Managing working capital is key to success in paint industry

Updated: Nov 20 2005, 05:30am hrs
With the current housing boom along with an increase in disposable income and favourable housing finance policies the Indian paint industry has been one of the fastest growing industries. Ashwin Dani, vice chairman & managing director, Asian Paints Limited spoke to Tina Jain about the company's future outlook. Excerpts:

Operating profit margins of the company are on the rise. What is driving the margins when crude oil prices are high and generally expenses are growing faster than sales

Asian Paints' objective is to drive volume growth while maintaining margins. In the last financial year we increased prices of our decorative products by 6% and in June 05 we increased prices by 1.25%. This has helped to alleviate the impact of increasing raw material costs. With crude oil prices still ruling high, there will be some pressure on margins.

However, higher volumes generated will help us get better operating leverage and will reduce pressure on margins. Also, it must be noted that there was a reduction in peak custom duty this February by 5% to 15%. Asian Paints imports around 25% of its raw material and nearly all its raw material attracts peak custom duty. Hence the duty cut has been beneficial for the company. In the recent past, a number of raw material prices which are not crude-dependent have fallen and this has also helped the company.

Do you see further increase in prices on account of escalating crude oil rates in the coming future When was the last time you increased prices and why

In the last financial year FY05, we had seen the steepest rise in raw material prices than ever in the past. Both crude and non-crude based raw material prices increased significantly. This year, for the first six months, raw material prices have been benign and most of the raw materials except solvents have been stable or have declined marginally. Our last price increase was in June 05 by 1.25% for all decorative products. Any decision for a price hike in the future will depend on raw material prices and market dynamics.

What is your market share in industrial paints segment That is a very fast growing market. What are your plans for this segment

For the paint industry in the last two years we have seen industrial coatings growing at a much faster pace than decorative coatings. In this financial year, we feel that both segments will grow at around the same rate. The industrial coatings market is still small as compared to other countries. We feel there is plenty of scope for industrial coatings to grow at a much faster pace. Asian Paints portfolio in the industrial coatings segment is well balanced and not tilted heavily to one segment. The company is also the second largest player in road markings. The industrial business of the company is growing by around 30% for the first six month of the current financial year. And this business has been growing at the rate of 25% per annum for the last three years.

How do you see the changing face of an Indian paint industry from commodity business to FMCG set up

Asian Paints has always viewed the paint industry from an FMCG set-up standpoint. This is the reason why we have continuously focussed on managing working capital and costs. Brand building has always been our thrust and over the years, we have built some of the most successful brands in the paint category. Managing working capital is critical to be successful in the paint industry, primarily because you have to manufacture a range of products in different sizes and shades. Also there are a number of raw materials used for the manufacture of paints. Hence inventory management is important in our set-up. Consumer awareness about paints has also increased significantly and we are seeing an increasing number of consumers directly visiting paint dealers whereas this was not the trend few years ago.

What are your expansion plans

Presently we are setting up two new plants in India and have recently commissioned a new plant near Chennai. The Sriperumbudur plant commenced operations early this year for an initial capacity of 30,000 kl. We are in the process of ramping up the capacity to 50,000 kl in the next financial year. This plant will produce only water based products and is being set up in phases. It will have a final capacity of 100,000 kl making it our largest plant in the world. We are setting up a new powder coatings plant in Baddi in Himachal Pradesh through our wholly owned subsidiary Asian Paints Industrial Coatings Limited. The new plant will have a capacity of 6500 mt and will be set up in two phases. We are also setting up another industrial coatings manufacturing facility in Taloja, Maharashtra. This plant will also be set up in two phases and will have a final capacity of 30,000 kl.

At present globally, the paint industry is valued at a P/E of 10-12. How far is the Indian paint industry valuations reasonable

The Indian paint industry is growing at a rapid rate surpassing the country's real GDP growth by 1.5 to 2 times on a year to year basis. Globally the paint industry has been growing by around 3%, with the developed countries' paint market registering growth lower than 3 %. Hence the average P/E for the Indian industry which is around 18-20 times forward earnings seems justified considering the enormous growth prospect.