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Budget 2006-07: Paints

The Indian paints sector is valued at Rs 66 bn in value terms and is very fragmented. The organized sector accounts for about 70% of the business while around 2,000 players in the unorganized players accounts for the remaining. Read more

Budget Measures

	Peak rate of customs duty reduced from 15% to 12.5%. Basic inorganic chemicals reduced from 15% to 10%.
	Excise duty is being reduced from 24% to 16% on small motor vehicles.
	Duty to be reduced on major bulk plastics like PVC, LDPE and PP from 10% to 5%; on naphtha for plastics to nil; on styrene, EDC and VCM which are raw materials for plastics to 2%.
	Emphasis on the Bharat Nirman project and its timely completion.

Budget Impact

	There is a great emphasis by the Finance Minister on rural and infrastructure development. But these are typically the long-term growth drivers for the sector as a whole. While benefits from these initiatives are unlikely to be immediate, nevertheless, these are steps in the right direction. Perhaps, one would have expected a more aggressive stance on rural and infrastructure development.
	The reduction in excise duty on small cars is likely to benefit both Asian Paints and Goodlass Nerolac in a significant manner, as the prices of cars will decline. In a scenario where domestic players are increasing capacity and new players are expected to launch products in the small car category, the top two paint companies will witness traction at the topline level.
	The reduction in customs duty is a big positive for paint majors, considering the fact that imports as a percentage of sales were around 6% of sales for companies like Asian Paints. However, it needs to be borne in mind that imports to sales have been coming down in the last three years in line with the reduction in duties (8% in FY03). The reduction in excise duty on plastic (the main packaging material as far as the paint sector is concerned) should cushion the impact on increase in other raw material prices.

Sector Outlook

We expect the paint sector to grow at 2 times long-term GDP growth over the next three 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. Goodlass Nerolac, Asian Paints and Berger are key beneficiaries.

Industry Wish List

	The government has given great impetus to the housing industry and one hopes that the same consideration will be given in the current budget also. Housing sector revival boosts the growth of the general economy and thereby the paint industry.

	The government should give incentives to companies that invest money in R&D activities by way of weighted deductions for revenue spends and accelerated depreciation rates for investment in R&D equipments. This will help the Indian industry to become globally competitive.

Budget over the years

Budget 2003-04	Budget 2004-05	Budget 2005-06

Continuation in interest exemption on housing loans. Peak custom duty reduced from 30% to 25%. Spending in health, education and housing given priority by the government.	A pool of Rs 400 bn will be pooled in by a consortium of financial institutions to provide finance for various infrastructural activities like power, ports, roads and civil aviation. Continuation in interest exemption on housing loans. Besides, income from housing projects for the construction of residential units of prescribed specification and approved from local authorities is exempt from income tax. This exemption is available for project that is approved upto March 31, 2005. Allocation of Rs 22 bn to provide a subsidy upto Rs 10,000 and loan upto Rs 40,000 for the eligible households. 1.0 m dwelling units financed so far and National Housing Bank has offered to reduce the rate of refinance by 25 basis points this year.	Construction of residential complexes having more than twelve residential houses or apartments together with common areas and other appurtenances. Exemption on tax deductible housing loan to continue. Under the rural development programme, 6 m additional houses to be constructed for the poor. Peak customs duty reduced from 20% to 15% The new income tax brackets, the change in exemption and deductions available to individuals and the increase in exemption for women. IT to generate around 7 m jobs till 2009.
[Read more on Budget 2003-04]	[Read more on Budget 2004-05]	[Read more on Budget 2005-06]

Key Positives

	Steady growth: Very low consumption levels compared to other developing economies. Decorative segment growing at 1% per annum, while the industrial paint segment (led by powder and protective coatings) is shifting to a new growth trajectory.
	A mixed bag: A robust housing sector is likely to boost demand in the decorative segment. Long-term growth potential of the auto sector is also a big positive.
	Structural shift: Continuous fall in excise duty in the past has benefited organised players and the impending consolidation will add to the pricing power.
	Capex cycle booster: With investment cycle showing signs of momentum, industrial paint demand could grow at a much higher rate than the last five years.

Key Negatives

	Raw material worries: Since the paint sector is highly raw material intensive, rise in crude and petrochemical prices affects performance and the reliance is unlikely to reduce going forward.
	Monsoon blues: The performance of the decorative division also hinges on rainfall. In the last five years, the country has witnessed three years of poor rainfall, which has impacted paint demand.

Budget Impact: Paints Sector Analysis for 2005-06 | Paints Sector Analysis for 2007-08

Latest: Performance Of Paints Stocks | Paints Sector Report

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Sector Performance

COMPANY PRICE (Rs)

AKZO NOBEL 2,435.4
(0.8%)

ASAHI SONGWON 362.9
(8.0%)

ASIAN PAINTS 2,874.4
(1.1%)

BERGER PAINTS 506.5
(-0.0%)

HARDCASTLE 717.4
(-4.0%)

INDIGO PAINTS 1,328.1
(0.4%)

KAMDHENU VENTURES 179.5
(4.1%)

KANSAI NEROLAC 277.1
(1.5%)

RETINA PAINTS 68.9
(0.2%)

SHALIMAR PAINTS 169.2
(-3.2%)

SIRCA PAINTS INDIA 320.5
(0.6%)

VISION CORP 3.5
(-0.3%)