For private circulation only
VOL. 01/01
Paints: Lower raw material costs and higher realizations boost profitability
Decorative coatings demand, which turned sluggish since
H2FY15, though have not shown signs of improvement the
aggressive positioning of industry majors with price cut seems
paying off with increased volumes at price sensitive low end
products. While the premium end products volume continues
to growth from low base, the medium segment demand seems
the one that is muted.
Higher realization on year on year basis despite recent price
cut along with less than expected volume growth sustains
revenue growth for industry majors, the lower material cost is
facilitating margin improvement.
Paint output down 1.3% in May 2015
Paints output that grew 2.15% in April 2015 after four months
of degrowth has again slipped to declining trend with the
output for May 2015 stood lower by 1.25% (to 63738 tonnes).
According to KBS Anand, Managing Director & CEO of Asian
Paints, "The decorative business registered low double digit
volume growth in Q1FY16 with the volume of both premium
and lower volume products growing faster than the medium
segment.
While the volume growth was better than that witnessed in
previous quarters, there was no significant improvement in
demand conditions." He further added "While the Auto Refinish
segment registered decent growth, there is subdued demand
conditions both in general industrial as well as Auto OEM
segments."
Material cost continues to stay lower
Paint Industry being one of raw material intensive and the
raw material cost accounts for about 50-60% of the total
cost of production and thus the profit of the industry players
swings with the material cost.
In manufacture of paint there are more than 275 raw materials
both crude based and non crude based are consumed. Major
of over 275 raw materials are phthalic anhydride (PAN), a
petroleum-based material and titanium dioxide (TiO2), which
accounts for 30% of total raw material requirement. Titanium
Dioxide, a mineral-based material, is classified under two
varieties, such as rutile grade and anatase grade. The paint
companies have been opting for importing the anatase grade
4 August 2015
4 August 2015
because of its better quality than those available from
domestic sources. The other raw materials for the industry,
such as organic pigments and penta, are available
domestically.
Globally about 20% of the tio2 capacity was controlled by
DuPont, 15% by Saudi Arabia's Cristal. The other major
players are Huntsman, Kronos and Tronox with the first
two accounting 10% each and the last about 9%.
However the China Tio2 exports amounts today to approx
20% of its production and comprise an equal amount of
Anatase Rutile. Chine has exported about 120000MT in
CY2013 which is insignificant % of world rutile
consumption but this will change in the future with
increased acceptance of Chinese Tio2 Rutile as the quality
of Chinese Tio2 rutile is keep improving.
Amongst key raw-materials, barring that of pentaerythritol
the prices of all materials continue to stay lower on year on
year comparison. The average price of Tio2 Anatase and
Rutile stood lower by 40% and 17% to Rs 125/kg and Rs
170/KG in May 2015. However on sequential comparison
the prices stay unchanged from April 2015 levels.
The prices of mixed Xylene in May 2015 was down by
13% YoY (to Rs 66/ltr) but on sequential basis it increased
from Rs 60/ltr in April 2015. Similarly the prices of Phthalic
Anhydride (PAN) was down by 17% YoY (to Rs 79.75/kg)
in May 2015 compared to a year ago price.
But the May 2015 price of PAN was up by Rs 2.75/ kg
compared to Rs 77/kg in April 2015. Likewise the prices
of Venyl Acetate Manomer (VAM) was down by 25% YoY
(to Rs 71.50/kg) in May 2015 even while it was up from Rs
69.50/kg in April 2015. However the prices of
pentaerythritol was up by 15% YoY (to Rs 115/ltr) even
while its price stay firm on sequential comparison.
Government of India on April 2015 has extended the
dumping duty on Acetone from Thailand and Japan for one
more year upto April 8, 2016. Acetone is used as solvent in
manufacture of paints. The average prices of acetone that
stood higher by 8.3% in 2014-15 is off-late witnessing
downward pressure on the back of fall in crude prices. Thus
the extension of anti dumping duty is not expected to have
material change in prices.
1
Market Commentary
The crude price as reflected by Brent crude after averaging
a low of USD 50.33/ barrel in Jan 2015 has bounced back
to USD 65/barrel in May 2015 but to decline to about USD
57.01/barrel as end of July 30, 2015.
No further price cuts after March 1, 2015
Paint price especially that of decorative paints has increased
sharply during both FY2013-14 and H1FY2014-15 as the
industry players are not averse to price hike when they are
faced with upward cost push. Asian Paints, the industry
leader who have made two price hikes of 1% and 1.2%
effective May 1, 2014 and June 1, 2014 respectively over
and above the 6.25% price hike it made in FY2013-14.
Similarly Berger Paints that has effected a price hike of
2.1% for its decorative paints in first quarter ended June
2014 in addition to a cumulative price hike of about 6.2%
in 2013-14.
But with sluggish demand for decorative paints the industry
players decided to pass some of the benefits of lower
material cost to customers to usurp volumes. The lead was
taken by Asian Paints with a cut of 1.95% in price effective
March 1, 2015. Following the market leader, Berger Paints
cut its decorative paints prices by about 2.4% effective
March 2015. Since majority if the price rollback happens in
price sensitive low end products that have given volume
push for industry majors it seems.
For the month of June 2015 the Wholesale price index of
paints stood at 1159.30, an increase of 1.98% YoY and a
fall of 1.06% MoM. Similarly the paints and varnishes WPI
in June 2015 stood at 151.20, up by 1.20% YoY but lower
by 0.79% MoM.
Though the price roll back comes into effect from March 1,
2015 that got reflect at retail end only in June 2015 given
channel stocks. Prices of paints even after price cut stand
lower the realization is expected to be stronger for the
industry players. Sequentially the truck rates are easing
even though the other costs such as advertisement and
brand promotion cost on sustained rise.
As the industry on capacity expansion spree for some time
and new capacities are still under ramp up mode there will
be pressure on under recovery of fixed cost. Overall higher
realization on year on year basis with lower material cost is
expected to boost margin.
Market overview
The market size of Indian paint industry is estimated at about
Rs 29100 crore. The industry comprised of both organized
and unorganized players with the former controlling about
65% of the market and the latter about 35%.
The organized segment consists of both home grown
majors such as Asian Paints, Berger Paints and Shalimar as
well as subsidiaries of large multinationals such as Kansai
Nerolac, Akzo Nobel and Nippon Paints.
4 August 2015
In the unorganized segment there are about 2000 players
mostly of small scale units.
The Indian paint industry can also be categorized into two
i.e. Decorative and Industrial paints. Decorative paint market
can further sub-segmented into emulsions, enamel paints,
distemper and cement paints. The industrial paint market
covers sub-segments such as automotive coating,
protective/high performance coating, powder coating, coil
coating and marine coating.
Today decorative paints account for the bulk of the Indian
paints market in terms of volume as well as value at about
75% unlike developed countries where non decorative was
the dominant segment. Of the total industrial paint demand
about 2/3rd comes from automotive sector, while the rest is
constituted by producers of white goods, electronics etc.
As the economy grows, there will be rapid growth in the
demand for industrial paints.
Demand dynamics & demand drivers
The demand for decorative paint is dependent on the growth
in construction sector, disposable and per capita income as
the demand for decorative paints comes from both
construction of new building as well as refurbishment of
old building otherwise repainting.
The industrial paints, on the other hand, depend on
industrial production especially that of automobiles, white
goods, shipping and structural engineering. Thus the
demand for industrial paints correlates to the growth of
automobiles, consumer goods, shipping and industrial
applications sector.
Repainting constitutes about 70% of the total paint demand
in the country. Moreover shortening of repainting cycle from
about 6-8 years earlier to about 3-3.5 years now is to drive
the demand for decorative paints going forward.
The retail demand for paints will be higher during the
months/period preceding major festivals such as deepavali,
pongal/magarsankranti, Onam and Christmas as most of
the repainting will be done during the festivals season.
Moreover the industrial demand too gains with festival
demand push for automobiles, houses and white goods.
Given this fact that most of major festivals of the country
fall in second half of a fiscal, the major demand period for
decorative paints and to some extent industrial paints is
between the months of Sep to March.
Moreover the second half is also normally see strong
construction activity with first half being season of south
west monsoon also leads to brisk demand in second half.
The paint industry in India is on a structural growth path
driven by rising incomes, rapid urbanization, changing
consumer preferences for aesthetics and better
understanding of the consumers of the inherent properties
of paints. The per capita consumption of paint in India
though has increased from 1.3 KG per year to 2.6 kg per
2
 year it still remains low compared with 4 kg in the South East
Asian nations and 22 kg in developed countries.
The global average per capita consumption is around 15 kg.
This leaves much room for growth for the industry going
forward as the Indian Economy braces for a high growth
trajectory in the current decades.
Increase in customer knowledge about paint and aesthetics
preferences the demand for premium product is witnessing
strong growth compared to economy or mid range paints.
Currently premium products account for a fifth of the country
organized decorative paints market and is expanding at a
fast cliff of about 28-30% annually in last four years. In
comparison the economy is growing at about 10-15%.
Since the premium product of higher margin to the extent of
10-15% the industry players are increasingly focused on this
products segment with more product offerings. Asian Paints
looks to increase the share of premium products from current
25% of product mix to about 30-33% in next three years.
Similarly Berger also looks to increase premium products by
4% points to 14%.
Since the demand for paint is related to economic
development of the country the volume growth empirically
to the tune of about 1.8-2.0 times of the GDP. Compared to
5% of GDP growth recorded in 2012-13 by the Country, the
GDP growth rate for 2013-14 was projected at about 5.5% by
RBI and much lower at 4.7% by World Bank. Given the thumb
rule of 2 times of GDP growth the Indian paint industry is
expected to grow between 8.5-9.4% for the fiscal 2013-14.
With increased preference for water based paints compared
to solvent based paints earlier is to augur well for the industry
especially in-terms of profitability as the water based paints
are of high margin compared to solvent based.
Weak rural income a cause of concern
Growth for Decorative paints major for quite some time come
from smaller a towns even while the demand from large cities
continue to be indifferent.
The unseasonal rain and hailstorm impacting the summer
crop in the country especially in North and Western part of
the country there by reducing their purchasing power the
demand turned sluggish in near term. South west monsoon
though started well against expectation of a below normal
monsoon has started weakening eliciting below normal
monsoon concerns.
Though it's early to come to a judgment has to see what kind
of impact I have on rural income, which in-turn has bearing
on paint demand.
Commercial real estate demand though on recovery path in
certain micro markets, the residential real estate continue
to see slump and thus there is no major recovery in demand
for new painting/coating demand in medium term. However
the reduction in repainting cycle from once in every six years
to once in every three years as well as customer preference
4 August 2015
for multi colour for different part of dwelling units and
premium products is to provide support for repainting
segment in large cities.
Kansai Nerolac Paints to expand capacity
The Indian paint industry majors are on aggressive
expansion mode though the market turns increasingly
challenging and unpredictable. With the industry grew in
double digit over last few years, the industry players are
confident that the current sluggish demand is an aberration
and the demand potential in medium to long term is strong.
Thus all the major players have pressed ahead with their
expansion plan and thus the industry has seen significant
capacity coming on stream.
Kansai Nerolac that has already expanded its Decorative
and Automotive paints capacity at Jainpur (in Uttar Pradesh)
and Bawal (in Haryana) and commissioned a state of the art
green-field paint plant at Hosur (in Tamil Nadu) propose to
set up a Greenfield paint production unit with a capacity of
42000 MTPA in Sayakha Industrial Estate in Gujarat at a
cost of Rs 350 crore. Further in July 2015 it has announced
that it will set up another green field plant at Goindwal Sahib
near Amritsar in Punjab with a capacity of 38000 MTPA at a
cost of Rs 180.50 crore.
Berger Paints has completed the work on its new powder
coating plant at Jejuri in Pune and the trial production of it
commenced in Oct 1, 2014. The plant has an initial capacity
of 900 MTPA and has facility to enhance the capacity to
3600 MTPA in the future.
In May 5, 2015 the commercial production out of power
coating plant has commenced. Earlier in Sep 29, 2014 the
company commenced commercial production of its largest
water based paint manufacturing plant at Hindupur in
Anantapur District of Andhra Pradesh.
The initial capacity of the plant is 80000 MTPA and in the
final phase, the factory will have a capacity of 320000 MTPA.
Additionally there will be a plant for the manufacture of
100000 KL of emulsion, a key raw material, for which
provision already exists.
Though Phase I of water based paints plant was
commissioned the emulsion plant is yet to be commissioned
and will be commissioned soon upon receipt of all
clearances. The Company has also initiated work on a
separate unit at Hindupur for its British Paints Division which
will further augment paint capacity by 30000 MTPA and
Resins capacity by 6000 MTPA.
Berger Paints India on Feb 18, 2015, announced that the
company and the Government of the Stavropol Region,
Russian Federation entered into a Memorandum of
Understanding (MoU) for conducting a feasibility study and
establishment of an industrial coatings plant in the Stavrapol
region of Russia by Berger. Stavrapol is an industrially
developed area, with an automobile manufacturing facility
and several other industries. Pursuant to the MoU, Berger
3
 will conduct a feasibility study, to be completed by 2015, for
setting up a modern industrial coatings plant in the Stavrapol
region. Berger will set up the plant to cater to the demands of
the industries in the region and elsewhere in Russia, based
on the results of the feasibility study.
Asian Paints to set up a Greenfield manufacturing facility at
Pudi Village near Visakhapatnam. The company will invest
approximately about Rs 1750 crore on this plant over a
period of 12 years from date of commencement of
construction, including the cost of land. The installed
capacity of this plant will be 400000 KLPA of paint per
annum. Recently on March 10, 2015, the company has
signed a MoU with state government of Andhra Pradesh in
this regard. Under the MoU the AP government will allot
110 acres for setting up this plant.
Asian paints which has expanded its capacity at Rohtak plant
by 50000 KLPA (to 200000 KLPA) in Q1FY13 is currently
embarked on doubling that capacity to 400000 KLPA from
current 200000 KLPA. This doubling of capacity at Rohtak is
progressing as per schedule.
The company has also signed MoU with Government of
Andhra Pradesh for setting up of 400000 KL paint
manufacturing facility at Visakhapatnam at an outlay of about
Rs 1750 crore in phases. Earlier in Feb 2013 it has
commissioned a new 300000 KLPA green-field paint
manufacturing plant, its seventh and largest decorative paint
plant at Khandala (near Pune) in Maharashtra. The company
is also embarked on expanding the Ankleshwar plant capacity.
The company expects to spend a capex of about Rs 700
crore in FY'16.
On October 28, 2013, Akzo Nobel has commissioned a 55
million litres capacity Greenfield plant to manufacture
decorative paints at a cost of Euro 20 million.
4 August 2015
Clariant doubled its pigments and pigment preparation
capacity in India with commissioning of a new extension
to its production facility in Roha, India in the month of
Sep 2014. The capacity expansion project was completed
with a cost of CHF 3.2 million. Pigments and pigment
preparations produced at the Roha plant are for wide range
of applications, including interior and exterior coatings,
packaging, personal, home and fabric care products, seed
coatings and dispersion for printing.
Outlook
Decorative paint demand though continues to be sluggish
with no signs of improvement; the efforts of industry
majors to push up volume with price cuts are paying fruits
at price sensitive low end segments. Rural demand going
forward continues to be concern as South West monsoon
after brisk start weakened giving thoughts of expected
below normal monsoon becoming true. So the progress
of monsoon holds key for agricultural activity and indirectly
rural paint demand. So it has to be seen how it pans out.
However given low base of H2FY15 the volumes in second
half expected to be better.
While the auto refinish segment demand continue to do
well, the industrial demand including auto OEM is yet to
recover as the efforts to revive up stalled projects and
industrial activity is yet to happen at ground level. So
recovery in industrial and protective coating demand is
some time away.
Industry majors though partially rolled back prices after
a spate of prices hikes in the last 15 months, the
realization is still higher compared to corresponding
previous period. Thus currently relatively higher
realization together with continued lower material cost
is to drive revenue and profit growth.
4