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Nath Balakrishnan

The health of operating margins is highly dependent on material costs, which constitute about 60 per cent of sales.

IN THE paint industry, the health of operating margins is highly dependent on material costs, which can constitute about 60 per cent of sales.

As much of the inputs are derivatives of petroleum, paint companies stand exposed to the vagaries of crude price movements.

The key raw materials that go into paints are titanium dioxide, phthalic anyhydride (PAN) and pentaerythritol (Penta). While the country is self-sufficient in PAN and Penta, the paint industry imports titanium dioxide.

When war broke out in Iraq during February-April, crude prices flared up and took the zing out the margins of the paint majors. Such adverse movements in crude prices can wreak havoc on the operational profitability of paint companies.

The prices of these raw materials have since stabilised — for instance, PAN prices, which touched a high of Rs 51 per kg during the March-May, has cooled off to settle at Rs 39 per kg now. Going forward, the prices are expected to remain soft.

Among the industry players, Asian Paints has managed to control input costs better, as it is backward integrated and manufactures both Penta and PAN, most of which are used for captive consumption.

It, therefore, should come as no surprise that its operating margins have consistently been higher than that of its peers.

A couple of other factors have also played a crucial role in ensuring that the rise in crude prices and its attendant effect on the increase in paint raw material costs have been mitigated to a large extent.

First, the announcement in the latest Budget scaling down the peak Customs duty from 30 per cent to 25 per cent.

The other is the steady appreciation of the rupee vis-à-vis the dollar, which, to an extent, would have offset the rise in crude prices.

But with the rupee stabilising, further appreciation of the kind seen in recent times seems unlikely. Hence, savings in material costs on this count are not likely over the next two quarters.

What if crude prices do an about turn and start inching upwards?

Companies will either have to absorb the price hikes or contemplate passing them on to customers.

Though OEMs may not warm up to the latter idea, such a move can be put through in the case of decorative paints without affecting offtake. And that would be the key to preserving margins as well.

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