Abhijit Roy, MD and CEO of Berger Paints

Abhijit Roy, MD and CEO of Berger Paints

In terms of revenue and market share, Berger Paints India Ltd, the country's second-largest paint manufacturer, announced that it will raise its price by 4% starting on December 5. This increase is the company's fifth increase this year, and will increase to approximately 18% of the total increase starting in 2021, the highest level in any year. According to Berger Paints, MD and CEO Abhijit Roy (Abhijit Roy), the unprecedented increase in raw material costs made this increase necessary. In an interview with BusinessLine, he talked about the prospect of rising and falling raw material costs and pressure on profit margins; the shift of product mix to high-quality products, etc. extract:

With the interest rate hike in December, will the price of decorative coatings stabilize before the end of the next fiscal year and fiscal year 22?

I think the last round of interest rate hikes should be enough to resolve the inflationary pressures and falling profit margins witnessed by Berger and the entire industry in the first half of FY22. In the near future, prices are unlikely to rise further. In addition, raw material costs and supply constraints are beyond our control. We raised interest rates at the beginning of the second quarter, when crude oil prices peaked and the cost of other commodities showed no signs of decline.

Do you think the price of raw materials will be stable now?

Crude oil prices are showing signs of weakness. I think it is hovering around US$75 per barrel, which is lower than the level of US$85 per barrel. So there should be stable.

International freight rates continue to rise until the first quarter of FY23, when raw material prices will experience some fluctuations. But from the perspective of end-user price and profit pressure, this will be easier to manage. However, the situation is dynamic.

Covid cases have surged in parts of Europe; there is a new variant of the virus, Omicron. We don't know the fear and psychosis that this causes, or whether the border will be closed; or any other interruption. Some cities in China have reported an increase in the number of infections. Nearly 20% of the raw materials are imported from there. There will also be some worries there.

Will opening up oil reserves help soften prices?

To be fair, this is more like a political or geopolitical move than a price reduction. What I mean is that government intervention has hardly helped determine the price point of oil. It is more of a function of demand and supply. However, this indicates that the dissatisfaction of major buyers will cool oil prices in a short period of time.

In addition, for companies that are mainly decorative coatings, raw materials directly related to oil account for only a small part of the total raw material cost. There are other materials, such as titanium dioxide, whose prices are also rising. Supply still cannot meet global demand.

Take freight and container availability as examples. In two quarters, the price rose from US$2,000 per box to US$8,000. Interest rates are still rising month by month. There is absolutely no logical reason for this rate hike. Even if the description is not available, it is the reason.

However, compared to your larger peers, your impact on profit margins is less...?

Yes, this is true. We bucked the trend and took the lead in raising prices among some differentiated products, and rebates for large-volume products. We took the calculated risk, because the toss is between transaction volume and profit margin.

The 27% increase in revenue was attributable to a variety of positive factors, economic growth, sales recovery in the industrial coatings sector, and price increases. EBITDA was down 333 basis points year-on-year; relative to the market leader's 1090 basis points.

Is this strategy—being ahead of the market leader and compromising in quantity—sustainable?

Market leaders are now taking a positive attitude towards price increases. Therefore, there is no need to raise prices in advance. We want to maintain a healthy balance between volume and profit. In the future, we will focus on high-end and luxury categories, hire brand ambassadors, and begin to get involved in high-margin areas, such as waterproof solutions, adhesives, etc.

These, coupled with price increases, should help us restore an 18-20% EBITDA margin by the fourth quarter of FY22.

And you don’t see the impact on sales due to price increases?

The paint cost is 40-45% of the actual project cost, and the rest is labor cost. Therefore, an 18% increase in paint prices will mean an 8% increase in total paint costs at the end user level. Therefore, the project cost of 30,000 rupees will increase by 2,500 rupees. This can be absorbed by consumers. In this case, it is unlikely that there will be a significant volume impact.

What is the prospect of rising industrial coatings?

Negotiations are ongoing. Industrial coatings are project-oriented and long-term contract-oriented. So far, automotive coatings have risen by 8-10%, and protective coatings and powder coatings have risen by about 20%. In terms of protection and powder, we are more or less protected, but we will have to go back to car customers to further increase prices. This renegotiated interest rate hike may have an impact in the fourth quarter of this year.

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