Maintaining High Margins May No Longer Be Possible, Says Asian Paints At Davos
KBS Anand, the chief executive officer of Asian Paints hopes that the Indian economy in 2017-18 will not be worse than 2016-17. Speaking at the World Economic Forum’s 47th annual meeting in the Swiss ski resort of Davos, Anand said raw material cost increases in the third quarter will impact the company's margins.
A post-demonetisation recovery can only be assessed in the fourth quarter, he added, though a marginal improvement was seen in the month of December.
Here are edited excerpts from the interview.
Insights on impact of the demonetisation on your business?
We had a different impact. Initially, for the first week or so, we didn’t see a drop in sales. Later, it varied across different parts of the country. The north was more affected than the south. Till the demonetisation was announced, we seemed to be on a good growth path. Then growth slowed down. December was maybe, marginally better, but I frankly can’t tell much more more at this point of time.
Are you beginning to see a revival in sales you lost due to the demonetisation?
Painting is quite often occassion-led. So there were a lot of marriages in November and December. Whether all of them underwent painting because of the cash crunch, I really can’t say. So any painting missed would be lost. But you have to take it as it is. It hasn’t been as bad as the media made it out to be but it hasn’t been great either. I frankly feel one month is a little too early to say anything because when you talk month-to-month there is a historical calendar perspective of what exactly happened in the corresponding month of last year. So it’s not fair to go on the basis of a month. I think the first quarter of the calendar year (January-March) should tell us how far the recovery has happened.
But are you seeing a recovery already?
We don’t operate on a month-to-month basis and it doesn’t make sense because any analysis you make on a month-to-month basis will go haywire.
Give me a sense of where you see the Indian economy in 2017 from the Asian Paints point of view - demand characterisation, margin characterisation and growth and expansion point of view.
The margins were extremely good over the last two years because raw material prices had fallen and we are seeing them rise now. Margins at the moment are reducing. Depending on the demand situation and how we see it going forward, automatically we’ll correct margins to the extent we can. We would like to gain (market) share and maintain margins, but you don’t live in an ideal world.
Balancing out price hikes and saving margins will continue. I don’t expect 2017-18 to be worse than 2016-17 or 2015-16. It should be better but let’s see.
On a scale of 1-100, how much confidence can you say that with?
We are living in a ‘VUCA’ (volatility, uncertainly, complexity and ambiguity) world. U.S. Federal Reserve interest rates go up, the rupee falls against the dollar, again raw material and crude prices will go up, we’ll have raw material pressures.
To what extent will margins and growth be hit for the year?
We are still in the planning process and we don’t give forward guidance.
So you are saying that 2017-18 won’t be worse than 2016-17, and that’s a telling comment because we were at the cusp of a recovery in the Indian economy last calendar year. Now you are not saying with confidence that it will be better. You’re saying you don’t expect it to be worse.
If it’s not going to be worse, there’s a chance that it can be better. It all depends on the way the economy recovers. We are a small fragment of the Indian economy. Out growth depends on how our economy grows, jobs come in, etc. So we’ll have to wait and watch.
This is also going to be a internationally a Brexit-Trump year, as they call it. We’re just days away from President Trump being sworn in. Maybe weeks away from the Brexit process getting underway legally. What’s your outlook on the global economy?
Be ready for anything.
How does business manage that kind of uncertainty?
Business doesn’t have any option. You have to manage.
How do you restrategise for it? For example, would you scale back some expansion plans internationally?
The Indian economy is growing and one year of slightly higher or lower growth will not impact our expansion plans. We’ve been living close to optimal capacities and I would like to build more capacities in the country. Hence we are putting up two more plants –one in Mysore and one in Vizag. The Mysore construction is underway and Vizag should start in a month or two. We are planning to go ahead with our expansion plans nevertheless. But that’s domestic.
International growth is widespread among many countries. Each country lives in its particular VUCA world. The advantage of being in many countries is that some countries go up while some countries go down. Last year was marked by great growth in Ethopia and Bangaladesh. This year is marked by great growth in Nepal and Jamaica, some recovery in Egypt, although the Egyptian pound has crashed. So the international part of the business has grown well. I have nothing to complain about.
And you expect it to continue in 2017 given the Trump-Brexit-Fed impact?
I think those individual countries are less affected than India because they are much smaller economies. They are affected by their own politics and their own situations on the ground.
What do you expect the impact of on India will be, given that President Elect Trump has said several things that are anti-global trade. It could have direct impact on India’s IT industry, his commentary on visas. We do know that Brexit will have some impact on the local economy of the U.K. but the EU as well. What do you expect will be the impact on India?
I think TCS, Wipro, Infosys are all here and they’ll answer that question much better than I can. I think they’ve always managed to cope whenever there have been visa restrictions or otherwise. They’ll face hurdles and will have to learn their way around it. They are all talking about employing more people within the U.S. itself. It won’t have a short-term impact, it may have a longer term impact if it really starts freezing. But immediately, I don’t think services can be shifted overnight from one provider to another on a bulk scale.