The Hindu Business Line : `Farmer-friendly Budget will help paints industry'

THE fortunes of the paints industry are related to factors as varied as the housing boom, vagaries of the weather and even better availability of rural credit.

Despite the pressure on margins, the industry grew by double digits last year. In an interview with Business Line, Mr M.R. Rajaram, the Chief Financial Officer of ICI India Ltd, talks about the performance of the industry over the past year. He also discusses ICI India's strategy in the backdrop of the macro picture.

How would you assess the performance of the paints industry in the last fiscal? What steps are you expecting in the Budget that would provide a fillip to the industry?

Volumes of the paints industry are very closely linked to the GDP growth. A Budget that encourages GDP growth will definitely generate demand and create volumes for the industry. The support expected for the agricultural sector in the Budget would also help the paints industry, as there is much scope for growth in the rural segment.

Last year the duty cuts on import of chemicals helped the industry. The good monsoons had also provided a fillip on the volumes side. Last year, the industry grew by about 10-12 per cent in volume terms. Though there was pressure on margins in the first half of the financial year with input prices going up, it eased during the latter half of the year due to several factors including the reduction in import duty on chemicals, appreciation of the rupee, and removal of the Special Additional Duty. The industry had passed on some of these benefits to the consumer and there was about three per cent reduction in product prices. The pressure on margins was, however, back in the first couple of months of the current fiscal as a result of which the price cuts are being rolled back. The pressure has been due to the increase in international chemical prices and also oil prices going up.

How has ICI India performed in this scenario? There was a marginal decline in profitability last year.

On the topline, we had one of the best performances in the industry. However, on the profitability front we still have a long way to go. Part of this is due to the fact that we have invested considerably for our long-run needs. Last year we spent about Rs 30 crore on publicity and promotions, implemented SAP (Rs 7-8 crore) to help control inventories and also invested towards developing new products. While the group turnover last year was about Rs 1,000 crore, the turnover for ICI Paints was about Rs 700 crore. Profitability was also affected as we had divested the profitable catalyst business the year before. While the profitability ratio for paints is about 10 per cent, the figure is about 20 per cent for catalyst. However, we improved profitability for the paints division to Rs 22 crore from about Rs 9 crore in the previous year.

How did the other core businesses such as surfactants and fragrances perform? The rubber chemicals business is currently a loss making one, any plans to divest that in the near future?

Our profitability levels for the surfactants business (which has turnover of Rs 100 crore) is one of the best in the industry. In fact we currently have a market share of about 7-8 per cent in the business and are doing very well primarily due to our ability to service clients. We have a textile research centre in Thane to service not only clients in India, but also the entire Asia Pacific. The business has huge growth potential post-2005, when the quota regime is phased out. We have the ability to emerge as a large-scale player.

We are doing fairly well in the adhesives/starch business as well, which we started about two years ago. The turnover for the division stands at about Rs 70 crore and it is growing by 50 per cent year-on-year. We see big potential once the Government regulation regarding starch is modified to the benefit of domestic producers. At present the regulation is inconsistent, but the Government is proposing to address it keeping in view the post-2005 scenario.

Yes, our Rs 70-crore rubber chemicals business is making losses. But it is not only us; everyone in this business has been making losses primarily because prices have been kept artificially low. I feel it will get better. In the meantime, we are taking steps to revive the business through initiatives such as cost cutting, augmenting capacity for specific grades of rubber chemicals and so on. We are also actively exporting the product in the international markets. For the present, we are keen to revive the business than to divest it. However, in the long run, we do not see the business remaining in our portfolio.

ICI India also has a 51:49 joint venture Quest International along with Hindustan Lever for flavours and fragrances. How is the business doing in light of the slowdown in the FMCG market? Will you be exiting from the food ingredients business with ICI Plc selling off the business globally?

This is a challenging time for us with the FMCG market slowing down. However, we are leveraging our capabilities to service other markets. We started exporting the products, predominantly fragrances, to countries located in the Asia Pacific region. At present, about one-third of the business for Quest is coming from exports. We are also contemplating to set up an export unit for fragrances.

Yes, we will not be participating in the food ingredients business anymore in India. But it will not make much difference in financial terms, as the business was quite small, less than Rs 3 crore.

There is talk that ICI has been actively scouting for acquisitions, as the company has a strong cash surplus after the recent divestments. What kind of growth are you expecting in the current year?

We have a cash surplus of about Rs 350 crore which we have plans to invest in our core businesses. For acquisitions, we are currently evaluating all options. The cash would also be utilised for our expansion plans, including the capacity expansion we are undertaking for rubber chemicals. We are also working with consultants to see if we can further augment capacity for paints from the current 60 million litres per year.

Last year our core businesses grew by about 20 per cent, we hope to maintain the high level of growth and effectively utilise our financial strength.