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

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Paints Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Sector Do's and dont's]

  • The Indian paint market is expected to reach Rs 709 bn by 2019-20 from around Rs 403 bn in 2014-15. The per capita paint consumption in India which is a little over 4 kgs is still very low as compared to the developed western nations. Therefore, as the country develops and modernizes, the per capita paint consumption is bound to increase.
  • The unorganised sector controls around 35% of the paint market, with the organised sector accounting for the balance. In the unorganised segment, there are about 2,000 units having small and medium sized paint manufacturing plants. Top organised players include Asian Paints, Kansai Nerolac, Berger Paints and ICI.
  • 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 75% 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.

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 '17

  • In FY17 the industry grew at a moderate rate. Growth picked up pace during the second quarter of this fiscal, owing to a good monsoon and a positive investment climate in the country. However, due to the demonetization activity undertaken by the government, pace of growth was impacted in both the decorative and industrial Markets in the third and fourth quarter. Post demonetisation, the auto industry saw a bit of a revival. Consumer demand also picked up, signaling a stabilization of the economy.
  • 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.

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  • With the economy poised to grow at a rate of 7.5%, consumer spending will get a huge boost, resulting in higher demand for paints. India's young population represents a huge opportunity as more and more young Indians join the workforce and will have disposable income available. The trend toward nuclear family augurs well for the paint industry.
  • 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.
  • Although the demand for industrial paints is lukewarm it is expected to increase going forward. This is on account of increasing investments in infrastructure. Domestic and global auto majors have long term plans for the Indian market, which augur well for automotive paint manufacturers like Kansai Nerolac and Asian-PPG. Increased industrial paint demand, especially powder coatings and high performance coatings will also propel topline growth of paint majors in the medium term.
  • Going ahead, FY 17-18 is expected to see a gradual upward trend in input costs. This rise may impact industry profitability in the longer run, affecting both top line as well as bottom line growth.

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

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