Paints [Key Points 

| Financial Year '09 | Prospects | Sector Do's and Dont's]

 The market size of the Indian paints sector has been pegged at Rs 170 bn in value terms and is very
fragmented. While in value terms, the industry grew by 17% to 18% in FY09, in volume terms, the
growth stood at 9% YoY, the lowest in the last five years. The per capita consumption of paints in
India stands at 0.5 kg per annum as compared to 1.6 kgs in China and 22 kgs in the developed
economies. India's share in the world paint market is just 0.6%. 

 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 paints manufacturing plants. Top organised players include Asian Paints (30% market share),
Kansai Nerolac (20% market share), Berger Paints (19% market share) and ICI (12% market share). 

 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
over 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 (30% petro-based derivatives)
involved in the manufacturing process. Since most of the raw materials are petroleum based, the
industry benefits from softening crude prices. 

 With the steady decline in excise duties (from 40% to 16% over five years), viability of small-scale
units has eroded considerably. Without the price advantage, these units have found it difficult to
compete with their peers in the organised sector. The unorganised sector has been consistently losing
market share to the organised 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 Price increase constrained with the presence of the unorganised sector for the
power of decorative segment. Sophisticated buyers of industrial paints also limit the bargaining
suppliers power of suppliers. It is therefore that margins are better in the decorative segment.

Bargaining High due to availability of wide choice.

power of
customers
Competition In both categories, companies in the organised sector focus on brand building. Higher
prices through product differentiation are also followed as a competitive strategy.
 Financial Year '09

FY09 was a tough year for the paints industry as the economic slowdown took its toll. Since the paint
sector tracks the overall GDP growth, because the latter was lower than the strong growth recorded in
the past, the growth in topline for the top three players was not as strong as in the previous years. For
instance, while Asian Paints did well on the topline front during the first half of 2009, things took a turn
for the worse in the third quarter wherein sales and profits were severely impacted as the global
financial crisis worsened. For the year however, Asian Paints managed to log in a strong growth in
topline as demand picked up in the fourth quarter. Kansai Nerolac on the other hand did not do too
well and the industrial paints especially the automotive paints business of the company was impacted
as the demand for automobiles waned. 

There was a sharp contrast in the movement of raw material prices as well. The first half of the year
saw crude prices escalating sharply thereby denting the profit margins of paint companies. For
instance, Asian Paints was compelled to raise the prices of its solvent based products 6 times. While
prices considerably softened in the last quarter of the year, the fall was not enough to offset the crude
price hike during the first half of the year. As a result, paint companies had to make do with falling
margins.

All the key players are in an expansion phase. While Asian Paints is setting up a plant in Rohtak,
Haryana and one in Maharshtra, Kansai Nerolac is undertaking brownfield expansions at its Lote and
Bawal plants and a greenfield project in Hosur, Tamil Nadu.

 Prospects
The market for paints in India is expected to grow at 1.5 times to 2 times GDP growth rate in the next
five years. With GDP growth expected to be over and above 7% levels, the top three players are likely
to clock above industry growth rates, especially given the fact that protection that was available to
unorganised players has come down significantly. 

Decorative paints are expected to witness higher growth going forward. The fiscal incentives given by
the government to the housing sector have benefited the housing sector immensely. This will benefit
key players in the long term. 

This apart, above normal monsoons in the current year would lead to higher agricultural output thereby
increasing demand for paint from rural areas. We expect paint demand to grow by 12% to 15% in the
next two to three years, largely led by post festive season demand. 

Demand in case of industrial segment is also 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. 

The reduction in peak customs duty from 12.5% to 7.5% will lower the import cost of key raw
materials. With more residual income with the population, home loan disbursals are expected to grow
at 25% CAGR in the next three years, which is a positive for paint companies.
Paints - Structure
 The Indian Paint industry can be divided as:

 The organized sector comprising of large and medium size units

 The unorganized or the small scale sector.

 The organized sector has a market share of 60%, valued at 23.4 bn. This is in contrast to the 55%
share that the sector commanded a few years back. There are around 25 units in this segment. The
unorganized sector comprises of around 2,000 units with a combined market share of around 40%.
Major companies in this segment include Asian Paints, Goodlass Nerolac, Berger Paints, Shalimar
Paints, and Rajdoot Paints. 

 High excise duties, low technology and low capital costs for production led to the incidence of a high
number of units in the small scale sector. However, since 1992 the government has been consistently
lowering duties from 40.5% in 1992 to around 16% currently. This has led to lowering of price
differential between the organized and unorganized sector. Moreover the paints sector was also
allowed to claim MODVAT credit on petro-based products, thus lowering the excise incidence further

Paints - Key Inputs

 The paint industry is raw material intensive. Paint involves the mixing of various raw materials in
various proportions. The raw materials are of a wide variety. On an average, raw materials account for
60% of net sales (industry average). In case of small-scale units it forms up to 70% of the net sales. 

 High cost and erratic availability of raw materials mark the Indian paint industry. Around 300-400 raw
materials are required to manufacture different kinds of paints. The high number of raw materials and
finished goods highlights the working capital intensity of the sector. 

 Most of the raw materials are petroleum based. Thus paint companies benefit when the petrochemical
industry goes into its cyclical downswing. A hike in the price of petroleum products raises input costs
negating the impact of a cut in import tariffs on raw materials. 

 Raw materials frequently run into short supply, resulting in high inventory cost. The shortage of one
specific material could result in severe manufacturing problems It is estimated that 18-20% of the total
raw materials used the industry are imported. 

 Most paint companies are hit by the fact that they do not make the raw materials themselves. For
example, phthalic anhydride (PAN) is manufactured from orthoxylene and which goes into the
production of paints along with titanium dioxide. Asian Paints is the only paint company that
manufactures PAN. The other paint companies have to import their stock. Since PAN prices generally
outpace international orthoxylene prices by almost 50% paint companies end up paying a fortune
when prices rise. In such a situation Asian Paints benefits by selling PAN in the open market. 

 Raw materials are divided into three major groups, namely, pigments (titanium dioxide, zinc oxide
etc.), solvents (mineral turpentine) and resins and additives. 

 Pigments are finely ground solids of different shades to give colour, durability, consistency and other
properties to paint. It is also one of the major raw materials, accounting for one-third of the total raw
 materials cost. 

 Amongst the vital pigments used in the process of paint manufacture is Titanium dioxide (TiO2) and
the industry consumes around 60% of TiO2. This pigment is available in two grades: anatase and
rutile, of which anatase is exclusively used in interiors while rutile is preferred in exteriors. India has
abundant raw materials for the manufacture of TiO2, especially ilmenite of which it has 12% of the
world’s deposits. It is ironical that the paint industry presently imports TiO2 in excess of Rs.1 bn - a
figure that may touch Rs 2 bn by the turn of the century. TiO2 is responsible for the demand-supply
gap. If the strong demand growth boosts domestic production of TiO2, there will be an increased
usage in various sectors. If the raw materials are properly utilized, India has the potential to emerge as
a net exporter of TiO2 in the next five years. 

 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. Solvents such as ethylene
glycols and alcohols are finding wider use as co-solvents in new water-borne formulations. 

 Binders are generally oils, resins and plasticisers 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.

Paints - Products
 Products 
The products of the paint industry can be classified into two major segments decorative
(architectural) paints and industrial paints. 

 Decorative paints: The decorative paint segment can be classified into interior paints and exterior
or cement paints. 80% of the decorative paints account for interior paints, which consists of
premium, medium and economy categories. The premium category consists of plastic emulsions,
the medium-priced category consists of synthetic enamels and the economy category consists of
distempers.
 The products under the decorative finishes can be limestone coatings, primers, distempers, cement
paints, matt/lustre finishes, enamels, emulsions (first quality), and premium emulsions. 

 Consumption of paints is skewed towards decorative paints which account for 70% of paints sold in
India. This is in a sharp contrast to the trend in developed countries, where the ratio is skewed
towards the industrial segment. 

 This segment is marked by the presence of a large number of players from the organized as well as
unorganized sector. Competition is high and margins tend to be low in this segment. Products of this
segment are relatively price sensitive. 

 Demand for decorative paints is seasonal with bulk of sales taking place during the festival seasons
from September to December. Besides sales remain slack during the monsoon months from June to
August. 

 Entry barriers in term of technological and funds requirements are relatively lower in the paints
sector. It is estimated that a plant of 1 m tpa will cost around Rs 120 m. However decorative paints
are marketing-savvy products and backed by large advertisement campaigns and dealership
networks. These serve as high cost entry barriers for new companies in this business. 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. 

 Industrial Paints:
Industrial paints comprising 30% of the market include automotive paints, high performance
coatings, coil coatings, powder coatings, marine paints and general industrial coatings. The
automotive segment is further bifurcated into OEMs and auto refinishes. The automotive and
general industrial coatings occupy top slot in terms of production.
 Demand for these paints is relatively price inelastic, but is prone to business cycles and depends on
industrial and economic growth. Major end user industries include shipping, capital goods, white
goods and heavy industries. 

 The industrial paints segment due to specialized technology and high capital expenditure attracts
fewer players. Most Indian companies have tied up with or are in the process of tying up with
international paint majors to have access to the latest technology. A tie-up with a global paint
manufacturer also enables the domestic company to supply to local customers of its partner. For
example, Goodlass Nerolac is a major supplier to Maruti Suzuki because of Kansai, its Japanese
collaborator and Suzuki relations. It is for the same reason that Asian Paints (tie-up with PPG
Industries, USA) is a major supplier of paints to Opel Astra.
Paints (Click on any field name to sort by it.)
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