Asian Paints Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Volume strong, value weak: Double-digit volume growth persisted, but a ~3.7% price decrease and downtrading pushed standalone value growth to -1.8% in Q4.
• Margins rose for the full year despite a soft Q4: Consolidated FY24 PBDIT margins expanded ~220 bps YoY, aided by raw material deflation and sourcing efficiencies, even as Q4 margins dipped sequentially on lower value sales.
• NeoBharat is the big bet for the Economy segment: The latex-based product, priced at distemper levels, launched in January and is expected to scale "in a very big way" next year, targeting the unorganized sector and rural markets.
• Home decor adjacencies are a mixed bag: The Kitchen and Bath business "has not done well" and is PBT-negative, while lighting, uPVC doors/windows, and fabrics are growing strongly and hold leadership ambitions.
• What to watch next quarter: Whether the promised rural resurgence and deferred government demand actually close the value-volume gap, and how raw material prices behave through Q2 and Q3.

The Volume-Value Disconnect

• The headline gap: Double-digit volume growth translated into a standalone value decline of 1.8% in Q4, driven by a total price decrease of ~3.7% and some downtrading, especially in rural centres. Including the strong Industrial business, consolidated value decline narrowed to -0.7%.
• Downtrading dynamics: The Premium segment was slow while the Economy segment gained strongly, with some consumers shifting from Premium to Economy products. Management is working to improve the value-for-money equation in Premium by increasing coverage per litre, making downtrading less attractive.
• Rural vs Urban: Urban centres drew a tad faster than rural markets, but the difference was not large. Management noted "some more resurgence happening in rural markets" in April, and good monsoon predictions are expected to improve sentiment further.
• The target gap: Management aims to maintain a 5-6% gap between value and volume growth going forward, calling Q4 an anomaly due to price decreases. The real test will be Q2 and Q3, with a decent Diwali period expected to aid both quarters.

Syngle: "the double-digit volume growth has been a very strong story. We feel that the volume trajectory gives us a boost, more from the point of view of saying, that is something which is a strong sustainable business, which is happening, quarter on quarter"

NeoBharat and the Economy Segment Offensive

• Product proposition: NeoBharat uses latex technology to deliver a product at the cost of distemper with better durability and coverage. Launched in January 2024, volumes are building up with strong growth, and Virat Kohli has been appointed as brand ambassador with the tagline "Har Ghar Khelega and Har Ghar Khilega".
• Strategic intent: The product is designed to take on the unorganized sector and is expected to impact urban centres but more strongly rural centres. Management describes it as "a revolution" that brings "joy and happiness to every home."
• Portfolio balance: While NeoBharat will drive Economy growth, management is putting equal energy into Premium and Luxury launches like 'All Protek' and 'Royale Glitz' to match Economy's growth rates. Luxury is already coming in strongly, aided by luxury apartment sales and second-home upgrades.

Management: "This is a revolution because this actually gives us the whole area of saying - bringing joy and happiness to every home."

Margin Structure and Sustainability

• Full-year margin expansion: Consolidated FY24 PBDIT margins rose ~220 bps YoY, driven by raw material deflation, sourcing efficiencies, and formulation improvements. Gross margins increased both sequentially and YoY.
• Q4 margin pressure: PBDIT margins fell sequentially and YoY in Q4 because value sales did not come in, even as gross margins improved. Marketing spends were consciously increased to support brand equity and propel Premium and Luxury segments, and this will continue in Q1 and Q2.
• The 18-20% guidance: Management reaffirmed its commitment to maintain PBDIT margins in the 18-20% range, citing three levers: a world-class supply chain model, overhead efficiency with economies of scale, and sourcing and formulation efficiencies on the 58-60% raw material cost base.
• Backward integration boost: The VAM VAE plant, involving an investment of over Rs. 2,100 crores, is expected to aid margins by at least 1-1.5% at the company level, depending on how rapidly utilization is increased. White cement backward integration will also support the margin guidance.
• Raw material risk: Current geopolitical situations and crude behaviour are worrying. Management expects raw material prices to remain benign in Q1, with only some inflation expected thereafter, but Q2 and Q3 price movements will determine gross margin outcomes.

Syngle: "When we got into this business, and we are looking at investing more than Rs. 2,100 crores in terms of setting up a plant, we would not do that if there was no cost benefit."

Home Decor Adjacencies: A Tale of Two Halves

• The strong performers: Decorative lighting is the Number One player in its category. Fabrics holds a strong Number Two position. Wall coverings and textures are Number One. The White Teak and Weatherseal uPVC doors/windows business delivered fairly strong top-line numbers in Q4 and the full year. Beautiful Homes Painting Service is "globally now the largest painting service offered by any brand" and growing at 70-80% YoY.
• The strugglers: Kitchen and Bath "have not done well." Q4 was down, and the full-year business was weak overall. In Bath, market share is very small, facing headwinds from low demand and pressure from both unorganized and organized players. Kitchen was okay but not great for the year. PBT is negative, though Q4 registered positive revenue numbers.
• The fix: Both businesses are being brought under the 'Beautiful Homes' umbrella brand ("Beautiful Homes kitchen, Beautiful Homes bath") to leverage Asian Paints' core strength in brand building. A new 14,000 sq ft store opened in Chennai. Management aims to take these businesses and "make it big as part of overall decor initiative."
• Store expansion: Beautiful Homes stores are expanding rapidly, targeting 85-90 stores this year and 150-200 over five years, with per-square-foot space expected to nearly double or triple.

Management: "Kitchen and Bath have not done well, to be upfront with you. Q4 has been down and for the full year, you have seen that the business has not done well overall."

Competitive Positioning and the New Entrant

• Management's stance: The new entrant's approach is described as "just copy paste" with nothing innovative. Management noted that the market has seen many new players come and go over two decades, and recalled that five years ago, analysts asked the same questions about another competitor "and now no one asks about that competitor at all."
• Pricing dynamics: Asian Paints does not benchmark against competitors' pricing and is the first to regulate price in the market. Other players already exist at less than 15% lower, and new players go down to 20% lower. Over time, pricing for other players dips and they start competing with smaller players, with each finding its own level.
• Dealer loyalty: Management believes consumer consideration is the strongest tool influencing the network. Dealer loyalties are difficult to shift because dealers understand the demand environment. Copying formulations, taking people, or copying plants does not easily change market structure.
• Distribution moat: Asian Paints has added 40,000-45,000 retail points in the last three years and will add ~10,000 more this year, taking the tally to more than 1.63 lakh retail points, 3-4 times higher than any competitor and comparable to any large FMCG player. The distribution strategy focuses on aiding retailer ROI through demand generation and faster capital rotation, increasingly powered by AI and algorithm models for forecasting and order fill rates.

Syngle: "I would say that it is just copy paste, which is happening in the market. There is nothing which is unusual. There is nothing, which is innovative that is happening."

Industrial and International: The Steady Contributors

• Industrial strength: Industrial JVs (APPPG and PPGAP) have performed very strongly for three years. Q4 saw auto business growing in double digits and other business close to double digits. Full-year both businesses did extremely well, with very strong profits. The protective paint market and auto market continue to grow, with auto players building up builds and the electric car revolution becoming strong.
• International recovery: In constant currency terms, growth is good. Excluding Nepal, which has been suffering for about two years, global business growth is in double digits. Sri Lanka is back, Ethiopia and Egypt have started doing well, and the UAE market is buoyant. Nepal recovery is not yet visible.

Syngle: "if I take Net of Nepal, I think the growth is in double digits for the global business."

Guidance & Commitments

Key Metrics