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					                                               PAINTS
•   The market size of the Indian paints sector has been pegged         was not enough to offset the crude price hike during the first
    at Rs 170 bn in value terms and is very fragmented. While in        half of the year. As a result, paint companies had to make do
    value terms, the industry grew by 17% to 18% in FY09, in            with falling margins.
    volume terms, the growth stood at 9% YoY, the lowest in the •       All the key players are in an expansion phase. While Asian
    last five years. The per capita consumption of paints in India      Paints is setting up a plant in Rohtak, Haryana and one in
    stands at 0.5 kg per annum as compared to 1.6 kgs in China          Maharshtra, Kansai Nerolac is undertaking brownfield
    and 22 kgs in the developed economies. India's share in the         expansions at its Lote and Bawal plants and a greenfield
    world paint market is just 0.6%.                                    project in Hosur, Tamil Nadu.
•   The unorganised sector controls around 35% of the paint
    market, with the organised sector accounting for the balance.      KEY POINTS
    In the unorganised segment, there are about 2,000 units having
    small and medium sized paints manufacturing plants. Top            Supply: Supply exceeds demand in both the decorative as
    organised players include Asian Paints (30% market share),         well as the industrial paints segments. Industry is
    Kansai Nerolac (20% market share), Berger Paints (19% market       fragmented.
    share) and ICI (12% market share).
                                                                       Demand: Demand for decorative paints depends on the
•   Demand for paints comes from two broad categories:                 housing sector and good monsoons. Industrial paint demand
    Decoratives: Major segments in decoratives include exterior        is linked to user industries like auto, engineering and
    wall paints, interior wall paints, wood finishes and enamel        consumer durables.
    and ancillary products such as primers, putties etc. Decorative    Barriers to entry: Brand, distribution network, working capital
    paints account for over 75% of the overall paint market in         efficiency and technology play a crucial role.
    India. Asian Paints is the market leader in this segment. Demand
                                                                       Bargaining power of suppliers: Price increase constrained
    for decorative paints arises from household painting,
                                                                       with the presence of the unorganised sector for the
    architectural and other display purposes. Demand in the festive
                                                                       decorative segment. Sophisticated buyers of industrial paints
    season (September-December) is significant, as compared to
                                                                       also limit the bargaining power of suppliers. It is therefore that
    other periods. This segment is price sensitive and is a higher
                                                                       margins are better in the decorative segment.
    margin business as compared to the industrial segment.
                                                                       Bargaining power of customers: High due to availability of
    Industrial: Three main segments of the industrial sector include
                                                                       wide choice.
    automotive coatings, powder coatings and protective coatings.
    Kansai Nerolac is the market leader in this segment. User          Competition: In both categories, companies in the organised
    industries for industrial paints include automobiles engineering   sector focus on brand building. Higher prices through product
    and consumer durables. The industrial paints segment is far        differentiation are also followed as a competitive strategy.
    more technology intensive than the decorative segment.
•  The sector is raw material intensive with over 300 raw materials    CURRENT SCENARIO AND PROSPECTS
   (30% petro-based derivatives) involved in the manufacturing
                                                                     • The market for paints in India is expected to grow at 1.5 times
   process. Since most of the raw materials are petroleum based,
                                                                        to 2 times GDP growth rate in the next five years. With GDP
   the industry benefits from softening crude prices.
                                                                        growth expected to be over 6.5% levels, the top three players
• With the steady decline in excise duties (from 40% to 16%             are likely to clock above industry growth rates, especially
   over five years), viability of small-scale units has eroded          given the fact that protection that was available to unorganised
   considerably. Without the price advantage, these units have          players has come down significantly.
   found it difficult to compete with their peers in the organised
                                                                     • Decorative paints are expected to witness higher growth going
   sector. The unorganised sector has been consistently losing
                                                                        forward. The fiscal incentives given by the government to the
   market share to the organised sector.
                                                                        housing sector have benefited the housing sector immensely.
                                                                        This will benefit key players in the long term.
 FY09
                                                                     • This apart, the status of monsoons would have a significant
• FY09 was a tough year for the paints industry as the economic         impact on agricultural output, which in turn would influence
   slowdown took its toll. Since the paint sector tracks the overall    the demand for paint from rural areas. We expect paint demand
   GDP growth, because the latter was lower than the strong             to grow by 12% to 15% in the next two to three years, largely
   growth recorded in the past, the growth in topline for the top       led by post festive season demand.
   three players was not as strong as in the previous years. For • Though the industrial paints segment continues to remain
   instance, while Asian Paints did well on the topline front during    subdued on the account of the slowdown, over the longer
   the first half of 2009, things took a turn for the worse in the      term, demand for industrial paints is expected to increase going
   third quarter wherein sales and profits were severely impacted       forward. This is on account of increasing investments in
   as the global financial crisis worsened. For the year however,       infrastructure. Domestic and global auto majors have long term
   Asian Paints managed to log in a strong growth in topline as         plans for the Indian market, which augur well for automotive
   demand picked up in the fourth quarter. Kansai Nerolac on the        paint manufacturers like Kansai Nerolac and Asian-PPG.
   other hand did not do too well and the industrial paints             Increased industrial paint demand, especially powder coatings
   especially the automotive paints business of the company was         and high performance coatings will also propel topline growth
   impacted as the demand for automobiles waned.                        of paint majors in the medium term.
• There was a sharp contrast in the movement of raw material • The reduction in peak customs duty from 12.5% to 7.5% will
   prices as well. The first half of the year saw crude prices          lower the import cost of key raw materials. With more residual
   escalating sharply thereby denting the profit margins of paint       income with the population, home loan disbursals are expected
   companies. For instance, Asian Paints was compelled to raise         to grow at 25% CAGR in the next three years, which is a
   the prices of its solvent based products 6 times. While prices       positive for paint companies.
   considerably softened in the last quarter of the year, the fall

				
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posted:11/6/2010
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