Falling crude impact on oil paints to reflect in Q3: Berger

Abhijit Roy, Managing Director, Berger Paints in an interview to CNBC-TV18 spoke about the likely benefit of fall in crude prices for the company going forward.According to him it is very difficult to pin point the drop of oil price impact immediately but it is sure to impact some of the raw material prices which are used for oil paints and so that will see an immediate drop. It will be passed on to the customers in a short timeframe. However the other elements of raw material and derivatives like emulsion which is used in water paints will have a lagged effect, so the impact will be seen in fourth quarter and not the third quarter, he said.The benefit of slide in diesel prices to have positive impact on freight costs.  So far the company has derived 1.2-1.3% EBITDA to sales benefit from the drop in crude, he added.According to him the gross margins will see an expansion if the crude prices and dollar levels sustain. On the demand front he said there has been no significant change on industrial side but decorative paint volumes will continue to grow at double-digits.

Below is the transcript of Abhijit Roy\\'s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: It’s been great times for paint companies like yours considering the amount of fall that we have seen in crude prices but can you quantify for us how much will every dollar fall in crude prices or every barrel fall in crude prices impact your margins and your earnings per share (EPS) as well?A: There are two areas in which it has an impact – (1) on the raw material prices and some of the raw material prices like the solvents which are used for oil based paints, those will drop immediately as per the crude prices drop because that’s passed on normally within a very short timeframe.The other elements of the raw materials and the derivatives like emulsion which are used on water based paints – that has a lag-ffect and it will probably come into the fourth quarter and not immediately in this quarter. Therefore, it is very difficult to pinpoint when the oil drops what will be the impact immediately because a part of it comes in this quarter and the rest of it will flow into the next quarter. (2) The other element which is likely to impact us is the freight cost reduction which might happen because diesel prices going down. So that is also an impact which will be beneficial for us.Latha: Can you quantify it in terms of what you have already seen in the third quarter?A: About 1.2 to 1.3 percent EBITDA to sales – that’s the benefit that we have got.Latha: Let me look at it differently – your gross margins improved by 160 bps year-on-year in Q2, what is your estimate for Q3 and Q4?A: If the prices hold through and if the dollar holds these levels then it will move up further. The gross margin expansion that you saw in Q2 was not so much on account of the raw material price drop but more on account of the mix change which happened and some of the industrial businesses which were struggling earlier started showing signs of little bit of revival both in terms of price and in terms of volume. So that is why the gross margin expansion took place.The third quarter expansion – a part of it will be the benefit coming in to the industrial business and also other decorative business also but most of it will come now from the raw material and freight advantage. Latha: Your gross margins were at 41.2 percent in Q2 and since you said 1.2 percentage points, should we expect 42.4 as of now for Q3?A: That is right. Sonia: Also on operating profit margins (OPMs) which were at about 11.5 percent, by the end of the second half of the year where do you see them stand and also if you can give us a slightly longer term view. On an average if crude prices have trended lower by the end of FY16 what kind of a margin profile Berger Paints will stand at?A: This is a very difficult question to answer because the operating profit does not depend only on the crude prices remaining stable or dropping because normally history would show that we tend to pass on these benefits to customers to drive up volumes. Operating margins depends on essentially four factors, the topline, the cost that we are able to control non essential cost. The raw material cost of course is a factor, which is very important and the mix which we have. All factors come into play, so it’s very difficult to isolate one.Stay tuned  more