"Sales led profit growth reflects a significant component of our third quarter performance" - Views on News from Equitymaster

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  • Mar 14, 2000 - "Sales led profit growth reflects a significant component of our third quarter performance"

"Sales led profit growth reflects a significant component of our third quarter performance"

Mar 14, 2000

Credited with the sterling performance of Goodlass Nerolac over the past three years, Mr T. R. Venkatesh, Managing Director has been primarily responsible for the company's aggressive foray into decorative paints while maimtaining its market leadership in the industrial paints segment. Originally an appointee of the Tatas, Mr Venkatesh continues to enjoy the confidence of Kansai Paints, after it took majority control in the company. In an interview to equitymaster Mr Venkatesh, Managing Director, spoke about the current scenario in the paints sector both industrial and decorative, expressed concern over the incessant rise in crude prices and commented on the company's excellent third quarter performance.

EQM: What is the current scenario of your raw material prices especially titanium dioxide and pentarythritol in the light of the rise in crude oil prices?

Mr. Venkatesh: The hardening of the crude prices has been happening since the past one year. That's the real issue. Crude prices have jumped from $9 a barrel to $ 30 a barrel over the past one-year. This is a major concern for all paint manufacturers. So far we have been fortunate that the cost increase has not been proportionate to the price increase but if it continues this way, at some point, we'll have to bear the full impact of the rise. Definitely, this is one of major areas of concern. So irrespective of what the budget has done or not done, global factors impacting input costs are far more important since the cost of raw materials would be approximately half of the cost of the paints themselves.

EQM: With the production volumes for passenger cars itself growing 35% on an average for the current year, have your volumes gone up commensurately or more than that?

Mr. Venkatesh: No, its lesser than that. One reason is that we don't supply to either of the Korean car companies. And there has been a significant growth coming from that area. Santro from a base of zero last year has gone up to 60,000-65,000 cars this year. The second is that there have been efforts by car companies to bring down the unit consumption of paints per car. So a 35% growth in numbers does not necessarily translate into a similar unit volume growth. Our growth is not very different from 35% but its not 35% and the larger reason is that we don't supply to Santro.

EQM: Toyota is a big customer for Kansai Paints in Japan…

Mr. Venkatesh: Yes. And we are already the sole supplier to Toyota in India.

EQM: What sort of revenue contribution do you expect to accrue around three year's down the line?

Mr. Venkatesh: It depends on Toyota's own plans in India. They are serious about launching a passenger car. We are confident of remaining a preferred supplier to Toyota in India and as and when they launch their models we will benefit from their increased volumes. We will give Toyota the same kind of service that they are accustomed to back in Japan and hopefully that will strengthen our position in terms of their own expansion and development plans in India.

EQM: Telco and Maruti are your major clients. How much would be their contribution to your turnover?

Mr. Venkatesh: Suffice it to say that Goodlass supplies almost 98% of Maruti's requirements and 60% of Telco's requirement.

EQM: Around 40% of your revenues accrue from the decorative paint segment...

Mr. Venkatesh: More than that. It's actually slightly more than half in favour of decorative.

EQM: In the light of a negligible growth in agriculture in the current year, has there been a slowdown in the growth of decorative

Mr. Venkatesh: No, not really. I think the rural markets have been strong for quite sometime. If we go over the last three and a half to four years in terms of the proportion between urban and rural clearly we have seen some impetus from the rural. I accept that since demand is largely agriculture based and if you have growth dropping from 7% to 3% or thereabouts it could have an impact but I suppose it is too early to feel that, because we've had very good Diwali season which is not too long ago.

EQM: You have also increased your product prices for decorative by around 3-5% around two month's back. Was this an offshoot of the increase in the raw material prices or would this accrue straight to your bottomline?

Mr. Venkatesh: The rationale for the price increase was purely on account of cost increase particularly because of of the impact of increase in raw material prices on mineral turpentine oil, which is a very important ingredient for the decorative paints.

EQM: You have more than Rs 360 m in investments, which includes shares of unquoted companies and bonds/debentures as well. Is there any possibility of disinvesting these and returning the money to the shareholders as dividend or ploughing it back in acquisitions?

Mr. Venkatesh: We are already in the process of liquidating the investments and redeployment in terms of the ongoing expansion and working capital. In this year's balance sheet you will see a significant diminution in the investments.

EQM: We have been witnessing a lot of competition amongst the car manufacturers. Could this lead to tough pricing norms for auto paint suppliers in the future?

Mr. Venkatesh: Yes, we anticipate that to happen. There will be enormous pressure in terms of pricing. Any cost increases due to extraneous factors will be very difficult to pass on. So the drive is essentially in terms of internal efficiency

EQM: Your third quarter performance has been excellent…

Mr. Venkatesh: One of most important reasons was that Diwali came in November. So as far as decorative is concerned the entire season shifted to the third quarter this year as compared to the second quarter last year. So sales led profit growth reflects a significant component of that.

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