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Set for an accelerating growth phase... - Views on News from Equitymaster
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  • Jul 7, 2001

    Set for an accelerating growth phase...

    As per a survey conducted (this was before some years), the most preferred colour of a car, from the consumers’ perspective, was white! Today, both the multinational and domestic auto majors are luring customers by introducing models with new shades as one of their USPs. While Ford has a ‘Spanish Red’ Ikon, Hyundai has recently launched its ‘Royal Gold’ Sonata. Welcome to the world of automotive paints!

    Goodlass Nerolac and Asian Paints dominate the Indian automotive paint segment. Some of the key clients of Goodlass include Maruti Suzuki, Telco, Mitsubishi Lancer, Honda, Bajaj Auto, Ford, Hero Honda, Mahindra, Toyota, TVS Suzuki, Volvo and Whirlpool. Asian Paints, on the other hand, is the key supplier to Hyundai, Daewoo, General Motors (GM), Bajaj Auto and Hero Honda. While Goodlass has technical collaboration with Kansai Paints, Japan, Asian Paints has formed a 50:50 joint venture with PPG Industries, US.

    In the automotive paint segment, collaboration with multinational paint companies plays a vital role for attaining a critical mass and commanding leadership. Internationally, PPG Industries and Kansai are key suppliers to auto giants like General Motors, Ford, Mitsubishi, Hyundai, Honda and Daewoo. As a result, these multinational auto companies, naturally, would source paint from companies who have technical tie-up with their international supplier.

    Declining volumes…
    (% change) FY98 FY99 FY00 FY01
    LCVs -32.5% -9.8% 5.5% 4.4%
    HCVs -39.0% -5.7% 27.8% -21.2%
    Cars 1.5% -0.9% 55.1% -8.0%
    Tractors 15.0% 2.9% 2.5% -6.9%
    Motorcycles 84.3% 12.1% 28.7% 20.4%
    Industry 11.8% 4.3% 14.3% -2.7%

    Though the automotive paint segment was growing at around 9 percent per annum, majority of the auto companies would unanimously agree that fiscal year 2001 was a year of adversity. Total industry volumes for the first time in four years declined by 2.7 percent to around 5 m units. Not only did the slow down in the economy result in subdued vehicle demand but also the rationalisation of tariffs in some of the key states of India aggravated the problem for auto companies. Demand for commercial vehicles fell by a sharp 21 percent in 2001 on account of uniform sales tax and hike in fuel prices. Besides, the fall in agricultural production to the tune of 12 million tonnes (the highest in a decade) also added to the woes of auto manufacturers, as commercial vehicle sales slackened on account of lower demand from freight operators.

    This is apparent from the second half performance of Goodlass, which derives almost 50 percent of its revenues from industrial paint segment. Though sales declined marginally by 0.4 percent to Rs 2,786 million, operating profit margins during the aforesaid period declined by as much as 490 basis points.

    However, margins for automotive paint manufacturers are generally on the lower side as compared to the decorative paint manufacturers. This is because industrial paint manufacturing involves continuous investment in research and development. Also, pricing power of the manufacturers is not as flexible as decorative segment. In 2001, Goodlass, the key supplier of paints to Telco and Maruti, was forced to reduce prices, as the auto companies themselves were in a crunch situation.

    One of the major threats for auto paint manufacturers is the freeing of quantitative restrictions. With India coming under the purview of WTO, majority of automobile companies have plans to introduce some new models through the semi knocked down (SKD) route, which could be a opportunity loss for automotive paint manufacturers. Already, Ford has announced the launch of ‘Mondeo’ through the SKD route in the second half of the year closely followed by Fiat and GM.

    Nevertheless, domestic majors like Maruti and Telco, which account for more than 70 percent of the industry volumes, have aggressive plans to introduce new models and launch variants in the existing models. Besides, the softening of interest rates has helped a long way in boosting the auto finance industry. Today, multinational companies like Orix and Ford Credit command a significant market share in car leasing and financing segment closely followed by new private sector and foreign banks. If interest rates were to reduce further, auto industry could witness revival in demand in the current year. So all these factors should favour paint companies in posting better volume growth in the years to come.



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