On the demand side, will you be happy with the 9% volume growth on a soft base? Was there a negative or positive impact of the price hike on preponement of demand? Was there an adverse impact of Bengal election? What is your view on the demand?
As an organization, you would like to achieve more and more. The demand conditions have been decent. All three months, the demand has been decent. Yes, because of the pricing action, there could be some extra pipeline inventory. We would have loved the demand conditions to be a little bit more vibrant with respect to T1, T2 cities where we have seen lower growth compared to rural T3, T4 cities. It got compensated by good growth in T1, T2 in the B2B sector. We seem to be quite happy of what we had predicted last quarter, that we should be in that band of about 8% to 10%.
The average pricing of 7% this quarter — we believe there is a price increase of 13%-14% put through till the month of June. Would that be the pricing growth to expect from Q2 onwards? And would rural growth not impact product mix negatively?
Given the rural growth being better, we have seen a certain product mix. Even when I say rural, there is a classification of certain T3, T4 cities. Therefore, possibly we can push some bit of good premium products there. We feel that possibly urban markets from here would only grow higher. The weighted average price increase has been about 7%. Possibly it would be in the range of about 8-9% going forward depending on product mix.
It seems like there has been a material increase in change in inventory. Is this low-cost inventory, and would you have a higher finished inventory booked at lower cost with benefits coming through in coming quarters?
From an inventory point of view, in fact, we have done better from an overall number of days of inventory. It's just that raw material inventory has come in at possibly a higher cost, which is where you are seeing a blip in the overall inventory. That will partly be affecting some margins as we go into quarter two.
The price increases you have taken — at what crude level does the equation to maintain an 18%-20% PBDIT margin band set in?
It's a slightly more difficult question to answer because the span of raw materials is across different types. TiO2 is something which is not linked to crude at all — it's the largest value consumption in the paint industry. Similarly, a range of additives are not really linked to crude. The current estimate is that the crude band has been very volatile. The direct correlation with crude at this point of time is very difficult. What we can take in is the point that 18-20% guidance is a good guidance to take.
If input costs maintain at today's prices, would you need any pricing changes to stay within the 18%-20% band?
The volatility is so much that you can't take anything at a constant. Some prices which are going down, some prices which are going up, as we have seen that some prices had started coming down in June as well. TiO2 prices were fairly stable, but has started going up at the end of June. Some of the prices of Monomers have started to come down from where they were at earlier levels. It would matter in terms of the overall material index when we look at the overall set of raw materials.
Would you be able to give some idea of the benefit of the low-cost inventory this quarter in basis points of gross margin?
Again, difficult to put a number to it, because today we have seen that normally you will not keep too much of inventory also. There is a mix of newer inventory which has also come in of about 30-45 days of what we would have sold the inventory. Possibly a lot of inventory which we would have sold for half of the quarter, would have been based on some of the old raw materials and the finished goods.
Costs have gone up by almost 25% and the price increase has been to the tune of 9-11% — does that mean we are bracing for gross margin compression?
Today, we are also seeing a lot of prices coming down in the market. The volatility is also helping us in a way — if you are able to manage your overall sourcing and logistics very well, it can be also an area of advantage going forward. While there is a gap between overall increase we have taken and the overall inflation, there is also a little bit of a deflation seen in a lot of categories which are basically the input costs. That mix married with the mix in terms of what we sell in quarter two would really govern of where we lie. To some extent, a large part of this inflation effect definitely will come in as we go ahead in quarter two.
At the time of announcement of this project, you had indicated that you expect this will give you cost competitiveness and help your gross margins by 400-500 basis points. Does that 400-500 basis points still hold at the current landed prices of VAM or VAE emulsions?
As a general rule, possibly there would be a certain band in terms of what we will operate upon. Very difficult to say that it will maintain at 400 or 500 basis points, because overall it also depends on the advantage which you are getting from the current sourcing which you are doing and the formulations you are really planning to make. Generally, overall, for the category of products it would translate into that 300-500 basis points band.
What is your sense on the industry growth? And on the economy range, the mix change that you called out — is it much more structural in nature? What is your market share trend for this quarter?
Some of the medium to large players would have got some benefit from some of the smaller players. Therefore, possibly we would have grown slightly higher than the industry average. As far as economy products are concerned, today the competition intensity is across whether it is economy, premium or luxury. The competitive environment continues not only from one player or two players, but across all players. My estimate is that the competitive intensity will continue to remain as we go ahead. In the economy segment, given the fact that there is a propensity that you can really convert a contractor much better if you were to do higher discounting, the competition would remain slightly more intense.
My first question is on the innovation. 17% of the revenue is coming from innovation. How do you define innovation? What time period of launch are you considering? Will this be largely in construction chemical and waterproofing? And where will these innovations be from a gross margin and EBITDA margin perspective?
Our definition is that we look at products which have been launched in a three-year time frame. A lot of these new products are not only in the waterproofing and construction chemical zone — many are in the emulsion zone, including absolutely new customer propositions in the premium and luxury segment. Given that a lot of them are in premium-luxury, they would be a propellant of keeping our margins overall healthy in that space.
When do you see margins normalizing in the two industrial segments? Currently around 120 bps drop is there in both segments. How much was the pricing growth in industrial?
In the industrial segment, the price increase actions are a little more deferred. With some of the B2B customers and key accounts, the whole process of price increase takes a bit of time. Segments that have done well include auto OE, marine and packaging. Refinishes have been a little bit slow. The margin impact is because of the deferred call on the price increases. My belief is that industrial will continue to grow at a higher pitch than decorative as we look ahead.
We've seen 9% volume growth. Could you share your thoughts on how should we look at FY27 volume growth, especially as the base turns adverse in the later part of the year?
Today, the demand conditions as we look at quarter two — we are entering a festive quarter where the month of September becomes good enough from some festive sales. Overall, we have given our direction that we should stay in the volume region of about 8-10%. We are looking at the band of 8-10% for the full FY27.
Could you help us appreciate how input cost pressures pan out going forward? You did highlight low-cost inventory, but logically Q2 might be lower than Q1. For the full year, how should we look at it?
Quarter two has traditionally been a lower margin because of the mix of what we sell in quarter two overall. Given the fact that we are taking a very strong drive in terms of premiumization, we are still garnering around the guidance of 18-20% of our PBDIT margins. We are making a lot of efforts with respect to how we galvanize demand, how we look at premiumization, and how we look at our cost structures far more strongly, especially with respect to backward integration and some of the cost efficiencies we are building through our formulations and sourcing.
I wanted to understand the mix and the gross margin expansion surprise this quarter. The difference between value and volume seems to be about +1% versus the -4% indicated last quarter. Would sales from putty have been negligible? Or would higher sales from exterior and premium paints be leading to better mix improvement?
There has been focus on premiumization and driving a better mix, which has principally been one of the reasons of how we drove overall margins. At the same time, there is obviously some benefit of the inventory — low-cost inventory to start within the quarter — which added to the overall area of the margins. The pricing which we took has been a calibrated pricing. Going forward, this imperative of premiumization and newer innovations to get higher margins will be the effort going forward.
That negative 4% mix — would that assumption be required to be revisited?
Going forward, for some quarters, till the time we don't take pricing corrections, value and volume gap possibly would be on the positive side, as you are seeing in this quarter, and the difference might not be too much. Till the time we get into pricing corrections, the value would continue to be higher than the volume.
So the low-cost inventory benefit — has it already seeped through in Q1?
Most of the low-cost inventory benefit on finished goods has seeped through in 1Q, and here onwards, we will see the pricing inflation coming in. We'll have to see how the mix also behaves, and therefore, Q2 will depend on that.
Noted the outlook for Q2. Conceptually, times like these which are very difficult tend to favor larger formal players, right? And for the full year, were you talking about 10% volume growth?
I've spoken of that 8-10% as an overall volume band for the entire year. What you said is right, that today in quarter one, we would have definitely got some advantage from some of the smaller players, because the supply chains were pretty volatile and therefore, given the fact that our supply chain was far more robust, yes, some advantage of that will seep in both for quarter one and quarter two going ahead.
The volume-value gap which is approximately about 7% this quarter — could you give some flavor on breaking this up into pure price increase and mix change?
Overall, the contribution of the premium products has been much better. There is almost about 3% impact which is coming higher because of the better mix. There has been still a decent performance from the mix of economy products as well. On a longer run, the product mix is much better from what conventionally we have been selling in various quarters. Given the premiumization drive and some of the newer products which have come in, all have given us the benefit of making the mix a little bit favorable from premium products.
Given that low-cost inventory was contributing to sales for roughly half the quarter, how might profitability have changed in the first versus second half of Q1? And if prices broadly remain where they are, are you thinking about taking more price increases in Q2? Or could there be margin compression versus Q1 levels?
Quarter two, relatively speaking, the margins are a little bit lower as compared to other quarters, given the product mix. Any price movements will depend only on the volatility which we will see in the market. Right now, it's very difficult to say we will take a price increase. Ideally, we would not like to take any increases going forward unless the situation really becomes alarming. Going ahead, the whole idea is that we can still maintain a band of what we have been operating on.
We've been quite aggressive on putty and low-value emulsions and gained significant market share. What is our strategy going to be around these products? Is it that we are incrementally going to focus more on premium and luxury and reduce focus on these products?
The strategy going forward is that we really get growth in every segment. While the overall premium segment is important to us, the economy segment is also large. Putty is a starting point of paints — it really signifies the first purchase a consumer is doing as far as painting is concerned. We are going to maintain the focus that in each of the segments we have a decent growth. At the same time, there is a lot of imperative to upgrade the consumer from unorganized to organized and from economic to premium and premium to luxury.
Is the understanding correct that VAE emulsion will be largely utilized only for premium and luxury emulsions?
It's a technology which is quite future generation oriented — it talks of low VOC and giving some special properties in paint. The usage can be across any category of products, not limited to only premium. It can go into economy, it can go into other segments as well, like adhesives and powders. The overall consumption is fairly broad. That's how we are looking at leveraging the overall output as it comes by.
How should one think about this 150,000 metric ton VAE capacity versus your potential requirement on the current scale of business?
It would depend in terms of how many products we are able to really get in the whole area of VAE, which would really guide the overall consumption from that 150,000 metric tons. It also takes a little bit of time to reach that capacity. Our feeling is that possibly over a period of about 2-2.5 years, we should be able to reach basically a capacity which is higher and closer to about 150,000 MT.