Festivals to help boost growth in Q3: Berger Paints

Abhijit Roy, MD & CEO, Berger Paints speaking to CNBC-TV18 on the outlook for the business going forward, said although there has been a marginal improvement in the business demand they are not yet completely out of woods and growth is yet to pick up significantly.However, the growth in third quarter is likely to better than the first two quarter of the fiscal on the back of upcoming festive season, said Roy.He said the company has always managed to retain higher margins because of continued product mix and constant innovation.He does not see much reduction in prices due to softer crude prices because whatever had to be passed on in terms of prices have already been passed through, said Roy.Speaking to Latha Venkatesh who is hosting from Kolkata for CNBC-TV18’s ‘Inside Kolkata Week’, he said although there seems to be an overall optimism and improvement in infrastructure in West Bengal, it is yet difficult to envisage investment climate.The Indian paint industry is likely to be a beneficiary of government’s Smart Cities and housing for all missions. It will also gain from the pick up in discretionary spending over the next few years.Below is the transcript of Abhijit Roys interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Sonia: We were speaking with the management of Eveready who have indicated that things have improved substantially in the state of West Bengal as far as investments are concerned and a lot of corporates are now increasing their capex expenditure over there, is that your feedback as well? A: It is improving from what it was earlier definitely that is visible. Overall infrastructure has improved considerably. There is optimism in the air, at least things are happening now but investments -- how much of is happening and how much is going to happen is difficult to say at this stage. Latha: I wanted to ask about business itself, not just in West Bengal but the paint demand -- not the best of seasons of course but if you have to look at this on a year-on-year (Y-o-Y) basis, monsoon to monsoon or Q2 over Q2, are you getting a sense that things are picking up at all? A: Marginal improvement has happened. There is sign that it will look up, I won't say that we are out of the woods and galloping at a fast pace but definitely not despondent either. So the growth is fine. Latha: We saw falling pace of demand for the last several quarters. Has that stopped, are you beginning to see at least an uptick in numbers, in volumes? A: It is difficult to say. July was pretty good but August there was a bit of a blip again, September looks good so far. So it is difficult to predict completely but there is a postponement of Diwali this year. Diwali is in the month of November. Therefore our major sales will happen in September and October. This is a crucial month for us. We will get a fairly better indication once September is over as to how things are moving. Latha: You have had an advantage of falling raw material prices, are you going to pass on some of this in the form of lower prices to improve volumes?A: Yes, we had an advantage, we probably are going to have that advantage right upto September end. October onwards the prices have started dropping already so going forward that advantage will not be there with any of the companies for that matter. So there will be some advantage because prices have continued to drop a little bit so that advantage will continue but the major gains that you are seeing would have happened in the first six months of the year.Latha: I agree that in terms of lower raw material prices, the advantage has come in but how much are you passing on?A: We have passed on quite a significant portion of it to build-up demand and that is normal because it is a very competitive industry. I don’t think either of the four major players who are there will let the other sleep in peace. So therefore it is a tendency overall that you tend to drop prices if you make too much of margin there. Therefore most of it that could have been passed on has been passed on and rest we need to conserve a little bit not knowing how the dollar/rupee parity will work because going by that direction, it might further depreciate.Latha: Has that dropping of prices helped in terms of volumes?A: Little bit but not very significant because demand has to build up before anything great happens.Sonia: To build on that point a little bit, you get 80 percent of your business from the decorative paint segment and when we spoke to you last, you had indicated that you don’t see too much of a pick up in volumes, given that we are heading into the festive season, what kind of average volume growth would you forecast for Q2 and Q3 for yourself?A: We don’t normally forecast anything in terms of actual figures but what I can say as a trendline has been that whatever we were doing on Q1 or the quarter before that is probably going to continue upto the end of Q2. Q3 is likely to be better in the sense that last year, Diwali was preponed a little bit, this year it is in the middle of November. So October should be a very weak month and November also probably might be a fairly decent month this year. So October, November, December, which is Q3 is probably going to turnout better for most paint companies especially the decorative oriented ones.Sonia: You recently commissioned your water-based paints unit in Andhra Pradesh. How will that help you in terms of improving your product mix and hence improving your margins as well?A: That is one of our most modern plant, it brings down the cost of production significantly also in the south, we were not having enough facilities to service the market locally whether it is Andhra Pradesh or Tamil Nadu or even Kerala where we had a fairly significant player. We had the issue of supplying material, we were supplying all the way from Goa and Gujarat, which become an issue at times. So this is going to help us also reduce freight cost, also service the market faster. Southern markets are important for every companies, especially the decorative theme and as the demand picks up in Andhra Pradesh, Tamil Nadu, Karnataka and Kerala, overall this factory will become a great boon for us.Sonia: Since you will manage to reduce your cost such as freight cost etc, how much do you think your margins could improve because even in the quarter gone by, your margins improved quite a bit to almost 13.5 percent, are we looking at 15 percent margins within this fiscal itself?A: Yes, we are trying to inch it up. Our objective is to take it up every year systematically instead of doing something dramatic. If you observe, for the last four years we have been taking up the margin in spite of the sales growth being one of the highest in the industry, we have managed to retain the margin at a very high level.This is what we have been trying to do by doing two things. One is the mix change, which is happening constantly, which is in the positive direction of the premium product essentially which we continue to sell, and the second is constantly innovating, we have brought about a lot of new things into the Indian market.The next one which we are bringing in is Express Painting, which is a new way of painting. If you look at painting process, the painting process is troublesome as far as Indian consumers are concerned for two reasons, one the dust, which is thrown around and the mess which is created at the time of painting and the second part of it is related to the time, which is taken. So typically a person living in a flat in Mumbai gets exasperated with a process itself.What we are trying to do is to remove this pain from the process of painting and we have got this automated equipments, which helps in removing the dust completely as it is attached to a vacuum suction which removes the dust. Secondly, the automatic rollers, which completes the job in far lesser time than what is required normally. So you have 40 percent saving on time and coupled with that no dust and all unbelievably at no extra cost to the customer. So that is something which we have innovated and we are going to advertise this heavily from October 1 all over India. We are training about more than 10,000 painters to use these equipments through 20 training centres which we have established across the country. So it is a comprehensive plan, which looks at the painting process completely differently.