The Paints Industry Is Shifting Towards The Organised Sector

Updated: Aug 31 2002, 05:30am hrs
Market leader Asian Paints, has outperformed the industry consistently. With a 44 per cent marketshare in domestic markets, the company has now set its eyes on emerging markets. In an interview with Papiya De of The Financial Express, Vice-chairman and Managing Director Ashwin Dani discusses the factors that has gone in to creating a high performing organisation. Excerpts:

Despite the industry growing by 7 per cent, Asian Paints posted an over 9 per cent growth last year, how have you managed it
The crucial advantage we have is the superior quality of people. Secondly, as a corporate policy we believe investing in systems and processes that is state-of-the-art. We have invested around Rs 8 crore in introducing cutting edge technology to bring in operational efficiencies. To streamline our supply-chain management (SCM) we customised a SCM solution, that is currently comparable to the supply chain of the top rung fast moving consumer goods (FMCG) companies. We have also completed the rollout of an ERP system and all transaction processes of the company are now on the new ERP platform. This has enabled us to prune costs in the entire supply chain. Thirdly, we also have a research and development team of 140 people that allows us to introduce new products suitable for the relevant markets. These have allowed us to reduce our working capital substantially and increased our fixed asset productivity. I believe these are some of the factors that have allowed us to post a decent result.

We are slightly
behind target.
The overall growth rate in
the industry has been consistently falling
Keeping in mind that your international operations have not had a very good year in 2001-02, was this recent acquisition in Egypt a wise decision
Yes we have not fared very well in some markets and our profit after tax is in the negative as far as international operations are concerned. But one has to realise that many of these operations be it Oman, Mauritius or the second unit in Australia, last year was the first full year. Also, due to political instability in some of the countries the demand was adversely affected.

What also needs to be realised is that business in other countries are done very differently. Say for instance, in a country where the currency is getting devalued, I would borrow more and inject money when the currency stabilises. So many of these units are highly leveraged. If you look at our PBIDT (profit before interest, depreciation and tax) you will see that we are making profits and our ROCE (return on capital employed) is 8 per cent. Our operations in Oman and Mauritius are doing much better this year and even our greenfield project in Bangladesh will commence commercial production later this week.

While exploring potential markets we discovered that Egypt lacked the presence of any major MNC in the paints sector. The $ 150 million or the Rs 750-crore Egyptian paint industry is growing steadily and we see a good opportunity for us. Acquisition of this 60 per cent stake in SCIB will give us access to a capacity of 25,000 tonne in a plant which enjoys a tax holiday till 2007 and a dealer base of 1,500.

The company seems to have laid an extra thrust on the exterior paints business in the past few years. Why
With globalisation and Indian consumers being constantly exposed to global products and lifestyle, we did an assessment of the areas where we did not have products that would match with global quality. We discovered that there existed a wide gap between the nature of demand and the availability of products. Cement paints were becoming obsolete in developed countries and within coastal areas cement paints last for just one season.

Our studies proved that consumers wanted better paints and so we launched exterior emulsions and in the process also helped to grow the size of the market. Our exterior paints business is growing well fast and we are the market leaders today in a segment where we were virtually absent five years ago.

Are there any plans for capacity expansions
We have enough capacity in enamel paints for the next 4 to 5 years. However, for water-based paints we will require capacity in another two years. Currently we are looking at probable sites for a new plant but it is yet to be finalised.

In 1998 you had announced a vision of becoming a Rs 2,000 crore company by 2003. How far or how close are you towards reaching it
I must admit that we are slightly behind that target. The overall growth rate of the industry had been consistently falling and last year it was a mere 2.6 per cent. The paint industry which was growing by 11 per cent in the late nineties has slowed down to post growth rates of 7 to 8 per cent and despite outperforming the industry we will not be able to reach the target of Rs 2000 crore by 2003.

Despite several talks of a impending consolidation in the paints industry, there has been no major moves towards it. Why
A consolidation has been taking place in a sense that the industry is shifting to towards the organised sector. Earlier the small scale enjoyed an excise duty differential that would allow them to compete on price.

Now with an uniform excise duty of 16 per cent the advantage that the small scale industry enjoyed is disappearing and they are increasingly finding it difficult to cope with the organised sector.

Consolidation is taking place even in the organised sector. Garware Paints, for instance, has closed down. Even one time big players like Jenson & Nicholson is performing badly.

But I would say that despite several companies scouting for buyers, acquisitions are not taking place because they are not worthwhile at the price at which they are being offered. Some of these companies have such huge debt burden that if they close down, financial institutions will have tough time tackling them.