The Indian arm of the Swiss-based speciality chemicals major, Clariant, has seen better times. Though it is a market leader in textile chemicals and dyes, rising input costs and intense competition made the company's profits dip in the first nine months of the current fiscal.
In an otherwise lacklustre year, exports were the only bright spot. Recently, its parent company Clariant AG was in the news for making an open offer for Colour-Chem, another group company operating in India. We spoke to B L Gaggar, chief financial officer and company secretary, on the possibility of a merger between the two companies, his outlook on the domestic market, and the company's plans for international markets.
With Clariant AG making an open offer for 20 per cent in Colour Chem, it now has over 70 per cent in the company. Are there any plans to merge the operations of Colour Chem and Clariant?
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All decisions regarding the consolidation of operations or merging of subsidiaries are decided by our parent company. Neither are we participating in the decision-making process, nor do we have any information on whether the group is contemplating such a move at this juncture. There is no major duplication in our businesses. There may be some overlapping in the textiles, leather and paper business. But we have an understanding and ensure there is no cannibalisation of marketshare.
Despite decent growth in sales, profits have declined in the third quarter. Why?
There are a couple of reasons why we haven't been able to capitalise on our sales growth. For one, input costs of some petroleum-based products have seen a sharp increase during the year. And unstable market conditions led to a slump in demand from the leather industry. This business contributes around 20 per cent to the company's total sales. While overall sales were led by growth in exports, domestic sales were was hit by the lower-than-expected performance of the leather business unit. The company's margins have also come under great pressure as result of rising costs.
Do you see the trend of rising costs changing in the near future?
The price of raw material, which has been steadily rising in the second and third quarters, is looking to stabilise. But factors like the uncertainty over VAT and the transporters strike have spoilt business sentiment. Further, the move to bring smaller textile players under CENVAT has only added to the industry's problems. Traders have been postponing their purchase decisions owing to the uncertainty over VAT, and now the transporters strike has brought the movement of goods to a standstill.
You mentioned sales growth was led by exports growth. How much of this was contributed to by the supply arrangement with the parent company. Doesn't this restrict your pricing power? How are the realisations compared to the domestic market?
Exports are likely to see over 30 per cent growth this fiscal. They make up about 35 per cent of total sales. Supplies to the parent company almost make up 92 to 95 per cent of total exports. We compete with other global manufacturers on all our chemical products. There is heavy competition from China, Indonesia and Japan. Therefore, our supplies are on competitive prices negotiated on a country-to-country basis. Clariant AG has three sourcing destinations in Asia - India, China and Indonesia. So we compete with each other for sourcing orders. Because of intense competition, we don't enjoy much pricing power. Hence, realisations from exports are lower compared to the domestic market. As a result, margins are lower as well.
Have these countries made significant inroads into the domestic market?
Players from Indonesia, China and Japan have been able to make inroads only in the commodities segment of the domestic market. India still has an edge over them where technology-based products, such as speciality chemicals, are concerned.
You had identified the masterbatches division as a high-growth and a focus area. But in the third quarter this division turned in a disappointing performance. What went wrong?
Yes, we had identified masterbatches as focus and high-growth areas but India has not developed the need for specialised masterbatches. User industries are looking for cost-effective and competitive prices. So, they're not too worried about the quality of the product and hence specialised masterbatches haven't taken off in India.
Has the company chalked its growth plans for the next couple of years?
We strive to record double-digit sales growth rates. We hope to improve profitability by keeping strict checks and controls on overheads and working capital utilisation. Cost-cutting measures are an ongoing process in the company. We are looking at outsourcing as an option, as we can save both time and costs.
Will you be able to sustain this exports growth rate in the current fiscal?
We have seen phenomenal exports growth in the last fiscal. But I don't expect to see such growth next year. Last year, we saw a good increase in export orders from European and American markets. European markets came out of their recessionary mode of 2001-02 and we saw a surge in exports to that region. Though we may not sustain these high growth rates this fiscal, we are still hopeful of good performance on the exports front.
What do you attribute the lacklustre performance of Indian chemicals industry to?
We feel India has the potential to produce research-oriented products. In the last of couple of years, we have not seen any major greenfield project in our industry. The industry has not created enough research facilities or upgraded its technology. Indian companies must spend more on research-based projects, upgrade manufacturing facilities and look to introduce more technology-based niche products in the market.
The domestic chemicals industry is highly fragmented. Do you see a round of consolidation happening? Does size matter in the industry?
Yes, size does matter as larger players enjoy economies of scale and have access to superior technology. But a lot of domestic players, especially small players, operate in niche segments. So I don't see them going out of business soon. I don't foresee a major consolidation happening in the industry. Instead, smaller players will play a complementary role to larger players, meeting their outsourcing requirements. Larger and smaller players will have to learn to co-exist.