2% price cut to weigh on margins: Asian Paints chief

Asian Paints has cut prices by 2 percent across decorative portfolios on back of low commodity prices, said the company’s MD & CEO, KBS Anand. In an interview to CNBC-TV18, Anand said that volumes are not likely to be impacted due to the price cut. The price cut has been more towards the economy segment, he added. Anand, however, said that operating margins will reduce by close to 200 basis points. Raw material prices will rise further if crude price moves above USD 40 per barrel. Below is the transcript of KBS Anand’s interview with CNBC-TV18's Agam Vakil and Surabhi Upadhyay.Surabhi: Can you take us through any of the price changes that you have announced recently and what the move is behind them?A: Frankly, we have done about two percent price reduction effective Saturday. It is essentially due to drop in effective raw material prices partially on account of margin of strengthening of the rupee plus drop in commodity prices we have seen over the last quarter. So, taking both factors into account we have reduced the prices by about two percent.Surabhi: Shareholders of course would have been hoping that this reduction in input cost would actually come down to your operating level and help you increase margins. But you decided to pass it on, is that a function of the weakness in the demand in the market and how would you describe that?A: I don't think the demand scenario has really changed from our perspective. It is simply that we feel beyond a certain point very high margins are unhealthy. It gives competitors a leeway to enter. So, we look at it differently and change accordingly.Agam: We know we have seen very good volumes from Asian Paints, particularly in the third quarter. What do you think this price cut could do for volumes. Do you see an increase in volumes given the fact that you have carried on price cuts or you don't think it will be a substantial change in terms of increase in volumes?A: It will be about the same. I don't think there will be any real difference in volume growth. Anyway, we are doing it to the end of the third quarter, so, it is going to be a reflection of what will happen in the first quarter of next year rather than this quarter.Agam: When it comes to the price cuts particularly is it more towards the economy segment or is it more towards the premium products or according to you is this more spread out evenly?A: It is spread out but probably more towards the economy segment.Agam: So, that means I can assume that your margins will not be as hit when you take these price cuts. Of course your premium segment enjoys higher margins for that matter?A: When I am saying a two percent price reduction, I am taking it from the point of view it is a price reduction in my overall margin. I am talking on overall price margin reduction.Surabhi: So, at the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin level how much of an impact could this have, if you could give us some sense?A: It is two percent price reduction.Surabhi: Have you passed on the entire cushion of lower input prices or do you think you can do more in the coming quarters going by how demand shapes up?A: Demand is partially related to our estimation of how raw material prices would go because of the relatively low demand we are seeing in chemicals in China, the commodity prices have weakened over the last quarter. On the basis of that those estimates we looked at price reduction depending whether they deepen further or they strengthen changes in prices will occur over the next quarters.Surabhi: What is your estimate on volume growth itself, you are also going to be starting a new financial year soon and despite the benefit of lower input cost the challenge for the industry really has been to get volume growth back at healthier levels, what is your outlook?A: We have been growing at approximately double digit volume growth this year which is considerably lower than the first decade of the century I agree, so frankly it relates to the overall economic growth since the economic growth Gross Domestic Product (GDP) number has slipped a bit in the last two-three years. I don't think we can grow very much faster if the economy doesn't grow faster.Surabhi: So, when you say double digit growth for FY16-17 are you hoping to be in double digits towards the lower side of it or are you hoping to scale it up or should we just expect lower double digit which will be around the 10-12 percent kind of volume growth number?A: If it is high double digit it would be like the first decade when we are talking of volume growth. So, it is definitely not high double digit. Our numbers are still to grow and we don't really give powered number but on the basis of the first three quarters.Agam: I wanted to ask you a little bit about the crude oil prices. I know we have seen a little bit of an inch up for crude oil and this is directly related to your raw materials. What is your outlook here and how do you think this could impact your margins going forward?A: We have estimated crude at between USD 35-40 per barrel. If it goes up further prices raw material prices will automatically go up with a drop because people are talking between USD 20-50 per barrel. It is very difficult to judge. If you have better estimates you help us.Surabhi: You were just completing your point on volume growth, I know you won't give a very specific number in terms of forward looking guidance but you were saying going by the trend of the last three quarters, if you could just complete that?A: For two quarters we had indicated double digit growth and in one quarter we indicated high single digit growth. So, it gives you an automatic indication.