Indigo Paints Limited (INDIGOPNTS) Q2 FY23 Earnings Concall Transcript

Indigo Paints Limited (NSE:INDIGOPNTS) Q2 FY23 Earnings Concall dated Nov. 07, 2022

Corporate Participants:

Srihari Santhakumar — DGM Finance & Investor Relations

Hemant Jalan — Chairman Managing and Director

Chetan Humane — Chief Financial Officer

Analysts:

Percy Panthaki — IIFL — Analyst

Prashant Kutty — Sundaram Mutual Fund — Analyst

Hardik Doshi — While Whale PMS — Analyst

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Manoj Menon — ICICI Securities — Analyst

Abneesh Roy — Nuvama Institutional Equities — Analyst

Jaykumar Doshi — Kotak — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day, and welcome to the Indigo Paints Q2 FY ’23 Earnings Conference Call, 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. [Operator Instructions] 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 — ICICI Securities — Analyst

Hi, everyone. A wonderful good morning, good afternoon, and good evening depending on the part of the world you are joining this call from. I represent ICICI Securities, also have my colleague [Indecipherable] is also there with me. It’s our absolute pleasure to host the 2Q FY ’23 results conference call of Indigo Paints. The management of the company is present with us. Over to Srihari from Indigo for the preceding.

Srihari Santhakumar — DGM Finance & Investor Relations

Thanks, Manoj. Good evening everyone. Thanks for joining the earnings call of Indigo Paints for the quarter ended, September 2022. Today on our call, we have our Managing Director, Mr. Hemant Jalan; Chief Operating Officer, Mr. Suresh Babu; and, our CFO, Chetan Humane. We will start the proceedings with quick brief overview of the performance of the company by Mr. Jalan followed by the Q&A. Over to Mr. Jalan.

Hemant Jalan — Chairman Managing and Director

Thank you, all for joining in on our earnings call of Indigo Paints for Q2 of FY ’23. [Technical Issues] Now this year this was further accentuated by excessive rains in many parts of India and extended monsoons across the country which have adversely impacted the sales of products, especially for exterior applications. Despite these headwinds, Indigo Paints has clocked a higher topline growth compared to the rest of the industry with fast-moving profitability metrics.

Now our financials for Q2 FY ’23 have been uploaded on the stock exchange portals, along with our analyst presentation. And, I’m sure you’ve had a chance to go through them. Now, I’ll just briefly summarize our financials, give a very brief note on future strategy and guidance and then open it up for Q&A.

Now compared to Q2 of last year. Our sales in Q2 of this year have registered a top-line growth of 23.71%. The gross margin this year for this Q2 has been flat compared to Q2 of last year, almost identical at 41.7%. Compared to Q1 the preceding quarter of this year the gross margins have slightly declined from 45.2% to 41.7%. Now, this is typical and usually happens during Q2 for most paint companies because of the inferior product mix which pervades in Q2. However, you will note that our gross margin percentage continues to remain ahead of the rest of the paint industry by a significant margin. We have also like the rest of the industry undertaken minor price increases on some select the quarter and now raw-material prices have stabilized and, some of them are showing signs of declining.

For Q2, this year compared to Q2 of last year, our total EBITDA has increased by 44.5%. And the EBITDA margin has risen from 11.92%, which is what it was a year-ago to 13.92% for Q2 of this year. Profit-after-tax has increased by a whopping 174%. And PAT margins have increased 6.8% in this quarter last year to 15.1% in the Q2 of this year. Now you will note from the presentation that part of this huge increase in PAT is attributable to one-time reversal of some excess tax provisions of INR16.3 crores, which pertains to earlier years for, which. The assessments got completed during this quarter and therefore this reversal is happening.

Despite this reversal, even if you take-away the effect of the, INR16.33 crores of contribution to the PAT, despite that our PAT on an absolute amount has expanded by 53.2% compared to the same quarter last year. And our PAT margin has gone up from 6.8% to 8.45% during this quarter. Similarly, if we look at the full six-month performance of this year. The top-line sales have risen by 32.5% compared to the corresponding six months of the last fiscal. Gross margins had been virtually flat at 43.4% almost the same thing as the first-half of last year. EBITDA in this half has grown by 58.7% compared to the EBITDA of first-half of last year. And the EBITDA margin has expanded from 12.36% last year to 14.8% in the full six months of this year.

PAT again for the full six months has increased by 127%. And PAT margin has gone up from 7% to 12.1%. Once again, if you adjust for the reversal of the excess tax provision even then the has expanded by almost 62%. And PAT margins have gone up from 7% to 8.65% percent during the first-six months. Not in-line with the brand-building strategy we continue to spend aggressively on advertising and promotion. You will note that the A&P expense for the quarter was down marginally by 7% compared to Q2 of last year. However, in Q1 of this year we had a significant increase in the A&P spend compared to Q1 of last year, and this entire phenomenon is attributable to the last year split of IPL, which got split between April and September and, therefore, there was a comparatively lower outlay in the first-quarter and higher outlet in the second-quarter so perhaps more meaningful to look at the A&P spends for the full six months, which have been 13.56% higher than the corresponding six months of last year.

Now you should note that on a half-yearly basis despite the fact that we had flat gross margin and slightly higher A&P spends, the EBITDA margin has expanded significantly for the six months from 12.36% to 14.8% reflecting the benefits kicking-in from our economies of scale. We have also furnished the volume and value sales growth figures for each of the four major categories of decorative paints, consistent with our past pattern of transparent disclosures. As has happened in the last few quarters the value growth is always higher than the volume growth as a consequence of the price increase of almost 20% which was undertaken during the last 12 months.

During the quarter you will note that the company has witnessed a small dip in our volumes for emulsion category minus 4%. However, keep in mind please that the emulsion value growth in the preceding quarter was 34.4% and in the year preceding quarter that is Q4 of FY ’22 was also up 43% volume growth. So because of some trade schemes which closed out in June, maybe a small amount of the emulsion sales got shifted to the preceding quarter which is why you see a marginal dip in the volume growth figures for emulsion. But what is heartening to note is that in the enamel space where the company has traditionally been somewhat weak we have had almost at 29% volume growth. And we are now gradually getting our rightful share of the pie as far as enamel is concerned which is a fairly large segment in the decorative paint industry. We continue to focus on-network expansion and as of 30th September our active dealer count stands in excess of 16,750 and our tinting machine population in excess of 7,700.

Now in the earlier calls, we have mentioned regarding our payment to focus on 750 larger towns of India which are the Tier-one and Tier two towns. And we have been executing that during the last six months and I’m happy to report that we are witnessing very good results from that. And we expect further boost in sales from these towns in the upcoming quarters. It is the early results that we have derived from this initiative which is mainly responsible in our exhibiting a slightly higher top-line growth compared to the rest of the industry. And we expect this to accelerate further in the coming quarters. To undertake the influencer outreach program in these 750 towns we have doubled the resources in terms of manpower on-the-ground to make this more effective and we continue to increase our manpower, base efforts, energy and spends in penetrating this larger cities.

Looking into the future with industry-leading gross margins and the softening of raw-material prices which we are witnessing, we will continue our trust to achieve higher-growth through higher promotional activities and recalibrating the channel incentives. In terms of promotion, during the last quarter the company launched a massive ad campaign in Kerala. A new ad to relaunch a very top-end emulsion of ours starting our new brand ambassador Mr. Mohan Lal celluloid Superstar of Kerala backed with significant channel incentives.

We have had an early Diwali this year. And monsoons which continued almost three or four days before Diwali. With all that behind us we are hopeful that the upcoming months will drive the sales further. And that we at Indigo Paints will continue to positively surprise you on both top-line and bottom-line growth. That’s all, I have to say in terms of opening remarks. Look-forward to receiving your questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Nuvama Institutional Equities, please go-ahead.

Abneesh Roy — Nuvama Institutional Equities — Analyst

Yeah, thanks my first question is on the demand-side in Q3. Now the other players have been saying that this time the gap between the rainfall ending and the festival season, this time it was quite short. Normally in the previous years, customer behavior is that you would like to have at least a two to three weeks kind of a gap there in the painting can be fully done, painting selection and all that, this time that was not possible in most regions because of the very short gap.

And secondly, sir last year, if you remember the sharp price hike by most of the players, happened in Q3 and that led to the preponement of the demand pipeline filling et-cetera in that context do you see for yourself also Q3 demand being a bit challenging? You were more positive, that’s why I’m asking this question. Q3 demand is it looking a bit challenging at this juncture?

Hemant Jalan — Chairman Managing and Director

So Abneesh you right and — to some extent. Whenever we have an early Diwali, see by now I think if I look at what has happened in the last 15 years, I think we’ve all gotten used to monsoon now continuing in India till at least 15th October. It is called the late monsoon withdrawal but if it happens 15 years in a row. I think that has become the normal monsoon pattern. Gone are the days when the monsoon would withdraw by first September which was — used to be the official monsoon withdrawal date. It is now a good 45 days after that. Now Diwali date shifts from year to year. Last year we had a normal Diwali time. I remember it was 4th or 5th of November or something around that time. So if monsoon finishes by 15th October, you’re right you get a good 20 days between the end-of-the monsoon and Diwali and you have bumper monsoon — I mean the bumper pre-Diwali sales.

However, whenever you have Diwali coming in November although you always get a great pre-Diwali paint sales season, it is usually followed by a lull in the next two-three months the rest of November and December and January gets kind of muted at least as far as Northern India is concerned. My own experience is that whenever we have an early Diwali as we had this year when Diwali was I think 24th of October and the gap between the end-of-the monsoon and Diwali was hardly four or five days now people are not going to start painting their house, two days before Diwali so at that time the pre-Diwali sale suffers.

However, once Diwali is over, this loss in sales that you experienced pre-Diwali tends to get made up during the next two to three months. So a lot of this, I mean it is true October, I’m sure, has been a bad selling month for all the companies in the paint industry. I am sure it will get made up for, if not completely by December definitely by January. Because there is a latent demand that always overhangs and it gets made up.

Now what you’re saying is right, but last year there were huge price hikes that were undertaken. A major one that happened in early November and another fairly significant price increase that happened in mid-December. So because of that there was some preponement of the sales, but that prepayment did not happen. As you know getting shifted to Q2. Basically, last year some of the November demand especially for the larger players, because whenever there is a big price increase, that channel tends to first put its hands on the requirement that they have for the larger players which are more liquid stocks. So, they would have, I expect had a huge hike in the demand in October and then again in November and probably a very-very dull December but overall if you look at the quarter, I don’t know whether it impacted at all that much.

For us, of course, we would have got some benefit in that little preponement from November to October, the magnitude would have been smaller. So what is going to be the result as far as the entire Q3 is concerned, while the jury is still out because we have just finished the worst month of the quarter which is October which was heavy rainfall, also remember it is not just rainfall you lose a lot of days during the months to holidays. You first have the share which means a three-four day holiday in most parts of North India, then you have Diwali, when there is three-four days of holidays and in at least two states of India in the North Bihar, Jharkhand, and parts of Eastern UP you have their most major festival called Chhath which falls the 5th and the 6th day after Diwali, so all the three festivals fell in the month of October, so the number of working days in Northern India were of course, severely impacted.

However, Kerala did extremely well for us in the month of October and we expect a more normal pattern emerging from Q3 onwards because the benefits of value price increase would be present in a very small respect as far as Q3 is concerned so the overall top-line growth numbers of the industry which in the last few quarters had been 20% at times even 40% when you had some pre-COVID impact in the preceding year, etcetera. I think all that is going to moderate and come down to more normal levels. We’re you, don’t have that pricing tailwind behind you for most of the quarter. So, let’s see, I’m quite hopeful that November and December we will see a huge upsurge in sale to make up for the slightly weak October which the industry has experienced. So let’s see what the future unfolds. It is very difficult to put a number guidance on that.

Abneesh Roy — Nuvama Institutional Equities — Analyst

No, sir thanks. One follow-up on the demand side. You mentioned October month has been good but Kerala so is it because of the focused marketing campaign with the brand ambassador and in Q2 also was Kerala growth better than the overall 23% growth, even Kerala last two years in terms of the base quarter there has been one challenge or the other because of COVID or because of the high rainfalls etcetera so in Q2, how was the growth?

Hemant Jalan — Chairman Managing and Director

Kerala’s growth was extremely good it was — fairly, fairly good in fact more than the rest of the country per se, part of it can be attributed to this new campaign that we have launched although that campaign was launched only from 15th September so it would have had a marginal effect as far as the entire quarter is concerned. The other thing you have to note is that Diwali is not really a festival that is celebrated in Kerala. And rainfall activities in Kerala during the month of September were not anything unusual. Whereas you must have read in the newspapers that just the neighboring states like Karnataka it has been just [Indecipherable], all through September and in fact all through October and the similar has been the story in most states in Northern India.

So fortunately for us Kerala, was a little more normal kind of a monsoon pattern, nothing very excessive. No flooding or waterlogging or anything like that. Coupled with of course a new campaign and good execution. I mean, Kerala for us has been doing very well in the last three-four quarters successively. So after COVID two was over in May of last year, I think from July onwards of 2022 — 2021, Kerala has done extremely well for us.

Abneesh Roy — Nuvama Institutional Equities — Analyst

Sure sir, last question is on the industry-leaders coming out with backward integration plans of VAE, VAM and white cement. Their claim is this will help them in terms of unique product and reduce import dependency. First time a paint company in India is doing this kind of a thing. So wanted to understand does this put the smaller paint companies in some kind of disadvantage from a longer-term perspective?

Hemant Jalan — Chairman Managing and Director

No, I don’t think it does. I think there is abundant supply of all kinds of emulsions including the VAE emulsions in India. We have not been using that very much in the last few years. We have used that in the past. At the moment we don’t use VAE emulsions because we don’t find them very cost-effective but then abundantly available. And the same goes as far as white cement is concerned.

So what the industry-leader has to do with they are in a different scale of operation when compared to us, so they can probably answer better to what advantages, they will get but you ask me as to whether we feel we will be at any disadvantage, the answer is no. Today, we don’t make any of our emulsions in-house and not just the market-leader but many of the larger players choose to make most of their emulsions in-house and you still note that our gross margin is much, much higher than any of those companies so. I don’t think that we suffered from any cost disadvantage by not making those products in-house.

It’s a different philosophy and it’s a different scale of operations. So what is good for them is not necessarily good for us and vice-versa.

Sure sir, that’s all from my side thanks. Thank you.

Operator

[Operator Instructions] Our next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.

Jaykumar Doshi — Kotak — Analyst

Yeah, hi. Thanks for the opportunity. What should we expect in terms of gross margin recovery in the third-quarter and fourth-quarter base done not the raw-material prices, its current level and…

Operator

[Speech Overlap] clearly, can you use the handset please?

Hemant Jalan — Chairman Managing and Director

I can hear you Jay, you were asking about gross margin recovery in Q3 and Q4…

Jaykumar Doshi — Kotak — Analyst

And EBITDA margin as well, yes.

Hemant Jalan — Chairman Managing and Director

And EBITDA margin.

Normally for us. Both in terms of top-line sales and in terms of bottom-line historically, Q1 has been the weakest quarter, Q2 is a little better overall in topline, although EBITDA margins and gross margins are under some stress in Q2 because of the deteriorating product mix during the monsoons. Both, these numbers are much better in Q3 and the highest in Q4. So that has something to do with the product mix. This time we have two tailwinds supporting us. One is the product mix which changes in Q3. More exterior painting starts, many of our specialty products especially our differentiated products their sales mainly happens in Q3 and Q4 and they tend to push up both the gross margins and the EBITDA margins.

Even in terms of you know top-line the total sales are normally much higher in Q3 compared to Q2 and Q4 sales for us are the highest. So the EBITDA margins are also always much, much higher than Q3 and Q4 because the same standard expenses, the overhead, the advertising and all the other expense get amortized on a much, much larger topline. So I think you should see a good recovery in both the gross margin and the EBITDA margins in Q3 and you will see a further improvement in Q4, mainly because of top-line growth and improving product mix. I won’t give a specific number guidance as to by how much you expect it to increase but I think there’ll be a very noticeable increase in both the parameters that you asked about.

Jaykumar Doshi — Kotak — Analyst

But reasonable to assume that, given seasonality, a sequential increase in gross margin for Indigo Paints should be better than rest of the industry?

Hemant Jalan — Chairman Managing and Director

Whether it will be better than the rest of the industry or not, I really am not privy to them but I’m looking at our own gross margins. I mean if you look at it last year Q2 was — gross margin in Q2 was 41.3% and…

Chetan Humane — Chief Financial Officer

From Q3 to, 42.89%.

Hemant Jalan — Chairman Managing and Director

Yeah, it went up by about 1.5% points it went up further in Q4 so roughly in the range of 1.5% to 2% increase in gross margins sequentially into Q3 and further into Q4. This year there are some at the moment at least softening raw material prices which should help it a little further. And the same thing goes for EBITDA margins. EBITDA margins last year also rose very sharply from Q2 to Q3 by more than 2.5% points and a further increase of 4% points in Q4 so, something along those lines ought to happen. I can’t give you very precise number or predictions as to how it will happen but that is the normal pattern that we experience every year between Q1, Q2, Q3 and Q4.

Jaykumar Doshi — Kotak — Analyst

Understood, this was helpful. And do you expect further price increases by the — by the industry or do you think that pricing is more or less stabilized at this [Speech Overlap].

Hemant Jalan — Chairman Managing and Director

I would be somewhat surprised at the industry leaders went for a further price increase. I really don’t see the need for it. Especially because some of the raw-material prices have started softening. So, I don’t expect either a price increase or price decrease at this point in time. I think that price should be pretty much stable till the end-of-the year as far as our, selling prices are concerned. Depending on the amount by which raw-material prices soften, I expect to see an increased aggressiveness on the part of everyone in terms of trade discounts and that is normally what happens when raw materials soften within a limited range and that is already evident in the last one or two months on-the-ground and we are also following suit and I think we’ll be able to match the firepower of others in terms of being aggressive in trade discounts. But, I don’t expect any price increase, in any significant manner over the next four-five months.

Jaykumar Doshi — Kotak — Analyst

Was there an element of higher trade discount in September quarter or you know — that is something that you expect in December quarter?

Hemant Jalan — Chairman Managing and Director

No. I think the price discounts will be aggressive in the December quarter also because people — everyone would have a little more margin to play around with. And the earlier tailwinds of the price increase that drove your top-line growth up much faster, those are not going to be very much in the play. And the fact that people would have had a relatively poor October month I would expect trade discounts could be a little more aggressive in November and December.

[Speech Overlap] this is what happens so it’s okay, it affects everyone in the same way.

Jaykumar Doshi — Kotak — Analyst

On the final — quick bookkeeping dealer and tinting machine additions decelerated [Phonetic] a little bit in 2Q versus 1Q while you were, focusing more on the larger towns. So is this just a quarterly anomaly or [Speech Overlap]

Hemant Jalan — Chairman Managing and Director

I didn’t understand your question can you repeat that Jay, your voice is a little unclear. What are you asking about tinting machine accounting?

Jaykumar Doshi — Kotak — Analyst

Tinting machine [Technical Issues] 2Q number drop versus 3Q.

Hemant Jalan — Chairman Managing and Director

Always it is a little difficult to do that in Q2 because of monsoons, see we are listing not our total dealers, we are always listening active dealers. So during monsoon time many dealers are not purchasing on a regular basis. So even though you add dealers there are some dealers who have not done much purchasing in the months of July, August, September, etcetera, and therefore they dropout from the count of active dealers. So you add some and you re-lose some in the active count. So this is merely a count of our active dealers. It is by no stretch of the imagination a count of our total dealer population which would probably be in excess of 25,000 but there is a certain way in which we quantify as to the regularity of purchase and determine whether somebody has been an active dealer or not.

And tinting machine, yes there is usually [Technical Issues] but even in Q1, we added about 300 tinting machines. We have added more or less the same maybe 281 machines in Q2. So, give or take you know we are averaging something like 100 tinting machines a month so about 300 per quarter. In some quarters we are lucky it adds a little faster in some quarters, it’s marginally slower. Normally in monsoon time when sentiment amongst the dealer counters is generally at its lowest ebb it’s normally the worst time to try and push them to add a tinting machine. They get a little more Gung ho when Q3 and Q4 comes when their sales at the counters are much better and they are in a better frame of mind to accept tinting machine. So but that’s pretty normal. But I don’t think there has been any significant drop seasonally in terms of dealer addition or tinting machine addition. Those are pretty much going on at the right pace. Of course, we’d like it to happen faster pace that’s always true.

Jaykumar Doshi — Kotak — Analyst

Understood, thank you so much. That’s it from my end.

Operator

Thank you. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Sir, I got a couple of questions, one before the questions, actually good performance by your company in the context of the demand which you otherwise see. So the question is anything on the general demand trends which you are observing particularly in the larger markets which you have? The reason I’m asking this is because for the last 12 to 24 months, we have clearly seen significant divergence between discretionary and non-discretionary part of it, whereas the discretionary urban top-end part of it has largely performed very well. And even the discretionary within staples to actually have somewhat performed well, etcetera.

Now of late we kind of started hearing from let’s say a restaurant company or a footwear company etcetera that there is some softness which they are actually finding. Just wanted your perspectives on your top-down [Phonetic] comments on-demand conditions based on anything which you’re observing.

Hemant Jalan — Chairman Managing and Director

So we don’t notice anything significant changing in the demand conditions. And it’s very difficult to extrapolate from what you hear about [Indecipherable] or other consumer products to paints. Many of the other sectors witnessed a huge demand slowed down during COVID and immediately after COVID whereas the paint sector if you recall remained fairly resilient all through the last two years of the COVID pandemic. Of course, there were lockdown months when everything was shut-down and you couldn’t do anything about it but it used to bounce back very fast when the lockdowns were lifted, which is why the paint industry has done fairly well during the pandemic and we don’t notice anything adverse happening on a broader spectrum.

Month-to-month yeah, I mean, weather patterns affects us much more than any other industry, especially rainfall. Because obviously, you don’t start painting a house when it is raining cats and dogs outside. So monsoon patterns, some changes in festivity some shifting of certain festivals from one month to the other month may make some difference when you are comparing a Y-on-Y monthly sale. But overall, I don’t find anything very different, either on the positive or the negative side. I think there is pretty much demand as usual.

I was hearing the commentary of some of the larger players, whose results have come out and they said that in the last quarter maybe the smaller towns have done slightly better than the larger towns, the commentary was quite the opposite in the previous quarter when larger cities, apparently performed much better than smaller towns. We of course are not — presence in the larger towns as you are aware, it has been slightly weak compared to the others and that is something that we are trying to correct. But during the quarter went by we didn’t find anything unusual about the larger cities or the smaller towns as far as demand is concerned.

Manoj Menon — ICICI Securities — Analyst

Understood sir and one question on the — for the listeners, now given that you are the only paint company at least till now who actually owns the aspect. So just trying to understand what are the typical economic value-add or ROCE on a steady-state basis for a product like this which actually generates.

Hemant Jalan — Chairman Managing and Director

On putty.

Manoj Menon — ICICI Securities — Analyst

Yes.

Hemant Jalan — Chairman Managing and Director

See, the reason we have decided to make putty ourselves and have always made all our putty ourselves is because of the location of our plant. We have a large manufacturing location at Jodhpur. Now that is the prime place as far as manufacturing of putty is concerned. Two basic raw materials are required for putty in large quantities. One is white cement. Now the only two manufacturers of white cement are both located within 50 to 60 kilometers of Jodhpur. That is both Birla White and JK White. The other raw material is Dolomite. Now the best quality Dolomite in the country and at a cheap price comes from Rajasthan. You have some other deposits in the Katni, [Indecipherable] area of Madhya Pradesh, but the quality or the whiteness of that deposit is as not as good as what you will find in Rajasthan.

Now when we are ideally located in terms of manufacturing with all the best raw materials coming from, less than 100-kilometer radius it didn’t make any sense to outsource that manufacturing to somebody else. Other people, other players don’t have any manufacturing facility in Rajasthan. So when they are located somewhere else, they may find it more cost-effective to outsource it to someone else and some of them outsourced not just putty, they outsource a whole lot of other decorative paints to job workers. We have chosen not to do that. Our cost structures at our manufacturing locations are fairly lean and thin.

And I think we are able to manufacture it as effectively as any job worker would or perhaps more effectively than them. We’d have a much better control on quality and any job worker is obviously going to take some profit margin for whatever he is doing. So having all those advantages, I would presume and I don’t have access to internal numbers of other paint companies, I would assume that the gross margin contribution that we get from putty is perhaps or should be better than what other paint companies realized by outsourcing it.

And margins in any case for putty are very low. But to measure ROCE separately for different product lines is a little difficult and that’s not the way in which we look at it. I mean if you look at it very objectively with a very low margin that putty gives it theoretically it may make sense not for, any paint manufacturer to ever offer any putty in the market, but that’s not how you can play the game. You cannot pick and choose and say that, I will not manufacture this product because it gives a lower return and I will only manufacture products that give a high gross margin. I mean you either go all-in or don’t go in at all.

So there are various products in for example take enamels. Now enamels is usually sold by all companies in 30:40 shares. They usually are sold at the same price for all the shades for marginally different price, but if you go on a shade-wise analysis there are some shades which gives almost zero margin and some shades that give a much higher margin. Now you can’t pick and choose and say, I will not sell these shades and I will sell that shades. And the same applies to putty. It is an integral part of decorative paints. It is the first item that gets used in the house and therefore for the strategic purposes it is important to offer putty, and even though its margin contribution may be lower. I think all paint companies choose to engage in that products. And for us it’s we are a little more comfortable than others perhaps as I said with the caveat that I don’t know their internal figures but because we manufacture it in-house and we are manufacturing it at the best possible logistical location, we ought to be a little more comfortable than others as far as that is concerned.

These are some of the reasons why you see our overall gross margin much higher than the rest of the industry. This may be one of the small contributing factors towards that.

Manoj Menon — ICICI Securities — Analyst

Yeah, thanks for the exhaustive response and fair points. And just one update, I don’t know if I missed that in your commentary earlier, an update on the Pudukkottai expansion.

Hemant Jalan — Chairman Managing and Director

Yes, so the Pudukkottai expansion is now it’s very-very final stages. The erection of the machinery, have also all been practically done. Now we are at the last stage of doing the interconnecting pipelines and the electrical cabling and the instrumentation cabling. We were hopeful earlier that we will start our production sometime in December. Although we still press our people on-the-ground to do that and I hope they’re not listening-in on the call but deep down in my heart, I know that that will probably not happen and it will spillover to January. But we are trying to maintain the pressure to commission the plant or at least start some trial production in December although between you and me, I think it’s more likely in January.

It’s a large plant, a very automated plant. Tt will take some time to stabilize so it’s not that we’ll press the button on one day-in January and the full production will rollout, but at the same time, it is something that is not at all a concern, because we have adequate capacity to meet the demand for the next, eight, nine months so even if the plant commissioning of the stabilization of the plant once we commission it goes by a few weeks here and there, we really not dependent on that capacity to meet the demand in the forthcoming quarters at all.

Manoj Menon — ICICI Securities — Analyst

Sir, one follow-up here. At [Phonetic] the full capacity utilization Pudukkottai phase 1 which are having now would expand your like-for-like capacity by what percentage? From today?

Hemant Jalan — Chairman Managing and Director

It is actually very difficult to answer because capacity in the paint industry is a very nebulous term. It depends upon your product mix. The same equipment can be used to manufacture a variety of different paint products and depending upon what product mix you choose the effective capacity changes so that’s a fairly difficult question to answer but in terms of water-based per se and that is what the new plant is coming for, it will — the existing water-based plants that we have both at Jodhpur and Cochin, the combined existing capacity that we have is about the capacity that we are adding Pudukkottai. So in terms of water-based paints, I think it will double our existing capacity and it should take us very comfortably for the next couple of years.

Manoj Menon — ICICI Securities — Analyst

Very clear. Sir one clarification, some of your colleagues are very much there on the call.

Hemant Jalan — Chairman Managing and Director

Yeah, I hope people at Pudukkottai not on the call because we are exerting pressure on them to start by 15th December.

Manoj Menon — ICICI Securities — Analyst

Sure, sure. Thank you, thank you sir. Aman, you can take the questions in the queue, please.

Operator

Sure, thank you. The next question is from the line of Percy Panthaki from IIFL please go ahead.

Percy Panthaki — IIFL — Analyst

Hi sir, am I audible?

Hemant Jalan — Chairman Managing and Director

Yes, yes you are. Please, go ahead.

Percy Panthaki — IIFL — Analyst

Yeah, sir so my question is on your expansion strategy. All this while we have expanded by going into Tier-3, and Tier-4 towns. Our logic at that time was that it’s very difficult for a small player to really expand into the larger towns and therefore we are expanding via the small town route. Now you’re saying that you wanted to shift focus a little bit and expand even in the Tier-1 and Tier-2 cities. So what gives us the confidence that basically, we will be able to do that now because still as a percentage of the decorative industry our market-share is still maybe around 2%, so fairly small market-share. I understand in states like Kerala it would be higher but then in some of the states it could be even lower than 2%. So just wanted some thoughts on this as to your pivot strategy [Speech Overlap].

Hemant Jalan — Chairman Managing and Director

The difficulty in cracking big cities has got less to do with your size or market-share, it has more to do with your brand equity. So the reason that we have always given why we initially focused on going to the smaller towns is that, when we were a small company we cannot afford advertising in those days. For the first 12 to 13 years of our existence, we have not spent anything on advertising because it was not possible, you know we didn’t come from a pedigree background where we had a huge amount of money in our pockets to burn-in advertising. And therefore we had no other options at that stage.

For the last 10 years, we have invested very heavily into advertising and you’re aware of the fact that our A&P spends are almost three times what the industry averages in terms of percentage of top-line even in absolute amounts. The amount that we spent in the last three-four years, has been much, much higher than a few of the larger players who are much larger than us in size. And we have been blessed to have a great brand ambassador, Mr. M.S. Dhoni who has been with us for now what 4.5 years. So with that amount of ad spending that we have consistently done over the last, 10 years, the last 4 or 5 years being with the help of, Mr. Dhoni and his image, I think that the brand equity that we have built across the country is very strong.

Now when you build a brand and invest in advertising that advertising is seen by people not just in small towns, they are seen as much by people in big cities and along with television advertising, we have also been investing a lot in online mediums. So today the brand equity and the awareness of the brand is very-very strong and all genres of cities in India. And therefore we felt that it was the right time to now attack the larger cities and as we go into those cities there is no problem about brand awareness. Everyone is well aware of the brand and some dealers even ask where were you in the last four or five years, why didn’t you come earlier?

So now it is just a question of building the network there, engaging with the influencer community in these bigger cities, which is marginally different from the way in which you engage with influencers in the smaller towns and that is why we have put a lot of feet-on-the-ground to do that and we are beginning to see the results and the effect of that result, in no small measure is the cause for the slightly higher top-line growth that you see in this quarter. And we have been saying for the last two quarters that magic will not happen in three months, it will happen gradually over a slightly longer period of time and hopefully, this breaking out-of-the pack in terms of top-line growth percentage will only accelerate in the coming quarters that’s what we hope for and that’s what we strive for.

Percy Panthaki — IIFL — Analyst

Right sir. One observation is that while you sort of said that, okay I have started with small towns, now I am also focusing on large towns. The large players are doing the opposite. I mean there were more stronger in the large towns but in the last two-three years and even going ahead, I think the larger players are focusing more on the small towns in order to get growth. Do you think that’s some kind of risk or threat to your existing sort of course… [Speech Overlap]

Hemant Jalan — Chairman Managing and Director

I think it is a misnomer that the larger players are only now looking at the smaller towns. I think they have been represented in the smaller towns very well for the last 50 years. If you talk of the existing four large players in the industry who are the so-called organized sector before we came in, they have all been around for more than 75 years in the country, some for 100 years. So don’t please think that there is any corner of India that was ignored by them. The Tier-3 and Tier-4 towns to the best of my knowledge also account for almost 50% of their sales in terms of value or something close to it.

So I don’t think that any of the larger players have ignored or neglected the smaller towns in the past. If they have some vacant gaps here and there than they try to fill-up. Well, that’s an ongoing process that will continue for the next 100 years for all companies that are there in the space. So I don’t think that there is any increased aggression or any lack of penetration of the smaller towns by any of those players. There have been present everywhere and they have been present as much in the larger cities.

For us, that issue has been different. A much smaller portion of our sales came from the larger cities because we had chosen to remain away from it by choice earlier months and now we are focusing there and we hope that in a year or two-hour proportion of sales coming from the larger cities or except [Phonetic] the small towns will become the same as any other paint company, large or small in India.

Percy Panthaki — IIFL — Analyst

Understood sir and finally if you can give some idea on what is the difference in margins or economics of the large towns and why — I mean if at all they are more attractive than small towns for, any paint players.

Hemant Jalan — Chairman Managing and Director

No. I don’t think that there is any difference in margin or spends expenditures of discounts or anything like that and I sincerely doubt whether the larger towns are more attractive or less attractive in the smaller towns for any player. I think everyone has to have the equal focus on both because both contribute almost the same to your overall sales value. Today, when we focus on the larger cities by no stretch of imagination, do we start ignoring the smaller towns because that is the bulk of the sales that we do. It’s just that you have to penetrate the larger cities in a slightly different manner. The difference that comes is the nature of the influencer.

In the smaller town the influencer is an individual painter. In the larger cities the influencer is usually a painting contractor who has 20 to 30 painters employed under him. And therefore the manner in which you have to reach out or the category of people that have to reach out to who influence the choice of brand is slightly different in the big city versus a smart town. That’s how that is.

Percy Panthaki — IIFL — Analyst

Sure understood sir. That’s all from me thanks and all the best thanks.

Operator

Thank you. The next question is from the line of Prashant Kutty from Sundaram Mutual Fund, please go ahead.

Hemant Jalan — Chairman Managing and Director

Sorry, there was some disturbance in the line the questioner, please?

Operator

Prashant Kutty from Sundaram Mutual Fund.

Hemant Jalan — Chairman Managing and Director

Sundaram Mutual Fund, okay.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Thank you for the opportunity sir and sir firstly just a data point, I do not know if you just highlighted that or not, what is the share of differentiated products as of now, that we are having or have you stopped sharing the data?

Hemant Jalan — Chairman Managing and Director

No, we share that at the end of every year. Please go back to our commentary two quarters ago when the year ended. I think it was almost 30% it was 29.6% at the end of FY ’22. The reason we don’t share that on a quarter-by-quarter basis is that these products by themselves have a pronounced seasonality. And therefore, these numbers will go up-and-down in the quarter, by quarter depending upon which products we are talking about and therefore at the end of every year, we share that and we have shared the numbers of what these percentages were at the end of each fiscal for the last four or five years. So you will notice that they have generally risen by half to one percentage point year-on year and I promise you we will share this number when this financial year is over.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Absolutely sir, thank you. The first question is more so on the — on the dealer numbers. So you have obviously seen that number increasing by about are 15% to 20% over the last couple of years now. If you — like you said that you are probably wanting to enter into the — into the Tier-1 markets, let’s say more penetrated markets, so going forward should one assume that that the revenue per dealer or the throughput per dealer would that be a bigger variant to look at or should the number still be considered to be a bigger number going-forward as well?

Hemant Jalan — Chairman Managing and Director

[Speech Overlap] You are very perspective and that is going to be the right way to look at it as we enter the larger cities because in the larger cities the potential of a dealer is usually two to three times the potential of a dealer in the smaller town. And therefore if you add one dealer in a Tier-3, Tier-4 town versus adding one dealer in a Tier-1, Tier-2 town on average you can expect a, much, much higher, almost three times the throughput for dealer in a large city versus a small town. And therefore as we add more-and-more dealers in the larger cities and as more-and-more tinting machines get populated in these larger cities, then the throughput per dealer would jump-up very fast.

Prashant Kutty — Sundaram Mutual Fund — Analyst

So safe to assume that you will have to look at more revenue per dealer number to be growing hereon forward rather than actually — the actual dealer numbers increasing?

Hemant Jalan — Chairman Managing and Director

As an internal metric, we look at both, you have to look at both and ultimately what you look at is none of this, you look at the overall top-line and the overall bottom-line. All of these are determinants to that, and that is the ultimate objective to get higher top-line growth and bottom-line growth, number of dealers is one measure, number of tinting machine is one measure, throughput per dealer is one measure, throughput per tinting machine is another measure, and there are many other metrics that we internally monitor which are all determinants to the final goals.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Understood. Sir this another question is with regard to the fact that again entering into larger towns. And one is — is that product added completely done to probably, be present as for the larger towns you are concerned or probably be accepted the dealers over here, accepting Indigo as a brand in the larger towns and a follow-up to that is that, would it also entail a higher incentive structure to those dealers because we are entering or we feel that now we are a well-known brand and do not have to have a very differentiated incentive structure as compared to get the Tier-2 and Tier-3 market?

Hemant Jalan — Chairman Managing and Director

I don’t think the incentive structure is any different from a small town or relapsed cities. So we have not faced any disparity as far as that is concerned. In terms of acceptance, if you go to any new geography, like for example there were some states that we have entered fairly recently. Take Himachal Pradesh. We have kind of established a depot there just about seven, eight months ago. Now we are — we have not been marketing there. Now there, whether you go to a small town or do you go to a large city, everyone has heard of the brand, but you still have to overcome that initial inertia of a dealer getting familiar with you, starting limited business with you, and then slowly, slowly developing confidence in your surveys in your accounting practices, in your product quality, and then gradually ramping it up.

We entered Jammu and Kashmir one and a half years ago. We faced the same problem there. Six-seven months ago, we have setup a separate depot in Delhi. Now Delhi is completely a very-very large city. It is a Metro. So you go through the same process. So the process is the same whether you enter a new small town or whether you enter large city. There will be — nothing will happen overnight. You will have to talk to the dealers. Dealers are obviously dealing in some other product because you were not present. They will start buying some of your products and gradually scale it up. And that is agnostic of the size of the city, but I don’t think the incentive structure changes at all from a large down to a small town.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Understood and one last question sir, if I may you typically always say that Kerala has been a very strong market for us and has been growing very well for us and we are penetrating into the next — the next largest city as well. Any data in terms of — in terms of how the next 7 cities or maybe in the next year 8 to 10 towns there would actually be helpful if you can help us on that.

Hemant Jalan — Chairman Managing and Director

Towns or cities? Kerala is a state [Speech Overlap]

Prashant Kutty — Sundaram Mutual Fund — Analyst

Towns, states, any… yeah, yeah so, like I said any in the next 10 states or the next 5 states, any such numbers would be helpful.

Hemant Jalan — Chairman Managing and Director

[Speech Overlap] I mean none of them are closed in terms of the contribution of Kerala but we have a fairly large presence in UP, in Bengal, in Assam, and Bihar, Jharkhand, Chhattisgarh, growing fast in places like Andhra, MP, Gujarat is doing well, so there are whole lot of states very difficult to predict. I mean, they’re all around the same level of sales. So you might say there are about 7, 8 or 10 states that compete for the number two slot. And they’re all doing well. Which one will break-out faster than the others to start giving a disproportionate share of our revenue is something that, I can’t predict. But they’re all doing well.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Sure, sure. Thank you very much sir, and all the very best to you.

Hemant Jalan — Chairman Managing and Director

Thanks.

Hardik Doshi — While Whale PMS — Analyst

Thank you. The next question is from the line of Hardik Doshi from While Whale PMS, please go ahead. Yeah, thank you for taking my question. You know you mentioned that the — firstly it is good to see you growing faster than let’s say the industry-leaders and also the overall industry in the quarter…

Hemant Jalan — Chairman Managing and Director

I’m sorry. I am sorry can you speak a little louder, I’m not able to follow your question.

Hardik Doshi — While Whale PMS — Analyst

Can you hear me now?

Hemant Jalan — Chairman Managing and Director

Yeah.

Hardik Doshi — While Whale PMS — Analyst

Okay, I wanted to just ask in terms of — you finally are growing faster than the industry-leader after several quarters and you said that it is because of the focus on the increasing presence in the Tier-1 and Tier-2 cities. Can you break-up what percentage of your revenues is from Tier-1 and Tier-2 cities this quarter versus last quarter and the same quarter last year?

Hemant Jalan — Chairman Managing and Director

I have that numbers but I’m not sure if I want to disclose that publicly at this open forum. But all, I can say is that the growth percentage that we are experiencing in the bigger cities is, much higher than the growth percentage in the smaller towns. But, I’m afraid it will be a little difficult for me to share the granular numbers with you.

Hardik Doshi — While Whale PMS — Analyst

Okay yeah. I mean I appreciate you do disclose a lot more than most of your competitors but…

Hemant Jalan — Chairman Managing and Director

I cannot disclose everything.

Hardik Doshi — While Whale PMS — Analyst

No-no, I understand that but since this is a key focus area for the company it would be good for us to kind of atleast see how you’re getting the traction out here. So maybe if you can consider that. Just secondly wanted to ask sir — now I mean — can you maybe elaborate a bit more than in terms of Tier-1 and Tier-2 cities right. I mean, I understand what you replied to one of the participant basically saying that the brand name was already there and it was just about focusing on the [Technical Issues]. Any metrics you can share in terms of dealers that you were reaching out to our influencers, what are the campaigns, I mean just some more color to help us understand how much of acceleration we can expect going forward and what will be the driver some KPIs around it?

Hemant Jalan — Chairman Managing and Director

As we have mentioned see what happens is that the influencer in that small town is an individual painter usually. So all along our paint cans have a token for the painter, in terms of financial gratification and it is nothing unusual that we do. All paint companies do the same thing. Along with that you conduct regular painter meetings where you’ve got a group of painters loosely associated with the paint counter and you do some demonstration and comparison of your paint versus a competitor’s paint usually by means of a blind test so that they get convinced about the superiority of your quality. So, these are two things that we have been doing religiously for the last 20 years in the smaller towns with the individual painters.

Now when you start doing the same work in a bigger city, there the influencer as I’ve said is a painting contractor who employs 20 to 30 painters. Now the painter tokens that is there in the can is pocketed by those employees, the junior painters. You need a separate incentivization program for the contractor. So from April this year we started putting a separate token as a financial incentive for the contractor. Again nothing unusual it is what other companies have been doing. We have not been doing that till March of 2022.

And, we’ve created an online app by which both the painters and the contractors can scan their respective tokens and redeem those tokens for cash or whatever they want. So all that has been operational. Now when you go to a big city, it is not simply having a meeting with the contractors to convince them on the quality which used to be sufficient with the painters in smaller towns. Here even after you have demonstrated your quality by means of a blind test comparison with some competitor, even if the contractor is convinced, people in big cities, the ultimate how is usually a little more brand sensitive, than a consumer in a small town.

And therefore the contractor needs your help in going and visiting the project site doing some sampling and convincing the house about switching over from some frequency brand that he had in his mind to Indigo Paints. So there is a lot more on-ground activity that will have to engage in, in these bigger cities to crack a site. And for that you need a separate team of people who will not only conduct these meetings with the contractors, but they have the time and the energy to visit the project sites that the contract takes them to, do some sampling sites, talk to the homeowner. And hence the contractor converts that site from some other brands to Indigo.

So that is the difference in color about the activity that you have to do. Now a prerequisite to all of this is already a good brand equity. If you don’t have that brand equity established and you’re trying to visit a site and convince him of a brand that he has never heard of, then the likelihood of conversion is exceedingly low. And that is what is different from a small town versus a big city. In big cities people are a little more brand-conscious and therefore having good brand equity which has been built over a long period of time becomes of paramount importance to break into these cities. The dealer is not the main influencer.

So therefore you have to work on different parameters in the bigger city if you want to make a success of it. And it is that activity that we have been indulging in very aggressively for the last six-seven months and continue to expand the scope of this in the coming months. And that is what gives us the confidence that we will reach the rightful share that we want in terms of market share in the larger cities as what we have in these smaller towns.

Operator

Thank you. We take the next question or the last question from the line of Pathanjali Srinivasan from Mirabilis Investment Trust. Please go ahead.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Sir, I just noticed that, I think sometime in April we told that we will focus more on Tier-2 cities. So, we’ve added about 700 tinting machines in the last six months. So could you — roughly around 2/3 or more of the machines you have added is more of in Tier-2 and Tier-1 cities?

Hemant Jalan — Chairman Managing and Director

Pardon what was the question.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

So we have added around 700 tinting machines in the last six months in our distribution chain so I just wanted to know, is more than — is more than 2/3 of it is being added in Tier-1 and Tier–2.

Hemant Jalan — Chairman Managing and Director

I don’t have that exact figure available which means. Maybe if you reach out to our people in the next few days, they will have to set it [Indecipherable] out that information and give it but I doubt if that number would be as high as two-thirds. But previously the number of tinting machines that we had in the Tier-1 and Tier-2 cities were very-very low and we are seeing a very significant uptick in that. So, therefore, the number of tinting machines being installed now are much higher percentage than earlier, since going into the Tier-1 and Tier-2 towns, that is correct but I doubt if 2/3 of them would be the Tier-1 or Tier-2 towns. But I don’t have the exact number in front of me right now to be able to accurately answer that question.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay, sir. And institutional business have we been able to get anything like off-late, what is the environment like in that?

Hemant Jalan — Chairman Managing and Director

No, we are not we do not pursue institutional sales as a matter of choice. That is we do not sell directly to builders or the government or any large institution like that. If there are inquiries from any institution it is always a routed through one of our significant dealers in that place and we have chosen to stay away from institutional business as of now.

Operator

Thank you. Ladies and gentlemen that will be our last question for today. I now hand the conference over to the management for their closing comments. Thank you and over to you.

Hemant Jalan — Chairman Managing and Director

Well, thank you all for very engaging session that we have had. I hope I’ve been able to answer most of the questions that you’ve had. We are glad to see that in the last few quarters when we were almost in the same bandwidth of growth in top-line compared to the rest of the industry we seem to be breaking out. And the bottom-line growth is what gives us more cost per share than the bottom-line growth is significantly more maybe by a factor of two in terms of percentage terms from the rest of the industry.

I sincerely hope that we will be able to not only sustain this pattern but also accelerate upon it. And look forward to interacting with you again at the end of next quarter. Thank you.

Operator

[Operator Closing Remarks]