Paints Sector Analysis Report

• The market size of the Indian paints sector has been pegged at Rs 170 bn in value terms and is very fragmented. While in value terms, the industry grew by 17% to 18% in FY09, in volume terms, the growth stood at 9% YoY, the lowest in the last five years. The per capita consumption of paints in India stands at 0.5 kg per annum as compared to 1.6 kgs in China and 22 kgs in the developed economies. India's share in the world paint market is just 0.6%.
• 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 (30% market share), Kansai Nerolac (20% market share), Berger Paints (19% market share) and ICI (12% market share).
• 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 75% 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.
• With the steady decline in excise duties (from 40% to 16% over five years), viability of small-scale units has eroded considerably. Without the price advantage, these units have found it difficult to compete with their peers in the organised sector. The unorganised sector has been consistently losing market share to the organised sector.

• 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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• FY09 was a tough year for the paints industry as the economic slowdown took its toll. Since the paint sector tracks the overall GDP growth, because the latter was lower than the strong growth recorded in the past, the growth in topline for the top three players was not as strong as in the previous years. For instance, while Asian Paints did well on the topline front during the first half of 2009, things took a turn for the worse in the third quarter wherein sales and profits were severely impacted as the global financial crisis worsened. For the year however, Asian Paints managed to log in a strong growth in topline as demand picked up in the fourth quarter. Kansai Nerolac on the other hand did not do too well and the industrial paints especially the automotive paints business of the company was impacted as the demand for automobiles waned.
• There was a sharp contrast in the movement of raw material prices as well. The first half of the year saw crude prices escalating sharply thereby denting the profit margins of paint companies. For instance, Asian Paints was compelled to raise the prices of its solvent based products 6 times. While prices considerably softened in the last quarter of the year, the fall was not enough to offset the crude price hike during the first half of the year. As a result, paint companies had to make do with falling margins.
• All the key players are in an expansion phase. While Asian Paints is setting up a plant in Rohtak, Haryana and one in Maharshtra, Kansai Nerolac is undertaking brownfield expansions at its Lote and Bawal plants and a greenfield project in Hosur, Tamil Nadu.

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• The market for paints in India is expected to grow at 1.5 times to 2 times GDP growth rate in the next five years. With GDP growth expected to be over and above 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 are 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.
• This apart, above normal monsoons in the current year would lead to higher agricultural output thereby increasing demand for paint from rural areas. We expect paint demand to grow by 12% to 15% in the next two to three years, largely led by post festive season demand.
• Demand in case of industrial segment is also 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.
• The reduction in peak customs duty from 12.5% to 7.5% will lower the import cost of key raw materials. With more residual income with the population, home loan disbursals are expected to grow at 25% CAGR in the next three years, which is a positive for paint companies.

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