Paint

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SECTOR REPORT
PAINT SECTOR
An INDEPENDENT Research Initiative We are NOT a Broking House Date: April, 2008
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Date of Report: 30th June, 2008
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Indian Paints Industry

The Indian paint industry is witnessing substantial growth on account of the boom in the infrastructure space. The paints industry is estimated to grow at a CAGR of 13-15% over the next three years and this is mainly on account of the rising income level, expected growth in construction activities and growth in manufacturing activities. Asian Paints Limited, being the market leader with close to 26% market share in Indian paint market would be the prime beneficiary of this. The per capita consumption of paints in India is still low at 1% as compared to that in Europe and the US. This depicts the potential for the sector to grow. The application of paints can be broadly divided into three categories viz., decoratives, industrial and automotive. Decorative paints accounts for over 75% of the overall paint market in India. It is broadly divided into interior paints (emulsions, enamels, wood finishes) and exterior paints.
The demand for paints is seasonal in nature. In the festive season (SeptemberDecember) it is high, as compared to other periods. While the Industrial paints business is driven by growth in automobile & white goods segment, decorative growth is affected by growth in housing, agriculture and disposable income of people and the overall economic performance of the country. This segment is price sensitive and is a high margin business as compared to industrial segment. Also the level of technology in the manufacturing of decorative paints is not very significant. The industrial and automotive paint manufacturing, however, is technology intensive and finds applications in sectors such as automobiles, consumer durables, infrastructure projects and the manufacturing. The demand in Festive season is dependent on monsoons and economic performance. Good monsoons result in higher agricultural output and have a positive effect on the GDP growth. So, when GDP growth is high, the paint sector will benefit and vice versa. Demand for paints comes from both new houses and repainting. The growth in revenues is also dependent on the growth in the housing sector. Thus a growth in the demand for new houses would spurt the demand for decorative paints.
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Increased demand for automobiles tend to have a positive impact on automotive paint manufacturers. The last year witnessed a phenomenal growth in the auto space helping the Paints industry. Demand for automobiles in turn is dependent on income growth and interest rates. The Indian paint sector has the co-existence of the organised and unorganised players. The organized segment constitutes around 54% of the total volume and 65% of value of paints industry. Further, in organized segment, the top 6 players account for around 84% by volume and 63% by value. The remaining players in organized business are largely present in non-auto industrial segment, and the unorganized players are mainly operational in decorative paints segment as industrial paints requires high technological know how and client tie-ups. The unorganized players were the ones not paying taxes and were unable to sell products at a cheaper rate and had no significant investments in technology. Due to fall in excise duty, unorganised players are losing competitiveness. Further a reduction in customs duty, results in cheaper raw material cost for ISIEmergingMarketsPDF in-bcg3 from 202.56.139.29 on 2011-08-08 01:19:41 EDT. DownloadPDF. organised players. The huge investments required in setting up a vast marketing and dealership network, to advertise and develop a brand over a period of time can only be afforded by companies in the organized sector. It is for this reason that smaller companies and small scale sector units are slowly losing market share to the organized sector. Asian Paints is a market leader in the decorative paints segment and has recently bought a stake in ICI, whereas Kansai Nerolac is the market leader in the Industrial paints segment. Domestic players have tied up with global majors like Nippon Paints, DuPont, PPG and Kansai for technology. Most of the raw materials used in making paints are petroleum based. Thus the paint companies benefit when the prices of the crude products go down. A hike in the price of petroleum directly impacts the bottom lines of companies.
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One of the major raw materials, forming one-third of the total raw materials costs are Pigments which are finely ground solids and determine the colour, consistency and other properties of the final output. Solvents are volatile organic compounds (VOC) used to dissolve, suspend or change the physical properties of other materials. They are generally used to bring down the viscosity of paints to the desired level, which also reduces the cost of paint formation. They constitute 70%-75% of the paint liquid and ultimate escapes into the atmosphere when the fluid dries. Binders are generally oils, resins and plasticizers that give paints its protective property. Most resin manufacturers make alkyds, polyesters, emulsion polymers, epoxy resins, amino resins, powder coating resins etc. Additives are added in small proportion to the paint to improve its performance characteristics in various ways. Skinning inhibitors, fungicides, wetting agents, driers are included in this category.
Margins of paint industry have remained under pressure as the major raw materials are derivatives of crude, and the crude prices have moved up. Even with the softening of crude prices, the prices of crude derivatives have not moved down proportionately thus indicating an upward price movement in future. While it is easier to comparatively pass on the burden of increase in raw material prices in decorative products, it is difficult to pass on in Industrial products. Moreover, it is also a long drawn process. In decorative water-based products like Interior & exterior emulsions, Wood finishes offer higher margins. Raw material cost typically account for around 50% of sales of a paint company High cost and erratic availability of raw materials affect the Indian paint industry.
Paint is dened as the group of emulsions, consisting of pigments suspended in a liquid medium, for use as decorative or protective coatings. Paint ranges from the broad group of environmentally-sound latex paints used to decorate and protect homes and the translucent coatings that line the interior of food containers, to the chemically-complex, multi-component nish that the automobile manufacturers apply on the assembly line.
Demand Supply Dynamics
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The industry has a positive correlation with GDP as both are drivers for growth. Demand for paints is both, derived as well as direct. The demand for decorative paints is a direct demand whereas the demand for industrial paints is a derived demand. The Indian paint industry has been growing at an average rate of 13% over the last five years. However, the per capita paint consumption in India is only 1.2-1.4 liters. The industry is less than half the size of the Chinese market by volume and about one fifth of the U.S. market by volume. Even Sri Lanka and Pakistan have higher per capita paint consumption. The low per capita paint consumption until recently can be linked to the large number of kuccha (temporary), and semi-pucca homes (semi-temporary), low purchasing power, the small size of homes, the long repainting cycle, and use of chuna (lime powder) and French polish (paint substitutes). Indias market is dominated by the decorative paint and coatings segment. Architectural coatings largely used in households constitute almost three-fourths of the markets value. The other large segments are automotive OEM paints, ISIEmergingMarketsPDF in-bcg3 from 202.56.139.29 oncoatings and powder coatings. automotive refinish paints, protective 2011-08-08 01:19:41 EDT. DownloadPDF. There are many players in the Indian paint market. The top four companiesAsian Paints, Berger, Kansai Nerolac and ICI (India)constitute more than 5.5% of the Indian domestic market. In addition to these, there are more than one thousand other companies in both the organized and unorganized sectors. The unorganized sector itself constitutes 25-30% of the market.
A number of foreign players have subsidiaries in India including:

Jotun (powder, marine and decorative); Akzo-Nobel (powder, protective and automotive refinish); Nippon Paints (decorative); Choguku (marine); DuPont (automotive refinish); and Becker (coil coatings). Others like Sherwin Williams are in the process of entering India. As a result, all the leading international players in the decorative, automotive OEM and automotive refinish paint markets will be operating in India. India also imports a small volume of specialty wood finishes including polyester and polyurethane water-based coatings and special effect emulsions.
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In the decorative segment, the next decade should see a value growth in the region of 15-20% per annum due to reduction in poverty levels, construction of new homes, higher inclination to spend, increasing dcor-consciousness and gradual replacement of chuna. The automotive OEM segment too should grow at least at 15% per annum powered by the projected high growth in the automotive segment. Thus if the Indian economy maintains its growth rate at the recent high levels, we should see value growth of at least 15% annually in the Indian paint industry over the next five years.
Demand drivers for Paints Industries Increase in Per capita consumption of paints: The per
capita consumption of paints in developed countries is around 15-25 kgs and world average is around 15 kgs. Comparing this with domestic consumption, Indias contribution in-bcg3 from 202.56.139.29 is 2011-08-08 01:19:41 EDT. DownloadPDF. ISIEmergingMarketsPDF to world paint markets on 0.6% with per capita consumption of around 800-900 gms. Based on the expenditure in the construction activity and increase in the repaint activity coupled with industrial growth, the industry is expected to increase at an 11.85% CAGR over next three years
Increase in Real Estate Investments: The demand for

decorative paints is directly related to the increase in the investment in the real estate. Out of the total demand for decorative paints, around 30-40% of the demand comes from fresh construction (Source: CrisInfac). The size of real estate industry is estimated to grow to Rs. 18,517 Bn, over next five years period. Investment in real estate will be primarily led by housing, which is expected to account for nearly 90% of total investment in the sector. Indias robust economic growth and resultant increase in income are speeding up the pace of urbanization. In India, about three fourth (3/4) of real estate development is for residential use and the balance one fourth (1/4) is predominantly for commercial use. Housing investments (permanent, non-slum houses) are expected to grow at a CAGR of 12% over the next 5 years period.
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On other hand, repainting activity which accounts for 70% of the decorative paint demand is also increasing, mainly due to increase in per capita income. The demand from the repainting activity has increased by 6-7 percent in last two years. Based on the expected investment in the housing, demand for paint is expected to increase at a CAGR of 12 percent over the next 5 years.
Prices in line with substitute product: Large scale of

operations and technical know-how has helped prices of paints to come down. They are now in line with those of substitute products like lime wash, distemper etc., manufactured by local players. This gives consumers the incentive to shift from lime to paints.
Industrial Paints
Increased demand for automobiles tends to have a positive impact on automotive paint manufacturers. Demand for automobiles in turn is dependent on income growth prospects and interest rates. Automotive paint manufacturing is technology intensive and Indian manufacturers have technical collaboration with foreign players like Kansai, Nippon and PPG of USA. In the case of automotive paint ISIEmergingMarketsPDF in-bcg3 from 202.56.139.29 on 2011-08-08 01:19:41 EDT. DownloadPDF. manufacturers, the ability to pass on any rise in input is weaker i.e. bargaining power of customers is higher. As far as industrial paint segment is concerned, increased spending in infrastructure plays a vital role in boosting paint demand. Thus the announcement by the government on higher public spending, benefits industrial paint manufacturers.
Outsourcing:
The organized players in the decorative paint segment have to compete directly with those in the unorganized sector manufacturing low cost paints like distemper and enamels. In-order to face this competition organize players outsource small part of their production (25-30%).
Import Scenario:
Climatic conditions in India are not conducive for foreign formulations and the modification cost in product formulation is quite high. As a result, imports are no significant threat to the Indian players. In case of industrial paints, most of the major players in the industry already have a tie-up with global players for latest technology. It negates the further supply from the international markets even after reduction of import duty from 40% to 15.3% in last 8 years.
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Cost Structure
The paint industry is raw material intensive industry. It takes around 300 different raw materials to make paint, most of which are petroleum based. Titanium Dioxide (TiO2) is the largest consumed raw material for manufacture of paints. It constitutes around 30% of the total manufacturing cost. TiO2 is available in two grade i.e. rutile (imported and mainly used by the Indian paint industry) and anatase (manufactured domestically). Besides TiO2, there are other petroleum based raw materials which constitute around 40-50% of total raw material consumed.
De-growth in end-user industry

Demand for paints is directly from the construction and automobile industry. Any de-growth in these industry will cap the growth in paint industry. Any increase in the interest rate can subdue the demand for the new houses and lead to a slowdown in the demand for paints.
Robust economic growth
The Indian economy is growing at a robust pace of over 8.5% per annum, translating into increased production, enhanced employment and expanding per capita income that should lead to a higher purchasing power.
Construction boom
India is currently witnessing a boom in construction. Construction activity grew at a robust rate from 7,396 million square feet to 8,288 million square feet during FY06-08E. Fresh demand for paints accounts for 40%, while re-paint demand is around 60%. Increasing real estate development is the major demand driver for paint industry.
INDUSTRY OUTLOOK
The size of the Indian paint industry was estimated at Rs 10,200 crore in 2006-07, of which organized players account for 75%, while the unorganized sector has remaining 25%. Over the last few years, the organized sector has become highly concentrated, with the top six players enjoying a market share of 84% in volume terms. The unorganized sector comprises 2,000 odd players that are widely scattered.
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Among the organized players, the decorative segment accounts for Rs 5,800 crore in value term, while industrial paints accounts for Rs 1,700 crore. The industrial paints segment is dominated by the organized sector with its high technology orientation. Industrial paints cater to industries such as automobile, auto ancillaries, consumer durables, marine vessels and containers. The automotive segment accounts for the largest share of the industrial paints. Demand for paints is direct as it is used for new houses and repainting, whereas demand for industrial paints is derived from user industries such as automobiles, auto ancillaries, consumer durables, marine vessels and containers, and depends on the level of industrialization in the country. The utilization rates in the paints industry is relatively low at 60-65%, as paint capacities are mainly designed to meet peak demand requirements during festive season. In the industry, realization per tonne has not varied significantly over the years on account of the competitive nature of the market and the need to maintain attractive pricing. During periods of significant increase in material costs, prices ISIEmergingMarketsPDF in-bcg3 froma202.56.139.29 on 2011-08-08 01:19:41 EDT. DownloadPDF. have been hiked but to limited extent, as the focus has been on volume growth.
MAJOR PALYERS
ASIAN PAINTS LTD
Asian Paints (APL) manufactures wide range of paints for Decorative and Industrial use. Companys product range includes wall paints, metal paints, wood finishes, primers and others. The company has presence in both decorative and industrial coating segment of the paint business. The industrial coating segment comprises automotive coating, powder coating and protective coating. APL operates in 20 countries and has 28 paint manufacturing facilities in the world. In India it has manufacturing facilities at Bhandup, Ankleshwar, Patancheru, Kasna, Sriperumbudur, Sarigam, Baddi etc. It caters to markets across 65 countries and is a market leader in 11 countries. It sells its products under several brand names such as Royal for the premium segment, Apcolite for the middle segment and Gattu, Tractor, Utsav, 3-Mango, etc. in the lower segment. APL has also diversified into
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manufacturing specialty products such as Pentaerythritol and Phthalic Anhydride. These are used in paints, plasticizers, inks and dyes. APLs polymer plant in Sriperumbudur was commissioned in Q1 of 2007-08. The company plans to increase the capacity of this plant to 100,000 Kilo Litre ( KL) and plans to commission it in Q1 FY09. APL has secured a plot of 130 acres at Rohtak in Haryana for setting up a paint plant with a first phase capacity of 150,000 KL by January 2010. APL has set up this plant exclusively for waterbased products. The company is expanding its capacity by 40% to 494,000 tons per annum (tpa) in FY10 at capital expenditure of Rs 3 billion. The companys sales initiatives like color world and home solutions, complimented with the largest network of dealers, would help expand sales volumes. They expect a 14% CAGR in sales over FY07-10E to Rs 41.81billion. The companys leadership position and earnings visibility due to increasing offtake in the domestic market, backed by strong housing demand and growing international business make the stock attractive.
BERGER PAINTS LTD

Berger Paints India (BERGEPAINT) is engaged in the manufacture and sale of decorative and industrial paints and coatings. The company offers decorative paints for all interior and exterior surfaces including concrete, plaster, metal, wood, and special applications like water storage etc. Acrylic brands like Luxol, Silk and Rangoli for interiors, and Weathercoat for exteriors are. Luxol Hi-Gloss is the national hallmark for excellence in paint enamel. Its also provides industrial, automobile, and powder coatings. Production facilities are located in east, west and south India. The company is to set up a Rs 500 million automotive paints plant in Pune with a manufacturing capacity of 800 KL of automotive paint a month. The existing capacity is 600 KL a month and contributes 24% of total sales. Berger Paints is a joint venture company between BNB Coatings India and Nippon Bee Chemicals Co. of Japan to manufacture automobile plastic substrate coatings. It has technical licence agreements with DuPont Performance Coatings (automotive coatings), Nippon Paint Co. (automotive coatings), Orica Australia (protective coatings), Tigerwerk Lack-u. Farbenfabrik GmbH & Co. KG, Austria (specialized powder coatings) and Nippon Bee Chemical Co. (coating on bumpers and other plastic parts). Subsidiaries include Beepee Coatings, Berger Jenson & Nicholson
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(Nepal) and Berger Paints (Cyprus) and also has interests in Berger Paints Overseas (Berger Russia). It has joined hands with Cartoon Network, a Time Warner company, to exploit the kid`s product market and launched a new product called Berger Kidz. In 29th April, 2008, Berger Paints inked pact to acquire 100% in Bolix S.A., Poland, for a net purchase price of USD 38.6 million (nearly Rs 1,559 million), from global private equity group Advent International. The acquisition will be made through a wholly owned subsidiary of Berger Paints India in Cyprus. The purchase is conditional upon fulfillment of certain conditions precedent including clearance by the Polish anti-monopoly office. The proposed acquisition will provide synergy benefits to Berger`s presence in the region, both in terms of new business opportunities and regional markets and will also compliment the company`s existing businesses. Simultaneously, Berger is also undertaking several modernization/expansion activities including expansion of solvent based paint plant, installation of resin ISIEmergingMarketsPDF in-bcg3 from in Goa, expansion of water based paint and resin manufacturing plant 202.56.139.29 on 2011-08-08 01:19:41 EDT. DownloadPDF. manufacturing capacity in West Bengal, expansion of facilities in Gujarat and expansion of powder paint manufacturing capacity in Jammu. Also recently the company has issued and allotted 20 million equity warrants to Jenson & Nicholson (Asia), UK, a part of the promoter group being the allotee, upon receipt of Rs 99 million towards 10% of the total issue price from the allottee.
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Date of Report: 30th June, 2008

Indian Paints Industry

Demand Supply Dynamics

A number of foreign players have subsidiaries in India including:

Increase in Real Estate Investments: The demand for

Prices in line with substitute product: Large scale of

De-growth in end-user industry

Robust economic growth

BERGER PAINTS LTD

on 2011-08-08 01:19:41 EDT. DownloadPDF.

Email: consulting@lotusknowlwealth.com www.theipoguru.blogspot.com

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