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Indian Paint industry draws a rosy picture
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted November 13, 2006
India's GDP growth of 8 percent, infrastructure investment in billions, over 60% of the population aged under 30, falling interest rates, rising consumer markets growing at double-digit percentages and the promise of a strong manufacturing base for exports - these list of attractions augurs well for the paints industry.
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The multi billion dollar market has come a long way to discover the new horizon of painting Industry in the Indian sub continent. The industry is expected to grow by 15 percent in value terms in the current fiscal.
But the per capita consumption of paints in India is very low at 0.5 kilo grams per annum if compared with 4 kgs in the South East Asian nations and 22 kgs in developed countries. The global average per capita consumption is 15 kg. So there is a huge scope to grow.
In India the organized sector controls 70 percent of the total market with the remaining 30 percent being in the hands of nearly 2000 small-scale units. Asian paints is the industry leader with an overall market share of 33 per cent in the organized paint market.
The industrial paint segment accounts for 35 percent of the paint market while the decorative paint segment accounts for 65 per cent of paints sold in India. In most developed countries, the ratio of decorative paints vis-à-vis industrial paints is around 50:50.
Growth drivers
"With strong growth in the housing and the automobile sector, the paint industry is expected to do well in the next year too," says Ashok Saini, Vice President - Special Projects, Goodlass Nerolac Paints Ltd.
Higher growth is likely in the decorative paints segment driven by the construction and housing boom: With the decorative segment accounting for about 75 per cent of the Indian paint market, the performance of the sector hinges on the demand from this category. And if one were to use disbursement of housing finance companies as an index for housing demand and, by extension, that for decorative paints, paint companies have every reason to cheer.
The continuing 30 per cent growth in the housing sector should maintain growth for the decorative segment, said an analyst.
Automobiles - the cars story: Close to 50 per cent of the demand for industrial paints comes from the automotive sector. A sharp spike in the fortunes of this segment, led to a re-rating of Goodlass Nerolac, a dominant player in this category.
In the automobile sector, the passenger car segment has been growing at 24 percent and the commercial vehicle segment at 32 per cent. "If this trend continues it is good for Goodlass," Saini said. The company has a strong presence in the industrial paints segment and is a leader in the automotive paints with a market share of 65 per cent. Currently, 45 per cent of its turnover comes from industrial paints, 55 per cent coming from the decorative segment.
Industrial paints: The other half of the demand from the industrial segment is driven by demand for protective coatings, powder coatings and special applications. With a swathe of companies across Corporate India announcing significant manufacturing expansion plans, the demand for industrial paints is soaring. Likewise, a fairly healthy demand growth in consumer durables has given the paint industry a fillip.
About 65 per cent of the demand for decorative paints stems from repainting. Till the recent past, this activity usually preceded the festival season. Now, with rising aspiration levels, coupled with a shift in the perception of paints as having a protective value rather than a mere decorative, the use of paints may well be through the year. This will smoothen out the ups and downs and lend a greater stability to the earnings stream of companies.
On a richer hue
The industry is raw-material intensive. Of the 300 odd raw materials, nearly half of them are imported petroleum products. Thus, any deficit in global oil reserves affects the bottom-line of the players. At the current juncture, paints companies are faced with firm raw material prices. As the paints industry uses up to 600 different raw materials, rising input costs remains an area of concern.
According to market sources, prices of titanium dioxide, an important raw material, has been rising. "Prices of most raw materials should stabilize at current levels and then start edging down," they say indicating the paint industry's hope of a possible decline in prices.
Despite high raw material costs constricting margins, leading paint companies have been able to turn in revenue and profits that help them to maintain growth.
The industry has been a beneficiary of the progressive lowering of import duties. "For the paint industry, the reduction of peak custom duty by 2.5 per cent to 12.5 per cent will be beneficial as nearly 30 per cent of the raw material is imported by the industry," says Ashwin Dani, Vice-Chairman and Managing Director, Asian Paints Ltd.
The import duty cut has also enabled the industry counterbalance, to an extent, the rise in the prices of such inputs whose prices are linked to that of crude oil. Another consequence of this duty reduction is that it has enabled frontline players to compete aggressively with the unorganized sector.
Flying colors
Paint companies have not quite set investor imagination on fire in the current bull market frenzy, though they have been busy posting index-busting returns over the past year.
With income rising faster and interest rates declining, the affordability factor improved dramatically, this in turn boosted demand for housing. The paint sector, especially on the decorative side, gained immense traction. This decorative space would show strength compared to the industrial segment, as growth in the latter may be capped by a combination of a high base effect of the earlier year and the limited pricing power.
There is certain solidity about the performance of key players such as Asian Paints, Goodlass Nerolac and Berger Paints that appears to suggest that the good times may last awhile. That these players are bullish on the sector's prospects is evident from their capacity expansion plans itself.
Major Players
Asian Paints
Goodlass Nerolac
Berger Paints
ICI India
Shalimar Paints
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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