Crude prices have softened of late and paint companies feature among the top benefactors owing to lower input costs.Abhijit Roy, MD, Berger Paints believes the reduction in crude prices will aid gross margins, however adds that most of the company’s raw materials will have no impact from the crude fall.
Roy rules out any price hikes in the short-term given softness in input prices. Although there is no material pick-up in volumes so far, the paint company is confident of achieving margins in the range of 11-12 percent on the back of their market share having improved to current 19-20 percent, he says in an interview with CNBC-TV18’s Sonia Shenoy and Latha Venkatesh.
While the automotive segment is seeing signs of uptick, a revival in the infrastructure space will abet growth in industrial paint segment, he adds.
Below is the verbatim transcript of the interview:
Q: How important is the cost of raw material in your end product and are you seeing a significant fall, should we expect higher gross margins?
A: Yes, crude always plays an important role as far as raw material prices are concerned. There is some softening in terms of prices, so there will be some uptick in the gross margin.
Q: Can you quantify for the moment assuming USD 99 per bbl; I do not know what your products would be and whether titanium dioxide gets impacted by all that but what is the percentage gain you may expect in margins?
A: Titanium Dioxide does not get impacted by the crude prices. The prices of mineral turpentine oil (MTO) gets affected a bit which is used for a solvent based products – that’s where we get little benefit otherwise most of the raw materials will have not much of an impact.
Q: So will you be able to clock operating margins at 11-12 percent this year?
A: Yes, I think so that should be possible.
Q: What is the percentage of raw material cost that comes from crude derivatives?
A: We have not worked out because with crude there are many other products, which are associated with crude, so those prices are likely to soften now because we have to renegotiate those prices with the vendors.
Q: Apart from the lower crude prices, you have also been taking a lot of price hikes in the quarter gone by. In the month of June, you took 2 percent price hike, so that has aided your margins as well. Any more price hikes that you will be able to execute in the months to come?
A: Immediately we are not looking at it but if prices of raw materials go up then we will have to pass on the price rise to the customers.
Q: What was the cost of raw material to your total expenses?
A: On an average year, it varies from 57 percent to 60 percent approximately.
Q: Coming to the demand side, the first of the festivals has kicked in, Onam is behind us. Have you seen first time buyers come in, have you seen an expansion of the market vis-à-vis same time last year?
A: There is some improvement. The sentiment has improved and in terms of volume gain, it is slightly better than last year but not significantly better.
Q: There are some aggressive targets coming out from bodies like The Associated Chambers of Commerce and Industry of India (ASSOCHAM), where they predict 20 percent compounded annual growth for the entire paints industry over the next couple of years, by 2016. Do you think that could be the growth rate for the sector including a company like yours?
A: There should be improvement in growth rate for sure because there are many developments which are happening which are pro-growth so to say (1) in terms of the smart cities which are likely to come up which will boost growth (2) there is an improvement in the sentiment; consumer sentiment improvement will also result in demand improvement (3) in automobile sector has seen some uptrend already and then we will also see significant traction in the infrastructure sector which is slowly picking up.
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