Though the Finance Minister did not reduce customs duty on titanium dioxide, which the paint industry was expecting, the direct and indirect tax proposals coupled customs rationalisation for the automobile sector, have come as a positive surprise for the Indian paint companies. The post budget reaction of CEOs of the Indian paint companies says it all.
One of the most important aspects that are expected to benefit paint companies significantly is the removal of the surcharge of 10% on customs duty on all items. Till now customs duty on titanium dioxide was 38.5% (35% plus surcharge of 3.5%). Since paint companies rely heavily on imports, the recent rise in crude prices as well as rupee depreciation has strained operating margins in the current year. This is apparent from the first nine months performance of the paint companies. Except for Asian Paint, other paint companies have reported a drop in margins between 100 to 200 basis points.
Titanium dioxide prices, in the current year, have gone up from US$ 1,650 per tonne to around US$ 2,000 per tonne, a growth of 21%. With the reduction in customs duty, operating margins are expected to improve by around 1%-1.5% in FY02 (the surcharge removal will also reduce prices of other raw material used in manufacturing paints like resins and oils).
Besides, the reduction in corporate tax and dividend tax rate is expected to boost net profit of paint companies significantly. We expect the net profits of Asian Paints, Goodlass Nerolac and Berger Paints to go up by 4%, 5% and 9% respectively in FY02. The Reserve Bank of India announced a 50 basis point cut in bank rate from 7.5% to 7%, which is also expected to reduce interest costs in coming years.
Further, the reduction in excise duty on cars and scooters coupled with the incentives provided for the infrastructure and agriculture sector, are also expected to kick start volume growth in FY02.
The other important aspect to note is the increase in exemption limit for interest payment of housing loans from Rs 100,000 to Rs 150,000. This will provide the necessary impetus for the construction industry, which in turn will benefit paint companies. Overall, one can expect a colourful year ahead for the Indian paint industry.
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