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Nath Balakrishnan

Dealers and contractors play an important role in the purchase decision for paints, as they are the major influencers. Over the past few years, we have concentrated on increasing our network in terms of depth and width.

Mr H. M. Bharuka, MD, Goodlass Nerolac

Goodlass Nerolac has been on a roll lately. As the leading player in the industrial paints segment in the country that counts original equipment manufacturers such as Maruti and Tata Motors as its key customers, it has taken advantage of the sharp upturn in automobile demand. The markets, too, have taken note of Goodlass' performance; the stock has almost trebled from its level of Rs 150 at the beginning of the current financial year.

With its position in the industrial paints category fairly well established, Goodlass is now making inroads into the decorative paints segment that makes up about 80 per cent of the overall paint market in India. What's more, it has also roped in none other than Amitabh Bachchan to be its brand ambassador.

In this freewheeling interview with Business Line, Mr H. M. Bharuka, Managing Director of Goodlass Nerolac, shares his views on the outlook for the paint industry, the company's expansion plans and the initiatives taken to expand its presence in the decoratives segment.

Excerpts from the interview:

When we interviewed you last time, you had said that Goodlass was an undervalued stock (then trading at Rs 125) compared to the price Kansai had paid to acquire the stake held by the Tatas (at Rs 250). What is your take on valuation now?

We would not like to comment on the market price; however, it is heartening to see it at current levels. It indeed speaks of the intrinsic strength Goodlass has. The performance of the company has also improved over the past two years.

Automobile sales have been robust during the first half of this fiscal and Goodlass, with a strong presence in the industrial paints segment, has been a beneficiary. What is the revenue and earnings growth we can expect from Goodlass over the next couple of quarters?

Our topline growth in the first six months has been 19 per cent. With the growth trends continuing in the automobile industry, we are likely to do well in the remaining period of this FY. We are expecting a topline growth of 14-15 per cent on an annualised basis. We have reported good profits in the current financial year so far, which should continue.

Do you feel the recent growth rates in the auto sector are sustainable? If so, what, in your opinion, are the factors that will fuel demand for automobiles over the next 12-15 months?

The auto industry is expecting a CAGR of 8-9 per cent in the next five years. The current growth is based on better footing than what we had seen last time. Therefore it is likely to sustain on account of exports, crude oil prices, ongoing road improvements and prices of vehicles.

With the sharp rise in the sales of passenger cars, are OEMs commanding greater bargaining power now?

With the auto industry experiencing pressure on their bottomlines, suppliers, too, are bound to feel the pressure. We have not been able to pass on the full increase in raw material prices to them. Goodlass already enjoys a good market share in the auto segment — 65 per cent currently — and it is rising consistently.

Could you comment on the price outlook for raw materials, especially titanium dioxide and pthalic anyhydride, which make up more than 50 per cent of sales?

The prices of titanium in the international market have been on a rise, but the increase is getting offset against rupee appreciation against the dollar. The price upsurge can be seen if consumption levels improve in the US and Europe. Pthalic prices have been comparatively stable.

You have consciously chosen to focus on the decorative market, as it constitutes 75-80 per cent of the Indian paint market. Over the next three years, what is the market share you are targeting in this segment?

Currently, Nerolac holds 15 per cent market share in the decorative paint segment. We have been consistent with our efforts to increase our presence in this sector. We hope to grow better than the industry standards. And this will naturally result in increased market-share.

Going forward, what would you think would be your preferred mix between decorative and industrial paints?

Nerolac is a leader in the industrial paints segment with a 43 per cent market share. The focus currently is on strengthening our presence in the decorative segment while consolidating our leadership position in the industrial segment.

The decorative segment is important to us because it currently contributes to around 70 per cent of the overall paint market We shall be looking at a ratio of 40:60 between industrial and decoratives. At present, the ratio is 45:55.

Within the decorative paints segment, what categories hold out promising growth prospects? How is Goodlass positioned to capitalise on such growth opportunities?

At present, exterior paints is one of the fastest growing segments in the paints business. The growth of Nerolac Suraksha & Excel 100 per cent Acrylic, since its launch, has been tremendous.

While the overall paint segment has grown by 8-10 per cent, the exterior paint segment has risen by 17-18 per cent. We have grown at a faster rate than the category itself.

For improving sales, we are focusing on contractor and institutional business. Wood Finishes is another area where the market growth is high. We have introduced a complete range for this segment and are currently educating painters on application.

Interior emulsion is also doing well. We recently launched Nerolac Plastic Emulsion — positioned as an economy emulsion — and it is a big success.

What has been the outcome of some of the distribution initiatives undertaken by Goodlass in the recent past, such as the addition to dealers and the ramp up in the installation of tinting machines?

Dealers and contractors play a very important role in the purchase decision for paints, as they are major influencers. Over the past few years, we have concentrated on increasing our network in terms of depth and width.

We have done a town-wise mapping of our existing dealer network and have initiated efforts to ensure increase in the width of the network, that is, number of dealers across the country; and the depth, that is, increase in the amount of Nerolac products stocked by each dealer (exclusive or otherwise) to give consumers a better choice of products. We have also done some churning of dealers by removing non-contributing ones and adding ones with good potential.

The installation of tinting machines has been an important initiative in increasing our penetration and helping the dealers to serve the consumers better, while decreasing the inventory costs. At present, we have over 2000 machines installed, which contribute 45 per cent to our decorative sale.

The latest value-added service being provided by our dealer network is the magic eye or spectrophotometer. With the help of this system, the customer can walk in with a shade in mind and walk out with the paint within minutes. The machine can conjure up 60,00,000 different colours, as many as the naked eye can detect. This goes with the company's commitment to provide technological breakthroughs to consumers and will definitely give the consumers an edge in the market.

Goodlass' advertising has always been family-centric and had a catchy jingle to go with it. What now explains the shift in your advertising that involves a celebrity such as Amitabh Bachchan?

Nerolac has been a household name for the past 83 years. The brand has always positioned painting as an activity associated with `happiness, joy, and valued moments'.

The brand's core positioning is based on this theme. Our jingle, Jab Ghar Ki Raunak Badhani Ho, and now Yeh Rang hai jo har Ek ki Zindagi ko Choota hai are an ideal communication medium for us. In fact, the jingle has helped us to forge an unforgettable bond with our user.

Our recent campaign with Amitabh Bachchan as our brand ambassador is a strategic initiative on the 360-degrees marketing concept aiming to create a perceptual leadership for the brand in the minds of the consumer.

The campaign was aimed at communicating the fact that Nerolac touches the life of the customers in every aspect. In a way, it is an extension of our family-centric approach.

Goodlass proposes to set up a new plant at Haryana. Could you outline the capital expenditure involved in this exercise, when the plant would be ready and what type of paints would be manufactured from this location? How do you propose to fund the capex requirements?

The capital outlay for the Bawal plant (in Haryana) is Rs 90 crore in the first phase, which is to be met out of our internal accruals.

We are targeting production from the third quarter of the next financial year. In the first phase, we shall be manufacturing industrial paints; and from the second, decorative products as well.

Goodlass has shut down two of its plants at Parel and Thane. Would they be put up for sale shortly? What would be the cash utilisation plans?

The Thane plant was closed three years ago when we exited the pigment business. The plant at Lower Parel was closed last year, as it was no longer commercially viable. As of now, there are no plans. In any case, the matter is pending in the court.

Do you believe that the time is right to scout for acquisitions in the Indian market now?

We are currently looking at an organic growth. In future, if we get an opportunity at the right price, we would be open to it.

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