Paints Sector Analysis Report 

• The paint industry is expected to grow at 12-13% annually over the next five years from Rs 280 bn in FY13 to around Rs 500 bn by FY18. FY14 was a challenging year for the industry as a whole due to subdued demand across key sectors and rising inflation.
• The unorganised sector controls around 35% of the paint market, with the organised sector accounting for the balance. In the unorganised segment, there are about 2,000 units having small and medium sized paint manufacturing plants. Top organised players include Asian Paints, Kansai Nerolac, Berger Paints and ICI.
• Demand for paints comes from two broad categories:
• Decoratives: Major segments in decoratives include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc. Decorative paints account for over 77% of the overall paint market in India. Asian Paints is the market leader in this segment. Demand for decorative paints arises from household painting, architectural and other display purposes. Demand in the festive season (September-December) is significant, as compared to other periods. This segment is price sensitive and is a higher margin business as compared to industrial segment.
• Industrial: Three main segments of the industrial sector include automotive coatings, powder coatings and protective coatings. Kansai Nerolac is the market leader in this segment. User industries for industrial paints include automobiles engineering and consumer durables. The industrial paints segment is far more technology intensive than the decorative segment.
• The paints sector is raw material intensive, with over 300 raw materials (50% petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the industry benefits from softening crude prices.

• Supply
• Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented.
• Demand
• Demand for decorative paints depends on the housing sector and good monsoons. Industrial paint demand is linked to user industries like auto, engineering and consumer durables.
• Barriers to entry
• Brand, distribution network, working capital efficiency and technology play a crucial role.
• Bargaining power of suppliers
• Price increase constrained with the presence of the unorganised sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is therefore that margins are better in the decorative segment.
• Bargaining power of customers
• High due to availability of wide choice.
• Competition
• In both categories, companies in the organised sector focus on brand building. Higher prices through product differentiation are also followed as a competitive strategy.

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• FY14 was tough for the Indian paint sector. Hopes of a revival in demand after a good monsoon and during the festive season were dashed by high inflation. The demand for paint, being a discretionary expenditure, is typically hurt during periods of rising inflation. However, to their surprise, paint makers have found that while demand remained tepid in cities, consumption was rising in rural areas. The increasing reach of media in villages has also helped paint makers, making easier for them to advertise their products in these regions. Companies have also discovered that demand for premium paints is high even in remote locations.
• Performance on the margins was impacted by the rising prices of crude oil and titanium dioxide which increased the overall expenditure, thereby impacting profitability growth. However, companies are undertaking a gradual and calibrated price increase in order to shield margins. Nonetheless, as a complete pass on of raw material price increase is not possible in the industrial segment, the blended margins continue to suffer.
• However, a good monsoon this year is expected to boost demand in the rural areas. A good harvest and festival season demand can boost volumes in the second half of FY15.
• All the key players are in an expansion phase. Asian Paints’ plant in Khandala, Maharashtra has recently got comissioned. Kansai Nerolac’s capacity expansion plans at Jainpur and Bawal has culminated. Berger Paints has also undertaken capacity expansion for its plants located in Andhra Pradesh (AP). Further, expansion of water based plant at Rishra and Goa is also on track. As per estimates, paint capacities are expected to go up by 50-70% in the coming 3 to 5 years.

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• The market for paints in India is expected to grow at 1.5 times to 2 times GDP in the next five years. With GDP growth expected to be between 5-6% levels, the top three players are likely to clock above industry growth rates in the future, considering they have a strong brand and good reach.
• The market size of the paint industry in India is estimated at around Rs 290 bn. Industry players expect close to 12% growth in business volume and 10-12% rise in sales in FY15.
• Decorative paints segment is expected to witness higher growth going forward. The fiscal incentives given by the government to the housing sector have immensely benefited the housing sector. This will benefit key players in the long term.
• Although the demand for industrial paints is lukewarm it is expected to increase going forward. This is on account of increasing investments in infrastructure. Domestic and global auto majors have long term plans for the Indian market, which augur well for automotive paint manufacturers like Kansai Nerolac and Asian-PPG. Increased industrial paint demand, especially powder coatings and high performance coatings will also propel topline growth of paint majors in the medium term.
• If the new capacities do not get utilized well, companies may face margin pressures in the near term.

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Related Links for Paints Sector
Quarterly Results | Sector Quote | Over The Years