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Asian + Goodlass = Paints - Views on News from Equitymaster
 
 
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  • Nov 13, 2000

    Asian + Goodlass = Paints

    Though the short-term economic outlook does not look promising given the fact that there is sluggishness in both industrial as well agriculture output, in the long run, India is about to emerge as one of the most powerful economies in the world. So what has this got to do with the paint industry and its prospects? The answer is that they have a positive correlation.

    First, let us analyse the historic growth trend of the Indian paint industry. The market size of this industry has grown from Rs 16.5 bn in FY94 to Rs 32 bn in FY99, at a compounded annual growth rate of 13.9%. However, a close look reveals that growth has been slower in last two years compared to early 1990s. To put things in perspective, both market size and sales value have grown at the rate of 13.3% and 12.5% respectively in FY99 and FY98. This, when compared to 19% is definitely slower. But this could attribute towards the outcome of South East Asian crisis, which pushed global economies into a tailspin.

    Assuming that the paint industry would grow at the same rate i.e. 13.9%, market size of the paint industry would touch Rs 53 billion by FY03. This seems to be possible considering the fact that demand for housing and automobiles is set to go up sharply. Now, the question is which company would benefit the most? We feel that there would be only four major players in the sector namely Asian Paints, Goodlass Nerolac, Berger Paints and ICI India. Consolidation is bound to happen sooner or later as smaller companies would merge with bigger players to exploit economies.

    Going by our estimates, Asian Paints and Goodlass Nerolac would command almost 60% market share by FY03. (Currently Asian Paints and Goodlass Nerolac have close to 33% and 17% market share respectively).

    The unorganised sector would continue to lose market share because of two reasons. One, once WTO regulations fall in place, whatever incentives these small-scale players have been enjoying till now, would dry out. Therefore, they will not have any cost advantage. Second, companies would have to invest heavily in technology to comply with environmental regulations, which smaller players cannot afford (water based paints would replace oil based paints).

    Going forward, these four majors are set to benefit from increasing end-consumer involvement and potential rural market as they expand their horizons. Added to this, almost all major automobile giants have planned to introduce new models in coming years. The tax incentives in FY00 budget has spurted demand for housing, as it is apparent from loan disbursement figures of housing finance companies. Overall, paint companies have colourful prospects. But the bourses seem to have ignored this!

     

     

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