Inflation hasn’t been a major factor so far, demand growing decently: Berger Paints MD

Why am I getting a sense that you are happy but not very happy with the quarterly performance? Am I right or wrong?
I would say, partially right. So yes, it has been a reasonably good quarter but not very happy in the sense that we did get decent value sales growth. Over two-year CAGR also we had a growth in excess of 25% and this year itself, around 21% which is good. As far as operating profit growth is concerned, that suffered a little bit this quarter on the back of the raw material prices and the reason for partial happiness is this. Of course, on a two-year CAGR, it is fairly good and given the constraints, we had growth in excess of 15% overall, which is okay given the current situation.

While raw material prices have been nothing short of nightmarish for paint companies, given that crude and raw material prices are going higher. Markets understand that. But what shareholders would like to understand is how long before you will not be able to pass on the price hike. At some point in time, if raw material prices go too high, you have to keep on passing the cost and that could start hitting demand. When will mehangai (inflation) hit your demand?
That question can be answered only when that situation is reached. As of now, we had passed on the raw material price increases till October-November. Whatever we had passed on was happily absorbed and there was no problem at all. In November and December, we took very steep price increases but towards the end of January and the beginning of February, we see demand at normal levels. We have not seen any slowdown. So mehangai as you call it has not been a major factor so far. It is reasonably growing and we have a decent growth rate so far.

Let us look at the other positive side. Let us work with an assumption that the worst of raw material pricing is behind us. At some point in time, crude and other commodity prices will reverse. What happens in that scenario? Will you start cutting prices or would you be in a position to retain some margins?
It depends. If it is a minor drop in prices, I do not think we will be cutting prices or doing something of that nature. Typically the adjustment is done through the rebating route and if the brand is a strong one, you need not rebate that hard. If it is a weak brand, you probably might have to rebate a little bit more. So that is adjusted through that route. It is not the cutting of prices which happens. However, if the drop is sharp, we may have to drop the prices but this year, at least for the next foreseeable three to six months, I do not see that happening.

You have told us a bit about the quarter that has been, the price hike that you took earlier so let us see going forward what happens with inflation. In the midst of a property boom, employees are also getting set to go back to offices which will translate into more business. So going forward, can you give any guidance on that front and how business is likely to pick up?
We are quite optimistic as far as the market is concerned. We see demand picking up actually. In the rural areas also, optically, there has been a little bit of a slowdown because last year they were doing very well and this year it has been a little bit of a slowdown compared to what they were doing last year. The urban areas have bounced back for the paint industry quite a lot. Overall, demand has been reasonably strong and now going forward, with these changes that you just now mentioned, the first quarter should look very good.

When there was a semiconductor shortage, I was very surprised to read that it had impacted the paint industry and that was because the showrooms were being impacted. They could not show customers the way it is done on the walls etc, is that all behind you?
When the semiconductor shortage impacted the automotive space, it was not so much the showroom painting etc, but rather the auto paint which got impacted. It is closer to normalcy now but we are not a major player in the passenger car segment but a significant player in the two-wheeler segment. It was more of a demand issue rather than the shortage of semiconductors. So there was some impact in terms of automotive paint sales, but otherwise showroom etc did not impact us.

There is a very strong home improvement trend which is repainting of houses during Covid when everybody was in a sense working from home. Is that a comeback cycle which could be a differentiated cycle repainting of the homes?
There is an expectation that you know some amount of postponement would have happened and even in January, with the spread of Omicron variant, this service called express painting was well liked by a lot of consumers in the urban space. They actually postponed some of their painting decisions for the following month. So it tends to get postponed in these times and that may come back later.

Last year, we had a loss of sales in the first quarter in the month of May. In fact, it decreased by almost 50%. That is not going to happen this time hopefully and that means a strong revival in that particular month. So this turbulence keeps happening and because of the pandemic, things get postponed. In our case at least, in the discretionary category, no one wants to paint at that point of time. There is a tendency to postpone specifically in the urban centres and it tends to bounce back in the next cycle.

The way we look at the Indian paint industry is that there is one large player with almost three-fourth of the market share and then three formidable players. Two more corporate houses have entered the paint space – the Birlas and the Jindals. How will this change the dynamics of market share competitiveness, profitability?
This has been happening for a long time. There have been big international players, many of them are leaders in different countries across the world including Southeast Asia or China or for that matter Europe or US. They have all jumped into India and tried various techniques to penetrate this market.

But it is still consolidated around the four players but any competition is obviously going to be challenging in the short run. We will be focusing on the consumers and the customers, we do not feel that there is any immediate impact there and we will continue to do what we are doing and which means being engaged with consumers and other stakeholders – dealers, painters etc. and carry on doing our job.