Berger Paints expects the robust 11 percent volume growth in the June quarter to sustain as good monsoon is likely to boost demand from rural areas, the company’s MD & CEO Abhijit Roy tells CNBC-TV18.The March quarter numbers were short of market expectations, but the company has been able to make amends in the June quarter, with net profit rising 34 percent year-on-year to Rs 77.3 crore. Quarterly revenues were up 5.8 percent year-on-year."In the domestic market, the volume growth was in double digit at around 11 percent,” says Roy, adding that volume growth was higher than value growth because of the price cut in March. Shares of paint companies have had a good run on the bourses since the start of the year as the industry is benefiting from lower raw material prices, particularly crude oil.So far in 2015, Berger Paints shares have risen around 13 percent and Asian Paints by nearly 20 percent, compared to a 4 percent rise in the BSE FMCG index during the period.Roy says rural growth was beginning to slowdown, but with good monsoons, demand should pick up. Berger Paints predominantly is a decorative paints company. However, this time around it has seen a significant uptick in protective coatings demand in the infrastructure sector. "There is some movement forward. It is still early days, but it is improving," says Roy.Brokerages view:Sudip Bandopadhyay of Destimoney Securities is bullish on both Berger Paints as well as Asian Paints. Paints stocks will continue to benefit significantly from the fall in crude oil prices, he says. "Apart from that what is happening, all the initiatives which the government is going to take, particularly in the area of smart city, that is going to benefit the leading paint companies in a big way over the next few years," he explains.JM Financial has a buy rating on the stock with target price at Rs 245. According to the brokerage house, the company's revenue was in-line while profit was 3-4% ahead of estimates. "Domestic revenue growth trajectory (7.8 percent) was better versus Asian Paints (7 percent) again this quarter, though the degree of outperformance is narrowing. Berger’s consolidated GPM expanded merely 274 basis points – a key disappointment, in our view, given the sharp decline seen in prices of its key inputs," JM Financial says.(Written by Devika Ghosh)
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Below is the verbatim transcript of Abhijit Roy's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18
Latha: Revenues have grown by 5.8 percent consolidated, can you tell us how much volumes grew? I don't know whether you measured it in litres or what but what was the percentage growth in volumes?
A: The 5.8 percent that you mentioned is basically the consolidated sales, if you look at the standalone that is about 8 percent. In domestic market the volume growth was in double digits, about 11 percent which we measure in terms of hash total which is litre plus kg put together. The mix has been changing a little bit in towards kgs because of the sale of putty and low-end products of that nature and therefore the volume growth is much higher than the value growth. Of course we had a price drop of about 2 percent in the month of March which also pulled down the value growth a little bit.
Latha: Would you say that you will be able to maintain this kind of a double-digit volume growth in the remaining part of the year, even improve on it?
A: Yes, we hope so. The rains have been pretty good so far and looks like it will continue in this manner, so if that is there, rural demand will pick up a little bit in the second half which as of late slowed down a little bit. Hopefully that will pick up in the second half and if that happens, we will improve on the current volume situation.
Sonia: Between the decorative and the auto and industrial paints business, which is the segment where you see a pick up as we head into the festive season?
A: For us it is decorative sincerely because we are predominantly a decorative company, however we have some significant uptick in terms of the protective coatings demand, not so much-we are not there in the car segment so much, we are more present in the two-wheeler and commercial vehicles space in the auto category and there it hasn’t shown any great traction so far in the two-wheeler category at least in terms of growth.
In the protective coatings area we are in the infrastructure sector, there we see some movement forward with early days but it is improving.
Latha: You have got of course a decent margin gain because of falling raw material prices, your gross margins are up three percentage points? How much of this will you invest in advertising and how much will you keep to the bottom line?
A: We have our own policies, we don’t actually rely too much on quarter to quarter operating margins going up or down, we have an annual plan which we follow and that is something which we will continue. We will invest substantially in terms of advertisement, we are introducing a new concept called Express Painting this year something different and new on which we will spend some amount of money.
Latha: What is your percentage Mergers and acquisitions (M&A) expenses?
A: Currently it is reasonable.
Latha: You don't have a number, some percentage of sales?
A: It is around 4.5-5 percent, that is not very high if you look at it.
Sonia: Your international subsidiaries have been under pressure for a while, when can we expect to see some of those subsidiaries give out profits and can we expect any recovery within FY’16 itself?
A: We have three, one in Nepal, one in Poland, one in Russia. The Nepal thing it was a very profitable operation but unfortunately due to the earthquake it got affected a bit. That will come back very fast, already on the way of mending itself, so I don’t think there is any problem as far as the Nepal operation is concerned, it is a very profitable operation, more profitable than the Indian operations, so that is not an issue.
Poland has been making profits, it is not that it hasn’t made profits, it has been making profits but the profit percentage can go up a little bit. Europe as you know is not in the best of health, so therefore it struggles a bit in terms of increasing its pace but it is profitable company, it is only the Russian operation which is in trouble. It is a very small operation, miniscule in terms of total size. It is about 5-6 crore, so it doesn’t matter too much for us.
Latha: How are the rural markets doing? We get contrary views depending on which product you speak to, as a whole how have the rural markets done and which are the geographical pockets that did well for you?
A: Rural market as it was growing earlier, it was growing at a very rapid pace, that has slowed down a bit, there is no doubt on that but it is still growing at a faster pace than the urban markets. So, that is in short what it is like the rural market. Of late in the last 7-8 months little bit of slowdown from the earlier pace which it was having but hopefully it will improve in the second half.
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