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Paints: Mixed fortunes - Views on News from Equitymaster
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  • Mar 5, 2002

    Paints: Mixed fortunes

    In line with the long-term objective of bringing down the customs duty in line with WTO requirements and Asian countries, the Finance Minister lowered peak customs duty from 35% to 30% in the recent budget. While this could have a significant impact on commodity sector, some sectors are expected to benefit from it. The paint sector is one amongst them. But how far will be the benefit for the paint manufacturers?

    A closer look at the raw material schedule of paint manufacturers like Asian Paints, Goodlass and Berger reveals the picture. Raw material costs as a percentage of sales accounted for more than 50% and as a percentage of total operating expenses, it is as high as 70%. Though crude prices still remain the largest determinant on raw material costs, the lowering of customs duty augurs well for the paint sector. Just to put things in perspective, total imports as a percentage of raw material costs accounted for 83% in FY01. Assuming a 35% customs duty on total imports of Rs 5,783 m, outflow as customs duty works out to Rs 1,499 m. After considering a 30% customs duty, outflow is Rs 1,334 m. Net savings, as a result of a fall in customs duty, is Rs 165 m, 2% of total expenses. Though the calculations are based on FY01 figures, the impact is on the positive side.

    Raw material costs at a glance…
    (Rs m) FY97 FY98 FY99 FY00 FY01
    Asian Paints 4,585 4,876 5,488 6,329 6,958
    % of sales 51.9% 51.4% 52.0% 51.0% 50.2%
    Goodlass 2,267 2,387 2,653 3,208 3,428
    % of sales 50.7% 50.5% 50.3% 53.0% 52.5%
    Berger 1,691 1,862 2,337 2,792 3,119
    % of sales 63.1% 62.1% 63.9% 63.7% 63.6%

    But this should not viewed in isolation. Rupee has also depreciated over the last few months and this, to a certain extent, could negate the fall in customs duty. Though crude prices have remained weak in the current fiscal in light of slowdown in all the major economies despite the output cut by the OPEC, there could be a upward revision in the coming months. Customs duty rate cut also mean cheaper imports, which could exercise a downward pressure on realisations.

    Apart from the lowering of the customs duty, there is not much for the paint sector in the budget. While interest rates on housing finance loans might fall, reduction of Section 88 benefit and dividend tax at the receivers end are likely to affect consumer sentiment. The government has promised higher allocation towards planned expenditure in the coming fiscal toward infrastructure and agriculture. However, going by the past track record of the government, this is far from convincing. Paint industry growth fell from around 12% in FY01 to 7%-8% in FY02. Though we expect the industry to grow at a higher rate in the coming fiscal, the growth potential is being limited on account of various structural bottlenecks.



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