Indian Paints Industry Report - Paints Sector Research & Analysis in India - Equitymaster
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Paints Sector Analysis Report 

[Key Points | Financial Year '18 | Prospects | Sector Do's and dont's]

  • Demand for paints comes from two broad categories:
    • Decoratives: Major segments in decoratives include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc. Decorative paints account for around 80% of the overall paint market in India. Asian Paints is the market leader in this segment. 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 and is a higher margin business as compared to industrial segment.
    • Industrial: Three main segments of the industrial sector include automotive coatings, powder coatings and protective coatings. Kansai Nerolac is the market leader in this segment. User industries for industrial paints include automobiles engineering and consumer durables. The industrial paints segment is far more technology intensive than the decorative segment.
  • The paints sector is raw material intensive, with over 300 raw materials (50% petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the industry benefits from softening crude prices.
  • 2017-18 was an eventful year for the domestic market. The introduction of GST ushered in a new era in Indian business. The Paint industry successfully adopted the new Tax system put in place.
  • The industry did feel the impact of demonetization as well as GST and demand as a whole for the industry was subdued in both the segments. The organized players are expected to perform better than the small and medium scale players. The industry however views GST as positive and beneficial in the long run.
  • Under the make in India initiative, the government of India aims to increase the share of the manufacturing sector to the gross domestic product (GDP) to 25% buy 2022 from existing 16%.
  • Manufacturing sector has the potential to reach US$ 1 trillion by 2025 and India is expected to rank amongst the three growth economies and manufacturing destinations of the world by 2020. These factors expected to significantly boost industrial paint consumption.

How to Research the Paints Sector (Key Points)

  • Supply
  • Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented.
  • Demand
  • Demand for decorative paints depends on the housing sector and good monsoons. Industrial paint demand is linked to user industries like auto, engineering and consumer durables.
  • Barriers to entry
  • Brand, distribution network, working capital efficiency and technology play a crucial role.
  • Bargaining power of suppliers
  • Price increase constrained with the presence of the unorganised sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is therefore that margins are better in the decorative segment.
  • Bargaining power of customers
  • High due to availability of wide choice.
  • Competition
  • In both categories, companies in the organised sector focus on brand building. Higher pricing through product differentiation is also followed as a competitive strategy.

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Financial Year '18

  • The year FY18 started retail off-take in May-June was curtailed due to GST implementation from 1 July 2017. As a result, first quarter fell of expectations. The retailer channel continued to be uncertain during the second quarter but on account of an early Diwali, growth returned.
  • On the cost front, the first half of the year saw a deflationary trend, which led to reduction in raw material prices. From the second half of the year, the industry witnessed an inflationary trend. This trend is expected to accelerate in the new financial year, further putting pressure on costs.
  • Rupee volatility also contributed to uncertainty on the cost front and continued to create challenges for the industry.
  • The manufacturing component of the IIP recorded 4.4% growth in FY17 and 8.4% in December 2017. The production levels are expected to pick up growth again as the Goods and Services Tax (GST) has finally been implemented.

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Prospects:

  • Decorative paints segment is expected to witness higher growth going forward. The fiscal incentives given by the government to the housing sector have immensely benefited the housing sector. This will benefit key players in the long term.
  • The Indian paint and coating industry is expected to grow steadily in the short and medium term on the back of strong growth in Indian economy. India‚Äôs young population represents a huge opportunity as more young Indians join the workforce and will have disposable income available.
  • Manufacturing sector grew at a CAGR of 6.9% between FY12 and FY18.
  • Huge domestic market with a rapidly increasing middle class and overall population. By 2030, Indian middle class is expected to have the second largest share in global consumption at 17%. (Source IBEF)
  • Just like GST, the Government is expected to continue with its reforms agenda, with policy decisions to come in sectors like infrastructure and power. These reforms would provide great impetus to the economy as well as to the paint industry.
  • Decorative paints segment is expected to witness higher growth going forward. The fiscal incentives given by the government to the housing sector have immensely benefited the housing sector. This will benefit key players in the long term.

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Related Links for Paints Sector
Quarterly Results | Sector Quote | Over The Years

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