Financial Daily from THE HINDU group of publications
Sunday, Dec 28, 2003
Corporate - Interview
`Paints still perceived as luxury product'
Asian Paints is a household name in the domestic paints industry. Now, with operations in 23 countries across the world, its business is acquiring a global dimension. In a freewheeling interview with Business Line, Mr Ashwin Dani, Vice-Chairman and Managing Director of Asian Paints (AP) shares his outlook on the company's prospects, how various categories within the paints segment fared, the role of marketing initiatives, such as the installation of tinting machines, and, finally, about AP's acquisition-led expansion strategy. Mr Dani's views on developments on the acquisition front will be published next week.
Excerpts from the interview:
Apart from a good monsoon, this fiscal has also seen a rebound in the economy with several sectors performing well. In this backdrop, what can we expect from Asian Paints in terms of revenue and earnings growth for FY04?
The performance of AP has been good for the first six months of the current financial year. With the overall economy expected to perform well, the prospects for the remaining financial year continue to look good. We expect our paints business in India, which accounts for 70 per cent of our revenues to outperform the growth of the paint industry. We expect our international operations to perform well on a comparative basis.
The health of operating margins is heavily dependent on the price of raw material costs, such as titanium dioxide, which has been on the ascendant. To an extent, an appreciating rupee has offset this. Broadly, can you comment on the extent of how sensitive margins are when raw material prices appreciate?
Raw materials, which constitutes around 60 per cent of total cost for the paints industry is an important factor for maintaining operating margins. The basket of raw materials is quite exhaustive. Around 600 raw materials are required by the paint industry and all raw materials are not directly related to crude oil prices. Thus, to a certain extent there is always some in-built hedge in this basket of raw materials. Also, the industry imports around 25 per cent of raw materials. But the most important raw material is titanium dioxide, which accounts for around 25-30 per cent of raw material costs. Prices for titanium dioxide has been rising over the last six months and is presently around $1,850 per tonne.
We expect titanium dioxide prices to remain stable or change only marginally during this half of the year. Also, if one were to analyse the raw material trend then in the first six months of the previous financial year raw material prices were soft. It was during the second half of the previous financial year that raw material prices began increasing and this trend continued through this current financial year. Thus on a comparative basis, the first six months of the current financial year was compared to a period where raw material prices were quite low, resulting in some pressure on margins.
AP has resorted to two price hikes in the last 15 months to pass on escalating costs to consumers. If titanium dioxide prices continue to harden, could we see a further r''ound of price hikes, or would the company absorb such costs?
In the last 15 months, AP increased prices of its finished products twice in September 2002 by around 1.3 per cent and in May by some 3 per cent. Prior to that, between November 2000 and September 2002, AP twice decreased prices. When one compares the increase in raw material costs and the prices increase, it is evident that AP has absorbed significant portion of the increased raw materials costs. As mentioned earlier, we expect raw material prices to remain relatively stable during this half of the year.
Was there any perceptible drop in demand after the price increase?
We did not witness any perceptible drop in demand after the price increase. Just prior to the price increase, there is always a spurt in sales as dealers stock inventory before the price increase. Thus, after the price increase has been effected there is a fall in demand for few weeks which is normal and anticipated.
How active have unorganised players been in recent times? Will price hikes give them an edge, at least among paints at the lower end?
The unorganised sector is a strong force and controls almost 35 per cent of the industry involving an estimated 2,500-3,000 players. A decade earlier, the unorganised segment used to have a much higher share of the market but this is slowly changing. Today's consumer is evolving and has become quality and brand conscious. In addition, the reduction of excise duties from a high of 40 per cent to 16 per cent in the last decade has reduced the advantage of the unorganised segment. Increase in raw material costs will equally affect both the organised and the unorganised sector.
If one reckons the offtake of housing loans as an index for housing demand, the numbers suggest that demand is robust. Is there a specific reason why, in spite of disbursal of housing loans growing at a healthy 30 per cent, demand for paints a direct beneficiary of the housing boom continues to grow at only 11-13 per cent?
It has been noticed that there is a lag of two-three years when the consumer paints his house.
Also, it must be remembered that property prices are different at different places in the country, whereas the volume of paint, which goes into a particular dwelling is nearly constant. These two important factors must be considered when relating the growth in disbursement of loans and the demand for paints. But to an extent there is definitely a co-relation between the disbursal of housing loans and the painting process.
The exterior paints segment is one of the fastest growing within the paints industry. In the half year, how has AP's performance been in this category, especially those of the premium paints launched in this segment?
Asian Paints has expanded its range of products for the exterior segment to capture growth in this segment. It has just launched the textured variant of Apex to further expand its product range for this segment. For the first six months of this financial year, exterior finishes continued to grow by over 25 per cent.
There has been a sharp surge in the sales of automobiles this fiscal. To what extent has Asian Paints capitalised on this boom? Have any new agreements been entered into with OEMs? What would your market share be in this segment?
The automotive coatings business of AP is solely serviced by Asian PPG Industries, the 50:50 joint venture company between Asian Paints (India) Limited and PPG Industries, USA. Its competitive edge lies in the latest technology from PPG and AP's high quality service and in-depth knowledge of the market. While the OEM market remains Asian PPG's biggest customer segment, the company has made significant headway in the refinish segment. New products launched with a view to increase the product portfolio and introduce new features and shades have performed well.
The industrial coatings business of the company, which includes automotive coatings has posted growth in excess of 20 per cent in the previous financial year. The industrial coatings segment is expected to continue its good performance during the second half of the year.
With the emphasis on infrastructure development, are there any other avenues that have opened up, on which Asian Paints can cash in?
Our efforts in research and development are focussed on developing new exterior finishes, economy emulsions, distempers and wood finishes, which we have successfully introduced in the market.
New finishes and new segments are emerging due to the focus on infrastructure development, which AP will capture for further growth. Most importantly, awareness levels of paint as a preserver rather than a decorator are low in the country. To many, paint is still perceived as a luxury product, which is largely not the truth.
The paint industry in India still has a lot to do to promote usage, which by itself is a huge opportunity.
What are the distinct changes in consumer behaviour that you notice after the launch of tinting machines? How have these machines benefited Asian Paints from a production/supply chain perspective?
The primary objective behind launching the Dealer Tinting Systems was to provide our consumers with the choice of shades; revolutionise the way of retailing paints and make "Colour worlds The paint retailers of the future." Our customers have acknowledged this effort, which has enabled AP to gain market share in the decorative segment.
We have taken the paint market to a new dimension into the age of retailing by providing the consumer a service interface. The consumer involvement in the painting process has also increased over the years primarily due to various initiatives undertaken by the company like the AP Helpline and the AP Home Solutions.
Also, the Colour World concept has helped in postponing the commit points of our customer as late as possible in the supply chain. Thus with only a limited set of bases and colorants, manufactured and transported throughout the supply chain, Asian Paints has provided a choice of innumerable shades to the customer through a technology of tinting at the last retail store.
We have been able to bring down the inventory levels of dealers that have installed this machine, which helps in better working capital management for the dealer and simultaneously he is able to cater to all consumer requirements.
(To be continued.)
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