Paints Sector Analysis Report 

• The paint industry volume in India has been growing at 15% per annum for quite some years now. As far as the future growth prospects are concerned, the industry is expected to grow at 12-13% annually over the next five years. FY11 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 paints 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 72% 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 (30% 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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• FY11 was a mixed bag for the paint companies. While all the 3 players viz. Asian Paints, Kansai Nerolac and Berger Paints reported strong growth in sales, operating margins came under severe pressure due to raw material price inflation. Top-line growth was boosted by strong demand from the decorative paints segment. Nonetheless, the demand environment in the industrial segment continues to remain challenging due to rising interest rates.
• Performance on the margins front was a big disappointment. Rising prices of crude oil and titanium dioxide increased the overall expenditure thereby impacting profitability growth. However, companies are undertaking a gradual and calibrated price increase 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.
• All the key players are in an expansion phase. Asian Paints' plant in Khandala, Maharashtra is under construction and is expected to be commissioned by 4QFY13. Kansai Nerolac's capacity expansion plans at Jainpur and Hosur culminated during the year. Berger Paints has also undertaken capacity expansion for its plants located in Andhra Pradesh and Goa. Further, it is also contemplating to set up a manufacturing facility in Pune, Maharashtra.

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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 over 7% levels, the top three players are likely to clock above industry growth rates, especially given the fact that protection that was available to unorganised players has come down significantly.
• Decorative paints segment is expected to witness higher growth going forward. The fiscal incentives given by the government to the housing sector have benefited the housing sector immensely. 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.

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