After Kansai Nerolac Paints entered in talks with auto companies to raise the paint prices, the stock has been rallying substantially. HM Bharuka, MD of the company told CNBC-TV18 that the fall in titanium dioxide (Tio2) prices will benefit decorative paints segment (for household and office premises).
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When talking about the expectations from Q4 in terms of the combined operating margins, Bharuka says, the company should be able to maintain whatever it has achieved in Q3 and does not think there would be any improvement. Bharuka also mentions that while Tio2 prices have gone down from USD 4200 to USD 2800, rupee depreciation has also affected the profitability of the comapny.
Below is the verbatim transcript of HM Bharuka's interview on CNBC-TV18
Q: What is going so right for all the paint companies? Are you seeing a sudden, sharp fall in titanium dioxide prices?
A: May be it is not going right for the others but it is going right for the industry. It is more negative for others than positive for the paint industry as of now.
Q: What is the trend in the titanium dioxide prices itself, how have they moved, what is the price this quarter compared to last quarter, has there been a fall in the last few days?
A: Too much has been read into the fall in titanium dioxide (Tio2) prices. We need to look at Tio2 prices, from USD 1700-1800 it has gone up to USD 4200 and from there it has come down to USD 2600-2800. That is temporary, infact the prices have started rising again. So, whatever slowdown we are seeing globally and the inventory got created and the result of that Tio2 prices have gone down. However, off late it has risen again. So I don't think we need to read too much into the fall in Tio2 prices as of now.
Q: What period did it fell from USD 4200 to USD 2800 and when you speak of a rise, what period and how much are you talking about?
A: In last two years, it has gone up from USD 1700 to USD 4200 and in last six months it has gone down from USD 4200 to USD 2600. So, the fall is also very sharp and the rise was also quite quick.
Q: What is the rise since you said, it has started recovering recently?
A: About 8-10 percent increase that has been discussed as of now. But from USD 1700 to USD 4200 you also need to understand rupee has depreciated by about 25 percent in last two years so that has also affected us. So while Tio2 prices have gone down from USD 4200 to USD 2800 now, the rupee depreciation has also negated that. We have to look at the total landed cost for the industry.
Q: Will it be wrong to say that on a quarter on quarter basis your margins could see an improvement? For analysts tracking one of your peer companies, say that about 20 percent of your raw material cost is Tio2. Quarter on quarter margins could improve by about 100-150 bps. Will it be wrong to say that?
A: As far as we are concerned, there are two segments we are dealing in, one is decorative and another is industrial. When it comes to industrial, Tio2 consumption is not much while in case of decorative, 20 percent comes from Tio2. So, to that extent Tio2 is positively affecting the industry but there are other raw materials like crude oil that has not fallen, but gone up. Overall, there would be some improvement on the profitability when it comes to decorative but whether that would be 100 bps, we will have to wait for the quarter to come and show.
Q: Is there any movement towards increasing the pricing of paints? Your raw material costs have been slightly reduced, so is there any macro support to go ahead and try and increase prices or will you keep it stable?
A: In the last two years, industry has been showing volume growth of about 15 percent and value growth of about 25 percent because we were able to pass on in case of decorative increase. However, in last six months the growth has gone down, the volume growth has come to single digit so that is putting pressure on the overall overheads, affecting the profitability. All other costs are rising, diesel prices have gone up, employee costs are rising and that is putting pressure on the overall profitability.
If you do not get the volume growth it will have a huge impact on the profitability. So far, we have restrained from increasing the prices because of the volume growth. But if volume growth slows down then industry is in a dilemma, there is no volume growth so you cannot increase the price at the same time because there is no volume growth and it is affecting the profitability. So, we will have to wait and watch. As of now, chances of reduction because of Tio2 are removed.
Q: Your third quarter margins came in at 11 percent, what will they be in the Q4, what do you see it in the coming quarter?
A: We deal in industrial paint largely where we have almost 45 percent of our sale coming through industrial paint. In case of industrial, we have not been able to pass on the entire rise for past two years and that has affected our profitability.
Q: What will be your combined operating margin for the company for the fourth quarter and if possible for the next quarter?
A: We should be able to maintain whatever we have achieved in Q3 and I don't think there would be any improvement.