Glass – half full or empty?

glass numbersPiramal Glass Ceylon, the sole container glass manufacturer in the island, has reported a slowdown in earnings and a drop in domestic volumes. Sales have slowed specially to key local customers in the food and beverage business, particularly liquor and soft drink manufacturers. As costs rise and margins get squeezed, the company, the local unit of India’s Piramal Group conglomerate, faces the threat of cheaper packaging materials.
“The cost of energy continues to be a challenge which has been trimming down the company margins continuously,” says Asia Wealth Management Company in a report.
Another challenge is the “increase in threat from substitutes in the local market.”
In the first half of the 2014 financial year, volumes fell 11% from the year before.
“Local demand dropped as customers primarily in the low-end liquor segment shifted towards reused bottles, aluminum cans (for the soft liquor segment) and cheaper imports rather than opting for brand new bottles that are locally manufactured,” Asia Wealth Management Company said.
It expects the declining trend in domestic volumes to continue during the rest of the financial year as the company gradually passes on the rise in energy cost through price increases. Earnings were only Rs18.7 million in the second quarter of FY14 with the net profit margin a mere 1.5%, compared with 20.2% in 2QFY13. Energy accounts for 40% of Piramal Glass Ceylon’s production cost. The depreciation of the rupee against the US dollar also drives up costs as a key raw material is imported soda ash.
Domestic revenue has dipped for three quarters consecutively up to 2QFY14. “Volumes declined as a result of key domestic segments shifting to alternatives to glass bottles such as aluminium cans and directly importing low cost bottles,” Asia Wealth Management Company says. “The persistence of this trend could slow down the future volume growth in the local market.”
Earlier, another stock broker, Asha Phillip Securities Ltd., had noted that “the developing trend for canned-beer will adversely affect the demand for glass bottles from the beer market.” Still, Piramal Glass exports, mainly of specialty bottles, are doing well, with sales up 40% to Rs377 million during the second quarter. According to SC Securities 85% of the export products are premium products with a higher profit margin than other export sales. Coloured bottles enjoy considerable demand from Asian countries as well as Australia.
Asha Phillip Securities expects exports to further increase towards the end of FY2013/14E, especially in Australia and New Zealand. Margins, however, could narrow as energy prices remain high and the firm is forced to discount prices to India with the depreciation of the Indian rupee to maintain volumes.