Goodlass Nerolac: New strokes -- Mr. T. R. Venkatesh, MD, Goodlass Nerolac Paints

A. Srikanth

DESPITE a strong brand name, Goodlass Nerolac has grossly underutilised its potential in decorative paints.

Constraints on capacity had earlier forced the company to focus more on industrial paints. The company is now trying to rectify this through its renewed focus on decoratives. This would also help the company even-out the impact of cycles in industrial paints. The company is also on a cost-saving drive. Mr. T. R. Venkatesh, Managing Director, Goodlass Nerolac Paints, spoke to Business Line on the various aspects of the company, as also about the industry.

Excerpts from the interview:

On the 1999-2000 performance:

In paints, we had a decent top-line growth of around 19 per cent in value terms. Though other companies also did well, we were marginally better. In other words, our performance was marginally better than the industry average. The profit growth was also good the previous fiscal. The profits in 1998-99 dipped mainly because our Lote Parshuram factory was commissioned during the year. While we were not able to utilise the full capacity of that factory, depreciation and interest cost had to be accounted for. Whereas during 1999-2000 we were able to utilise the full capacity and so the top-line growth was good.

In terms of the various segments, we did well in both industrial as well as decorative paints. The growth rate in powder coatings (through an associate company Polycot Coatings) was good, but in high-performance coatings only middling last year as this depends on the implementation of new capital projects. Since few capital projects got implemented last year, the offtake of high-performance coatings was only moderate.

On the recent first quarter performance:

During the recent first quarter, the top-line growth was around 11 per cent, which again is marginally better than the industry average. The post-tax earnings too improved by around 22 per cent. More or less the same trend was maintained in July too.

The growth rates in the passenger car segment was not good in the first four months of this fiscal. And we have been affected by this. But we have been able to make it up significantly on decoratives and other segments within automotive paints. For example, we have been concentrating on the two-wheelers, tractors, LCVs, utility vehicles and scooters, where we have improved our share. In automotive refinishes, which is another major focus segment, we have been able to see growth rates of around 35-40 per cent. These has helped us offset the impact of the slowdown in the passenger car segment.

On the chances of sustaining such a performance:

We are, in fact, planning to improve upon our first quarter performance. The Index of Industrial Production posted a lower growth rate during the first quarter of this fiscal. But we expect the situation to improve. Generally a lot of stock adjustment takes place in the OEM sector during the first quarter of every year. Though we are not sure about the kind of growth we would be witnessing during the main season between October and December, we definitely expect it to be better than the first quarter.

On long-term growth rates:

If we consider the actual growth rate of industrial paints over a period, there is not much different from the growth rates posted by the decoratives segment. This is mainly because the demand growth rates for industrial paints has seen sharp fluctuations compared to the decorative paints. In other words, industrial paints growth rates have been more chequered. This is mainly due to the fluctuations in the growth rates posted by the passenger car segment.

This could probably change in future. As of now, while decoratives accounts for around 70 per cent of the total paints demand, industrial accounts for the balance. This trend has been changing and is bound to change more, with industrial paints gaining an upper hand over a period of time. Thus, from the long-term point of view, the demand growth rate for industrial paints is expected to be more than that for decorative paints. But in the medium term (two-three years), we do not expect any big difference between the growth rates for decorative and industrial paints.

Our future growth strategy is, thus, based on fairly high growths coming from the decorative segment also. Just because we are leaders in industrial paints, we cannot expect that the high growth rates in this segment will take us where we want to go. Our long-term target is to achieve a turnover of Rs. 1,200 crores by 2003. This translates into a CAGR of 18-19 per cent, which we are confident of achieving.

On the impact of the recent hikes in raw material costs:

It is clear that we cannot easily pass on the price increases on to our customers. So, we have to find resources to absorb the increase in raw material costs. The resources would have to come from the savings derived from streamlining of internal operations. And there is lot of scope for such savings.

Over the last five-six years we were concerned more about the overall growth rates in revenues. In other words, our intention was to manufacture to somehow meet customer needs and increase sales. Thus, till at least our Lote factory was commissioned, it was a case of supply chasing demand. This obsession with growth resulted in accumulation lot of inefficiencies also. So, there is considerable scope for cost reduction.

Towards this, we have been investing on two things in the recent past to reduce costs. One, we have been upgrading our equipment to improve efficiency in manufacturing. Two, we have been taking advantage of the developments in IT to improve overall efficiencies. We have already spend Rs. 18 crores for an ERP system to be implemented in November. We have also looked at supply-chain programmes to improve the extent of services offered to our dealers and for optimising inventory.

We are also looking at data-warehousing, where we are able to make effective use of the data gathered over the years for improving the quality of decision making. Thus, we are planning to use a combination of both manufacturing and IT-related measures to derive cost savings. This should help us overcome the kind of inflationary pressures we are facing on the raw materials front.

On the recent change in strategy to focus on decoratives:

Though we are leaders in industrial paints, we feel that we have grossly underutilised our potential in decoratives. Our overall market share in decoratives might be just 13-14 per cent. But this is not same across geographical regions or products. This means that we have been able to capture higher market shares in certain regions and in certain product segments. Whereas our good brand name is all pervasive. This again means that we are not utilising the full potential of our brand name. There are a number of reasons for our underperformance in decoratives.

For one, our capacities were not enough to cater to the growing demand. In other words, till at least the Lote factory was commissioned, our supply was lagging behind demand. In such a situation, supply of industrial paints was our priority as we had to satisfy our long-term contracts. Consequently, our supply was not adequate to cater to the decorative segment. Two, our product range in decoratives was also not adequate. We were concentrating on enamels and not on emulsions and other segments which were witnessing faster growth.

So, our present strategy is to rectify such defects. Towards this end, we have already increased our capacity. Apart from the efforts to increase our product range, we are also installing colour dispensing machines across the country. Our ad-spend is also slated to double this year. So, a number of steps have been taken to give a boost to our decorative business. Our renewed concentration in decoratives is also aimed at evening-out the adverse impact of the cyclical nature of demand growth in industrial paints.

On some specific strategies to improve decorative business:

First is product focus. We are already strong in enamels. So, we are now concentrating on strengthening our presence in water-based emulsions and distempers. In other words, our focus is on interior paints. At the same time there is no specific focus in terms of value. High-value products are as important as low-value products. As the market expands from the urban to the rural areas, value products would drive volume growth. At the same time, we are also segmenting the top end of the customer profile in terms of distinctive tastes and requirements. This would be possible through support from Kansai Paints. Second is in terms of distribution focus, where we are in the process of strengthening the dealer network.

On e-commerce possibilities:

Right now it is only B2B in terms of improving the dealer connectivity for better service and supply-chain management. B2C is still a gleam in the eye. But any B2C initiative cannot totally ignore the dealer network. We are still exploring on a B2C model which would include dealer participation.

On the extent of consolidation in the industry:

Consolidation need not come only through mergers and acquisitions. There is indeed consolidation in the sense that the strong is getting stronger and the weak weaker.