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GST: Pidilite cuts prices of adhesives by 2-5%, reorganizing warehouses

LiveMint logoLiveMint 12-07-2017 Soumya Gupta

Mumbai: Pidilite Industries Ltd, maker of the adhesive brand Fevicol, has slashed prices across its adhesives business as the company would pay lower tax rates under the goods and services tax (GST) regime, a top company executive said.

“We have redone our price lists to reflect the new pricing,” Bharat Puri, managing director of Pidilite Industries, said in an interview.

“(The GST rate) for adhesives is 18%, but for coatings and epoxy-resins is 28%. Our composite rate will be somewhere between them. Wherever we will make a saving, this is the time to pass it on to the consumer.”

Pidilite has dropped prices of adhesives across categories by 2-5% although it has also hiked rates for coatings and epoxy-resins by 2-3% to reflect the new 28% tax rate, Puri said.

The company is also in the midst of reorganizing its network of 32 warehouses. It currently has nearly one warehouse in each state in the country, Puri said.

“Once the input credit situation becomes clear, the reduction in the tax rates, there are 2 areas where (industry) should focus,” he said. “One is the logistics piece. You don’t have to have a warehouse in every state, you can (set one up) where it makes sense. We’re in the middle of that exercise.”

However, GST-related hiccups remain.

“Now the key is how quickly the retailers adopt. The single biggest impact right now, if you ask me, is in wholesale,” Puri said. “The small retailers who are under the composite scheme, they don’t have a problem. But today, even in small towns, (dealers) have fairly large turnovers and they have to issue GST invoices. They’re still figuring that out. That will take some time. The wholesale business traditionally in India has been largely cash, what will be their new normal? How will they operate? They will need to figure that out.”

Puri said it will take 60-90 days for the retail channels to “settle down”, although rural markets continues to be the “hardest hit”.

In the meantime, Pidilite has been training its distributor network in the run up to the GST and began invoicing on the new system on the first morning of the new system, Puri said. About 15% of the company’s consumer and bazaar (sold through carpenters and service providers) sales are made through the wholesale channel, primarily for high volume goods like Fevikwik that are available now at 3-3.5 million outlets in India.

“GST will have a similar impact on Pidilite as on other consumer companies,” said an analyst at Reliance Securities. “Adhesives are now taxed at 18% from the earlier indirect tax rate of 23-24%. There is destocking in the dealer and distributor level but whatever shortfall there was will reverse by Q2 or Q3 (of this financial year. As the company passes benefits (of lower taxes) on to the consumer, there will be higher growth volume over a period time in Q2 and Q3,” the analyst said. The lower pricing will help volumes as adhesives make up about 65-70% of the company’s business, the analyst added.

Meanwhile, Pidilite is working on its international businesses, expanding operations to Ethiopia and Kenya with either waterproofing or adhesives. These countries will act as a base for the company to reach out to other East African markets including Uganda and Tanzania.

The company entered Sri Lanka by acquiring local brand Chemifix in December 2015 and is now looking to set up a manufacturing facility in the country, Puri said. In Bangladesh, where the company is among the top three brands, it is scouting land for a second manufacturing facility.

Revenue from the international business fell 12% to Rs1.3 billion in the quarter ending March 2016, primarily due to decline in sales in North and South America, as per a note by Reliance Securities. “The company has said in the past that it will not do too many acquisitions abroad, focusing on fewer and bigger acquisitions,” the analyst quoted above said, adding that about 40% of the company’s international business comes from North America while 20% comes from Africa and the Middle East, which are more volatile in currency and geopolitical terms.

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