U.S. Markets open in 4 hrs 3 mins

Edited Transcript of BERGEPAINT.NSE earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q1 2020 Berger Paints India Ltd Earnings Call

Kolkata Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Berger Paints India Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Srijit Dasgupta

Berger Paints India Limited - CFO & Director of Finance

================================================================================

Conference Call Participants

================================================================================

* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Ashit Desai

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Dhiraj Mistry

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Hiral Desai

Anived Portfolio Managers Pvt. Ltd - Portfolio Manager

* Jaimit Doshi

Kotak Securities Limited - EVP

* Keyur Pandya

ICICI Prudential Life Insurance Company Limited - Equity Research Analyst

* Prashant Kutty

Sundaram Asset Management Company Ltd. - Research Analyst

* Rajesh Majumdar

Stewart & Mackertich Wealth Management Limited - Head of Equities Institutional & HNI

* Shirish Pardeshi

Centrum Broking Limited, Research Division - Senior Analyst

* Tejash Shah

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [1]

--------------------------------------------------------------------------------

We would like to thank the management of Berger Paints for giving us this opportunity. Now (inaudible) remarks. So, it is over to you, sir.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [2]

--------------------------------------------------------------------------------

Thank you, Ashit. Good evening, ladies and gentlemen, and welcome to the Q1 FY '20 earnings call for Berger Paints India Limited. As usual, I will begin by summarizing the growth numbers for the quarter for both stand-alone and consolidated operations and offer some brief comments on the performance, following which, I will invite questions from the participants in the call.

The growth rates for standalone for the quarter: Total income from operations was 15.5%; PBDIT, 25.6%; PBIT at 29.2%; PBT at 29.0%; and PAT at 27.4%. The consolidated growth rates are as follows: total income from operations, 15.7%; PBDIT, 27.5%; PBIT, 32.9%; PBT before share of profit or loss from JV, 32.8%. PBT is 32.2%, and PAT is 31.8%.

The stand-alone financials had the following major features. The decorative and protective coatings businesses continued to show a sustained performance in the quarter. Automotive coatings business lagged behind. I think the reasons are well understood, so I shan't comment further on it. In decorative business, the new products did particularly well. Of course, this includes the newly launched Easy Clean Fresh, which is an interior emulsion; and the Home Shield polyurethane roof coating. There's been a slew of new products, other new products that have been launched, and we will report on the progress in the quarters to come.

There has been a gross margin expansion versus Q1 FY '19 as well as the trailing quarter, largely on account of declining raw material prices, particularly crude-based raw materials. There was a price reduction in May 2019 of around 0.5% in some solvent-based products to pass on the benefit of lower raw material costs. These -- the 0.5% is on the total business of decorative.

The new Ind AS 116 was implemented in Q1 FY '20. This has to do with long-term operating leases, mainly rentals. So, impact at the net profit level was insignificant being INR 0.82 crores and INR 0.97 crores for Q1 FY '20 and Q1 FY '19, respectively.

The exchange rates were favorable and helped bring down raw material costs. This is, of course, in comparison to Q1 FY '19.

In terms of the consolidated financials, the points to note, strong performances from Bolix S.A. Poland and Saboo Coatings. And in terms of the outlook, going forward, of course, the automotive business, the foreign exchange rates and crude prices remain potential concerns and also the outcome of the monsoon. All of this may impact demand going forward.

I now invite participants to address their questions to us.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Avi Mehta from IIFL.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sir, just wanted to kind of first understand on the sales growth front. Now if we look at the other peers in the industry, some of them have indicated that there was an aggressive channel push, which aided growth in the quarter. Would our decorative growth also have seen a similar view?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [3]

--------------------------------------------------------------------------------

Very similar. I think we have to respond to conditions in the marketplace. But let it also be said that our numbers have to be interpreted in the context of a 20% industrial business, so I think that has to be also taken into account. But for the decorative business, yes, your comments are valid.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So in that sense, sir, could you kind of give us some details on how the offtake at the retail side was? Was that -- if there is -- just trying to understand how much of it is dry in your view. I know it's a difficult number to estimate, but any guidance or any idea about it would be...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [5]

--------------------------------------------------------------------------------

I can't help you more than this, Avi, unfortunately, because none of these numbers are in the public domain, so you'll have to bear with us unfortunately. But I think you've got a sense that automotive has not done well in the quarter in terms of certainly growth. So, I think that has impacted our overall growth numbers.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sir, let me rephrase the question. What I meant is that is the retail offtake also as healthy as the numbers that you would have in the decorative? We don't know the decorative number...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [7]

--------------------------------------------------------------------------------

Difficult to get full visibility into that, so -- but yes, we would make -- expect that it is largely in line with our own offtake.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Perfect. And sir, the gross margin expansion has been fairly healthy. Does it kind of affect the current spot prices? Or has there been a subsequent correction in the RM basket?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [9]

--------------------------------------------------------------------------------

I think RMs have been declining, so -- and a little bit helped also by the foreign exchange rates, so that affects the imports, so combination of both. To give a little more clarity, roof tiles, monomers and some other crude-based raw materials have all declined in prices, so that has helped and of course, the combined effect of the price increases in the last year. Even though there has been a marginal price decrease effective third week of -- end of third week of May, the cumulative effect of the previous price increases came into effect.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sir, my question was that whatever we have seen the average consumption basket in first quarter, since then, has there been a further reduction in RM costs?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [11]

--------------------------------------------------------------------------------

In the first quarter? This is the first quarter, Avi.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, no, I mean whatever is the -- I mean we don't have an absolute consumption basket, but whatever was the actual utilization in the first quarter, the spot prices right now, which would be, are they lower than that level? Or are they equal? Or how are they?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [13]

--------------------------------------------------------------------------------

You're talking about the current position?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, current position, sir.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [15]

--------------------------------------------------------------------------------

No, that, I can't comment, Avi, unfortunately. I can't give you any visibility. My answers have to be restricted to the performance of the first quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And lastly, sir, any details on the Nepal sales and profitability? Because we had -- we were hoping for profitability to improve. Has that kind of played out the way we are hoping?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [17]

--------------------------------------------------------------------------------

Nepal has the highest profitability of all our subsidiaries and continues to be so. The demand side, as we had mentioned last time, there were some corrections to be made, some new products to be introduced, some network corrections to be made. That has happened, and the improvements have been seen in the first quarter. I cannot give you exact growth numbers, but yes, the turnaround has happened.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That turnaround has happened. And the tax rate guidance because some would now be in, so how should I build in for the year, sir?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [19]

--------------------------------------------------------------------------------

Very marginal because, as I explained last time, the [Assam] effect on the total turnover is not very large, not in terms of income tax.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So, kind of build in similar.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [21]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question is from the line of Abneesh Roy from Edelweiss.

--------------------------------------------------------------------------------

Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [23]

--------------------------------------------------------------------------------

Sir, congrats on a good set of numbers. So protective coatings, past few quarters, the growth has been really good. So, what is driving this? And are you gaining market share here?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [24]

--------------------------------------------------------------------------------

I think we are. We were market leaders and still are in protective coatings, so I think that story continues to be sustained. And it's a combination of some projects being sanctioned and some aggressive selling, too, so a combination of both factors.

--------------------------------------------------------------------------------

Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [25]

--------------------------------------------------------------------------------

And this will be from which industry segment?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [26]

--------------------------------------------------------------------------------

These are basically corrosion-resistant coatings, meaning, largely, these are large-scale projects. It would be a new project or a maintenance business but maintenance of power plants, oil rigs, pipelines, roads, bridges, everything, electricity generating plants, so all of that.

--------------------------------------------------------------------------------

Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [27]

--------------------------------------------------------------------------------

Sir, when I see your volume growth in the deco business, that's really good, and that's on a double-digit base. So, in the last quarter, you had said distemper will now come in the base. So, has distemper still seen a much faster growth than your overall deco volume growth?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [28]

--------------------------------------------------------------------------------

I think, by and large, the economy end has done reasonably well, but I can't give you exact numbers in terms of growth rates. Certainly, they are higher, including the premium end of the market, the growth is higher than, for example, enamels and primers.

--------------------------------------------------------------------------------

Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [29]

--------------------------------------------------------------------------------

And sir, you mentioned the 20% part of the business coming from industrial. So obviously, liquidity [grants] and overall cash in the system is quite weak. So how has that part of the business done? What is the strategy you're employing here? We just heard one more company in broadly this space. They are saying no to some of the business because of the cash not coming back, that kind of scenario. So, are you also saying no to some projects?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [30]

--------------------------------------------------------------------------------

100%, but ours is more in terms of the lower contribution items. I think that is the action we are taking. And of course, our policy has always been not to offer extended credit. So, we've actually missed out businesses, which would otherwise have happened for us. But that's a policy that we've formed and implemented uniformly. So that continues.

--------------------------------------------------------------------------------

Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [31]

--------------------------------------------------------------------------------

Sir, historically, Tier 1, Tier 2 and even the rurban and Tier 3, those have grown broadly similar and strongly for you. But this quarter, obviously, most companies highlighted that rural, there is a -- and rural -- rurban, there's a fair bit of slowdown. In your case, if I take that aggressive promotion strategy with you and maybe the leaders employ, if I take that off, have you seen rurban slow down versus earlier?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [32]

--------------------------------------------------------------------------------

No. The Tier 2 and Tier 3 towns have done better, better than most other quarters.

--------------------------------------------------------------------------------

Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [33]

--------------------------------------------------------------------------------

And sir, lastly, in terms of adhesives, you have seen some of the paint companies enter this. You have got adhesive business in -- outside India. So, what's the strategy on this medium, long term?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [34]

--------------------------------------------------------------------------------

See, the adhesive business that we have done in Poland, for example, is mainly to do with the insulation system. So, it's a part -- it's a component of the insulation system, though we do sell what is known in Europe as ceramic adhesives. Essentially, these are tile adhesives, but that's a very small part of the business. In India, this will also happen once the external insulation business takes off fully. So that will mirror the consumption in Europe once this happens. But right now, we don't sell too much of external insulation products, so that has not happened.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

The next question is from the line of Rajesh Majumdar from Stewart & Mackertich.

--------------------------------------------------------------------------------

Rajesh Majumdar, Stewart & Mackertich Wealth Management Limited - Head of Equities Institutional & HNI [36]

--------------------------------------------------------------------------------

Congratulations on a fantastic set of numbers in a challenging environment. I just wanted to know a couple of things. One, is it possible to get the contribution of the new products like Home Shield, Easy Clean and Anti Dust, the total turnover for first quarter? And secondly, we're really hearing a lot about the fact that there is a lower time period from the monsoon end to Diwali this time. So, is that likely to have an impact on the demand going forward? Because you've seen a strong first quarter on the back of a longer summer than expected and maybe the monsoons are delayed; and you have a shorter time frame till the Diwali, which is in October this time. So, these are my 2 questions.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [37]

--------------------------------------------------------------------------------

Yes. So, in answer to your first question, no, we can't give you exact contributions of the new products. We can only tell you that they are doing well and growing well. Regarding the second bit of...

--------------------------------------------------------------------------------

Rajesh Majumdar, Stewart & Mackertich Wealth Management Limited - Head of Equities Institutional & HNI [38]

--------------------------------------------------------------------------------

Rephrasing the first question, sir. It's growing faster than the overall growth rate, the new products?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [39]

--------------------------------------------------------------------------------

Sure, sure. And regarding the second part of your question, yes, it's a very valid point regarding the timing of the monsoon or the delay of the monsoon and the timing of Diwali, so the season gets squeezed effectively. So yes, that is a concern. But these are quarter-to-quarter 2 concerns. I don't think they will impact overall demand in a sustained way. There will only be perhaps a change in the seasonality a little bit.

Of course, the monsoon has a different impact in terms of the overall fortunes as regards the monsoon, which we believe tends to have an impact after a lag of 7 to 8 months, in terms of mainly rural demand. So that is our concern.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

The next question is from the line of Hiral Desai from Anived PMS.

--------------------------------------------------------------------------------

Hiral Desai, Anived Portfolio Managers Pvt. Ltd - Portfolio Manager [41]

--------------------------------------------------------------------------------

Srijit, great talking you after 5 years. So, I was actually looking at the annual report for 2019. And one thing caught my eye actually. The advertising and sales promotion spend for 2019 is about INR 200 crores and this is the consolidated number. And if I go back to like 2014, the number used to be fairly similar. Now I do understand that under Ind AS some of the trade promotions got knocked off from the revenues, but I would have anticipated this number to be a lot higher. So, my question is, of the INR 100 that you would typically spend on advertising and promotions, what percentage of that could be your trade promotion. And has the productivity on advertising significantly improved for the number to sort of remain constant over last 5 years?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [42]

--------------------------------------------------------------------------------

A couple of responses. Actually, this -- the scope of this call does not include comments on FY '19, so I'll have to stay away from that to kind of respect the scope of the call. But to answer your question, yes. I think you've given the answer yourself. The effect of the Indian accounting standard has had a significant impact in terms of the way the trade discounts have been -- or promotions have been reported earlier and as they are reported now. So that certainly has an impact.

And also, the fact that I think you'll recall a couple of years ago or perhaps even earlier, the intention was to taper off some of the marketing expense once we were over the hump and actually had a reasonable share of the premium product market. So, I think it's a combination of everything, a little bit of tapering off as well as the declared intent then, as well as the effect of the accounting standards.

--------------------------------------------------------------------------------

Hiral Desai, Anived Portfolio Managers Pvt. Ltd - Portfolio Manager [43]

--------------------------------------------------------------------------------

And now broadly, going forward, the numbers will remain at these kind of levels. If I look at ad spend as a percentage of revenues, it will remain in this range.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [44]

--------------------------------------------------------------------------------

Yes. I mean, barring seasonality, I think that can be expected.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [46]

--------------------------------------------------------------------------------

Congratulations on a good set of numbers. Sir, there's quite a bit of divergence in growth momentum and commentary reported by the current paint players in general, versus many of the consumption basket this quarter. So, you have seen many more such cycles. So, from your experience, just wanted to know what explains such sharp divergence where staples are not growing but the discretionary part of the portfolio is growing so fast?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [47]

--------------------------------------------------------------------------------

I think -- I mean we are trying to also figure it out ourselves. I don't think I have all the answers. I wish I had the answers. And I hope the industry or the economy is not -- continues to be kind to us. I think that's the first reaction. But I think to bring a little sense out of what's happening, primarily, we are of the view that because at least architecture or decorative paint demand is largely repeat or renovation demand and the cycle is, say, 4 years or 4.5 years, the -- it -- and the fact that paint itself only accounts for about 37% or 38% of a total painting contract, all of this has a little bit of impact as well as the fact that unlike some FMCG products, this is largely under penetrated or less penetrated in terms of presence in the rural and semi-urban markets.

So, the opportunity, I think, in terms of bringing paint to these markets overshadows or counterbalances the negative effect of economy or growth in the economy or the other negative sentiments, which you have talked about. I'm hoping this is true, but I can't tell you for sure.

--------------------------------------------------------------------------------

Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [48]

--------------------------------------------------------------------------------

Sure. Sir, do you believe that organized players are gaining a lot of market share versus unorganized in the last couple of quarters?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [49]

--------------------------------------------------------------------------------

I would not like to comment on quarters. I don't have exact numbers to speak about. But yes, I think, generally, year-on-year, there seems to be a trend but marginally in favor of the organized players I think. Maybe a little more post-GST implementation.

--------------------------------------------------------------------------------

Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [50]

--------------------------------------------------------------------------------

Sure. And sir, in recent past, you have specifically called out East contributing disproportionately in the growth for us and for industry at large. Is the trend continuing currently as well?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [51]

--------------------------------------------------------------------------------

Probably. I think yes. That seems to be true, yes.

--------------------------------------------------------------------------------

Tejash Shah, Spark Capital Advisors (India) Private Limited, Research Division - VP of Research [52]

--------------------------------------------------------------------------------

Okay. And sir, lastly, there were some comments reported in the media from AGM a day before on possible acquisition in Russia. So, is there any specific acquisition plan? Or was it just a general comment made at the AGM?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [53]

--------------------------------------------------------------------------------

Absolutely. In general, I think this is not new. We have been talking about investing in Russia in a suitable acquisition, I think, for the past 6 or 7 years. So, it's just echoes those sentiments. We continuously evaluate opportunities. And obviously, there is no call to talk about any of the opportunities that we examine until something happens. I mean -- and you'll be the first to know. I think we will inform the stock exchanges well in advance.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.

--------------------------------------------------------------------------------

Keyur Pandya, ICICI Prudential Life Insurance Company Limited - Equity Research Analyst [55]

--------------------------------------------------------------------------------

Congratulations on a good set of numbers. Sir, my question is you're positive on the industry growth. Also, as you mentioned that since there was a [channel] push by the leader and so by the large players as well, so all have reported healthy growth. So, is that the case that even the end user industry also growing at the same pace? Or then this growth is happening at the cost of some marginal players?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [56]

--------------------------------------------------------------------------------

We don't have exact numbers to understand the performance of the marginal players. There would be some shakeouts, I'm sure, at a regional level and at the economy end of the scale, but I can't tell you exact situation. We can only surmise or guess.

--------------------------------------------------------------------------------

Keyur Pandya, ICICI Prudential Life Insurance Company Limited - Equity Research Analyst [57]

--------------------------------------------------------------------------------

Okay. Okay. Sir, second question is on the mix end. So, for the last 12 to 15 months, we have been hearing about the change in the mix of the products. So even the base of the pyramid is getting larger. So, what has happened over the last 1 year or so? And what is the situation right now and how you seeing it panning out going forward? Any view on that?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [58]

--------------------------------------------------------------------------------

See, I have to comment only on the quarter unfortunately, so I'll restrict. Yes, you're right. The base of the pyramid is growing fast, but then so is the top of the pyramid also. So, I think mainly the products, which are not growing as fast as can be expected, mainly the solvent-based paints. So, I think no concern there really, but I think it's enough to say that both the base and the premium products are growing fast.

--------------------------------------------------------------------------------

Keyur Pandya, ICICI Prudential Life Insurance Company Limited - Equity Research Analyst [59]

--------------------------------------------------------------------------------

Okay. Perfect, perfect. And sir, last question is on the regional mix. So, have you seen any deviation or variation within the regions that are particular retail is growing faster or some other is growing at a lower than faster...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [60]

--------------------------------------------------------------------------------

I can only talk of our numbers. I think it's pretty much in line with what's happened in previous quarters. There may be 1 or 2 states which go up and down, but that's only temporary.

--------------------------------------------------------------------------------

Keyur Pandya, ICICI Prudential Life Insurance Company Limited - Equity Research Analyst [61]

--------------------------------------------------------------------------------

Otherwise, at [final] level, it is similar growth.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [62]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

The next question is from the line of Jai Doshi from Kotak Securities.

--------------------------------------------------------------------------------

Jaimit Doshi, Kotak Securities Limited - EVP [64]

--------------------------------------------------------------------------------

Congratulations on a good quarter. Sir, I believe you're experimenting or piloting on some distributor model in the state of Uttar Pradesh. Can you please sort of share some thoughts on what is the thought process there? How does trade margins differ in that scenario? And what is your experience so far?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [65]

--------------------------------------------------------------------------------

We can't talk about our distributor initiative. Yes, there is a distributor initiative, but we have not made these numbers public. And therefore, I have to stay away from exact performance numbers. But yes, we are exploring this model, as with many other companies.

--------------------------------------------------------------------------------

Jaimit Doshi, Kotak Securities Limited - EVP [66]

--------------------------------------------------------------------------------

Right. So how does it work? If you can -- without specifying numbers, if you can just explain as how does it -- sort of how -- what are the markets? And how does it work?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [67]

--------------------------------------------------------------------------------

We're possibly to approach our weaker markets a little more vigorously. I think that's enough for me to say. I can't talk in depth about the strategy, but it's a way of addressing our weaker markets.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [69]

--------------------------------------------------------------------------------

Just a quick question, extending the previous question. Is that rural, is the driving strategy what we're seeing in the growth numbers for this quarter?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [70]

--------------------------------------------------------------------------------

It used to be fairly even until a quarter back. I think this is a -- as I mentioned just now, that I think a little bit our efforts and many other companies, I'm sure, are paying off in terms of network expansion in the smaller towns. I think that's paying off, and I think that's good for everybody.

--------------------------------------------------------------------------------

Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [71]

--------------------------------------------------------------------------------

Next question on the inventory level, trade and the dealer level, is that very significant change which has happened at the lower end of the pyramid and that's what we are seeing in terms of volume growth?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [72]

--------------------------------------------------------------------------------

It's not significant. It's sustained. I think this is a phenomenon that we have seen for a couple of years now or maybe 1.5 years, and that's sustained. So, the base of the pyramid is also growing fast, but I don't think that worries us or anybody else in the industry.

--------------------------------------------------------------------------------

Shirish Pardeshi, Centrum Broking Limited, Research Division - Senior Analyst [73]

--------------------------------------------------------------------------------

I'm only saying that, on a Y-o-Y basis, we had a very strong quarter last year. And on that case, we are saying because there was an extended summer. So maybe that's one of the things which has happened in this quarter. Or is that really fundamental structural change happening at the trade inventory, which is happening at the lower end of the pyramid?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [74]

--------------------------------------------------------------------------------

I don't think so. We don't have enough data to back any view. But I think it's a sustained -- to answer your question, it's a sustained change, which has happened. Of course, the quarter this time has to be, as I mentioned earlier, seen in the context of our industrial businesses as well. So, I'm assuming that you've taken all of that into account.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

--------------------------------------------------------------------------------

Prashant Kutty, Sundaram Asset Management Company Ltd. - Research Analyst [76]

--------------------------------------------------------------------------------

Yes. Congrats on a good set of numbers. Just one question on the margins front, sir. Just wanted clarifications over here. If you look at the gross margin for the quarter, it's about 40-odd percentage. And on that, you've actually delivered a 18% EBITDA margin. Now I believe, obviously, the operating leverage does play, but this is probably not the best gross margins you have actually delivered. So, should we be seeing that, like from a margin perspective, the overall margin trajectory for us has actually kind of changed because of the initiatives that you've taken?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [77]

--------------------------------------------------------------------------------

Yes. There are some overall impact of the initiatives. It's an impact of also the backward integration. We've started our own second emulsion plant last year. We are growing our premium products faster than others. All of that takes into account, and it appears in the performance in the quarter. But it's also because of lower raw material prices, the cumulative effect of price increases in the past.

And as I mentioned, also, going forward, we'll have to take into account the combined effect of the 2 small price decreases that we had in solvent-based paints. So difficult to put all of this together along with demand and give you a view going forward. In fact, we do stay away from any kind of specific guidance on margins going forward. But I think I've explained a little bit about the factors that went into the performance of this quarter.

--------------------------------------------------------------------------------

Prashant Kutty, Sundaram Asset Management Company Ltd. - Research Analyst [78]

--------------------------------------------------------------------------------

Sure. If I may just extend this a bit, I mean the reference point is more so because you've actually seen gross margins far higher than this as well. Was there anything -- something particularly one-off over here as far as the gross margin is concerned? I mean in terms of our low-cost inventory probably being really high, which is why we're seeing this low gross margin, still a very high EBITDA margin number. I mean that's more so...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [79]

--------------------------------------------------------------------------------

No. To answer your question, no.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Ashit Desai from Emkay Global.

--------------------------------------------------------------------------------

Dhiraj Mistry, Emkay Global Financial Services Ltd., Research Division - Research Analyst [81]

--------------------------------------------------------------------------------

Dhiraj here. So, Sir, I would like to know what were the dealer additions in the current quarter. And what's the total amount of dealers, number of count of dealers?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [82]

--------------------------------------------------------------------------------

These are not numbers we give on quarter. These are numbers we give annually, but I can help you out by saying that our -- we target -- the planned target of our 10% growth in the dealer network is being achieved. So, we are well above that.

--------------------------------------------------------------------------------

Dhiraj Mistry, Emkay Global Financial Services Ltd., Research Division - Research Analyst [83]

--------------------------------------------------------------------------------

Okay. And if you can highlight where the dealer would -- addition would be done in which region. You are specifically targeting...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [84]

--------------------------------------------------------------------------------

Uniformly, I think, as you can understand, the dealer network expands a little faster in our stronger markets. But by and large, it's a pan-India phenomenon.

--------------------------------------------------------------------------------

Dhiraj Mistry, Emkay Global Financial Services Ltd., Research Division - Research Analyst [85]

--------------------------------------------------------------------------------

Okay. Because if I understand correctly, your market share in West is comparatively less, so I assume that the dealer addition in West would be higher compared to the East or something like that.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [86]

--------------------------------------------------------------------------------

No, in fact, possibly the reverse in terms of the overall numbers. But yes, in terms of the base for the East, yes, that is true.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

Mr. [Desani], your line's in talk mode. Please go ahead.

--------------------------------------------------------------------------------

Unidentified Analyst [88]

--------------------------------------------------------------------------------

Sir, I just wanted to ask how are you venturing into the construction chemical or the waterproofing space?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [89]

--------------------------------------------------------------------------------

I think this is something that we started a few years back, so really one of our faster growing segments in the overall architectural business. So yes, it's going well. We've kept on adding new products. As I mentioned in my opening remarks, we recently introduced a polyurethane RoofKoat under the brand of Home Shield, which is part of the -- or the banner under which our construction chemicals are sold, so doing well, yes.

--------------------------------------------------------------------------------

Unidentified Analyst [90]

--------------------------------------------------------------------------------

Got it. And can you tell me what could be the penetration of these products as compared to the paints? What percentage of dealers would be housing these products of yours?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [91]

--------------------------------------------------------------------------------

Again, not numbers that we publish. But since we are late starters in this, compared to the majors in the construction chemicals industry, we have a lot of catching up to do. But having said that, the growth numbers are good.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [93]

--------------------------------------------------------------------------------

Just wanted to understand the roof tile prices, are they flattish? Or has there been any -- how has -- how have they behaved?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [94]

--------------------------------------------------------------------------------

I think flattish, by and large, give or take the improvement or the favorable effect of the exchange rate. So, the exchange rate has helped us compared to, say, corresponding quarter last year.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [95]

--------------------------------------------------------------------------------

Okay. And so -- and sir, the second bit is on the industrial side. I mean, are we now in a favorable position in terms of -- or do we still need price increases from a margin point of view?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [96]

--------------------------------------------------------------------------------

Yes, we do need some more price increases, but probably, this is not the best time to do this. Of course, we are trying our best and hoping that the demand conditions improve, particularly in the automotive segment. This -- automotive, of course, accounts for only about 6% or 7% of our total turnover. It's not a huge number, but we are hoping that this will improve going forward. Keeping our fingers crossed.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [97]

--------------------------------------------------------------------------------

And sir, the Nippon JV would not have an issue as yet, right? I mean, we -- that's still -- the small share is coming in. That's not impacted by the [auto] share to that extent.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [98]

--------------------------------------------------------------------------------

Absolutely, absolutely. We are still getting the products and the presence in the counters sorted out, making incremental improvements every month. And so, it doesn't worry us that much. It's a very small part of the total basket currently, but we have -- we are a little bit disappointed that this has happened. Obviously, the progress will be marginally slower than what we expected earlier.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [99]

--------------------------------------------------------------------------------

Okay. And any comment on the JSW, the -- their plan that they were trying to supply finished goods directly to dealers? Is there anything that you're seeing on the ground? Have they...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [100]

--------------------------------------------------------------------------------

No, you'll have to ask JSW. We don't see very much happening on the ground.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [101]

--------------------------------------------------------------------------------

And lastly, sir, the CapEx guidance for the year, how should I look at that?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [102]

--------------------------------------------------------------------------------

Typically, and I've said this before, I think in the Q4 call also, it will vary between INR 220 crores to INR 250 crores for '19,'20 and sustain to -- through 2021 as well.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [103]

--------------------------------------------------------------------------------

And this will be for the Jejuri, right? I mean, we should...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [104]

--------------------------------------------------------------------------------

No, no. Initially, for Jejuri, in fact, it's already over and done with. The cash flows have already been affected and the cash is already out of the system and capitalization will happen when the plant is commissioned. But we are mainly talking about the Lucknow plant, the Sandila plant in UP.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [105]

--------------------------------------------------------------------------------

Okay. And that's the decorative one. Fair enough. And that is expected probably by '21, right, if I'm correct.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [106]

--------------------------------------------------------------------------------

Early '21 but hopefully, by January '21, we should go onstream.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [107]

--------------------------------------------------------------------------------

And sorry, you said Jejuri is already on. Sir, I missed that. I mean -- or only the cash is out?

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [108]

--------------------------------------------------------------------------------

Repair is already over and done with, meaning it hit the cash flows already.

--------------------------------------------------------------------------------

Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [109]

--------------------------------------------------------------------------------

Okay. Okay. And UP is what you're saying. It's the greenfield one, right, sir? Sorry, I'm...

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [110]

--------------------------------------------------------------------------------

Absolutely, absolutely.

--------------------------------------------------------------------------------

Operator [111]

--------------------------------------------------------------------------------

(Operator Instructions) As there are no further questions, I now hand over the conference to the management for their closing comments.

--------------------------------------------------------------------------------

Srijit Dasgupta, Berger Paints India Limited - CFO & Director of Finance [112]

--------------------------------------------------------------------------------

Yes. Thank you all for a good set of questions, and I think it's been quite interactive. And going forward, I think in the next quarter also, we wish to come out and present a good set of numbers to you. Thank you.

--------------------------------------------------------------------------------

Operator [113]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen...

(technical difficulty)