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…
% of sales
% of sales
% of sales
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.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407