Indigo Paints : Transcript of Analysts/Institutional Investor Meet/Con. Call

"Indigo Paints Limited Q4 FY2022

Earning Conference Call"

May 23, 2022

ANALYST: MR. MANOJ MENON - ICICI SECURITIES

MANAGEMENT: MR. HEMANT JALAN - CHAIRMAN MANAGING DIRECTOR,

INDIGO PAINTS

MR. CHETAN HUMANE - CHIEF FINANCIAL OFFICER,

INDIGO PAINTS

MR. SURESH BABU - CHIEF OPERATING OFFICER, INDIGO

PAINTS

MR. SRIHARI SANTHAKUMAR - DGM FINANCE &

INVESTOR RELATIONS, INDIGO PAINTS

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Indigo Paints Limited

May 23, 2022

Moderator:Ladies and gentlemen, good day and welcome to Q4 FY2022 Earnings Conference Call of Indigo Paints Limited, hosted by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing "*" then "0" on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Menon from ICICI Securities. Thank you, and over to you, Sir.

Manoj Menon: Hi everyone, it is a wonderful good morning, good afternoon to depending on the part of the world you are joining the call from. At ISEC it is an absolute pleasure to host once again the Results Conference Call of Indigo Paints Limited. The company is represented today by Mr. Hemant Jalan, Chairman and Managing Director; Mr. T.S. Suresh Babu, Chief Operating Officer; Mr. Chetan Humane - Chief Financial Officer and Mr. Srihari Santhakumar, DGM Finance & Investor Relations. At ISEC we covered Indigo Paints and we continue to have a constructive view. Now over to Mr. Jalan for the opening remarks and post which we will have the Q&A. Over to you, Sir.

Hemant Jalan: Thanks Manoj and thank you all for joining in on the earnings call of Indigo Paints for Q4 FY2022. For once I shall not start the meeting with the customary greeting of wishing that you and your family members are keeping safe from the pandemic and that in itself should be a strong indicator that everything is back to normal in the paint industry.

Now our financials for Q4 FY2022 and for the full year FY2022 have been uploaded on the stock exchange portals, along with our analyst presentation and you have probably had a chance to go through them. Before I dwell on the actual numbers, let me first up front confess to a disappointment on behalf of Indigo Paints.

In the 10 years that preceded our IPO last year, we had consistently outperformed the paint industry in top line growth percentage by a factor of 2x or even 2.5x at times. It was expected that such high growth levels would continue in the future. However, we are conscious of the reality that this has not happened in the last five quarters. We have certainly kept pace with industry top line growth percentages, and generally outperformed on our profit growth numbers, but not to the extent that was expected of us.

Let me admit that this has been a far greater disappointment to us than to the investor community. So, during the last few months we have been digging deep into ourselves to figure out where we are going off the mark and what we need to do better. Now, during the last 20 years the Indigo Paints growth story has been led by launch of a range of differentiated products, a conscious focus on tier 3 and tier 4 towns for growth, gradual buildup of our brand equity through advertising, and a relentless increase in our dealer network and tinting machine population.

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Indigo Paints Limited

May 23, 2022

We now find that in most states of India, our network of dealers in these small towns is excellent and an attempt to further increase our network in tier 3 and tier 4 towns would be counterproductive. In these towns within our existing dealer network usually we find that our share of counter revenue for Indigo Paints is also fairly high and although there is considerable scope for further increase in our counter share within our existing network we also realize that this further increase will happen at a more gradual pace. So, we have now decided to focus on the next level of towns or cities in India, which you may broadly refer to as tier 1 or tier 2 towns. We have identified 750 such cities in India, which are the largest cities of the country by population excluding of course the largest 10 to 12 cities which may be referred to as the metro cities. So excluding these metro cities the next largest 750 cities is where we now need to expand our presence.

We find with data analysis that over the last few years we have managed to build a reasonably good dealer network in the 750 cities, but unfortunately our output per dealer is extremely low here. So we have now embarked on a vigorous campaign since the start of the current fiscal FY2023 to exclusively focus on these 750 cities to concentrate our engagement program with the influencer community which is the painter community to generate large increase in sales.

The scope or head room for growth is huge in these cities. Fortunately, our brand equity has become quite strong over the years and a dealer network in these cities for us already exists. We just need to focus and get more output from this network. Large-scale effort in this direction has started on an all India basis from 1st of April and early results are beginning to show. It will take a few more months before these efforts will start reflecting themselves in operational results in a significant matter. At which time we sincerely hope that our growth trajectory will be back to its earlier levels where we start outpacing the growth rate of larger players by a huge margin.

You are also all well aware of the unusual inflation and raw material prices which our industry has experienced in the last 18 months or so. You will recall that the industry took very sharp price increases in paints in Q3 of the last fiscal to mitigate this. During Q4, prices of raw materials remained relatively stable during the months of January and February, but once again moved up sharply in March due to further spurt in emulsion monomer prices globally.

The continuing war in Ukraine has certainly made matters worse. Minor price increases have been affected earlier this month and some further minor price increase is slated for next week. At the moment raw material prices have been relatively stable and steady in April and May and the near-term outlook for raw material prices appears to be stable. However, this remains somewhat unpredictable in the medium to long-term and we have to continue to react to the ongoing situation as and when it emerges.

Gross margins which had taken a big hit in the last fiscal have started moving up gradually in Q3 and Q4 and we expect further small movements in upward direction in Q1 and Q2 of this fiscal. Now the trade channels in the paint industry had overstocked materials in Q3 to avail of pre price increase benefits and the channel was in an overbought condition on the 1st of January 2022.

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Indigo Paints Limited

May 23, 2022

Naturally, volume off takes January and February were adversely affected by this and has generally seen the weak top line growth by listed paint companies in Q4 despite the fact that the average selling prices in Q4 were about 20% to 22% higher than the corresponding selling prices in Q4 of FY2021. Fortunately, we have all seen good growth returning in April and volume off takes have been strongly positive in April 2022 and we hope that this trend will continue.

At Indigo Paints, we strongly believe that we have to continue to aggressively invest in brand building through advertising to improve our brand equity. You will note that despite the severe pressures on gross margins last year we have avoided the temptation to reduce advertising expenses in an effort to shore up bottom line.

Our advertising expenses continue to register healthy growth and we have done so in FY2022 as well. Even the current fiscal FY2023 has started off by aggressive advertising in the IPL season, which is the most expensive advertising platform in the country. We are progressing reasonably well on the construction of our new water-based paint plant in Tamil Nadu with civil construction and machinery procurement in full swing, equipments have started arriving and equipment erection has now started although we are a little bit behind our schedule on civil works. So it now appears likely that the commissioning of this plant which we had earlier slated for Q2 of this fiscal is likely to get shifted to Q3 of this fiscal. However, this is not a cause for concern by the management as we have enough adequate surplus capacity at the moment to meet any demand.

I will now move on to our financial numbers and the related commentary: Compared to Q4 of FY2021 the Q4 of FY2022 showed a sales growth of 13.4%, gross margins had started slipping in Q1 and Q2 and had started recovering in Q3 and they have further improved in Q4 although only by 70 basis points . Despite maintaining our advertising and promotion spends at a high level in Q4 and despite the year-on-year contraction of gross margins experienced by the entire paint industry including ourselves. Our EBITDA in Q4 has grown by 25.2% on a Y-on-Y basis which has perhaps a much stronger growth than other paint companies. Our EBITDA margin has also increased to 18.6% in this quarter, which is up sequentially from 14.6% in the preceding quarter and even higher than 16.9% that we experienced in Q4 of FY2021. Profit before tax numbers for Q4 have expanded by 27.8% on a Y-on-Y basis and PAT numbers for Q4 have expanded by 39.1% on a Y-on-Y basis. Once again being a strong outperformer in profitability growth numbers within the industry. This reinforces our commitment to always grow the top line but maintain the growth in a profitable manner.

I now turn to the financial numbers for the full fiscal FY2022. Net sales in operations in FY2022 have been 25.3% higher than FY2021. Now it should be noted that this increase is on a more robust base level of FY2021 and Indigo Paints had not been as severely impacted by the first COVID wave relative to other paint companies and we had shown a much higher top line growth in FY2021 relative to others. So this growth of 25.3% comes from a relatively robust base for us.

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