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The market size of the Indian paints sector has been pegged between Rs 112 bn and Rs 115 bn in value terms and is very fragmented. In volume terms, the sector posted a 16% YoY growth in FY07. The current demand is estimated to be around 650,000 tonnes per annum and is seasonal in nature. The per capita consumption of paints in India stands at 0.5 kg p.a. 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%.
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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 (44% market share), Kansai Nerolac (20% market share), Berger Paints (17% market share) and ICI (12% market share).
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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. Industrial paint's market size stands at around Rs 9.5 bn. 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.
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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 (ex: Titanium Dioxide), the industry benefits from softening crude prices.
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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.
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| Supply |
Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented.
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| 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.
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| Barriers to entry |
Brand, distribution network, working capital efficiency and technology play a crucial role.
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| 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.
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| Bargaining power of customers |
High due to availability of wide choice.
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| 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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Since the paint sector tracks the overall GDP growth, the growth in topline for the top three players was healthier, with Berger Paints lagging the other two companies viz., Asian Paints and Kansai Nerolac. Asian Paints outpaced its peers with a 21.5% YoY rise in net sales led by strong performances by both the industrial and decorative segments. With the GDP growing at 9.2% in FY07 (8.1% in FY06), the topline growth was relatively much stronger in comparison to the growth witnessed in FY06.
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During the year, prices of raw materials increased sharply and the major increases were in Xylene, Phthalic Anhydride, Acrylates and other petroleum based products and vegetable oils. This was expected to have a negative impact on operating margins and Berger Paints did record a marginal drop in the same. However, Kansai Nerolac actually posted a marginal expansion in margins while Asian Paints maintained margins at the same level as FY06. We believe this is commendable.
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All the key players are in an expansion phase. While Asian Paints is enhancing capacity at its manufacturing facility in Himachal Pradesh (for powder coatings) and Maharashtra (industrial coatings), Berger’s facility in Jammu started contributing to its topline performance, albeit on the lower side. After exterior paints, industrial paints seems to be the focus area for paint majors, with Asian Paints growing its revenues from this segment by over 24% YoY.
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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.
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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.
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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.
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Demand in case of industrial segment is also expected to increase going forward. This is on account of increase in demand in the automobile segment and 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 coating and high performance coatings will also propel topline growth of paint majors in the medium term.
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As part of the budget proposal, peak customs duty was reduced from 12.5% to 7.5%, which 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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