The Indian Paint industry, estimated to be a Rs.21,000 Cr. industry, has been growing at a rate ofabove 15% for the past few years. The organized players of the industry cater to about 65% ofthe overall demand, whereas the unorganized players take care of the remaining 35%, in valueterms. The unorganised players mainly dominate the distemper segment.The industry consists of two segments, namely Decorative segment – caters to the housing sector and Industrial segment - consists of powder coatings, floor coatings and other protective coatings catering to the automobile, marine and other industries.In the domestic market, Decorative segment accounts for 70% of the total demand for paintswhereas the industrial segment accounts for the remaining 30%. Globally, the demand for paintsis almost equally distributed, where both the segments account for close to 50% of demand.So, how does the industry work? Here is the analysis….The working of the Paint industry has been explained pictorially below:
Raw Materials: On an average, raw materials constitute ~56% of the total expenditure in paintcompanies. Titanium dioxide is one of the major raw materials and price fluctuations in its costhave direct and substantial impact on the cost of production. Crude oil derivatives are the othermajor raw materials and have similar impact. Apart from these a large number of other rawmaterials are used for adding/giving specific properties to the wide product range offered by theindustry.End-User: The decorative paints segment products find use in households and constructionwhereas the industrial segment products find use in automotive industry, consumer durablesindustry and other OEM’s.What does the Past Say?Growth of the paint industry has been consistent with the growth of Indian GDP. Paint industryhas been growing at a rate of 1.5 to 2 times of Indian GDP growth. The Decorative segmentshows a seasonal trend with sales peaking during the festive seasons in the months of Septemberto November, whereas the demand is low in the monsoons.The top 5 companies make up more than 80% sales of the organized market. The marketshare of the organized sector is continuously improving as consumer preference is shifting
towards better products offered by the leading brands. Established Foreign companies haveentered the Indian market by acquiring existing Indian companies. Kansai Paints, Japan enteredthe Indian Market by acquiring Nerolac, Akzo Nobel, the world’s largest Paint company, enteredthe Indian market by acquiring ICI Paints (now Akzo Nobel India.)Asian Paints is the market leader in the Indian Paint Industry and gets the major portion of itsrevenue from the Decorative segment. Over the years, it has outperformed its peers in everyaspect by wide margins. This is mainly due to its strong moat (competitive advantage) which liesin its strong Brand Equity and an extensive Distribution Network. The company’s Net sales, NetProfit and Book Value have grown with a 5 year CAGR of 22%, 27% and 28% respectively.Also the company’s debt is very low and its ROIC has been 40% on an average over the last sixyears.Kansai Nerolac holds the second position in the Indian Paint market, and is the market leader inthe Industrial Paint Segment, owing to its leadership position in the Automobile Paint segment. Itis the subsidiary of Kansai Paints Ltd., the leading Japanese paint company. Berger paints has thethird position and derives its major revenue from the Decorative segment. Akzo Nobel (formerICI Paints) is the subsidiary of the world’s largest Paint Company and is at the fourth position.Shalimar Paints is at the fifth position.
What are the growth drivers of the industry? Here’s theanalysis…1. Increasing level of income and education – The increasing proportion of young populationalong with increasing disposable incomes is leading to a change in consumer habits. The Indianeconomy is shifting from a savings economy to a spending economy. With more income at theirdisposal, people are now ready to pay for better products and paint is no exception.Educated consumers are more brand conscious and seek value in what they consume. Thus, paintcompanies offering value-added features like non-toxicity, weather protection, texture, eco-friendly production, etc. will attract more demand. These value-added products enable themanufacturers to earn a better premium as compared to the regular paints, thus offering highermargins.2. Increasing Urbanization: Urbanization is leading to a shift from temporary houses topermanent houses. Urban houses are well-designed in its interior as well as exterior aspect. Thiscalls for more houses being painted using medium and premium paints. For urban houses,interior design is becoming a fashion statement and a lot of paint is used to decorate the interiors.This will lead to an increase in the per capita consumption of paint which will increase theoverall demand of paint. Urbanization also brings more nuclear families. More nuclear familiesmean more number of houses even for the existing population thus further driving the demand.3. Increasing share of organized sector: Decrease in taxes on key raw materials will improvethe position of the organized players. The Organized sector is expanding its distribution networkand adopting the installation of tinting machines at retail outlets. These tinting machines offer awide variety of colour shade options to choose from. The unorganized players are not in aposition to offer such facility as it is comparatively capital intensive. Shift in use, from distempersegment towards premier segment is also shifting market share from the unorganized sector tothe organized sector.4. Development of the Realty, Automobile and Infrastructure sector: The growth of the paintindustry is largely dependent on the development of the realty and housing sector, as decorativesegment generates about 70% of the total paint demand from this sector. The Automobilesegment generates more than two-third of the demand for Industrial paints, and hence is thegrowth driver for Industrial Paints. The Infrastructure segment creates direct demand for paintsas well as creates indirect demand through supporting the growth of the realty, automobile,FMCG and other industries where paint is used.The growth potential in the above 3 sectors is immense, the paint industry being dependent onthese 3 sectors is expected to grow along with them.5. Availability of financing options: Easier housing finance and auto finance is expected tofavour more people to buy houses and travel in personal vehicles. This will drive the growth ofhousing and automobile sector, of which the Paint industry will get its share.
6. Increasing Penetration in the Rural Markets: Paint usage in rural areas is generally in thedistemper segment, hence dominated by the unorganized players. Demand in rural areas isdependent on agriculture, which is dependent on the monsoons. With the development ofirrigation facility, the dependence of agricultural output on monsoons will be on a decreasingtrend. Also, with the modernization of agriculture and accompanying development of rural India,consumer preferences are expected to improve. Paint companies are expanding their distributionnetwork in rural parts of India, which is a relatively untapped market for the organized players.These factors supported by the increasing penetration of the paint companies will help drive thedemand for paints.So, is there anything to be concerned about?• Cost of raw materials: The Cost of Raw materials is an important factor as the industry israw material intensive. Fluctuation in the prices of Titanium dioxide and Petroleum directlyaffect the production cost. This is more of a concern for the Industrial segment as compared tothe Decorative Segment, as it is comparatively easier to pass on the costs in case of decorativepaints. Also, a large portion of raw materials are imported, leaving the cost factor vulnerable toexchange rate fluctuation.• MNC’s entering the Indian Paint Market: The entry of Established foreign players in theIndian market may increase the competition among the players of the industry. This may lead toprice competition which may impact the profit margin of the companies. As a result, the increasein volume growth may not equally reflect in the profit growth for the companies.What is the future Outlook for the Paint industry in India?The Indian paint Industry has a wide potential for growth which is demonstrated by the fact thatthe per capita consumption of paint in India is merely around 1 kg as compared to about 20 kg inthe developed countries or a global average of about 15 kg. So, the absolute consumption ofpaint in India is definitely expected to rise.The market share of the organized sector is on an increasing trend. Also, the contribution ofindustrial segment will increase with the continuing economic development of the country. WithIndia moving towards becoming a developed economy, the decorative to industrial paint ratio of70:50 is expected to move towards the global average of 50:50. Thus the Indian paint industryis in its growth phase and is expected to grow at a rate faster than that of GDP. The futureprospects of the industry are strong.Looking at the above points, we can say that the long term future prospects of the IndianPaint Industry appear to be Green (Very Good.)Companies which have high revenues, efficient operations and distribution network, comfortabledebt levels and robust capacity expansion plans will be best suited to capitalize on the growthprospects.It is very important that while investing in a company, an investor selects an industry, where the
long-term future prospects are bright. We have seen that in the long run the Indian Paint industryis expected to have good growth.Also, it is equally important that the company has an excellent financial track record (i.e. Green10 Year X-Ray) and its long-term future prospects are Green (Very Good).*The 10 YEAR X-RAY facilitates analysis of the financial performance of the companyconsidering the five most important parameters. A 10 Year period will normally encompass anentire business cycle. Analysing the performance over this time frame is essential to understandhow a company has fared during the good as well as bad times. The five most importantparameters that one needs to look at are Net Sales Growth Rate, EPS Growth Rate, Book Valueper Share (BVPS) Growth Rate, Return on Invested Capital (ROIC) and Debt to Net Profit Ratio.Given below is the MoneyWorks4me assessment for a few Paint companies:The table above gives you a list of the top 5 companies from the Paint Industry. Due to the verynature of the paint industry, it is best advised to invest in companies which have created a strongbrand equity for themselves and have a strong competitive advantage. While such companiesusually trade at a premium and are rarely cheap, you should look to invest in them when they areavailable at a good discount. To find out the right price to invest in these companies, become amember of MoneyWorks4me.com.http://stockshastra.moneyworks4me.com/paints-indian-paint-industry-analysis-and-research-report-2011/
The Indian Paint Industry which is pegged at around 210 billion rupees has undergone aphenomenal evolution in the recent past both in terms of structure & portfolio. It has beengrowing at over a CAGR of 15 percent owing to the increase in demand for utilitarian or artisticworks and introduction of some new liberalization policies.Overview-The Indian paint industry was initiated in 1902 when Shalimar Paints set up its factory inKolkata. The industry consisted of small producers and two foreign companies then. Theaftermath of World War 2, saw the uprising of small manufacturing units by the localentrepreneurs. Though the imports ceased but the foreign dominance still continued. Beingrestrained by Foreign Exchange Regulations Act and Monopolies & Restrictive Trade PracticesAct, most of the players were not allowed to increase production capacities until the nineties.With liberalization, as the excise duties got drastically reduced from 40% to 16% ,these shackleswere removed and the industry recorded a healthy growth of 12-13% annually.The paint industry can be broadly classified into the Organized & the Unorganized sector. Theunorganized sector controls around 35% of the paint market accounting for the balance. Most ofthe organized companies in India’s paint market have a nationwide presence with multi-locationmanufacturing facilities. Top players in this sector include Asian Paints (30% market share),Kansai Nerolac (20% market share), Berger Paints (19% market share) and ICI (12% marketshare). The companies in the unorganized sector are mostly regional and deal in low valueproducts and have been consistently losing market share to the organized sector. Market Segmentation-The industry can be further segmented into — Industrial and Decorative.The decorative paints account for approximately 75% of the total sales with Asian Paints beingthe market leader. This segment caters to the housing sector. It is price sensitive and is a highermargin business as compared to industrial segment as it is used in protecting valuable assets.Urbanization has surged the demand for decorative paints. Easy availability of housing loan, risein the level of income and shift in the perception of paints as having a protective value ratherthan mere decorative one, have been a few factors that have impacted the housing and therebythe paint industry positively. There is also seasonality involved in the demand for decorativepaints with demand at its peak around festive time.Industrial paints cater to the Automobile Original Equipment Manufacturers (OEMs) forprotection against corrosion and rust on steel structures, vehicles, white goods and appliances.
With production and sales of passenger cars expected to grow, demand for automotive paintswill continue to remain healthy. Kansai Nerolac is the market leader in this segment. Theindustrial paints segment is far more technology intensive than the decorative segment. Globally,the industrial paints segment accounts for a major share but over the next few years, the ratio ofindustrial paints to decorative paints is expected to be 50:50, more in line with the global trend.This industry is raw material intensive. As most of the raw materials are petroleum based, theindustry benefits from softening of crude prices. Trends and Forecasts-The market for paints in India is expected to grow at 1.5 to 2 times GDP growth rate in the nextfive years. With GDP growth expected to be over 7% , the top three players are likely to clockabove industry growth rate. Demand in the case of industrial segment is also expected toincrease.The per capita consumption which is at 1.5kg, way below the consumption of the developedcountries (20kgs), is expected to improve with the growing income levels, both in urban as wellas rural India on the back of various government initiatives like NREGS, farm loan waivers, paycommission led salary hikes etc.Despite the positive figures, the Indian paint makers might see growth slowing in the comingmonths as a drop in the demand for homes, offices and cars is seen hurting the industry. A betterfocus on supply chain or distribution mechanism backed by aggressive promotion might turn thewheels of fortune and trigger unprecedented growth in the paint industry.