The Hindu Business Line : Rising input costs may impact Asian Paints

ASIAN Paints (India) Ltd (APIL) has identified macro-economic environment, further rise in input costs and the unorganised sector as the three risk factors that could affect its performance during the current fiscal.

"If India's GDP grows at significantly less than 6.5 per cent to 7 per cent in 2004-05, then the industry may not see adequate growth in demand for decorative paints," APIL said in its annual report for 2003-2004.

Rising input costs also could put pressure on APIL's operating margins. During 2003-04, most of the raw material prices headed northwards. The material consumption to sales ratio increased from 53.8 per cent to 56.8 per cent. The operating profit margins fell to 16.7 per cent from 17.9 per cent.

The company said that the overall decorative paints market did not grow as per expectation. "The overall market ought to have grown by about 8 per cent to 10 per cent in volume and about 13 per cent to 15 per cent in value. Given the low paint penetration in the country and the growth in India's GDP by around 8 per cent, there should have been higher growth in sales of decorative paints," APIL has said in its annual report.

The company has enlisted five reasons as to why this growth did not come about - extended monsoon; low interest rates resulting in buying of consumer lifestyle products; prolonged transport strike in the first quarter of 2003-04; revival of paint companies in the decorative coatings segment; and consumers not spending.

The company also pointed to the fact that it faced competition from lower priced products of national and regional players in the area of distempers. "To overcome competitive pressures in this category we have devised a strategy to defend our market share in this segment — reduce prices from May 2004,'' APIL said, adding that it has reasons to believe that lower prices combined with its brand and distribution strength will help it to expand this segment and gain market share from competition.

But overall, the current fiscal looks attractive for APIL. "If rains are good this year, we expect a surge in rural demand which should benefit the paint industry. The boom in housing finance would aid growth for the construction industry and would have a positive effect on demand for paints," the company said in its annual report.