Nov 12, 1999|
Painting a colourful future
This year finance minister Yashwant Sinha's budget sops to the housing sector must have really brought joy to the paints industry. The industry, which was reeling from lacklustre demand from user industries like housing, automobiles and engineering, really got a fillip out of the 'feel good factor' of the budget. With the economy getting back on growth mode, things are looking up the Indian paints industry.
The Indian paints sector, valued at US$ 1 billion, is very fragmented. Manufacturers operating in the organised segment (60 percent of total market) have large-scale operations, unlike their counterparts in the unorganised segment who operate on a smaller scale. There are over 2,000 units in this segment accounting for 40 percent of total market. However, with the steady decline in excise duties (from 40 percent to 18 percent over five years), viability of small-scale units has been eroded considerably. Without the price advantage, these units have found it difficult to compete with their peers in the organised sector.
The per capita consumption of paints in India stands at a lowly 0.5 kg per annum, compared to nearly 4 kgs in some South-East Asian nations, and about 22 kgs in developed economies like the USA and Germany. Paint demand tends to be cyclical as it is influenced by the economy and has grown at a CAGR of 10% over the last five years. Demand for paints can be classified into two broad categories: demand for decorative/Architectural finishes and Demand for Industrial finishes.
Decorative paints account for 70 percent of market, and include acrylic and oil-bound distempers, enamels, plastic emulsions. 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.
Industrial paints comprising 30 percent of market include automotive paints, coil coatings and power coatings. User industries include automobiles engineering and consumer durables. The industrial paints segment is more dependent on technology than the decorative segment.
The paints sector is raw material intensive, with over 300 raw materials (50 percent petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the paints industry benefits from a downturn in the petrochemicals industry.
In FY99, the sector posted 8 percent volume growth (12 percent in FY98). Most of the growth was attributed to demand from the small car segment, which witnessed a number of launches. Decorative paints witnessed demand slump in view of depressed housing activity. Industrial paints demand was also low in view of the downturn in industrial growth in FY99. Raw material supply was steady. Overall raw material prices appreciated by 10.5 percent during the year.
With the Indian Paints Association estimating paints demand to rise from 600,000 tonnes per annum to nearly 1,000,000 tonnes by 2003, the sector can look forward to healthy growth in the near future. Higher housing demand will lead to strong demand in the decorative segment. Tax sops offered in the FY2000 Union budget for housing loans are moreover, expected to fuel demand. The industrial paints segment is also expected to post robust growth as a result of the demand upturn in major user industries like automobiles, engineering and consumer durables. The auto segment in particular promises to be a major growth area as auto companies have outlined new launches over the next few years.
With the decreasing price gap between organised and unorganised segments, demand for branded paints in semi-urban and rural areas will increase. Increasing demand from these segments will see the larger players beef up their marketing and distribution networks in semi-urban and rural areas and leverage their brands to corner market share. In the long run, small-scale units will be forced to merge with large-scale ones to survive. At the same time, larger domestic manufacturers will tie-up with international majors to access technology. This consolidation will increase the bargaining power of suppliers and also protect margins in the long run.
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