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Paints: Testing times - Views on News from Equitymaster
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  • Sep 17, 2001

    Paints: Testing times

    Last week’s terrorist attack on the US has created a lot of discussion on its likely impact on various sectors and their profitability. Here we take a closer look at the impact on the Indian paint industry and what else is on the anvil.

    One of the key factors that could have a material impact on the paint industry is the possible rise in crude prices. If the US decides to attack the Middle East, then the possibility of crude prices touching historically high levels cannot be ruled out. Though the Organisation of Petroleum Exporting Countries (OPEC) has promised of stable crude output, one is not sure as to what extent they can control crude prices in case of a war. The recent speech by President George Bush clearly indicates that US wants to take revenge for the horrendous WTC tragedy. However, the attack might not happen immediately in light of ongoing FBI investigations.

    Since crude is one of the key input in manufacturing titanium dioxide, a significant rise in crude prices might result in higher raw material costs. Since Indian paint companies primarily source titanium from the international market, the sharp fall in rupee might further add to the woes. At the beginning of the year, paint companies were of the view that raw material prices as a percentage of sales would be lower than FY01. But given the current uncertain environment, this might not be the case going forward.

    Falling production…
    (tonnes) Mar-01 Apr-01 May-01 Jun-01
    Paints (IPP) 39,884 35,726 38,236 38,803
    % increase   -10.4% 7.0% 1.5%
    Paints (SSI) 20,414 20,457 20,414 20,414
    % increase   0.2% -0.2% 0.0%
    Phthalic Anhydride 11,763 15,768 16,623 13,248
    % increase   34.0% 5.4% -20.3%
    Source: CMIE

    Coming to the demand scenario, paint demand remained subdued in the first quarter of the current financial year. Barring Asian Paints, none of the other major paint companies showed encouraging topline growth. If one were to look at the production trend of paints and other paint related chemicals, compared to a 7% growth in production in May 2001, production has increased by just 1.5% in June 2001. Similarly, the small-scale manufacturers (SSI) have also scaled down production in recent months.

    Given the subdued demand scenario, if raw material prices were to harden, the impact on bottomline is expected to be higher for smaller paint companies. Also, if crude prices increase, inflation, which is currently hovering around 5% levels, will be tested. Consequently, demand might further decelerate.

    But there is a silver lining. The Centre for Monitoring Indian Economy (CMIE) expects agricultural production to increase by 9% compared to a 4.6% fall last year. Food grain and non-food grain production are also expected to go up by 8.2% and 10.3% in the current financial year as opposed to a fall of 6.2% and 2.2% respectively last year. Though southern states have had deficient rainfall, India as a whole has received a normal rainfall. With festive season nearing, one might see an increase in paint demand.

    Trend in production…
    (% change) FY99 FY00 FY01 FY02E
    Agri production 8.2% -1.5% -4.6% 9.0%
    Foodgrains 6.1% 2.3% -6.2% 8.2%
    Non-foodgrains 11.1% -6.8% -2.2% 10.3%
    Source: CMIE

    While speaking with a paint company, the general view is that demand is subdued amidst marginal increase in the western region. But one will get a clear trend only from the second and third quarter results, everything else remaining constant.



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