Companies

There is no possibility of further price hike in the immediate future: Berger Paints MD and CEO

Abishek Law | | Updated on: Dec 03, 2021
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‘The latest round of hike should be enough to take care of inflationary pressure and margin erosion’

Berger Paints India Ltd, the country’s second largest paint-maker by revenue and market share, announced a 4 per cent hike in price effective December 5. The hike, which is the fifth by the company in the current year, will take the total hike initiated in 2021 to approximately 18 per cent, the highest in any year. According to Abhijit Roy, MD and CEO, Berger Paints, the hike was necessitated by an unprecedented rise in raw material costs. In an interview with BusinessLine , he spoke about the outlook against the back drop of raw material cost increase and pressure on margins; a change in product mix towards premium offerings, among others. Excerpts:

With the December hike, will there be some stability in decorative paint prices for the coming fiscal and till end FY22?

I think this last round of hike should be enough to take care of inflationary pressure and margin erosion that Berger and the industry witnessed till H1 of FY22. There is no possibility of further price hike in the immediate future. Moreover, raw material costs and supply constraints were beyond our control. We went for the hikes early in Q2 when crude prices were peaking and other commodity costs showed no signs of ebbing.

Do you foresee stability in raw material prices now?

Crude prices are showing signs of softening. I think it is hovering at around $75 a barrel, down from $85 a barrel level. So there should be stability there.

International freight rates continue to be high There will be some raw material price volatility right till Q1 FY23. But this will be more manageable from both an end-user price and margin pressure point of view. However, the situation is dynamic.

Parts of Europe are witnessing a spike in Covid cases; there is the new virus variant Omicron. We do not know the fear psychosis that this has created, or if there’ll be closure of borders; or any other disruptions. There are cities in China that are reporting increased infections. Nearly, 20 per cent of raw materials are imported from there. And there will be some concern there too.

Will opening up of oil reserves help soften prices?

To be fair, it is more of a political or geo-political move rather than bringing down prices. I mean government interventions have hardly helped determine price points of oil. It is more a function of demand and supply. However, it signals displeasure from major buyers which will cool down prices of oil for a short while.

Also, for predominantly decorative paint companies, the direct oil-linked raw materials are just a small part of the total raw material cost. There are other materials like titanium dioxide which are witnessing a rise in prices. Supplies cannot match demand on a global scale still.

Take the case of freight rates and container availability. Rates have moved up from $2,000 a container to $8,000 within two quarters. The rates are still going up month-on-month. There is absolutely no logical reason for this hike; even if non-availability is stated as the reason.

But you have had a lesser hit on margins compared to your larger peer...?

Yes, that’s true. We bucked the trend and took the lead in hiking prices in some of the differentiated products and cutting back on rebates on high volume products. We took a calculated risk asthe toss up was between volume and margins.

Revenue growth of 27 per cent was aided by multiple positive factors, a growing economy, sales recovery in the industrial paints segment and price hikes. EBITDA fell 333 basis points YoY; against the market leader’s 1090 basis points.

Is the strategy — hikes ahead of the market leader and compromising on volumes — sustainable?

The market leader is now aggressive on price hikes. So the need to take price hikes ahead of them is not required. We would like to maintain a healthy balance between volumes and profit. For the future, we are focusing on premium and luxury categories, roped in brand ambassadors and have started getting into high margin adjacencies like waterproofing solutions, adhesives, etc.

These, coupled with the price hikes, should help us get back to EBITDA margins of 18-20 per cent by Q4FY22.

And you don’t see volume impact because of price hikes?

Paint cost is 40 -45 per cent of the actual project cost, rest is labour cost. So an 18 per cent hike in paint prices would mean an 8 per cent increase of total painting cost at the end-user level. So a project cost of ₹30,000 would be up by say ₹2,500. This can be absorbed by consumers. A visible volume impact in such cases is unlikely.

What is the outlook on hikes in industrial paints?

Negotiations are on. Industrial paints are project driven and long-term contracts oriented. As of now there has been an 8-10 per cent hike in auto and about 20 per cent in protective and powder coatings. In protective and powder, we are more or less covered but we will have to go back to auto customers for further price increases. The impact of such re-negotiated hikes is likely to come in Q4 of this year.

Published on December 03, 2021

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