Coming to price hike, Syngle says that given the inflation in the first quarter, they took a price increase in terms of passing it on to the market. They also saw a lot of volatility in terms of the crude prices. The entire paint industry has taken a price increase and the full realisation of the price increase will happen in Q3.
In Q2, your peers had managed to report a volume growth between 4% and 9%. But your numbers were clearly a bit of a miss. In fact, the volumes declined by half a percent. What led to this divergence because we usually do not see Asian Paints performing so badly versus its peers. What led to that?
Amit Syngle: As we look at the last quarter, we have just touched our base in terms of the volume terms and the value has also been negative. July was good for us but then all the rainfalls and floods that came in August, were not very well distributed across the country. So, we saw a muted demand coming in both August and September and given that the seasonal component in overall our sales is very high, we saw that in all the seasonal markets, and faced pressure in our overall product mix and the overall sale. The other area which we felt strongly is that all the metro towns and the bigger cities did not do well for us. It was the rural centres that performed a little bit better for us. Even the B2B market, where we accounted for 15-20%, did not go the way we anticipated. Normally, the growth there is pretty strong in terms of what we see and that was also something which went very slow. It was only the industrial markets that did well for us, where we grew almost 6% and given the competition in the organised sector, they have a larger component of the industrial sales. The impact on the deco sales for Asian Paints was much higher.
On one hand, you are talking about intense competition in the market and on the other hand you have also taken a price hike. Did the entire industry take a price hike and given the intense competition in the market, how confident are you that this price hike will sustain throughout the second half?
Amit Syngle: We experienced inflation in the second quarter and we also saw inflation in the first quarter to that extent and given the inflation, we took a price increase partially in terms of passing it on to the market. That was the clear reason. We also saw a lot of volatility in terms of the crude prices. The entire paint industry has taken a price increase as well and as we go forward, the full realisation of the price increase will happen in Q3. We feel that while the competitive intensity is higher, we should be able to sustain the price increase.
But with the price hike taken, will your margins be in the guided range of 18% to 20% in the second half of the year, taking into fact that crude might stay stable,? Can the margins be in that range?
Amit Syngle: Overall, when we look at the first half of the year, we are at a PBDIT margin of close to about 18.5%. As we go forward, there are two-three factors coming in. One is we are looking at the full realisation of the price increase in terms of what we have taken. Second, we are working on a product mix, which is much better and third, what we see very clearly is that while there is a volatility in terms of the crude prices, there is some softening in terms of the raw material prices. So, we are expecting a deflation of about 1.5% in the coming quarter. Given all this and if we are able to get to a reasonable growth in Q3 and Q4, we expect to be in the range in terms of overall guidance for the PBDIT margins.
If you look at the early trends for Q3, how are they shaping up? Have sales picked up? Has anything improved compared to the Q2 or the first half of this financial year?
Amit Syngle: From the point of view of trending this year, one story which has remained in the industry that you have seen is the overall demand. The consumer sector or the construction segment, or the paint industry – have all been muted. As a larger share leader in the market to that extent, the leader gets affected a little bit more and that is something which we have seen as a sentiment continuing, despite the fact that in October 1st fortnight we saw some good retailing which is happening.
We also have an ongoing strong wedding season coming in November and December but we have not seen the demand pick up to that extent. The rural markets are definitely coming up, but the urban centres are showing a slower growth. So, it is a mixed trend, but the story which has remained is that the overall demand scenario has not been very strong.
But what does it mean for the volume guidance for the entire year? When we started the year, you talked about a double-digit volume growth, is that still likely?
Amit Syngle: When we look at the overall Q3, remember we have had a shorter Diwali because earlier last year, the Diwali was in mid November and to that extent, that has an impact in terms of the immediate retailing. We also have a higher base in terms of this quarter in terms of what we are looking at. We are cautious about the overall demand conditions that would augur in Q3 and Q4 as we go forward. We are looking at single-digit volume growth in the coming quarter.When it comes to competition, Birla Opus has barely gained traction after aggressive sales in the last couple of quarters. Do you see the competitive intensity worsen from here on?
Amit Syngle: Whenever the market conditions are slow and every competition is trying to kind of take a slice in the market, we see that the competitive intensity will go up and that is what has happened. So, we are seeing possibly the current players, the existing players in the organised market and the unorganised market putting up an aggression in the market very-very strongly across various parts of the country.
With respect to new competition, as you rightly said, we do not see that there is too much of a very strong impact which has happened but we should always give the new competition a little bit more time in terms of seeing how their strategies unfold and what they kind of do in the market to that extent.
So, that game will have to be seen over at least a two-year period to see where they are and what they are doing as we go ahead. Having said that, we have seen new competition over a period of time and we feel that we need to look at our own band strengths and leverage them.
I appreciate that you are looking at a two-year period to see how the competition plays out. But can we say that in the immediate term and during that two-year time period, you expect the competitive intensity to remain high?
Amit Syngle: Competitive activity would remain for existing as well as the new players. I see this trend till the time demand flares up in the market to that extent.
As AkzoNobel is looking to exit its India business, multiple potential suitors have lined up. Are you also one of them?
Amit Syngle: As of now, AkzoNobel has indicated that they are looking at a strategic view of their review of their business in India. We have not got any particular details in terms of what the options they are looking at. We could be interested once we have the clear options in terms of what they are looking at, what kind of strategies they want to get in, and that is when we would make a move.
Are you saying that nothing has come so far from AkzoNobel’s side, and they have not floated any paper which says they are either completely looking to exit or looking for a tie-up?
Amit Syngle: Yes. The only thing which has come from Akzo is that they are looking at a strategic view of their India business and that is where it stays. There are no options and deals which have come up in the open. I guess whenever it comes, then we will possibly make a move in terms of what has to be done.
But would you consider buying out AkzoNobel because if someone else does, then it might impact your dominance in the luxury category? If they plan to revive the Dulux category as well, which is their premium brand? Will you very actively look at buying out AkzoNobel?
Amit Syngle: Overall the Dulux brand has been strong in the overall market. But it is too early to say whether we would be looking at a buy or not to that extent because it all depends in terms of what options which come in because we will have to look at all angles with respect to overall legal compliances and other areas which kind of come in given the fact that we have a certain position in the market to that extent.
It all depends in terms of which way Akzo is looking at in terms of looking at their India business and definitely that is something which we will look at once the options are there.
What would be the deal breaker for you? Is there any condition like that or anything in your mind which would be a bit of a deal breaker and you will stop looking at AkzoNobel as a possible acquisition target?
Amit Syngle: Today we have our own strengths with respect to brands. We have very strong premium and luxury brands in the market. We feel that as of now we look quite comfortable with respect to our business in terms of what we are doing. So, till we know how they are looking at the overall business, it is very difficult to say whether it is going to be attractive or not and what is going to be the deal breaker there.