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Paints: FY02 in perspective

Jul 1, 2002

It is known fact that India's economic growth has slowed down considerably over the last three years. Despite a challenging macro-economic environment, select sectors in India have grown at a healthy pace in the same period. Apart from housing industry, paint sector is one of them. We analyse the combined performance of top four paint majors in the country viz. Asian Paints, Goodlass Nerolac, Berger and ICI, which together command almost 70% market share in the organised paint market.The paint sector grew at a slower rate of 6.5% in FY02 due to general slowdown in the economy and subdued demand in western region, which were affected by communal riots. While decorative paint demand grew at 7%, industrial paint volumes increased by 6.5%. The fastest growing segments in the sector are the exteriors (20%) and powder coatings (12%). Demand in FY02 was aided by a 6% growth in farm output, which is one of the key demand drivers.

In the industrial paint segment, automotive paint demand was higher in FY02. This was due to various factors. Passenger car demand perked up in FY02 on the back of a number of new model launches and overall recovery in automobile demand. Key automotive paint manufacturers like Goodlass Nerolac and Asian-PPG posted impressive performance in the same period. Goodlass posted a 21% rise in net profits in FY02. Asian-PPG's, a 50:50 joint venture between Asian Paints and PPG USA, turnover is estimated to have crossed Rs 1 bn levels in FY02.

(Rs m)FY01FY02Change
Net sales 31,020 30,713 -1.0%
Other Income 280 437 55.8%
Expenditure 27,440 26,829 -2.2%
Operating Profit (EBDIT) 3,580 3,884 8.5%
Operating Profit Margin (%)11.5%12.6% 
Interest 402 274 -31.8%
Depreciation 832 1,008 21.1%
Profit before Tax 2,626 3,038 15.7%
Extraordinary items 455 557 22.5%
Tax 822 1,060 28.9%
Profit after Tax/(Loss) 2,259 2,535 12.2%
Net profit margin (%)7.3%8.3% 
Market Capitalisation (Rs m)  28,874  
Industry P/E (x)  11.4  

Amongst paint majors, Asian Paints recorded the highest growth in turnover with revenues increasing by 9% followed closely by Berger. As a result, it has extended its already commanding market share in the industry. The combined turnover of Asian Paints, Goodlass Nerolac, Berger and ICI has declined by 1% to Rs 30.7 bn. However, if we were to exclude ICI (turnover fell due to divestment of business), the top three have actually posted a 7% rise in sales during FY02. This is in line with the industry growth trend.

Though rutile titanium dioxide prices moved up in 1QFY02, thanks to the fall in crude prices post 2QFY02, the industry benefited from lower raw material costs. Paint manufacturers passed on the benefit of lower raw material prices to the consumer with atleast 3% reduction in prices in 3QFY02. This also gave a thrust to industry volumes in the second half. In contrast to FY01, operating margins increased YoY for most of the players. Favorable raw material prices is reflected in overall improvement in sector margins by more than 100 basis points.

Other income has increased significantly in FY02, which could be attributed to higher lease rentals from installations of dealer tinting machines. Cumulative number of such machines has crossed more than 4,500 levels with Asian Paints alone accounting for 2,500 of such installations. The phase of consolidation continued in FY02 as well. The most prominent being Asian Paintís acquisition of powder coatings business of Howcoplast Chemicals. This would consolidate its presence in the industrial sector. But at the same time it has to be mentioned that this sort of consolidation will not have a material impact on the industry.

Prospects for FY03 remains challenging due to continued weakness exhibited by the industrial sector in the last two years. While the reduction in customs duty from 35% to 30% in the budget would benefit paint sector, industry growth is expected to be in line with FY02 of around 7%-8%. But one positive factor is that monsoons have arrived on time and this could spurt paint demand during festive season. Slowly but surely, the unorganised segment is losing its competitive edge and this augurs well for industry market leaders. But as we have mentioned above, the phase of consolidation is on the slower side. We expect profits of top four players to increase by more than 15% in FY03 and this would be aided by improvement in operating margins.

Since the aforesaid players are representative of the industry, gauging from current valuations, the P/E multiples seem to be on the lower side given the fact that the sector has grown at twice the GDP in the last decade. A robust housing sector, increasing involvement of consumers and effective branding exercise undertaken by the industry in the last five years have set a foundation for a promising long-term growth potential.


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