In an interview to CNBC-TV18, Abhijit Roy, chief executive officer of Berger Paints says there will be some improvement in profits possibly in Q3.
Also read: Berger Paints Bangalore godown on fire
As far as the business is concerned, he says, August-September was relatively slow. "In October, we saw a huge surge in demand, possibly some amount of it was pent-up demand, which did not happen in August-September because of excessive rains in the non-central areas. So, October was reasonably good for almost all the paint companies," he elaborates.
Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.
Q: How consumption is panning out in the second half of the year? You have seen previous festival seasons, there is an all-round complaint of downturn and consumer downtrading, how would you gage consumer mood at this point?
A: As far as the business is concerned, August-September was relatively slow. But, in October, we saw a huge surge in demand, possibly some amount of it was pent-up demand, which did not happen in August-September because of excessive rains in the non-central areas. So, there was some postponement. So, October was reasonably good for almost all the paint companies.
I think in terms of consumer demand per se and we saw it also in the automobile to some extent, there was a lift in demand. We saw some uptick. Will it sustain itself through the period in November-December? That has to be seen. Though upto Diwali, it was quite good in November, it has to be seen whether it holds good now onwards upto December end.
Q: What your main markets are? What is your market share currently at this point in time? What is the volume and pricing power looking like for Berger Paints?
A: We have a market share of around 20 percent in the domestic market. As far as our main markets are concerned, we are relatively stronger in the northern and eastern part of the country and comparatively weaker in the west and the south.
As far as our pricing power is concerned, we have a reasonably good pricing power because we do have 20 percent market share, which is the second highest in the industry. We have some unique brands as well in our portfolio. Therefore, we have some amount of pricing power in the market.
Q: How are you viewing costs and margins? We did see a fall in the price of titanium dioxide, would you say that there is some kind of a receding of cost pressures for you and therefore scope for margins to improve in the second half? Also, how is pricing power?
A: There is a fall in the prices of titanium dioxide. But it is too early to predict how it will behave because it is going up and down, cyclical in nature. It fluctuates with demand and the supply situation.
However, we had some amount of stocks, which were being carried on our books earlier. So, it will start reflecting from now onwards in terms of profitability. There will be some improvement in profits possibly in Q3 as was expected.
As far as pricing power is concerned, I think prices should hold good. We are not seeing any immediate impact or drop in prices.
Q: In general, would you say that cost pressures are receding?
A: No, those are not receding to that extent. I would say the wage pressure cannot recede, because it has been committed already for the period of the year. As far as other components are concerned, including other raw materials, which constitute a significant portion, titanium dioxide is only about 20 percent. There is a significant portion of solvents involved. We have not seen any significant drop in prices as such. So, there will be some drop in prices.
In emulsions, the prices have gone up to some extent. That is a key raw material as well. Prices of monomers, which are used for making of emulsions, are firming. That, in the near future, will have an impact on the emulsion prices again. So, there is no dip in prices across the board. There are few materials where the prices have dropped specifically rutile or titanium dioxide. That will have some positive impact on the results.
Q: In the quarter gone by, your international operations happened to do better than your domestic operations. What sort of earning estimates are you working with in your international operations? Any sort of write-down that you have taken with regards to the godown fire, which took place in November first week?
A: As far as the international operations are concerned, we have three operations; one in Russia, one in Poland and one in Nepal. We are doing reasonably well, across all three, but they are a small portion of our total turnover. Yes, they did well in terms of margin of profit, which saw an improvement in Poland and in Nepal. I think it will sustain itself and this is what we are set out to do. Because it is a small business, we thought to concentrate on the margin part rather than to grow sales aggressively this year.
As far as fire is concerned, the normal process is being carried on. It is fully insured. We hope to recover the full amount.
Q: What about A&P spends? We do understand that you are becoming quite aggressive in terms of expensive brand ambassadors at that. How much of a percentage of sales would you spend on A&P? How much of a margin hit are you willing to take in order to build up your brand?
A: We will be sustaining our A&P spends. We have not cut back. We have increased it marginally, by about 0.2-0.3 percent. We would like to sustain this because this is important that we build up our brands. Ultimately, it is a consumer industry and brand plays a critical role. We need to strengthen our brands.
We have three important and very critical brands to sustain. One is Silk, the other is Easy Clean and the third is WeatherCoat All Guard. We will continue to invest in these. Two of them are unique to us. Therefore, we would like to sustain our advertisement spends on them.
Q: How would you bet second half? Would you say that consumers will come and bite or you do not want to take that bet?
A: I was thinking that, this year, we will meander along, but October was a surprising month. It went up suddenly. We were all scrambling for stocks and supplies. So, it is difficult to predict. But I think we should be coasting along at a reasonable pace, up to March, the way things are as it stands today.