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Edited Transcript of ASIANPAINT.NSE earnings conference call or presentation 22-Jan-20 11:30am GMT

Q3 2020 Asian Paints Ltd Earnings Call

Mumbai Jan 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Asian Paints Ltd earnings conference call or presentation Wednesday, January 22, 2020 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

* Kanwar Bir Singh Anand

Asian Paints Limited - MD, CEO & Director

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Conference Call Participants

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* Amit Sachdeva

HSBC, Research Division - Analyst, Consumer and Retail

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Kuldeep Gangwar

ASK Investment Managers Limited - Portfolio Manager

* Latika Chopra

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nilesh Soman

Keynotes Financial - Managing Director

* Pritesh Chheda

Lucky Investment Managers Private Limited - Analyst

* Pulkit Singhal

Motilal Oswal Asset Management Company Limited - Associate VP & Analyst

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Tejash Shah

Spark Capital Advisors (India) Private Limited, Research Division - VP of Research

* Varun Singh

IDBI Capital Markets & Securities Ltd., Research Division - Research 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 Q3 FY 2020 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 Asian Paints 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 Call for Q3 FY '20 results. On the call, we have Mr. K.B.S. Anand, MD and CEO; Mr. Amit Syngle, Chief Operating Officer; Mr. R. J. Jeyamurugan, CFO and Company Secretary; and Mr. Parag Rane, GM Finance.

May I now request Mr. K.B.S. Anand to take the call forward.

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [3]

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Good evening, everyone, and thank you for partaking in this call. The paint industry continued to be affected by adverse macroeconomic conditions in the domestic economy as well as certain adverse impacts of an extended monsoon until almost October end, early November. Demand conditions have been a little weak. And in an economy with a large domestic consumption sector, this is getting reflected in the lower GDP growth rates that have been published. These adverse factors, coupled with the preponement of sales in the second quarter, given an early Diwali this year as compared to the previous year, has had an impact on our domestic decorative business with volume growth in low double digits.

As stated during the second quarter results call, we continue to focus our strategy to grow the bottom of the pyramid with a large push on the economy range of products, which continue to grow at a much faster rate than the premium range of products. The SmartCare waterproofing and adhesive product ranges also grew well. Focus on décor through the Paint Total service continues to be pushed forward. Material prices remained benign in the quarter, and we took one more round of price reduction in a few solvent-based products, amounting to a price reduction of 0.25% at the portfolio level. This takes the cumulative price reduction to the year -- during the year to slightly above 1% at the portfolio level.

The persistent slowdown experienced by the automotive industry continued to adversely affect the automotive coating JV, PPG-AP. The Industrial Coating JV, AP-PPG, saw a demand improvement on a sequential basis compared to the first 2 quarters of the financial year, particularly supported by the demand in the Protective Coatings segment.

Both the JVs registered improvement in profitability on the back of lower material prices and contained growth in overhead costs. In the international business portfolio, the overall performance was affected by the slowdown in Oman and Bahrain as well as the impact of an extended monsoon in Sri Lanka. However, improvement in Egypt and Bangladesh helped negate some of this adverse impact during the quarter.

Revenues from greenfield operations in Indonesia grew well in the third quarter. Benign material costs supported the profitability of international operations. Both the segments within the Home Improvement business, Kitchen under Sleek and Bath business under Ess Ess faced challenging conditions with the slowdown in real estate construction affecting project segments for both these businesses. However, the retail segment for both the businesses continued to grow well with good growth in full Kitchen business and the sanitary ware range.

In the consolidated financials, revenue from operations has increased by 3% to INR 5,420 crores in Q3 and by 9.2% to INR 15,576 crores in 9 months. PBDIT before other income increased by 7.9% to INR 1,208.6 crores in Q3 and by 14.9% to INR 3,348.93 crores in 9 months. PBT increased by 8.4% to INR 1,057.3 crores in Q3 and by 14.2% to INR 2,934.8 crores in 9 months. Net profit from continued -- continuing operations increased by 20.3% to INR 779.7 crores in Q3 and by 33.3% to INR 2,298.9 crores in 9 months.

In the stand-alone financials, revenues from operations increased by 2.7% to INR 4,657 crores in Q3 and by 9.5% to INR 13,315 crores in 9 months. PBDIT before other income increased by 7.8% to INR 1,117.9 crores in Q3 and by 14.8% to INR 3,081.2 crores in 9 months. PBT increased by 8.1% to INR 1,017.4 crores in Q3 and INR 13 -- and by 13.8% to INR 2,796.8 crores in 9 months. Net profit increased by 20.1% to INR 758.9 crores in Q3 and by 33.1% to INR 2,201.9 crores in 9 months.

Higher growth in net profit as compared to profit before tax is on account of reduction in the effective corporate tax from 34.94% to 25.17%. As mentioned in the previous quarter, the CapEx plan for the company for the current year is about INR 700 crores.

Going forward, the demand conditions for the paint industry continue to remain challenging and uncertain, reflecting the overall slowdown in the economy. We will continue to monitor and respond adequately to the evolving demand condition. On the cost side, there has been some increased volatility in a few key raw materials. We will need to watch out for any sustained movement of the raw material cost front. In the international markets, we will have to be careful about the emerging situation in the Middle East as well as business conditions in key markets like Sri Lanka and Bangladesh.

Thank you, everyone, and we will be 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 Avi Mehta from IIFL.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [2]

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Sir, I had a question on the difference between the volume growth and the revenue growth that we've been seeing for the last few quarters. Now in the start of the call, you said that you had focused on growing the economy segment. And that is what has been the focus. Would that mean that this -- is this the key reason for this realization decline that we are seeing of almost about 5%, 7%-plus? And hence, is this expected to continue as we go forward?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [3]

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See, there is definitely a continued focus. We have introduced 2 new economy emulsion products priced 15% to 20% below the lowest priced product we had in the past. These have performed exceedingly well in all markets. The second factor is the slowdown in construction and the general mood has affected metros and Tier 1 towns to a much greater extent. The smaller towns in the rural sector have continued to grow. So these 2 factors compounded together have magnified it. Now if there's a change in the environment, things will change.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [4]

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Sorry, sir. The first part I understand. But then the growth rate in these segments had to be significantly ahead. Is the metro and Tier 1 impact much more than...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [5]

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No, no, no. Our rural-urban divide is about 50-50.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [6]

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Okay, okay. So you're saying that because of the mix is essentially a little different in the rural side and because that is growing strongly, the mix has been impacted, plus the focus on economy. Is that understanding correct, sir?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [7]

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Yes.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [8]

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And what you are essentially -- the first one that you highlighted is -- that is not in our hand. But the second one is in our hand, and that is going to be the focus that will continue?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [9]

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Yes. So we are getting growth in the smaller towns than in the rural market. So definitely, we'll focus there.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [10]

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Okay. Sir, in that case, would -- is this something that, while the focus on economy that you're highlighting, what exactly is driving that? Is this GST-linked still? Or what exact -- if you could share some comments on that as well?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [11]

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That can only be an hypothesis. It's very difficult to gauge unless we have published figures of the unorganized and smaller sector -- it's very difficult to identify. That could be one factor in the whole thing.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [12]

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Okay. Sir, the second question was on the other expenses. We've seen very -- you've kind of controlled it exceedingly well in this quarter. What was the reason for that? And just trying to understand that.

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [13]

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When sales is tough, you have to control other expenses.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [14]

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So it's not marketing linked, right? So that's what I wanted to get -- it's not one-off in nature. It's more...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [15]

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It would be a little marketing linked. It would be a little other linked. I mean it's all around.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [16]

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So would 9-month growth rate be the apt number? Or would the absolute number be a better metric to kind of look at?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [17]

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I give no forward projections.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [18]

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Sir, lastly, the CCI case that has come in -- sorry?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [19]

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You know all my answers.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [20]

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No, sir, I don't. Sir, lastly is the CCI case. Is there any precedent on how one can look at this case? What...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [21]

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It's the first time for us also. So I can't really give you a precedent. We -- our policy is very clear. We have no -- I mean most -- a majority of our dealers and stockists are multiple counters. They deal in all companies. So even with the complainant, we have many counters that are dealing with both the companies. So it's very difficult to understand the whole situation. We've asked CCI for details. Once we get the details, we'll probably be in a better position to answer.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [22]

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Okay. And typically, sir, any precedence on how these cases -- how long these cases typically take? Or any idea if you could share? Because in the other example, cement, it's a different scenario altogether. So I don't have supply -- that's why I was just kind of reaching out in case your team has looked at something, which has...

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Unidentified Company Representative [23]

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It is totally dependent on in terms of what charges are there and what is the investigation, which kind of goes. So it's very difficult to put a time frame to this.

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Unidentified Company Representative [24]

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[No] time frame on this.

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Operator [25]

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The next question is from the line of Amit Sachdeva from HSBC.

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Amit Sachdeva, HSBC, Research Division - Analyst, Consumer and Retail [26]

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Again coming back to, sir, revenue and volume mix. And it is, obviously, that sort of equation between pricing and volume has accelerated in the last 2 quarters given your economy push. And I see that you suggest that this will continue. Can you, sir, give us some understanding of what percentage of the revenues is -- that segment is representing in the domestic decorative side?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [27]

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Sorry, we don't really give split-ups like this. The only split-up I gave you is that the -- from our point of view, about 50% of the market, which is the Tier 2, Tier 3 rural markets seem to be growing reasonably well. It's the larger towns, metros and Tier 1 towns that are a little slower.

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Amit Sachdeva, HSBC, Research Division - Analyst, Consumer and Retail [28]

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Sure. But sir, given that this mix is sort of changing, but gross profit has obviously still remained quite strong in that sense, is it something that -- is the mix -- although is deteriorated in some sense because of these 2 factors, but is the gross margin not much different across 2 products, like main emulsions, your -- at the bottom end?

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Unidentified Company Representative [29]

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Gross margin may not be very different.

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Amit Sachdeva, HSBC, Research Division - Analyst, Consumer and Retail [30]

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Gross margin is still the same, even though the product is 20% cheaper?

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Unidentified Company Representative [31]

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Not too significant difference between these 2 entities.

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [32]

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Because see, there is a certain component of the material cost, which is there. So to that extent, the margins are not very, very different if you see from the point of view of economy and premium.

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Amit Sachdeva, HSBC, Research Division - Analyst, Consumer and Retail [33]

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Okay. So your -- so from your point of view, you are happy to sell more because your -- at least margin's not getting impacted. You're getting more volume from the -- and where this volume is coming from? Like do you see this is a newer segment of customers which are buying or you see expansion of market as a result? Or is it something that your emulsion customer is now downgrading to this product?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [34]

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It's very tough to answer this question very simply because people don't paint every day. They paint in 3 to 5 years. Whether they are newer customers or customers from different segments coming in or the reach is -- a very detailed research has to be done to really understand that.

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Amit Sachdeva, HSBC, Research Division - Analyst, Consumer and Retail [35]

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The reason I ask this question is there is obviously -- we see that because the labor cost being significant there's a -- general understanding is that structurally material is premiumizing because labor is inflexible. And so people tend to put premium materials as a result. So material is a small fraction of the total cost. So I'm just trying to understand, are you gaining market share from maybe unorganized -- or so when dealers pick up the stock and I assume that dealers give some indication of what kind of stock they are picking up, and do you see their intent is to buy the cheaper one more, and they are pushing it more? Or what sort of dynamic from the dealer side that you're experiencing towards selling it?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [36]

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See what really happens is that as part of overall focus, we tend to kind of see that if there is an upgradation which we can do of the customer, we try to kind of push basically the full range of emulsions which is there. Now sometimes, what happens is that it is the dealers' propensity that depending on the kind of customer which is coming, he tries to basically upgrade the customer to the next product. And in some cases, what we have seen is that the upgradation is not generally linear. So the upgradation can happen to the -- in the economy emulsion and the upgradation can also happen to the luxury emulsion to that extent. So there is no linearity that a customer who's coming in the cycle first will go for economy, then will go for premium, and then will go for luxury. So it is a very difficult question to really answer in terms of how that upgradation is really happening because the upgradation actually is nonlinear.

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Amit Sachdeva, HSBC, Research Division - Analyst, Consumer and Retail [37]

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Sure. But the reason I said that whether this trend worries you more or excites you more? Because end of the day, you are getting more volumes for sure. But you would much rather have volume, which also gives you higher sell-ins because your gross profit gets maximized there? So given this trend, as a company, when you look at structurally how your segments are evolving, does it give you a little bit long-term worry? Or it's like very exciting for you that we are cracking new segment? That's where I'm coming from.

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [38]

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So see, excitement and happiness are very relative terms. So what we are definitely looking is that as from the point of view of today, we are able to kind of look at saying that the brand is going in a certain direction. We are able to kind of look at maximizing our reach and looking at in terms of the overall objectives getting fulfilled. We would kind of go in that direction. Obviously, we would like that -- we would like to sell more premium and luxury products as we kind of go for. But we would also, at the same time, try to really reach out to every customer who's there on the environment. And therefore, I think, at the moment, given the situation the way it is, we are okay in terms of the current direction, which is it is going. So we would have loved the metros and bigger towns also to grow very well for us, but it hasn't happened that way.

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Operator [39]

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The next question is from the line of Nilesh Soman from Keynotes Financial.

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Nilesh Soman, Keynotes Financial - Managing Director [40]

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Sir, my question too is that there is any hope from the budget for the infrastructure side and you are -- rely on the infrastructure as well because you deal in the industrial side as well as home decorative?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [41]

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There is definitely -- the Prime Minister and everybody's talked of spending much more on infrastructure. But if you're saying what has to come from the budget, I think we need to wait for only a few more days.

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Nilesh Soman, Keynotes Financial - Managing Director [42]

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Yes, yes. I understand, sir. And second question is that, is there any strategy for the distribution network from your side since you are more focusing on the pyramid -- economical pyramid or economical side? So 2 years before the budget -- government has announced that 2020 is a home for everybody. So do you have any strategy regarding that for the distribution network also?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [43]

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We have a very intensive distribution network with about 140 depots, a sales force of almost 2,000 reaching to about 65,000 to 70,000 shopkeepers all over the country. So -- and we look at expanding that on an ongoing basis every year going to new towns and new locations within -- because today towns are also growing. So we look at expanding that on a regular basis and is a part of our critical objectives on an ongoing basis for the last 30, 40 years.

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Operator [44]

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

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [45]

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I'm still struggling in my mind. You're saying 3% revenue growth and double-digit volume growth. So I mean whatever you have said, there are 2 things which -- out of my experience I'm saying. In the such big economic situation where dealers are struggling, liquidity issues, macroeconomic challenges and yet we are seeing that rural is growing faster. So is there any credit enhancement which you have extended to your dealers? And what kind of discounting which has gone up? Because if I see that in current scenario, if and if there is a demand, the dealers have become more and more savvy and they want to have more discounting. So is that -- these 2 things, what we are assessing is true?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [46]

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Paint dealers, I think, have always been very savvy. So they haven't changed on that regard. But I agree with you when demand is very good, the pressure on them to demand more from companies is less. And when demand is not that great, they themselves are searching for ways to make more money. That does happen. So discounting may have gone up marginally in this quarter, but nothing really significant and nothing on the credit front. Credit front, sorry, absolutely nothing. We are -- we quite like to adhere to the policy because the credit problems faced by the retailer are actually much more than by us. If we give them credit, we actually encourage them to give credit further, which is a dangerous exercise.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [47]

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Okay. Because what I learned from the trade is that the discounting is higher, that's for true. But I'm still surprised that we had a weak quarter. I mean, obviously, we had a higher...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [48]

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No, no, remember one thing. Last year in this quarter, we grew by 27%. It was an early Diwali and a good Diwali. We grew by 27%. So this year, you had a Diwali which was about 20 days later. You had an extended monsoon that came up to, I think, 10th of November, if I'm not right -- if I remember, right. You had a severe winter that started in the north. So I mean, I'm not going through all the individual factors. I think one should really go by year-to-year growth rather than quarter-to-quarter growth. If you remember, in the last quarter, I actually said, I'm not very happy because the quarter should have been better, given that it was an earlier Diwali.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [49]

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Correct, sir. Mr. Anand, that's what my point is. If I read that, we had a prolonged rainy season in west and some parts -- other parts. So what -- my assessment is that your trade inventory which was about 20, 22 days, which with this kind of push would have gone up. So I mean, why the trade has picked up the inventory and the inventory stocking has gone up? [Essence] is that it would not significantly...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [50]

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Trade doesn't have too much inventory. It doesn't -- it fluctuates at best 10 days between one end and the other. They don't have space to keep stock.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [51]

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Correct. So you are saying that the trade inventory is still in the control, and we still have push factor which can still...

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Amit Syngle, Asian Paints Limited - COO [52]

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Individual dealers may vary here and there, but in a sense it is the same.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [53]

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No. Amit, I understand, but I'm only reading -- Mr. Anand has given in his press release saying that double-digit volume growth has impacted by the slowdown in the overall economy. So if economy would have done better, you would have done 20% volumes.

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Amit Syngle, Asian Paints Limited - COO [54]

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Of course.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [55]

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Just one last question on -- last -- I mean we have been seeing that Middle East and this part is still becoming a problem, I mean, Egypt and all. Do you think any good signs that recovery will happen in...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [56]

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So we said that both Egypt, Bangladesh, Indonesia have actually done well in this quarter, and there's signs of recovery. What we are worried about more is Bahrain and Oman, which are going through a tough patch.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [57]

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Okay. Just last question on this Home Improvement business. You said that the project businesses has slowed down. I mean, also, last quarter I have said that the retail business, you had done a fantastic job. What kind of contribution we will be getting from retail or maybe from project investments?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [58]

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While I won't give you the exact percentages, the contribution in the case of bathrooms and kitchens is much higher in fresh construction as you will realize compared to the repainting business or the regular -- even when you refresh kitchens and bathrooms, you won't do it every 3 years or 5 years. The frequency is much less.

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Operator [59]

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The next question is from the line of Tejash Shah from Spark Capital.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [60]

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The question is slightly an extension of the earlier question. So sir, how would you suggest to reconcile our current growth momentum with your macro commentary? Should we say that double-digit volume growth in 5% -- 4%, 5% GDP growth environment, hence, we are bucking the trend? Or value growth of 3% matches with our overall macro read of very benign outlook? And how do you prioritize internal benchmark of your performance? Is it on now value growth or volume growth?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [61]

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Okay. The last question, the easiest -- both. Both value and volume. The others we leave to you actually. We try and grow the fastest we can both by value and volume. What analysis and what you derive and how you relate to GDP, we have not succeeded in all these years. We welcome input from you on how you find a correlation.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [62]

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We are struggling, hence, we are looking for an answer from you.

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Amit Syngle, Asian Paints Limited - COO [63]

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See, the other answer is that so long as there is growth, which is happening, I think it is always a good sign in tougher circumstances. So we would kind of say that it's not that we would run after only volume or we would run after only value. We would obviously like to grow both value and volume in a strong way. But I would say that under the circumstances, if you are able to kind of grow at such a volume, I think it's, to that extent, a reasonable performance.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [64]

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Sure. And sir, this volume growth at March end, is it coming largely from other organized players? Or is it also a reflection of unorganized to organized happening?

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Amit Syngle, Asian Paints Limited - COO [65]

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So very difficult to, again, say that. We've not seen any results of the other organized players which have come in, and neither we know in terms of specifically how the unorganized players would have done. But I think the reason to believe is that, today, in a way, you would have affected both in terms of looking at the kind of volume growth which have come in, especially when you look at the fact that your Tier 2, Tier 3, Tier 4 cities have gone at -- grown at a good rate to that extent. So in those markets, I think, given the fact that you are a larger player, you would have affected that.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [66]

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Sure. And sir, in last quarter's call, you touched upon waterproofing doing very well and you having ambition of becoming top 2 or 3 player very soon in that space. But when we look from a consumer perspective, we've not put our branding prowess behind the segment. So we don't see that much advertisement spend aggressive one on this call. So any insight you can share on that?

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Amit Syngle, Asian Paints Limited - COO [67]

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So today, when we look at the whole area of waterproofing and construction chemicals, I think the -- from the point of view of just brand promotion plays a very small part. What plays a stronger part is more the education of the customer, and the solution which we can provide to the customer to give for a certain problem. So today, the entire work which we do is around: one, educating the customer in whatever way we can do; secondly, in terms of equipping the retailer to offer the right solution for what the problem is there at the customer's end; and third, in terms of investing in the training of the applicator, so that he is able to apply the product to give the right solution to the customer. So there is a huge investment, which we think is a long-term investment we are doing in terms of looking at really affording the right solution to the customer, so that the equity of the brand is built through trust and expertise rather than just looking at basically above the line advertising and other things, which, in general, a brand would do.

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Operator [68]

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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 [69]

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So one of the things we realize that because paints is not really sold on MRP, the more of the market share a player has, it results in more discounting at the dealer level, and he ultimately earns lesser margin on selling an Asian Paints product versus the other players. So I mean, in some ways, the market share kind of goes against the dealer itself. So he is more incentivized to probably sell this #2 or #3 brand if in a locality you have a lot more Asian Paint dealers. So how do you take care of this situation and try to maintain your market share in such areas?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [70]

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So you're talking at a very basic element, assuming 3 things. Assuming all products are equal and all companies are equal in terms of the products and services they give to consumers. You're also assuming that it is the consumer really who's the only one person buying. And three, that the shopkeeper is always comfortable in making a very high margin.

If I answer each of these separately, I think we provide much better products and services than most of our competitors. We've -- the activity and support we give consumers to handle any complaints that may arise out of painting with Asian Paints in their homes is of a totally different order. And although the complaints may occur due to improper application or improperly treated substrate, we attempt to assist the consumer to resolve all these issues and problems. This, thereby, gives a strong level of reassurance, both to the customer as well as the applicator who feels that the customer -- that the company stands by him whenever he faces issues as well as the dealer who says, "Look, I am now selling the product. The company is going to take care of any issues that may arise."

As long as -- when you have a higher market share, I will agree with you that the gross margin you make on every liter sold would be lower. But if you take the ROI or the investment he makes in terms of the rotation of the stock, it will probably be much, much higher. On an average, our dealers rotate the stock at least 15 to 20 times a year. So if you build that into the margins they're making, it becomes more reasonable. Simultaneously, in our own way, we provide a lot of services to consumers, which attract them to the brand. And in a product that is used once in 3 years or once in 5 years, the biggest brand equity comes with problems faced in the past or problems they have seen faced by other users of the product. The fact that we are able to ensure that, by and large, our products are used and give a trouble-free performance ensures that the demand of our products continues further. Have I answered something of what you've asked?

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [71]

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Sure, sir. Just one observation. I mean, it comes out in some of our channel checks. I mean in a lot of the hinterlands and rural and small towns, where the dealer is really the influencer, he does end up still selling other branded products where the margins could be as much as 4 to 5x higher, I mean. So do you, in some way, I mean, try to focus on incentivizing them a lot higher at least in the hinterlands?

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Amit Syngle, Asian Paints Limited - COO [72]

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I can't incentivize 4 to 5x. It's not possible. See what you're not getting right is that -- see it's not the question of only margin. It is a question of the ROI actually. That's a very big factor, which the -- with the same capital, if you are able to get a certain kind of rotation and even if the margin is a little bit lower, the retailer would kind of go with that brand rather than going with someone where the capital he invests is stuck for a larger time and the margin return is higher, okay?

So there is -- so that -- our retailers are pretty savvy. No retailer would kind of just give away a chance that if there is someone who is giving a higher margin, he will not push that product to that extent. But he also reconciles with the fact that, one, it's a question of what is demanded by the consumer and second, in terms of how much is the rotation he is able to do to get to maximize his ROI. So that would kind of really answer your question in terms of saying, how do we kind of survive, because we work on the consumer in terms of looking at, seeing that there is a certain demand which we create. We work in terms of giving the solution. We work from the point of view of giving a quality product. You give a service. And at the same time, you are giving a good ROI to the retailer. So that would be the essence in terms of how the brand works.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [73]

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Sure. Sir and in terms of the depot addition, I mean, that obviously helps improve the ROI of the dealer. What I've come across is 2 to 3 -- I mean, dealer ordering and getting the paint required in 2 to 3 hours maybe seems to be the best we have reached. Is there something more that can be done? Or do you think that is where -- that is the best that can be done?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [74]

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It used to be better. But if you can reduce the traffic on Indian metros, we can make it better.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [75]

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So, Amit sir, in terms of the dealers who are actually getting this service, I mean, where you've penetrated through depots quite a bit, like what percentage of your network is there in this kind of 2 to 3 hours kind of delivery service areas?

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Amit Syngle, Asian Paints Limited - COO [76]

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So see, it totally depends because depending on the city, like metros is a challenge completely. Whereas, if you go to the smaller towns and cities, there, basically, we are able to do it much better in terms of doing it. So very difficult to say because today, when cities like -- when you look at cities like Pune, okay, the traffic is kind of on the increase to that extent. So it totally depends in terms of the city in terms of how it is there. But we can reasonably say that there is a good quantum of network we are able to service basically anywhere between 3 to 6 hours.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [77]

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Okay. And sir, finally, on the home painting services, any update on that as to any pickup that you're seeing on that front? And how is your experience there?

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Amit Syngle, Asian Paints Limited - COO [78]

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Okay. So see, we have mentioned that the service has done very well. And as a larger objective, we believe in terms of partnering the consumer and looking at giving more and more solutions, so that actually the pain in the painting process comes down. And as part of that, we are looking at investing more and more in training of the people and the contractors which are there. And we would like to see that we are able to maximize the numbers as we kind of go ahead.

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Pulkit Singhal, Motilal Oswal Asset Management Company Limited - Associate VP & Analyst [79]

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Okay. But one of the feedback that we got was, I mean, the dealers effectively end up becoming -- I mean, they feel that they end up becoming -- like they have to do a lot of work in the process. The consumer keeps reaching out to the dealer if the painting is not done properly and all that. So I guess, he's not too sure about how involved he should be in the ultimate painting process we've got.

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Amit Syngle, Asian Paints Limited - COO [80]

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He also makes more money. See, any service will basically have a slightly more headache in terms of what is there, but it will also give you higher returns.

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Operator [81]

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The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [82]

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Sir, in the urban-rural mix, which you mentioned 50-50 , in urban, you'll consider what metros -- top 10 metros as urban and everything else is rural? Or there's a different...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [83]

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We consider about 140 towns as urban, and the top 1 -- say, top 100 towns as urban and the balance as rural.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [84]

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And second data point I wondered, some empirical studies or whatever in-house research that we have done. What would be the repainting demand to the total demand? And what will be the projects demand to the total demand?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [85]

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It's a tough analysis. The projects may be somewhere 25%, 30% of total demand.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [86]

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Okay. And repainting?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [87]

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The balance is repainting.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [88]

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Okay. So these PMAY houses which get constructed, these are new houses, so they will come as a part of projects in the...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [89]

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Yes, yes.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [90]

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Okay. So project demand is 25%.

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Operator [91]

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(Operator Instructions) The next question is from the line of Shirish Pardeshi from Centrum.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [92]

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Just a quick question. You've been saying that there is no data which is available that unorganized or local regional players has been getting converted and you are getting the benefit of this reach, what you're trying to do in Tier 2, Tier 3. But in reality, what kind of opportunity we're talking about? Is that unorganized spend industry was about 30%, 40%, 50%? What kind of number you guys have?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [93]

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See since there was never any published number, it can only be an estimate. So we think it was at least 30% of the market. I'm saying at least 30%. We don't have -- we -- very tough to really give a very accurate figure. Initially, when GST was announced, they took a little bit of time in coming on track and -- because the administrative processes and all were a little complex for them. I think many of it would have come on track by now. It's a long time since GST has been implemented. So...

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [94]

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No. What I'm trying to understand is this 30% is largely into economy and distemper and putty or low-end segment? Or is it also the benefit what you're enjoying...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [95]

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See, a lot of them are into emulsions also because there are a lot of emulsion manufacturers who have come up over the last decade in India who are giving the paint formulations also to these smaller paint companies to manufacture products. So they are in the economy emulsions and exteriors, texture paints, putties, primers, enamels, industrial stoving enamels of a cheaper quality. They are in a very wide range of products. We have the advantage of being able to supply customized products at a very -- in a short time as well as the advantage of having shop brands, which they can give where basically the retailers would earn higher margins.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [96]

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Yes, I got that. And so when we visited South, we have seen this extensiveness more. So my point is the only thing is that now we are seeing this conversion would have partially helped, and we are still growing at 12%, 14%, 15% in terms of volume at the low-end emulsion. So how long it will take or how long we will get this benefit getting in terms of volume growth?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [97]

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See, what we see is that even some of the unorganized players are getting into the zone that they have also fairly good tinting mechanisms and they are tinting emulsions and so on and so forth. So today, to that extent, I think there is a lot of emulsions, which are happening at the lower end also to that extent. And what we feel is that it is difficult to say until when it will go on because there is a population increase which is happening. The propensity to spend is going up. And what we are also seeing that the upgradation continues, okay? So you must remember that there is also a large amount of distemper which is there in the market, which continues to kind of upgrade to emulsions, which is there. So the pyramid kind of really keeps on broadening to that extent because there are more and more customers who are coming into the organized brand over the years.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [98]

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Yes, I got that point. What I'm trying to understand or maybe if you can help me to understand is that what kind of market share gains, which we would have -- I'm not asking the specific market share, but on a Y-o-Y basis, if you can indicate what kind of market share gains which you would have got?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [99]

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Very difficult to assess and say, very difficult, because we -- there are no figures which are available to really assess.

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [100]

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Okay, okay. So you mean to say that with your growth in number of accounts and reach in rural, which is supplementing, that will continue ongoing, and we will still continue doing double-digit volume growth for at least next...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [101]

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(foreign language)

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Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [102]

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(foreign language)

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Operator [103]

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The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [104]

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Yes, sir, just a question. In this volume growth and the fact that the economy range is growing faster, how much of PMAY house construction would have influenced these changes?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [105]

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Nothing because most of this economy end would be going into fresh construction -- repainting cycles, sorry, going for repainting. Fresh construction probably a much lesser quantity or it is the unorganized sector that goes there, it's very tough to say. We don't directly sell to most of these smaller projects. It is done through a retail network. So it's not very easy for us to gauge this.

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Amit Syngle, Asian Paints Limited - COO [106]

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Yes. But at the same time, we are saying that --

(technical difficulty)

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [107]

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Hello?

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Operator [108]

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Participants, please stay connected while we reconnect the management. Participants, thank you for patiently holding your line. We have the line for the management reconnected. Over to you, sir.

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Amit Syngle, Asian Paints Limited - COO [109]

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Yes. So what I was saying is that the -- what we are also seeing is that when we look at the entire project sales segment, there also what we're seeing is that there is an impediment of the -- some of the economy emulsions doing well. So to that extent, to some extent, it would be aided by that today a lot of construction which is happening is at the low end, the mid-end in terms of the affordable housing which is coming up, because the top end of the housing is not moving and the real estate sector has gone extremely slow on that end.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [110]

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See, sir the -- so just to sum it up here. The PMAY houses are basically self-constructed houses and obviously they would have gone through the retail network to purchase the paint. To that extent, we don't -- sorry?

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Unidentified Company Representative [111]

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Not all are self-constructed. There are a lot of big projects also under the PMAY scheme. So there are multiple modalities in terms of how PMAY is run by the government. So nothing -- not everything is self-constructed.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [112]

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So here, you do not want to call out any major contributor to growth what we are seeing on account of the PMAY housing construction that is happening?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [113]

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No. So because -- see, it is across what we see is that we can't attribute it to only that because there is a large segment, which is also being constructed, which is constructed by the overall builders under the scheme, and it's not self-constructed at all.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [114]

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And that part, you will consider as a project demand, right?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [115]

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Yes.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [116]

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But everything is serviced via the dealers?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [117]

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Yes.

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Operator [118]

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The next question is from the line of Kuldeep Gangwar from ASK Investment Managers.

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Kuldeep Gangwar, ASK Investment Managers Limited - Portfolio Manager [119]

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Yes, just a small clarification. You provided the split of rural and urban. It's by sales or by volume?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [120]

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Probably by value.

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Kuldeep Gangwar, ASK Investment Managers Limited - Portfolio Manager [121]

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Value. That means that rural will be having significantly higher volume, right? Is it fair understanding?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [122]

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Higher -- slightly higher.

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Amit Syngle, Asian Paints Limited - COO [123]

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Not significantly, slightly.

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Operator [124]

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Next question is from Avi Mehta from IIFL.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [125]

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Sir, just one question. You have indicated about this economy focus. Would this -- traditionally economy paints had some element about sourcing of manufacturing; are these economy paints constructed in-house -- I mean manufactured in-house? Or...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [126]

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In-house.

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Unidentified Company Representative [127]

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In-house.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [128]

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Okay. And so the new plant is essentially where all this has been kind of -- is that...

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [129]

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It's made in all the plants.

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Operator [130]

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The next question is from the line of Tejash Shah from Spark Capital.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [131]

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Sir, just one follow-up. Sir, looking at the current raw material scenario, do we have an immediate need to make any pricing interventions, either on upside or downside?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [132]

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If I see the current status, I will say no. But because of the volatility and the changing environment, especially in the Middle East, I really can't comment. If the economy -- world economy really starts zooming as they're expecting in 2020, I mean, finally, chemical prices are dependent on world demand as much as supply. So then prices could be expected to increase.

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Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [133]

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Sure. And sir, lastly, one bookkeeping. What will be our effective tax rate for this year?

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Unidentified Company Representative [134]

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Tax rate. Effective tax rate, yes we expect a marginal 25%.

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Operator [135]

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(Operator Instructions) The next question is from the line of Varun Singh from IDBI Capital.

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Varun Singh, IDBI Capital Markets & Securities Ltd., Research Division - Research Analyst [136]

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Sir, just wanted to understand how are we competing in waterproofing segment compared to the top brand in this category?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [137]

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You were saying how is waterproofing doing as we compare to the top brand?

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Unidentified Company Representative [138]

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How are we competing?

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Varun Singh, IDBI Capital Markets & Securities Ltd., Research Division - Research Analyst [139]

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Yes, sir. How are we trying to differentiate us compared to top brands?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [140]

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Okay. I just covered that earlier. What we are doing is spending a lot in terms of looking at equipping our retailers in terms of projecting the right solution to the customer. Because what is important is that if the customer doesn't get the right solution, his specific need with respect to the waterproofing gets unanswered.

The second thing what we are doing is that we are looking at training a lot of applicators, so that the product is applied in the right manner, so that the customer is able to get a satisfaction and also get a solution for his or her problem, which is occurring. Third, we continuously look at in terms of what kind of products we should be able to give for the -- every type of solution which we can give for all surfaces, which are there -- which would require a waterproofing solution. So a larger investment kind of goes in terms of looking at all these aspects which is there. And it is a huge kind of effort which is being put in all these areas.

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Varun Singh, IDBI Capital Markets & Securities Ltd., Research Division - Research Analyst [141]

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Do you think any of these things were not there or not provided by the top brands that we are trying to adjust? There was any gap in the market and that we're trying to fill? Is this a kind of similar kind of product that competition is also offering?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [142]

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So see, we actually look in terms of our specific efforts in terms of what we are doing. We look at in terms of targeting the consumer in terms of giving new chemistries, new solutions which we can give. We don't want to really benchmark our products against anyone because that's the approach Asian Paints has always taken in terms of saying that so long as I have the right product for the customer and it works for me, that is the premium solution for me. So we don't really look at in terms of benchmarking the competition and that may product to product.

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Varun Singh, IDBI Capital Markets & Securities Ltd., Research Division - Research Analyst [143]

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So -- and sir, just wanted to understand that, for example, we use titanium dioxide rutile, the raw material in paint. So is there any specific grade of rutile that we'll be using that is...

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Unidentified Company Representative [144]

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Specific grade of rutile.

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [145]

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We largely use rutile.

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Operator [146]

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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 [147]

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My question was on the economy brands that you talked about, 2 products that you launched, which were 15%, 20% cheaper than your lowest priced SKU. Which geographic areas have you seen better traction or these catching up faster? And what is the price differential between these products and the -- maybe the unorganized local brands in those regions?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [148]

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So one, it is across the country. We have got a good response in terms of the products. So no specific regions as such, but across we have got a good response. The second thing is that the unorganized pricing varies a lot at what they offer at the bottom end. So very difficult to see there, but what we have definitely benchmarked is that it is about 20%, 25% lower than our cheaper selling emulsion.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [149]

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All right. And just to clarify again. You -- do the gross margins of these products fairly similar to your mid-end range or they are lower?

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [150]

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Yes. Quite similar.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [151]

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Quite similar. And lastly, any comments on CapEx investments for FY '21?

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Unidentified Company Representative [152]

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I think we mentioned...

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Unidentified Company Representative [153]

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I think we're in a planning cycle right now. We'll finalize the plan for the next year over the next 2-odd months.

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Operator [154]

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That was the last question in queue. I would now like to hand the conference over to Mr. K.B.S. Anand, MD and CEO of Asian Paints, for closing comments.

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Kanwar Bir Singh Anand, Asian Paints Limited - MD, CEO & Director [155]

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Thank you, everyone, and thank you for being soft on us in a tough quarter. See you next time. Bye.

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Operator [156]

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