like that. Would that have contributed in any significant manner to the kind of volume growth we are seeing in paint industry?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [66]

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It would have had an impact definitely.

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Prashant Poddar, Abu Dhabi Investment Authority - Portfolio Manager [67]

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I mean in any significant manner? Or is it like a business as usual kind of...

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [68]

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See, every year there is a marriage season in that period. If the days are more, I'm not sure the marriages are more. The marriages get clubbed in a fewer days, so to speak if the marriage days are less. So the people want to get married on the dates available.

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Prashant Poddar, Abu Dhabi Investment Authority - Portfolio Manager [69]

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Okay. Sir, the other question is if we look around at the commentary of some of the consumer sectors or consumer-related financing businesses as well, they are pointing towards pretty weak set of consumption environment out there. Within that, this obviously comes as a pleasant surprise. And given it's a large company, we would want to understand more of the trends from you. How are you looking at the environment in the forthcoming period, not immediately, but I mean in general, how do you think the quarter -- sorry, the year is likely to pan out in terms of volume growth in decoratives?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [70]

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So we really don't give forward guidance, so to speak. But like I said, it's a lot dependent on how the overall economy does, how the monsoon does.

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Prashant Poddar, Abu Dhabi Investment Authority - Portfolio Manager [71]

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And you would not be directly impacted as much by the builder segment, right? Most of your consumption is from the secondary market?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [72]

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Yes. A majority of our consumption is from the secondary market, but the builder segment does affect us to some extent. It also affects our Home Improvement businesses, Ess Ess and Sleek a little more significantly.

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Prashant Poddar, Abu Dhabi Investment Authority - Portfolio Manager [73]

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Okay. Last question from my side. Sir, in terms of margins, you always have given a cautious kind of indication for the future there -- sorry, sir.

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [74]

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I continue to do so.

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Prashant Poddar, Abu Dhabi Investment Authority - Portfolio Manager [75]

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So you still think that the margins, which have further moved up are higher than what you'd want to be in the medium term?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [76]

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So we reduce -- these reduce prices towards the end of the quarter in solvent-based products. We still are uncertain given the Middle East situation what really would be the crude prices and the rupee prices. So we are waiting for things to stabilize a little bit before we decide what next to do.

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Operator [77]

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The next question is from the line of Latika Chopra from JPMorgan.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [78]

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My first question was, was there a considerable difference in primary and secondary retail sales for paints during the quarter versus the trends that you have noticed in the previous quarter, particularly, at the secondary level?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [79]

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We have nothing like primary and secondary sales. We have only one sale, our dealer sale. We have no distributors.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [80]

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Yes, yes. But any feedback that you would have seen at their end from a retail end customer sales, have those growth trends remained fairly resilient?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [81]

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Given the constraint in money and space, if sales doesn't occur, they are not going to buy more from us.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [82]

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Okay. So you don't think the channel inventory would have moved up during the quarter?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [83]

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I did mention it might have moved up a little bit, essentially because of last year, they would have tended to be a little bit of destocking due to the announced reduction in GST from 28% to 18%.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [84]

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All right. Secondly, any comments on promotional intensity in the space, and would it be possible to share what's your net realization grow during the quarter positive or negative?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [85]

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It was -- everything is similar, nothing -- on both the areas, it is significantly different from the past.

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Operator [86]

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The next question is from line of Amit Purohit from CGS-CIMB.

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Amit Purohit, CIMB Research - Analyst [87]

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And sir, just on the industry structure, I wanted to check with you, as the painting process has changed over the last 3 to 5 years wherein -- I mean the way the painting is conducted now versus it was, say, probably 5 years down the line because we are moving towards more premium products. Is the process of primer, putty primer followed now more rigorously than it was earlier?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [88]

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The painting processes have changed to the extent that the use of mechanized tools have increased, especially in the project business in a much more significant manner. So spray guns and some of the other mechanized manner of tools have been used more, but I don't think there is any other. And the -- bringing together or waterproofing with painting as a part of the application process has come into being.

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Amit Syngle, Asian Paints Limited - COO [89]

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So there are 2 things happening there. At the economy end, what we find is that possibly the use of direct top coats is something which is more prevalent rather than putting the entire system.

At the mid and the top end, what we are finding is that the full system usage is more in vogue and that is kind of getting complemented by the usage of waterproofing coming as the first initial thing, then added to it is the primer, patti, primer kind of a combination, which kind of comes in. So there is a differential in terms of how consumption in painting, which is happening at the economy end and at the mid and the top level.

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Amit Purohit, CIMB Research - Analyst [90]

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Sure. So that's exactly. So just to, I mean, follow up on this. Is -- as the premium paints are moving up consumers, so the process of painting towards a full process painting, which is primer would be primer and 2 coats or 3 coats, is that is now getting utilized more, right, versus when a 5, 6 or 10 years back when only probably a normal tractor emulsion or for that matter...

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Amit Syngle, Asian Paints Limited - COO [91]

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Yes. So that's what I was trying to explain you that there is a difference. At the economy end, there is still a lot of abuse, which kind of takes place where people are not -- people compromise on cost because there is a cost constraint which happens there.

At the mid and the top level, there is a consciousness of using bit of quality, branded products is kind of going up and people kind of tend to follow the system because they want to kind of get warranties and other things, which are there in the system to kind of get.

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Amit Purohit, CIMB Research - Analyst [92]

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Sure. Sir, second one on the overall demand. So I mean while I understand it is difficult to predict in terms of volume growth, you don't give any outlook. But from your experience, what are the factors which you feel could probably result in just mid-single-digit kind of volume growth in the paint industry? And what would be those variables if you could just broadly highlight those?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [93]

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Like we mentioned, it's on the overall economy and the monsoon at this point of time.

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Operator [94]

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The next question is from the line of Bhavesh Shah from CLSA.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [95]

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Sir, you mentioned about aggressive channel push. I'm just curious to know where is this getting captured in your P&L. If you look at your GM and -- gross margins, they are clearly up 2 percentage points sequentially. And if you look at your other expenses, they look quite subdued. You also called out that marketing spend were a little bit lower. So what exactly do you mean by aggressive channel push? And where is this getting captured in your P&L?

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Amit Syngle, Asian Paints Limited - COO [96]

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So see aggressive channel push doesn't always mean that it has to be higher spend, okay? Aggressive channel push also means strategically how you are kind of aiming for what periods and what you are kind of doing. So I think that's the difference in terms of what we have used in terms of being, as I said, more proactive and utilizing the timing very, very carefully in terms of what we did and at what time we need to kind of put in and the kind of designing of possibly various kind of spends, which we have done in the market. So you are right, it might not show in the balance sheet.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [97]

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Okay. Okay. And strategic spending, you mean more -- so you are more surgical at this time or elite? I'm still trying to understand. Apologies, I'm not able to understand, but your more strategic spending, what do you mean by that?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [98]

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It means using your money the best way that will drive your sales better. I agree you need to do it every time, but sometimes it works better and sometimes it doesn't.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [99]

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Okay. Okay. Sir, secondly, you mentioned somewhere in your commentary that there was some ForEx loss in the base quarter versus some gain in this quarter. So can you just share some numbers on this?

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Unidentified Company Representative, [100]

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No. Actually for the year number, it is there in the balance sheet. We don't give quarter-on-quarter number because it tends to change depending on the rupee and dollar rate.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [101]

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Sure. No, I understand. No, I'm just trying to understand what was the like-for-like growth in your other expenses adjusting for these ForEx losses? So if you can give some color on it, that will be very helpful, sir.

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Unidentified Company Representative, [102]

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We can't really share this number on a quarterly basis, excuse us on that.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [103]

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Sure, sir. Sir, one more question on your staff cost. I understand your commentary on your new plants are still ramping up. So probably some of the overheads are not fully reflective, but your staff cost should be fully reflective. Is it a fair assumption of your new plants?

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Unidentified Company Representative, [104]

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Yes, yes. Yes, it is reflective.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [105]

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Sure. And sir, just one more final question. When did we take this price cut of 1.25% in the solvent-based products? And what is the proportion of your portfolio in this?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [106]

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No, no. We never we took -- we never said that we took 1.8. Aggregate, it's about 0.4% in terms of what we have taken. And what we did was that this was done in a 2-phased manner: one was done on 1st of May, and the other one was done on 1st of June.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [107]

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Okay. No, I was just referring to your conference call introductory remarks...

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [108]

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I said 0.4%.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [109]

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You mentioned somewhere 1.25%. Okay, fine. So aggregate is 0.4% at the company level?

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Unidentified Company Representative, [110]

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Yes. Aggregate portfolio level, it reflects 2.4%.

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Unidentified Company Representative, [111]

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0.4%.

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Unidentified Company Representative, [112]

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I said 0.4%, not 1.25%, sorry.

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Bhavesh Pravin Shah, CLSA Limited, Research Division - Research Analyst [113]

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Sure. So this 0.4% is at the company level?

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Unidentified Company Representative, [114]

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That's at the portfolio level.

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Unidentified Company Representative, [115]

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Entire portfolio.

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Operator [116]

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The next question is from the line of Shirish Pardeshi from Centrum Broking.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [117]

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Heartily congratulations for the good set of numbers. Just 2 questions I'm more keen to understand. In terms of dealer push in the Annual Analyst Meeting, you've guided that we will add about 5,000 outlets -- 5,000 new dealers. So if I actually look at the paint industry, roughly about 1.2 lakh outlets. So is there further significant scope for us to go up to another 5,000 in the following year and the growth of aggression...

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [118]

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I think outlets are increasingly by at least 10% every year year-on-year as urbanization is increasing and outlets are increasing. The scope is unlimited.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [119]

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So I'm trying to understand with this addition of new account you said that the channel push is -- basically this 10% outlets are qualifying in terms of your promotions which you are running for them or dealer promotion?

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Amit Syngle, Asian Paints Limited - COO [120]

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No, no. See, you are confusing the issue. There are 2 things: one is the channel push, which can happen on older dealers, new dealers, combined; and the second is basically proliferation of newer counters, which is independent of the channel push, which will keep on happening as basically towns expand and more towns come into the place and so on so forth. As urbanization happens, the number of counters keep on increasing. So both things are happening: one, there is an issue of channel push in terms of which is happening at the overall channel; and second is there is a proliferation by adding more and more new counters today.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [121]

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I got it. The other question on this is that what is generally the channel or maybe trade or maybe dealer, what we call, is the inventory what you have seen this year and the last year in terms of number of days of sales?

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Amit Syngle, Asian Paints Limited - COO [122]

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So by and large, as we said that -- see there has been a little bit of increase of inventory, which has happened. But by and large, it's not that you are seeing a huge kind of a pipeline inventory going up kind of a zone to the extent. But yes, definitely there is a little bit of increased inventory possibly at the stores in terms of what would have happened this year in the first quarter.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [123]

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Amit, I got your point. I'm just trying to understand quarter 1 has been weak seasonality quarter. So what kind of channel stocking happens in the first quarter? I do understand when the festive season picks up, the inventory will be higher.

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Amit Syngle, Asian Paints Limited - COO [124]

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So what literally happens is that it is also dependent on Diwali being earlier or later. So to that extent, possibly the wholesale cycle starts happening from July to that extent. And therefore sometimes what happens in a shorter Diwali period, the June end inventory would be a little bit higher as compared to possibly a longer Diwali year to that extent.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [125]

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I got your point, Amit. I'm just more keen to understand this inventory goes up by 2 weeks or 3 weeks or month...

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Amit Syngle, Asian Paints Limited - COO [126]

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No way, we have that period, but we have no clue on which it goes up by to answer you honestly.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [127]

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Okay. Got it. And if you can breakup top 12 metros versus rural or...

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Amit Syngle, Asian Paints Limited - COO [128]

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Rural is much faster, that's all we can say.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [129]

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No, no. I'm not asking the growth rate. The contribution coming from rural versus urban. I mean, for you, you may not be tracking rural absolutely, but maybe if you can split to what is the top 12 metros versus rest?

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Amit Syngle, Asian Paints Limited - COO [130]

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I don't have those figures off hand, but our rural is larger than urban. And we can tell you that geographically, there is not too much of a difference.

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Operator [131]

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The next question is from the line of Pulkit Singhal from Motilal Oswal.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [132]

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Sir, one is on the waterproofing side. Number one, is the demand lot higher in 1Q in general versus all 4 quarters? And do you think this year in particular, it has triggered faster painting cycle kind of demand, which has helped?

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Amit Syngle, Asian Paints Limited - COO [133]

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So we feel that actually the whole market is something which possibly we are expanding the market in our own way. So we feel that today, there is a late trend waterproof requirement both at the repainting and the new construction level, and we are putting in new products, new usages across the segment so that we are able to fuel more sale of waterproofing to happen. So whether it is old houses in terms of having leakages or it is in the new houses to that extent, and we are trying to make it as basically a default part of the whole painting cycle, so that every painting cycle uses the waterproofing product, so that it kind of increases consumption.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [134]

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Got it. Sir, secondly, I mean, when we met you in May end and even now, you're pretty cautious on the growth aspects and mentioning it to be uncertain as well. Now when I look at 1Q itself, I mean the economy has not been in good shape and that's clearly reflected in every other company's financials. I understand there is certain one-off aspects like a favorable base and then aggressive channel push, but you also talked about certain structural aspects like smaller towns, which are growing faster and shift from unorganized and even say this waterproofing. So why is there -- I mean so that suggest that there seems to be some delinking happening at this stage for Asian Paints growth rate versus the economy even if it is for the small period of time. So why is there some cautiousness in the commentary from you?

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Amit Syngle, Asian Paints Limited - COO [135]

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Not necessarily because see overall the macro factors would always overweigh some of these architectural shifts. So unless basically the overall economy, according to us, why we are being cautious because that's the reality. We do not know in terms of where the economy is going and how is the monsoon kind of going to fuel some of this demand and consumption, which is going to happen in the market. See from our point of view, we will continue to kind of work in terms of trying to make these shifts, which are happening, which would only kind of do better if the economy and the monsoon kind of do well. So I think it's a win-win situation in that stage that if the overall macro factors are with us, I think we would see possibly good numbers, but it is all totally dependent in terms of how the overall macro parameters pan out.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [136]

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Fair enough. Sir, last question, and just to understand the reach better of the overall paint sector and more so for Asian Paints, I mean the 60,000-odd dealers, that we have, I mean, how many towns and cities are we covering in the country?

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Amit Syngle, Asian Paints Limited - COO [137]

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Outside, we won't be able to tell you the numbers in terms of how many towns, which we'll be covering. But basically, all towns which possibly population of more than 10,000, we will have a good representation.

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Operator [138]

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The next question is from the line of Ayush Bagla from SBICAP Securities.

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Ayush Bagla, SBICAP Securities Ltd., Research Division - Associate of Midcap [139]

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I wanted to ask, you have taken a price sort of 0.4% in the solvent base. What would be the portion as a percentage of total portfolio versus emulsions and other lower-end products? If you could just give a rough estimate also that would be fine.

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [140]

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We don't give such estimates, sorry.

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Operator [141]

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Next question is from the line of Krishnan Sambamoorthy from Motilal Oswal.

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Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [142]

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Yes. If I understand correctly, there was a deterioration of mix that happened, and particularly, it worsened towards the end of last year. Has that deterioration of mix has been arrested now?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [143]

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No. We did mention that the lower-end economy continues to grow significantly faster. Whether it is partially fueled because of the shift from the unorganized to the organized, we are not really clear. So the trend continues to an extent.

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Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [144]

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Okay. Okay. And my second question was, was the delay in monsoon also favorable for you in terms of an extended painting season?

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Amit Syngle, Asian Paints Limited - COO [145]

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Not necessarily because see what really happens is that the delay in monsoon puts more anxiety for people to kind of really stock as well because as I said that there is a little bit of a preparation which happens for the season at this point of time. So people live by the day, in the sense that if there are rains getting kind of delayed, they will be totally dependent on the consumption. So I think a lot of customers would also not tentatively come in because they also do not know when the monsoon would start to that extent. So I don't think it is linked very strongly to that.

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Operator [146]

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The next question is from the line of Shirish Pardeshi from Centrum Broking.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [147]

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Yes. One more follow-up. On the non-painting business, basically what's happening in Sleek? And -- I mean the numbers are very impressive. I mean, is the dealer expansion is now started firing in both Bath and even Sleek?

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Amit Syngle, Asian Paints Limited - COO [148]

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Things are better, but since a lot of the business -- some -- I mean a larger proportion of the business goes in new construction, then the overall impact on the building industry, credit terms there, et cetera, have been a little bit of a dampness. We would have liked to have done much better.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [149]

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What I'm asking if I compare the stand-alone Sleek business, it was always been stronger into the southern market and then we were trying to expand into the northern market, which is actually a good spend in terms of Home Improvement and Solutions. So if the dealer expansion is much more aggressive in the north?

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Amit Syngle, Asian Paints Limited - COO [150]

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Yes. So see overall, we are expanding across the country in terms of putting new retailers and new distributors kind of a thing in terms of going. Obviously, some of that is giving us results in terms of a far better reach and therefore also the entire kind of a product mix kind of reaching there. So we've also worked in terms of ensuring that they are -- the supply cycles are shortened to the retailers to that extent, and that's the back end supply chain work which has happened in terms of really giving us capability to supply better. So all those things are auguring well for us in terms of looking at a much better reach happening in these 2 businesses.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [151]

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Amit, I got what you think, but my whole question is that is the services part in Sleek is growing faster or is the products business is growing faster?

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Amit Syngle, Asian Paints Limited - COO [152]

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It's not a question of faster because it's a very small business overall at this moment. So you can't relatively compare it to the depot business to that extent because there is no comparison between the 2 immediately.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [153]

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Okay. And any comments on the Bath business?

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Amit Syngle, Asian Paints Limited - COO [154]

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On the Bath business?

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [155]

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Yes.

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Amit Syngle, Asian Paints Limited - COO [156]

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Yes. So as -- so overall what has happened is that there is a lot of consumption which happens with respect to the projects business also which is the new business which happens, the new construction business. So as -- I think we would have kind of grown better if the market liquidity would have been better and the new construction pace would not have kind of slowed down currently. I think there is some part of effect which has happened on the Bath business because of that because the projects business has been affected.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [157]

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To what extent these 2 businesses has reconstruct -- or I mean Home Improvement happens other than the new construction?

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Amit Syngle, Asian Paints Limited - COO [158]

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So you're saying what is...

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [159]

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What I'm trying to understand like repainting is more than 2/3 of the business, like Home Improvement, how much business comes from the reconstruction or...

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Amit Syngle, Asian Paints Limited - COO [160]

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So it's largely the same. See it depends on which place -- which player is auguring for what kind of a zone to that extent. In our zone, the Bath business still would be about -- dependent about 25% to 30% on the new construction.

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Operator [161]

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The next question is from the line of Kunal Bhatia from Dalal & Broacha.

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Kunal Bhatia, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [162]

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Sir, I just wanted to understand in terms of demand, how has been the demand, especially from the new construction or new project space vis-à-vis the repainting demand also taking into account the -- this concept of affordable housing, has it really helped us vis-à-vis the last year period?

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Amit Syngle, Asian Paints Limited - COO [163]

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So as far as the new construction goes, we have not seen any kind of increase in terms of that demand coming either at the premium sector or the affordable housing kind of a zone to that extent. What we definitely see is that the infrastructure project is something which is on the rise. To some extent, there is -- we are finding that there is good activity happening on that front, which is also kind of fueling some demand.

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Kunal Bhatia, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [164]

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Okay. And sir, that would be how big as a portion, if you could share?

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Unidentified Company Representative, [165]

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No, we can't share that.

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Unidentified Company Representative, [166]

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No, no, we don't give.

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Kunal Bhatia, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [167]

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Okay, okay. And sir, the repainting part is still showing the similar pace of growth?

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Amit Syngle, Asian Paints Limited - COO [168]

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Yes. So the repainting overall is, I would say, a little bit subdued. It depends. In terms of some geographers, it is doing well. Some geographies, it is not to the tune where we would like it. So it kind of varies from some geographies to geographies in terms of how it has been doing.

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Kunal Bhatia, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [169]

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Okay. So to sort of conclude, is this infrastructure project business which has also led to some kind of an increase growth in this current period?

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Amit Syngle, Asian Paints Limited - COO [170]

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So definitely, it has some impact in terms of the overall projects business in terms of what we do. So it would have definitely kind of given us some flip to us overall.

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Operator [171]

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The next question is from line of Aditya Gupta from Goldman Sachs.

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Aditya Gupta, Goldman Sachs Group Inc., Research Division - Associate [172]

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A couple of questions. First one on the innovative schemes that you mentioned you had for the dealers, et cetera. So was this just opposed for this quarter itself or will the benefits be there permanently going forward where you have more shelf space, et cetera? And second one, was there any easing of terms with the dealers in terms of higher margin or more working capital days to the dealers to offset the liquidity pressure in the system?

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [173]

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The second definitely no. But -- I mean you always do innovative schemes. I mean you really can't ensure what will work and not work. So it's worked in the first quarter is all I can say.

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Operator [174]

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(Operator Instructions) The next question is from the line of Bobby Jayaraman from Falcon Investment. There seems to be no response from the line of Bobby Jayaraman. (Operator Instructions) As there are no further questions, I'd like to hand the conference back to the management team for any closing comments.

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K. B. S. Anand, Asian Paints Limited - MD, CEO & Director [175]

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Thank you very much. I look forward to a great year. Thank you. Goodbye.

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Operator [176]

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Thank you very much. On behalf of Asian Paints, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.