The Ionic Thrust

Ion Exchange's thrust on the water treatment business in the consumer segment is not without justification. The company has been in the business of water treatment for years but only recently has it accelerated product launches and identified the consumer segment as a priority area. About seven different types of domestic water purifiers, a product that turns hard water soft, another that removes iron from water are just some offerings that have hit the market. The company expects contribution from water purification in the consumer segment to nearly treble in 1998-99.

The impact is visible on its top line growth. In the first quarter ended June 1998, its sales have risen by 25.7 per cent to Rs 36.66 crore while its net profit has risen to Rs 1.02 crore from Rs 78 lakh in the previous corresponding quarter. Bottom line growth will take some time to pick up as promotional expenditure for the consumer segment will impact margins.

 

While threat from its near competitor Thermax-Culligan could be one reason, an equally and more serious problem is the slowdown in industrial growth. This has affected Ion Exchange's traditional businesses of ion exchange resins, water treatment plants and chemical additives. Overall sales growth for Ion Exchange has fallen from 7.04 per cent in 1996-97 to 5.33 per cent in 1997-98.

Water treatment plant sales were up by only 9 per cent, ion exchange resin sales were down by 15.43 per cent and chemical additives registered a relatively flat growth of 4 per cent. Of more concern is that delays in some projects and consequently payments have seen its receivables shoot up sharply. Debtors over six months have increased to Rs 28.55 crore in 1997-98 from Rs 10.89 crore in 1996-97.

In fact, Ion Exchange's grip on its consumer products business had slackened in 1996-97 as sales had fallen to Rs 5.73 crore from Rs 7.11 crore. In 1997-98, however, it seems to have got its act together as sales are back at Rs 7.18 crore. Success in the business is crucial as prospects of a revival in industrial growth in the near term seem bleak. Till then, building up its consumer portfolio seems the only way of attaining growth, though at the cost of lower margins in the near term. Margins in the first quarter ended are at 12.82 per cent compared with 14.75 per cent in the previous corresponding period.

Its exports business has come under pressure as the earlier years had seen Japan and south east Asian countries contribute significantly to its export performance. It is now trying to penetrate other markets like the Middle East, America and South Africa.

Berger Paints

One thing common with most paint companies is expansion of capacity in the last few years and Berger Paints is no exception to this. It commissioned a 18,000 tpa paints capacity at Pondicherry in May 1997, the results of which are trickling in.

Capacity utilisation in relative terms has dropped to 58.47 per cent in 1997-98 from 89.08 per cent but increased in absolute terms by 35.47 per cent to 20,419 tpa. Projected offtake did not materialise on account of the industrial slowdown and slump in the real estate market. Building up of capacity at this time have led to flat margins, which have fallen to 8.59 per cent from 8.95 per cent. This is despite sales increasing by about 12 per cent to Rs 299.85 crore in 1997-98 over the previous year.

The stock price had touched a level of Rs 124 in May 1998 but subsequently fell to Rs 90 in August 1998. Its first quarter results too were nothing exceptional. Net sales have increased by a healthy 13.37 per cent to Rs 80.8 crore but expenditure too has risen by approximately the same amount. The expenditure bill has been affected mainly by higher raw material costs for paint companies, consequently affecting their margins as the entire rise is not being passed on to customers.

Berger's share price rise on Thursday from Rs 90 to Rs 97 seems linked to the announcements made at its annual general meeting. One of them is related to possible mergers and acquisitions. The other pertains to beefing up its distribution network in the country which will enable it to attain higher volume growth. The more immediate impact will come from its proposal to hike prices of paints by about five to seven per cent.

Analysts say that Asian Paints has already hiked its prices in certain categories two months ago and it is only natural that others also follow suit. With volume growth slow to come by, increasing prices is the only way of improving per unit realisations, and consequently improve its margins.

At the bottomline, the new plant has given it a cushion in the form of tax concessions. Net profit has increased by 27.64 per cent to Rs 18.24 crore in 1997-98 and by 35.79 per cent to Rs 4.97 crore in the first quarter ended June 1998.