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.
How to Research the Paints Sector (Key Points)
Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented.
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.
In both categories, companies in the organised sector focus on brand building. Higher prices through product differentiation are also followed as a competitive strategy.
Continuing with the previous year's trend, year 2015-16 was positive yet challenging for the Indian economy. Infrastructure slowdown and a weak demand across major industry segments like automotives, consumer durables kept demand subdued. Factors like poor monsoons, high interest rates, uncertainty due to geo political events all contributed towards subdued demand. The Industry is estimated to be around Rs. 39,000 Crores as at March 2016.
On the cost front, the industry benefitted from lower crude oil prices. Derivative prices, however, did not go down by the same proportion and therefore raw material prices did not come down significantly for the industry.
Rupee volatility also contributed to uncertainty on the cost front.
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.
The Government is expected to continue with its reforms agenda, with policy decisions like GST, Infrastructure, and Power Sector Reforms projected to be implemented in the near term. These reforms, if implemented, 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 16-17 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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