ET NowIn a chat with ET Now, Ashok Goel, VC &MD, Essel Propack, said that demonetisation have had some impact on his business but also said that he is expecting a surge in demand from December end itself. Edited excerpts:
Some of your clients are not using online payment and that is something that will hurt you so can you tell us your assessment of the impact of demonetisation on your business, what has been the initial impact?
Yes, the consumer because of lack of availability of cash particularly in the rural area, we see that the FMCG sector is seeing some impact on demand. Even though the brands have extended the credits to the trade channels, we suspect that the brands are also shrinking their supply chain demand so that they can keep their overall working capital within the limits and therefore we see that there is more than actual shrinkage of forecast that we see because typically we work on a monthly forecast and forecast for the month of December is about shrinkage of about 20% in certain categories. Some categories like pharmaceutical and all are doing fine but the other categories there is a shrinkage of forecast of about 20%. Therefore, we see that in the third quarter, we will see overall growth that we were expecting this year will not happen which is about impact of 12%.
Now you do have exposure to certain consumer staple items like oral care of course contributes about 50% at least in India so given the fact that many on the street do not expect staples of course naturally to be really impacted do you think that that portion of your revenues are going to remain intact?
Yes, it is a very interesting question. Logically oral care should not have had any impact but as I said that there is a fear psychosis, people are holding on to whatever cash that they could lay hands on the new money and also the brands shrinking their supply chain, logically it should not have happened, but we see that the forecast that we are seeing from our customers are at a lower end.
Your consolidated revenues have been declining over the past few quarters. Are we likely to see a little more pain going ahead especially now on account of demonetisation being reflected in the next quarter?
Well, being a global company and having plants and customers across the globe, the fact is that some geography or the other will sometime be not doing as well as you would expect and some would do much better than you expect it. So that is the nature of our business and being having a global footprint I do not think there is too much to read into that. This year fortunately India has been growing very nicely and the fact that India contributes about 40% of global revenues, we were hoping that we would more than make up the short fall in some other geographies. But this monetisation will have an impact on third quarter but on the fourth quarter, I think in the categories that we cater to, we would see the demand coming back up even before the 30th of December.
So that is the indication you are receiving from clients that from the fourth quarter onwards you will be able to asses the situation.
Yes, absolutely. And in fact we are actually preparing for a surge demand from January onwards so we are preparing ourselves, we are investing further so that if there is a surge in demand then we are able to cater to that.
We have seen your margins expand very well. Of course, you know this will come with a lag the higher crude prices but of course if this trajectory continues for $50 a barrel and plus do you think that it is going to hurt your margins and do you think we could see a trend of compression coming in?
Well our margins has nothing to do with the price of the raw materials because most raw material prices are a pass through whether it comes down or goes up. At the same time we also had to keep in mind that the building blocks between polymer and oil there is a huge chain and therefore the impact of oil prices comes with a lag effect of four to six months. So there is nothing for us to get alarmed about in that sense.
So, what trajectory would you pencil in for your margins?
What I am saying is that the trajectory for margin improvement happens with the oral and non-oral care play. As we keep getting more non-oral care business margins keeps getting better and that is how it is the oil prices, therefore the raw material prices do not have much impact. It does have an impact because we do have lag effect but that is only for three months if the prices have changed.
Some of your clients are not using online payment and that is something that will hurt you so can you tell us your assessment of the impact of demonetisation on your business, what has been the initial impact?
Yes, the consumer because of lack of availability of cash particularly in the rural area, we see that the FMCG sector is seeing some impact on demand. Even though the brands have extended the credits to the trade channels, we suspect that the brands are also shrinking their supply chain demand so that they can keep their overall working capital within the limits and therefore we see that there is more than actual shrinkage of forecast that we see because typically we work on a monthly forecast and forecast for the month of December is about shrinkage of about 20% in certain categories. Some categories like pharmaceutical and all are doing fine but the other categories there is a shrinkage of forecast of about 20%. Therefore, we see that in the third quarter, we will see overall growth that we were expecting this year will not happen which is about impact of 12%.
Now you do have exposure to certain consumer staple items like oral care of course contributes about 50% at least in India so given the fact that many on the street do not expect staples of course naturally to be really impacted do you think that that portion of your revenues are going to remain intact?
Yes, it is a very interesting question. Logically oral care should not have had any impact but as I said that there is a fear psychosis, people are holding on to whatever cash that they could lay hands on the new money and also the brands shrinking their supply chain, logically it should not have happened, but we see that the forecast that we are seeing from our customers are at a lower end.
Your consolidated revenues have been declining over the past few quarters. Are we likely to see a little more pain going ahead especially now on account of demonetisation being reflected in the next quarter?
Well, being a global company and having plants and customers across the globe, the fact is that some geography or the other will sometime be not doing as well as you would expect and some would do much better than you expect it. So that is the nature of our business and being having a global footprint I do not think there is too much to read into that. This year fortunately India has been growing very nicely and the fact that India contributes about 40% of global revenues, we were hoping that we would more than make up the short fall in some other geographies. But this monetisation will have an impact on third quarter but on the fourth quarter, I think in the categories that we cater to, we would see the demand coming back up even before the 30th of December.
So that is the indication you are receiving from clients that from the fourth quarter onwards you will be able to asses the situation.
Yes, absolutely. And in fact we are actually preparing for a surge demand from January onwards so we are preparing ourselves, we are investing further so that if there is a surge in demand then we are able to cater to that.
We have seen your margins expand very well. Of course, you know this will come with a lag the higher crude prices but of course if this trajectory continues for $50 a barrel and plus do you think that it is going to hurt your margins and do you think we could see a trend of compression coming in?
Well our margins has nothing to do with the price of the raw materials because most raw material prices are a pass through whether it comes down or goes up. At the same time we also had to keep in mind that the building blocks between polymer and oil there is a huge chain and therefore the impact of oil prices comes with a lag effect of four to six months. So there is nothing for us to get alarmed about in that sense.
So, what trajectory would you pencil in for your margins?
What I am saying is that the trajectory for margin improvement happens with the oral and non-oral care play. As we keep getting more non-oral care business margins keeps getting better and that is how it is the oil prices, therefore the raw material prices do not have much impact. It does have an impact because we do have lag effect but that is only for three months if the prices have changed.
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