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Paints: A year in retrospect - Views on News from Equitymaster
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  • Jan 10, 2001

    Paints: A year in retrospect

    The year 2000 marked the year of drought, floods, declining car sales, rising oil prices, slowdown in agriculture and industrial production. This should have meant bad news for the Indian paint industry. But the industry showed that it was made of sterner stuff. Indian paint companies posted good half-yearly results with an average of 15% growth in sales (Asian Paints, Goodlass Nerolac and Berger Paints). Will this continue?

    The calendar year 2000 was a mixed bag for the industry. Budget 2001 gave the industry something to cheer about. The government reduced the excise duty on rutile titanium dioxide prices (the basic raw material used in manufacturing paints) from 40% to 35%. Besides, import duty on titanium dioxide was also reduced from 40% to 38.5%. However, the reduction was much below what the industry anticipated.

    Before the industry could start enjoying the benefits of the reduction in duties, the oil prices spiraled. Crude prices, which were hovering around US$ 9 per barrel during April 1999, went on to touch US$ 35 during mid September 2000. The result: spurt in all crude based products, which also includes rutile titanium dioxide (accounts for more than 50% of the raw material costs of paint companies). Prices have moved up from US$ 1,700 per tonne (imported from Taiwan) last year to more than US$ 1,950 per tonne in December 2000, an increase of more than 16%.

    Despite rise in titanium dioxide prices and drought in three states, paint companies reported good half yearly results in the current year. While aggregate volumes grew by a healthy 15%, margins were more or less maintained at the previous years levels. One of the primary reasons was the fall in other raw material prices. Also, to offset the rise in basic inputs (like titanium dioxide), paint companies resorted for a partial increase in paint prices, which prevented their operating margins from a sharp decline.

    Another important reason for the companiesí volume growth was the tax incentives provided to the Indian housing sector. The government increased the tax deduction allowed towards interest paid on housing loan, which boosted housing development activities. This is apparent from the fact that loan sanctioned and disbursed by major housing finance companies have shown 23% and 26% growth respectively for the first six months of the current year. This was good news for the Indian paint companies.

    However, both volume and value growth is not expected to continue in the later half of the current year because there are no stimulating factors to boost demand (second and third quarter are festive seasons, which usually boost paint sales). Though crude prices have come off from higher levels i.e. US$ 35 per barrel to US$ 24 per barrel, fear of higher raw material prices continue to loom over paint companies. Besides, lethargic government reforms have failed to attract adequate foreign direct investments thus resulting in fewer green field projects. A substantial oil price hike and rationalisation of excise duty by the government led to depressed automobile sales throughout the year. This also added to the industry woes.

    Further, we believe that consolidation would be the way forward in the Indian paint industry. We saw the first signs of consolidation in 1999, when Berger Paints took over Rajdoot Paints. Even in the current year, Berger Paints took over the Jenson & Nicholson (Nepal) Limited, the Nepal subsidiary of Jenson & Nicholson along with the right to market its brands in Nepal. Speculations are also rife about Asian Paints acquiring Shalimar and Jenson & Nicholson. Asian Paints acquired Delmege Forsyth & Co. in Sri Lanka and Pacific Paint Company in Australia, thus increasing its international presence to nine countries. Both Berger Paints and ICI India are also keen on acquisitions both in the domestic as well as in the international markets. So, smaller companies would merge with bigger paint companies, which would enable these market leaders to consolidate their presence in the domestic market.

    As per our projections, Asian-Goodlass combine would command close to 65% market share by FY02-FY03. Eventually, post WTO regime, where quantitative restrictions on imports would phase out, we believe that only four major paint companies would dominate the Indian market viz. Asian Paints, Goodlass Nerolac, ICI India and Berger Paints. Moreover, with the domestic housing sector growing at the rate of 10% per annum, it would provide necessary impetus to the topline growth of the paint companies in coming years.

    Having understood the potential of the Indian market and the sluggish per capita consumption, multinational players like Sherwin Williams have showed their intent to set up manufacturing capacities in India. Besides, the Indian paint industry, off late, has to contend with an influx of cheaper imports (at Rs 17.5 per litre, which apparently is the cost price to the Indian companies) from China. This could seriously cramp realisations and impair growth for the Indian paint companies.

    What is the possible way out? The key to success in the long run, lies in the ability to differentiate via brands. Researches abroad have shown that consumers do have strong loyalty towards brands while painting their houses. Though end-consumer involvement is relatively lower in India, the advent of colour tinting machines has slowly gained acceptance among consumers. Survival of these paint companies also depends on the capability to introduce new products and upgrade existing manufacturing facilities to comply with stringent environmental regulations.

    India has also attracted a fleet of international automobile companies that include Mercedes, Ford, Opel, Hyundai, Toyota and Mitsubishi. With a favourable auto policy on the anvil, hopefully demand for passenger cars will show a positive trend in the coming years. Besides, growing urbanization and buoyant housing sector are more likely to expand the Indian paint market at a faster rate. Overall, a promising year ahead.



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