India holds lot of promise for Covestro: Frank Lutz

With a turnover of Euro 11.8 billion, Covestro (formerly known as Bayer Material Science) is one of the world’s leading manufacturer of high-performance polymers for key industries. Created as part of the restructuring of Bayer AG, the company manufactures and develops materials like coatings, adhesives & sealants, polycarbonates (CDs, DVDs), polyurethanes (automotive seating, insulation for refrigerating appliances), etc. It mainly serves industries such as automotive manufacturing and supply, electrical engineering & electronics, construction & home products, and sports & leisure.

The German polymer major views India, where it is well established with three manufacturing facilities at Greater Noida, Ankleshwar and Cuddalore, as one of the key growth markets for the future. 

During his maiden visit to India post his appointment as CFO of Covestro, Frank Lutz, interacts with Rakesh Rao to discuss the company’s strategy to strengthen its presence globally and in the country, and shared his view on present status of the polymer industry. 

How is the market scenario globally? Is the demand picking up?

Covestro is a world-leading manufacturer of high-tech polymer materials for key industries. During second quarter of 2016, Covestro managed to increase core volumes by 7.7 percent year-on-year (YoY). Furthermore we expect a mid- to high-single-digit percentage increase in core volumes for 2016.

The three core sectors for Covestro in India are automotive, electronics and construction. These industries are on a strong growth trajectory due to surge in demand for the efficient and eco-sensitive products.

Will the Brexit have any impact on the polymers industry?

Talking about some of our core customer industries, we expect that growth in the automotive industry will decline compared with the forecast beginning of this year due to the potential impacts of the Brexit among other uncertainties. 

For the construction business, the decision for Brexit may deliver a downside to UK’s construction sector. Non-residential maybe influenced negatively as demand for office buildings is expected to decline due to relocation of businesses outside the country. However, as other effects will at least partially compensate that, we expect the overall impact on the polymers industry from today’s perspective to be rather limited.

How is the headquarters in Germany viewing the Indian market? 

India is a growing market and holds lot of promise. APAC region holds significant importance in the Covestro’s future growth story, especially India which has been witnessing a double-digit growth. With ongoing urbanisation and increasing mobility, we see potential for immense growth. 

How is market for polymers in India compared to developed and other developing (emerging) countries?

All markets are affected by the global trends of ongoing urbanisation and increasing mobility. However, developed countries and emerging countries are affected to different degrees and in different ways. For India, we believe these megatrends offer potential for immense growth. 

From Covestro’s point of view, which end-user industries are the key drivers for you (globally and in India)?

Our three segments hold leadership positions and enable us to benefit in particular from the growth in our customer industries. We believe these industries have the potential to grow faster than the global economy driven by macro trends such as climate change, expanding global population, urbanisation and increasing mobility. These trends certainly will also affect India.  

In India, our key customer segments are automotive, followed by the IT sector, which is a rapidly growing market. Home furnishing and construction are the next two key industries.

Are there any plans for expansion (new investment) in India? 

We have been through a wave of expansion and are now reducing capex levels to below depreciation. Approximately half of our global assets are 10 years old or less. We want 4-5 years of cash generation before we consider another major expansion as we have sufficient capacity for our foreseen growth. 

Are looking at any acquisitions in India?

Currently, we are not looking at any acquisitions in India or anywhere else.  However, we are prepared to use opportunities for smaller acquisitions, especially to enhance our competence in terms of technological know-how.  

What is you outlook for the industry and your company for 2016?

The global economy will probably grow slightly slower than in 2015, supported as before by a generally expansionary monetary policy.

With respect to Covestro, on the back of a positive development in the first half of 2016, we are raising our outlook for the full year. We expect a mid- to high-single-digit percentage increase in core volumes. We predict that the free operating cash flow will be at the previous year’s level, while ROCE is likely to be above last year. We expect EBITDA for the second half of 2016 to be at least at the level of the same period in 2015.