Customs duty cut to help paint industry

Mumbai: Finance Minister Yashwant Sinha, in his recent Union Budget, slashed the customs duty on key raw materials for the paint industry, namely Pthalic Anhydride (PAN) and Titanium Dioxide (TiO2), by 5 per cent. The duty reduction, market analysts say, is a positive sign for the paint industry as a whole, and Asian Paints in particular since it is the market leader.

They say the duty cut will result in about a 5-per cent growth in Asian Paints earnings in the coming financial year. But the benefits on account of reduction in the customs duty on TiO2 will be partially offset by the decrease in customs duty on PAN and the decrease in customs duty on the paints itself.

Asian Paints manufactures PAN for its own consumption and, consequently, the company will be negatively impacted due to the reduction in the duties. The company sources say PAN accounts for just 7 per cent of the total raw material, so the impact will be limited. Even the cut in duties on imported paints is unlikely to have any great effect on the company since the imported paints are only a small fraction (less than 1 per cent) of the overall paint market.

Imported paints are primarily restricted to premium segments, such as wood finishes or hi-tech automotive paints, which Asian Paints itself imports through its joint venture, Asian PPG. Moreover, the companys strong distribution network in the urban and semi-urban segment will help it to face any kind of competition from imports.

The 5-per cent cut in customs duty on TiO2 will contribute greatly to the earnings of the company, as TiO2 is the largest raw material, accounting for nearly 30 per cent of the raw material needed for producing paints. This benefit will more than offset the negative impact due to the cut in customs duty on PAN and the import duty on paints.

Market analysts say the reduction in prices, if any, will benefit Asian Paints the most because of its strong distribution network. Historically, paint companies have reduced the prices of paints to pass on the benefits of a lower raw material.

Asian Paints distribution strength in semi-urban areas will ensure a higher growth for the company, as the volume growth, aided by lower prices, is more likely in the semi-urban areas, where Asian Paints has a stronger position. Another factor that is going to have a positive impact on the companys earnings is its plans to retire high-cost debts.

It is expected that the company will retire over Rs 30-crore debt during FY02 itself. This move will reduce the interest burden and will be a booster to the earnings. The higher cash flow from the operations has been facilitated by the successful implementation of the ERP system (SAP, in FY01) and the implementation of the supply chain management solution by i2 technologies (during FY00). The same has already resulted in the reduction in cost, the company sources say.

Analysts say the capital efficiency of the company is also improving, as its return on capital employed (RoCE) will go up from 30 per cent in FY01 to about 40 per cent by FY04, due to a lower capex and a decrease in the working capital.

The company sources say the implementation of ERP and the supply chain management solution is complete and the company is expected to derive substantial benefits by way of inventory reduction in its FY02 results.