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Nath Balakrishnan

FRONTLINE players in the paint industry are likely to end financial year (FY) 2004 with bottomline coated thick black.

The continued high demand for housing in the past two years and a further softening of home loan interest rates should be a booster for companies such as Asian Paints and Berger that operate predominantly in the decorative segment; the surge in the offtake of automobiles, led especially by impressive numbers from market leader Maruti, should augur well for the fortunes of companies such as Goodlass Nerolac.

Revenue growth, too, should be higher than what the three major players achieved in FY 03 (12.5 per cent), and settle at about 15 per cent.

Housing — the key driver

The performance of the decorative segment (which accounts for 80 per cent of the total paint demand) is linked to the demand for housing; if one reckons the disbursal of housing loans — which grew at a robust 30 per cent for the first half of this financial year in the case of HDFC — as a proxy for housing demand, players with a focus on decoratives could be in for good tidings. Prime beneficiaries would be Asian Paints and Berger.

Lending institutions have made it substantially easier for one to rustle up the finances needed to buy that dream home. The demand for paints from new housing would constitute about 30 per cent of all demand; the rest comes in from repainting, which is normally carried out after the monsoon and before the the festival season. This is a function of disposable income; in this context, the likely improvement in rural incomes over the next couple of quarters should augur well for paint demand.

Within the decorative space, considerable traction is seen in the exterior paints segment, which is also the fastest growing at about 20 per cent. Paint majors have launched premium products in this category, which have been well received, thanks mainly to their durability and ability to withstand climatic changes well.

The auto story

As the Indian middle-class gradually ascends the social ladder, the first pit stop is invariably at the doorstep of a car dealer. There has been a strong surge in automobile offtake in 2003, led by the likes of Maruti, Hyundai and Tata Motors. Additionally, the market has also been witness to a clutch of new launches. These factors have converged and led to resurgence in the demand for automotive paints. As market leader, Goodlass Nerolac has been the main beneficiary, as a majority of the original equipment manufacturers (OEMs) are its clients.

Even as the auto boom means good times for Goodlass, the company has realised over the past few years that a dependence on this segment could, in the long run, hurt its margins. The reason: OEMs command significant negotiating leverage and would use every bargaining chip to hammer down supplier prices. Suppliers of paints would be no exception to this rule.

Goodlass' focus on the decorative market — where realisations are better on account of a highly fragmented buying population — has paid off. It now derives about 55 per cent of its revenues from this segment.

While the automobile sector makes up a substantial chunk of industrial paints demand, a pick-up in the offtake of consumer durables also means an improvement in the fortunes of paint companies, as it spurs demand for powder coatings. The consumer durables segment has rebounded in the first half of FY2004.

Branding initiatives

Given the pivotal role that raw material costs can play on margins (see related story), companies are also constantly devising methods to ensure that they continue to remain the brand of choice even after they have passed on cost increases to customers. Asian Paints, for instance, has effected two price increases — one in September last year and another this May.

As the industry distances itself from the tag of being in a commodity business and gets closer to being considered an FMCG business, its advertising, too, is acquiring a consumerist hue. Investments in brand building appear to be the order of the day.

If advertising such as this aids brand recall, companies are also ensuring that their brands are easily accessible by beefing up their distribution network.

Widening reach in the rural areas, ramping up the installation of colour tinting machines and providing home-painting solutions are a few other measures aimed at making easier the whole process of shade selection and the subsequent painting.

Capacity additions

That the paint majors are upbeat about growth prospects has led to all of them proposing to set up new plants: Asian Paints has a unit coming up at Chennai, which would enable it to serve customers in the South better; a Goodlass plant is coming up at Haryana, which would give it the logistical edge when it involves servicing a key customer such as Maruti; and Berger's plant, being set up at Jammu, would further strengthen its presence in the North, apart from enabling it to explore opportunities in neighbouring countries.

These additions, juxtaposed with the ailing financial condition of a few of the fringe players, increasingly point to major players wanting a bigger share of the pie. A consolidation within the industry also appears imminent and acquisitions cannot be ruled out.

As preferences shift towards better-quality paints, players in the unorganised sector that have the capabilities only to manufacture low-end paints would increasingly get marginalised.

This process would also be hastened by the progressive reduction in excise duty, which has considerably shrunk the differential in prices between the organised and the unorganised sectors.

Coupled with the consolidation within the organised sector, one should see the top three/four players in the industry controlling more than three-fourths of the market.

While it might not confer upon them the same kind of pricing power as it might in the case of cement or steel, what it will do for the customer is to raise the quality bar significantly higher. Quality will cease to be a differentiating parameter and it will merely be the price that a new entrant will have to pay for market entry.

Market portrait

THE OVERALL market is reckoned at around Rs 6,500 crore. The reductions in excise duties have taken away the price advantage enjoyed by the unorganised players. At present, they control about one-fourth of the overall market.

Within the organised sector, the top five players control about 80 per cent of the market.

Competition from the unorganised sector is in the decorative paints space. Unlike industrial paints, which are technology intensive, the outlay to set up a decorative plant is lower.

In India, all the key players have technology tie-ups for industrial paints: Asian Paints with PPG Industries; Goodlass' parent, Kansai Paints, is among the larger players in the industrial paints space worldwide; and Berger has an arrangement with Nippon Paints.

In India, the mix between industrial paints and architectural coatings is skewed distinctly towards the latter, which constitutes about 80 per cent of the market. In developed markets, the mix between industrial and decorative paints is the reverse.

While per capita consumption of paints in India is below 1 kg, it is well above 10 kg in developed countries. The housing boom and the repainting demand that is creates are likely to boost consumption. Though paints can be freely imported, they do not pose much of a threat.

The key to success in the industry is to have a strong distribution network; imported paints would be hard pressed to match organised players when it comes to availability.

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