*The facts and figures in this article are not up to date.

The Indian Paint industry, estimated to be a Rs.21,000 Cr. industry, has been growing at a rate of above 15% for the past few years. The organized players of the industry cater to about 65% of the overall demand, whereas the unorganized players take care of the remaining 35%, in value terms. The unorganised players mainly dominate the distemper segment. Source : http://stockshastra.moneyworks4me.com/paints-indian-paint-industry-analysis-andresearch-report-2011/ The industry consists of two segments, namely

Decorative segment caters to the housing sector and Industrial segment - consists of powder coatings, floor coatings and other protective coatings catering to the automobile, marine and other industries.

In the domestic market, Decorative segment accounts for 70% of the total demand for paints whereas the industrial segment accounts for the remaining 30%. Globally, the demand for paints is almost equally distributed, where both the segments account for close to 50% of demand.

So, how does the industry work? Here is the analysis.

The working of the Paint industry has been explained pictorially below:

Raw Materials: On an average, raw materials constitute ~56% of the total expenditure in paint companies. Titanium dioxide is one of the major raw materials and price fluctuations in its cost have direct and substantial impact on the cost of production. Crude oil derivatives are the other major raw materials and have similar impact. Apart from these a large number of other raw materials are used for adding/giving specific properties to the wide product range offered by the industry. End-User: The decorative paints segment products find use in households and construction whereas the industrial segment products find use in automotive industry, consumer durables industry and other OEMs.

What does the Past Say?

Growth of the paint industry has been consistent with the growth of Indian GDP. Paint industry has been growing at a rate of 1.5 to 2 times of Indian GDP growth. The Decorative segment shows a seasonal trend with sales peaking during the festive seasons in the months of September to November, whereas the demand is low in the monsoons.

The top 5 companies make up more than 80% sales of the organized market. The market share of the organized sector is continuously improving as consumer preference is shifting towards better products offered by the leading brands. Established Foreign companies have entered the Indian market by acquiring existing Indian companies. Kansai Paints, Japan entered the Indian Market by acquiring Nerolac, Akzo Nobel, the worlds largest Paint company, entered the Indian market by acquiring ICI Paints (now Akzo Nobel India.)

STRENGTHS
Asian Paints is the market leader in the Indian Paint Industry and gets the major portion of its revenue from the Decorative segment. Over the years, it has outperformed its peers in every aspect by wide margins. This is mainly due to its strong moat (competitive advantage) which lies in its strong Brand Equity and an extensive Distribution Network. The companys Net sales, Net Profit and Book Value have grown with a 5 year CAGR of 22%, 27% and 28% respectively. Also the companys debt is very low and its ROIC has been 40% on an average over the last six years.

WEAKNESSES
Kansai Nerolac holds the second position in the Indian Paint market, and is the market leader in the Industrial Paint Segment, owing to its leadership position in the Automobile Paint segment. It is the subsidiary of Kansai Paints Ltd., the leading Japanese paint company. Berger paints has the third position and derives its major revenue from the Decorative segment. Akzo Nobel (former ICI Paints) is the subsidiary of the worlds largest Paint Company and is at the fourth position. Shalimar Paints is at the fifth position.

What are the growth drivers of the industry? Heres the analysisOPPORTUNITIES
1. Increasing level of income and education The increasing proportion of young population along with increasing disposable incomes is leading to a change in consumer habits. The Indian economy is shifting from a savings economy to a spending economy. With more income at their disposal, people are now ready to pay for better products and paint is no exception. Educated consumers are more brand conscious and seek value in what they consume. Thus, paint companies offering value-added features like non-toxicity, weather protection, texture, eco-friendly production, etc. will attract more demand. These value-added products enable the manufacturers to earn a better premium as compared to the regular paints, thus offering higher margins. 2. Increasing Urbanization: Urbanization is leading to a shift from temporary houses to permanent houses. Urban houses are well-designed in its interior as well as exterior aspect. This calls for more houses being painted using medium and premium paints. For urban houses, interior design is becoming a fashion statement and a lot of paint is used to decorate the interiors. This will lead to an increase in the per capita consumption of paint which will increase the overall demand of paint. Urbanization also brings more nuclear families. More nuclear families mean more number of houses even for the existing population thus further driving the demand. 3. Increasing share of organized sector: Decrease in taxes on key raw materials will improve the position of the organized players. The Organized sector is expanding its distribution network and adopting the installation of tinting machines at retail outlets. These tinting machines offer a wide variety of colour shade options to choose from. The unorganized players are not in a position to offer such facility as it is comparatively capital intensive. Shift in use, from distemper segment towards premier segment is also shifting market share from the unorganized sector to the organized sector. 4. Development of the Realty, Automobile and Infrastructure sector: The growth of the paint industry is largely dependent on the development of the realty and housing sector, as decorative segment generates about 70% of the total paint demand from this sector. The Automobile segment generates more than two-third of the demand for Industrial paints, and hence is the growth driver for Industrial Paints. The Infrastructure segment creates direct demand for paints as well as creates indirect demand through supporting the growth of the realty, automobile, FMCG and other industries where paint is used. The growth potential in the above 3 sectors is immense, the paint industry being dependent on these 3 sectors is expected to grow along with them. 5. Availability of financing options: Easier housing finance and auto finance is expected to favour more people to buy houses and travel in personal vehicles. This will drive the growth of housing and automobile sector, of which the Paint industry will get its share. 6. Increasing Penetration in the Rural Markets: Paint usage in rural areas is generally in the distemper segment, hence dominated by the unorganized players. Demand in rural areas

is dependent on agriculture, which is dependent on the monsoons. With the development of irrigation facility, the dependence of agricultural output on monsoons will be on a decreasing trend. Also, with the modernization of agriculture and accompanying development of rural India, consumer preferences are expected to improve. Paint companies are expanding their distribution network in rural parts of India, which is a relatively untapped market for the organized players. These factors supported by the increasing penetration of the paint companies will help drive the demand for paints.

So, is there anything to be concerned about?..THREATS

Cost of raw materials: The Cost of Raw materials is an important factor as the industry is raw material intensive. Fluctuation in the prices of Titanium dioxide and Petroleum directly affect the production cost. This is more of a concern for the Industrial segment as compared to the Decorative Segment, as it is comparatively easier to pass on the costs in case of decorative paints. Also, a large portion of raw materials are imported, leaving the cost factor vulnerable to exchange rate fluctuation. MNCs entering the Indian Paint Market: The entry of Established foreign players in the Indian market may increase the competition among the players of the industry. This may lead to price competition which may impact the profit margin of the companies. As a result, the increase in volume growth may not equally reflect in the profit growth for the companies.

What is the future Outlook for the Paint industry in India?

The Indian paint Industry has a wide potential for growth which is demonstrated by the fact that the per capita consumption of paint in India is merely around 1 kg as compared to about 20 kg in the developed countries or a global average of about 15 kg. So, the absolute consumption of paint in India is definitely expected to rise. The market share of the organized sector is on an increasing trend. Also, the contribution of industrial segment will increase with the continuing economic development of the country. With India moving towards becoming a developed economy, the decorative to industrial paint ratio of 70:50 is expected to move towards the global average of 50:50. Thus the Indian paint industry is in its growth phase and is expected to grow at a rate faster than that of GDP. The future prospects of the industry are strong. Looking at the above points, we can say that the long term future prospects of the Indian Paint Industry appear to be Green (Very Good.) Companies which have high revenues, efficient operations and distribution network, comfortable debt levels and robust capacity expansion plans will be best suited to capitalize on the growth prospects. It is very important that while investing in a company, an investor selects an industry, where the long-term future prospects are bright. We have seen that in the long run the Indian Paint industry is expected to have good growth. Also, it is equally important that the company has an excellent financial track record (i.e. Green 10 Year X-Ray) and its long-term future prospects are Green (Very Good).

*The 10 YEAR X-RAY facilitates analysis of the financial performance of the company considering the five most important parameters. A 10 Year period will normally encompass an entire business cycle. Analysing the performance over this time frame is essential to understand how a company has fared during the good as well as bad times. The five most important parameters that one needs to look at are Net Sales Growth Rate, EPS Growth Rate, Book Value per Share (BVPS) Growth Rate, Return on Invested Capital (ROIC) and Debt to Net Profit Ratio. Given below is the MoneyWorks4me assessment for a few Paint companies:

The table above gives you a list of the top 5 companies from the Paint Industry. Due to the very nature of the paint industry, it is best advised to invest in companies which have created a strong brand equity for themselves and have a strong competitive advantage. While such companies usually trade at a premium and are rarely cheap, you should look to invest in them when they are available at a good discount. To find out the right price to invest in these companies, become a member of MoneyWorks4me.com. Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.
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The Indian paint industry - an overviewnews Paint is a mixture of four elements 07 April 2007 Source: http://www.domainb.com/industry/paints/200012_paint_overview.html Highlights

The Indian paint industry is a Rs 49 billion sector. The demand for paints is relatively price-elastic but is linked to the industrial and economical growth. The per capita consumption of paints in India is very low at 0.5 kg per annum if compared with 4 kgs in the South East Asian nations and 22 kgs in developed countries. The global average per capita consumption is 15 kg. In India the organised sector controls 70 percent of the total market with the remaining 30 percent being in the hands of nearly 2000 small-scale units. In India the industrial paint segment accounts for 30 percent of the paint market while the decorative paint segment accounts for 70 per cent of paints sold in India. In most developed countries, the ratio of decorative paints vis- -vis industrial paints is around 50:50. All the industry majors have a vast dealership network and are required to maintain high inventory levels. most of the paint leaders have technical tie-ups with global paint leaders.

Sector comments Paint is a mixture of four elements - solvents, binders, pigments and additives. Solvents give the paint a liquid flow while the binder binds it to the surface. Pigments impart colour and opacity to the paint and the additives give it special resistance properties. Sector trends The recession in the construction and automobile sector had thrown in shades of grey across the Industry spectrum, but the revival in these sectors is cause for cheer for the paint industry as well. The balance sheets of the industry majors are now painted with bright colours. Sector specifics On product lines, paints can be differentiated into decorative or architectural paints and industrial paints. While the former caters to the housing sector, the automotive segment is a major consumer of the latter. Decorative paints can further be classified into premium, medium and distemper segments. Premium decorative paints are acrylic emulsions used mostly in the metros. The medium range consists of enamels, popular in smaller cities and towns. Distempers are economy products demanded in the suburban and rural markets. Nearly 20 per cent of all decorative paints sold in India are distempers and it is here that the unorganised sector has dominance. Industrial paints include powder coatings, high

performance coating and automotive and marine paints. But two-thirds of the industrial paints produced in the country are automotive paints. Market profile The leaders in the organised paint industry are Asian Paints (India) Ltd. (APIL), Goodlass Nerolac Paints Ltd. (GNPL), Berger Paints, Jenson & Nicholson Ltd. (J&N) and ICI (India) Ltd. Asian paints is the industry leader with an overall market share of 33 per cent in the organised paint market. It has the largest distribution network among the players and its aggressive marketing has earned it strong brand equity. The Berger Group and ICI share the second slot in the industry with market shares of 17 per cent each. GNPL has a market share of 15 percent in the organised sector. The market can be further split into decorative paints and industrial paints. The demand for decorative paints is highly price-sensitive and also cyclical. Monsoon is a slack season while the peak business period is Diwali festival time, when most people repaint their houses. The industrial paints segment, on the other hand, is a high volume-low margin business. In the decorative segment, it is the distribution network that counts while in the industrial segment the deciding factor are technological superiority and tie-up with automobile manufacturers for assured business. APIL dominates the decorative segment with a 38 per cent market share. The company has more than 15,000 retail outlets and its brands Tractor, Apcolite, Utsav, Apex and Ace are entrenched in the market. GNPL, the number-two in the decorative segment, with a 14 per cent market share too, has now increased its distribution network to 10,700 outlets to compete with APIL effectively. Berger and ICI have 9 per cent and 8 per cent shares respectively in this segment followed by J&N and Shalimar with 1 and 6 per cent shares. The share of industrial paints in the total paint consumption of the nation is very low compared to global standards. It accounts for 30 per cent of the paint market with 70 per cent of paints sold in India for decorative purposes. In most developed countries, the ratio of decorative paints vis- -vis industrial paints is around 50:50. But, with the decorative segment bottoming out, companies are increasingly focussing on industrial paints. The future for industrial paints is bright. In the next few years, its share would go up to 50 per cent, in line with the global trend. GNPL dominates the industrial paints segment with 41 per cent market share. It has a lion's share of 70 per cent in the OEM passenger car segment, 40 per cent share of two wheeler OEM market and 20 per cent of commercial vehicle OEM market. It supplies 70 per cent of the paint requirement of Maruti, India's largest passenger car manufacturer, besides supplying to other customers like Telco, Toyota, Hindustan Motors, Hero Honda, TVS-Suzuki, Mahindra & Mahindra, Ashok Leyland, Ford India, PAL Peugeot and Bajaj Auto. GNPL also controls 20 per cent of the consumer durables segment with clients like Whirlpool and Godrej GE. The company is also venturing into new areas like painting of plastic, coil coatings and cans. APIL, the leader in decorative paints, ranks a poor second after Goodlass Nerolac in the industrial segment with a 15 per cent market share. But with its joint venture Asian-PPG Industries, the company is aggressively targeting the automobile sector. It has now emerged as a 100 per cent OEM supplier to Daewoo, Hyundai, Ford and General Motors and is all set

to ride on the automobile boom. Berger and ICI are the other players in the sector with 10 per cent and 9 per cent shares respectively. Shalimar too, has an 8 per cent share. Price sensitivity factors Various factors that have influenced the pricing of paints are summarised below:

The industry is raw-material intensive. Of the 300 odd raw materials, nearly half of them are imported petroleum products. Thus, any deficit in global oil reserves affects the bottomline of the players. The major raw materials titanium dioxide, phthalic anhydride and peutarithrithol constitute 50 per cent of the total cost. Besides, this, there are other raw materials such as castor, linseed and soybean oils, turpentine. The raw materials cost sums up to a whopping 70 per cent. Any increase in the prices of these raw materials could adversely affect paint prices. Most of the paint majors have to import nearly 30 per cent of their raw material requirements thus changes in import policies can affect the industry. The prices of packing materials such as HDPE, BOPP and tinplate have reduced considerably. However, the decision of the Central Government to ban import of tinplate waste could lead to a spurt in the prices of the tinplate in the near future.

Technology collaboration All the paint majors have tie-ups with global paint leaders for technical know-how. Asian Paints has formed a JV with PPG Industries Inc to service the automotive OEMs. Berger has a series of tie-ups for various purposes. It has a technical tie-up with Herbets Gmbh of Germany in addition to its joint venture with Becker Industrifag. With the agreement with Herbets coming to an end in 2001, Berger has now allied with the Japanese major Nippon Paints to boost its OEM turnover since the Indian roads are being flooded with Japanese automobiles. It also has an agreement with Orica Australia Pvt. Ltd. to produce new generation protective coatings. The company also has tie-ups with Valspar Corp and Teodur BV for manufacturing heavy duty and powder coatings. Incidentally, ICI makes paints with the technical support of Herbets, which has been recently acquired by by E I Du Pont de Nemours of the US. Interestingly, Du Pont, which is a leader in automotive coatings in the US, has a technical tie-up with Goodlass Nerolac for the manufacture of sophisticated coatings for the automotive sector. Goodlass also has technical collaborations with Ashland Chemcials Inc, USA, a leader in the petrochemical industry, Nihon Tokushu Toryo Co and Oshima Kogyo Co Ltd, Japan. Overseas expansion If the global Goliaths are foraying into the Indian paints market aggressively, the Indian paint companies are also spreading their wings. Asian Paint exports its paints to over 15 countries. It also has joint ventures in Fiji, Tonga, Nepal, Vanuatu, Solomon Islands, Australia, Oman and Mauritius. In October 1999 it acquired 76 per cent equity stake in Delmege Gorsyth & Co (Paints) Ltd, the second largest paint company in Sri Lanka with a 12 per cent market

share in Sri Lanka's Paint Industry. Within a short span of just five years, the company has emerged as the number one player in these markets. Conclusion The industrial paints are slated to grow at an annual rate of 10 to 12 per cent per annum for the next few years. The industrial paint manufacturers would benefit from the burst in the passenger car sales. The two-wheeler industry has also registered a good show in the current year. The commercial vehicles segment, a star performer last year with 33 per cent growth, is expected to average a growth of only 15 per cent this year. However, the raising titanium dioxide prices and the negligible growth in agriculture this year, will play spoilsport. Considering the past trend, the paint industry is expected to show at least twice the growth of Indian GDP in the ensuing years. The reduction of excise duties from a high of 40 per cent to 16 per cent in the last five years, has made the numerous small-scale units unviable, as they no longer have a price advantage over the organised sector. This has helped the organised paint Industry a lot. The industry is in a consolidation phase and only those Indian paint companies with a strong technical alliance, better distribution network and an ability to compete in the global markets would emerge victorious in the paint war.