Berger Paints Nov-24

Berger Paints India Limited Q2 FY25 Results Conference Call

• The Q2 FY25 results conference call for Berger Paints India Limited took place on November 5, 2024.
• The call was hosted by Emkay Global Financial Services represented by Nitin Gupta.
• Key Berger Paints personnel in attendance: Abhijit Roy (Managing Director and CEO), Kaushik Ghosh (VP and CFO), Sujyoti Mukherjee (VP Finance and Accounts), and Sayantan Sarkar (GM-Finance & Accounts).

Financial Performance

• Q2 top line remained almost flat year-on-year due to extended monsoon and flooding in key markets; traction appeared towards September's end.
• The company believes it gained market share during Q2.
• A product price increase of approximately 2.3% was implemented during the second quarter.
• The company's highest gross margin for the last 10 quarters was achieved
  • 40.4% standalone
  • 41.7% consolidated
• Operating margin stayed within the guided range of 15-17%.
• The company maintained its net cash positive position at the close of the quarter.
• Volume growth for Q2 is 3.6%, with half-yearly growth at 7.8%. Value growth is slightly negative at -0.4%, but nearly flat at 1.1% positive on a half-yearly basis.
• The company recorded single-digit volume growth.
• Unusually extended monsoon along with excessive rains and key market flooding impacted results in Andhra, Kerala, West Bengal, Gujarat, and Maharashtra.
• Sales picked up towards the latter part of September.
• The volume value gap was partially mitigated through the product price increase undertaken in Q2.
• Improved product mix: premium and luxury product sales increased, while basic product sales decreased.
• Protective coatings and infrastructure businesses demonstrated strong growth.
• On a standalone basis on a half yearly basis, volume sales growth by CAGR:
  • Two-year CAGR: 9.8
  • Three-year CAGR: 14.5
  • Four-year CAGR: 19.5
• Value sales CAGR percentage:
  • Two-year: 3.8
  • Three-year: 13.8
  • Four-year: 22.2
• Volume growth over the last two years "moderately okay", but value growth has suffered because of the price drop.

Margins, Expenses & Outlook

• Gross margin expansion occurred despite price decreases due to improved product mix.
• Raw material price drops helped improve gross margin.
• Higher manpower additions related to urban initiatives lowered the operating margin.
• Higher advertisement spending was allocated on conscious call.
• 15.8% was the operating margin
• Increase in manpower costs.
• Sales growth: -0.4%, Vbdit: -4.9%, PAT: -5.9%, PAT: -6.1%
• YTD Growth was 1.1%
• Pvd at minus 5.4 and PAT at minus 6.3
• Decorative business recorded single-digit volume growth affected by weather conditions.
• Premium segment did well.
• Construction, chemical, waterproofing, and wood coating products reported robust performance.
• Mass consumption product growth rates were either flat or negative
• Aggressive network expansion continued with 2,200 retail touchpoints added and over 2,000 color bank machines installed during the quarter.
• The company has a large range of anti-dust, easy clean, and prime products; including long-life coatings, waterproof putty, and roof cool & seal products
• registered strong double-digit growth
• helped improve overall margin
• Several products were added in the construction chemical category.
• 80-85% of major products in the construction chemical range has already been introduced; expansion will continue.
• The company continues to spend reasonably well on media, heavily in digital media, on express painting, lead generation, etcetera.
• Urban initiatives included major television advertisements for anti-dust, easy clean, and roof coolant seals
• A new urban market initiative team has been fully operational since August.
• Focus will increase on urban markets, strategic changes, stores, franchises, store, project work, improved brand visibility and penetration
• The protective coating business continues to display good performance with a double digit volume growth and a mid single digit value growth for the quarter.
• Automotive, general industrial, and powder coating business line at flat growth because of suppressed demand from 2-wheelers and commercial vehicles
• The 2-wheeler industry did much better in October, and the growth was restored in automotive
• March 24 net cash position: began with 3.41, increased to 6.92, dividend outflow of 400+ crores
• now, in September 22, at 242 crore
• October collection was very good, and the net cash position should improve by the end of December.

Consolidated Results for Quarter 2

• Total income from operations: +0.3%
• PAT: -7.9%
• Operating profit: -8.3%
• YTD basis:
  • Total income from operations: +1.2%
  • Operating profit: -7.2%
  • PAT: -3.7%
• Poland consolidated performance posted robust top line growth.
• Profitability in Poland suffered due to one-off costs on project business; a strong double-digit value & profit growth is expected in Q3.
• Subsidiary Bj. and Nepal reported another quarter of degrowth from a credit crunch in the economy.
• Cash flow had improved, and better performance is expected in Q3
  • last month saw double-digit value growth
• A muted base may facilitate higher growth (40-50% in Nepal).
• Subsidiary Stp experienced soft top-line growth and lower profitability.
• SBL speciality coatings: marginal degrowth.
• Berger Becker coatings JV experienced healthy growth on the top and the bottom line.
• Berger Nippon Paint automotive coatings JV reported a small top line growth
  • aided by cost restructuring, robust bottom line growth, and gross margin expansion.
• The decorative business should show better growth in the second half due to upticks in sentiment, demand, and inventory reduction

Outlook and Initiatives

• The volume value gap is likely to decline in Q3 from price increases implemented in Q2 of almost 2.5%, with the price decrease impact waning off in November
• Further improvements can be seen in Q4 with the impact taken in January 24 negative
• Moderation of post inflationary trends and a normal monsoon may increase chances of rural demand
• The urban initiative program aims to increase volume growth in urban areas in Q3 and Q4.
• The industrial business faces a better outlook because of government spending and infrastructure following state elections.
• There is an increase of the auto industry, especially with 2-wheelers
• Nepal and Bullix likely to deliver strong double-digit sales and profit growth in Q3.
• Raw material price decreases, impacting Q3 on account of inventory effect Improving marginal profitability and Overall business prospects are encouraging
• Geopolitics may pose some risk.
• Exit of competitor ExxonMobil and the entry of Grasim is creating a balancing off.
• Competition intensity remains a manageable factor with one player entering while another considers exiting.

Q & A Session

• Axio(ExxonMobil) has not made its intention clear, regarding sale of decorative part, whole entity, mergers or joint ventures
• Competition from both foreign and local players have to be anticipated
• Margins have been good in India
• The leaders always command a premium in the market, and Berger is able to maintain our gross margins.
• The company will try to improve further in launching the business by further differentiating products and making them more successful
• An initiative is aiming for 12-12.5% market share in urban zones in the short run, with ~15% within 2.5 to 3 years.
• Employee costs from the initiative have the greatest need and that figure keeps changing.
• There is still about 4% gap between value and volume and the mix was 7% higher
• If the company were to reverse some volume into quarter 4, positive rate would remain
• Prices are rising due to competition The numbers for Grassim aren't clear enough in the public domain to know about market share yet
• Top line of Berger will come out when ready
• Headcount is about 17-18% incremental growth which means almost an additional 8 or 9% in manpower
• Demand post monsoon is high in quarter 3 and 4
• Expectation sits between 7 and 8%-10%
• Double digit volume growth set for quarter 4
• Value growth is steadily improving
• Anti-dust, easy clean silo, and prime have a large range of differentiated products, the price of the 1-2% has made no difference
• Not looking to spend money
• Urban initiatives are for the brand
• Premium will grow much faster
• Rural places consumers have important role
• More specific about urban initiative:
  • divided into 2 teams
  • upcountry is growing at a decent pace
  • that dependency is stronger
• Brand was important in the markets

Manpower Cost and Urban Initiatives

• 10% is the rate, an increase for manpower purposes is now 12%
• Manpower is an addition for future business growth
• Urban Initiatives are the major additional activity
• There is strong double sales and strong profit possible by most
• If the company focuses on being better, only then it will play but will otherwise do other things around that space.