Potential for paint units to grow

By Ramnath Subbu

MUMBAI, DEC. 23. The Rs. 5,000 crore paints industry, in spite of a slowdown in major user industries, fared reasonably well in 1999-2000 with the leaders being able to hold their own. The organised sector constitutes about 65 per cent of the market and is expected to grow at 12-14 per cent. The per capita consumption of paint in India today is as low as 200 grams against 5 kg in developed countries which illustrates the inherent potential for the sector.

The paint sector consists of the decorative and the industrial segments. In India, two companies dominate these two segments. Asian Paints (APL) has more than 40 per cent market share in decoratives followed by Goodlass Nerolac Paints (GNPL) with 19 per cent. GNPL is the market leader in industrial paints with a 40 per cent market share while APL has a 16 per cent share.

Paint companies have benefited from Government measures in the recent past. There has been a rationalisation of excise duty which has come down to 16 per cent by end 1999 from 40 per cent a couple of years ago. This helped majors reduce prices in line with the unorganised sector.

Another step was the reduction of import duty on titanium dioxide, the major input for paint manufacture. However, there has been a hike in prices of major inputs and although the industry has absorbed most of this, a marginal hike has been effected.

The profitability of paint companies in future depends more on the product mix between decorative paints and industrial paints. The industry has a low capital cost but is highly capital intensive.

The decline in the production of the auto sector (which accounts for about one third of the off-take of industrial paints) could impact GNPL which is the leader in this segment. But the sluggish activity in the general engineering segment which accounts for the remaining 65 per cent of the industrial paints segment could impact all companies.

In such a scenario, the off-take of decorative paints would be the clinching factor for most companies. The demand for decorative paints is linked to construction activity but repainting also constitutes a large part of the demand. The domestic decorative paints market is likely to grow at 10-11 per cent in the near term. GNPL's decision to focus on this segment is an indicator. APL has a 40 per cent plus market share in this segment with a dealer network of almost 15,000 outlets about 5,000 more than GNPL against 5,500 for Berger Paints and 4,500 for ICI.

The cause for worry is rising input costs - raw materials including resins, pigments, solvents and additives account for about 50 per cent of the total cost of production. But larger players have been able to successfully combat this by having captive input facilities.

Asian Paints has the advantage of having its own phthalic anhydride (PAN) plant whose capacity is being augmented from 22,000 tonnes to 24,000 tpa. The company sells nearly 65 per cent of the product in the open market and firming up of PAN prices would boost margins.

APL has fully integrated facilities, manufacturing phthalic anhydride and pentaerythritol (PE), the two key raw materials. In fact, in 1999-2000, the profitability of Asian Paints got a boost from the higher revenues (due to higher capacities) from the sale of phthalic anhydride, the realisation of which improved by about 24 per cent.

Besides its position of pre-eminence in the domestic paints industry, the company has, in the last one year, made two acquisitions overseas. It acquired Pacific Paints of Australia and one of the largest paint companies in Sri Lanka. It has set up nine joint ventures and exports its products to 22 countries. It has also recently set up manufacturing facilities in Mauritius and West Asia and is looking at acquisitions in Bangladesh.

The Rs. 700 crore Goodlass Nerolac Paints (GNPL) commissioned its new plant at Lote Parshuram in 1999 increasing its capacity from 57,500 tpa to 1.01 lakh tpa. The company is now refocusing on decorative paints. Earlier, the company relied on industrial paints and was hamstrung by capacity. This would effectively help the company counter the slowdown in off-take of industrial paints.

GNPL is the leader in the industrial segment and has five manufacturing facilities in India. GNPL is a subsidiary of Kansai Paint Company of Japan after Forbes Gokak divested its holding in favour of Kansai early this year.

In the decorative segment, GNPL is looking to focus on interiors, in particular water-based emulsions and distempers where the demand growth rates are high. With volumes holding the key in the decorative segment, the company has already introduced several products at the lower end to improve volumes.

The company has made major headway in colour dispensing machines under the brand `Colorscapes' whereby over 600 outlets have been covered and this has given a boost to emulsion and acrylic distemper sale.

Berger Paints is the third largest paint company and a leader in performance coatings segment of industrial paints. The company has a limited presence in the western region which is the largest market for decorative paints.

In order to augment its distribution network, the company installed about 600 colour testing machines (colour banks). Following the merger with Rajdoot Paints in 1999, the acquired brands give it a presence in the lower end of the segment as well.

Industrial paints accounts for about 30 per cent of Berger's sales and it leads in performance coatings, powder coatings, but has a limited presence in the automotive segment. In industrial paints, Berger has technical tie-ups with Valspar Corporation of the U.S. and Orica Corporation of Australia for protective coatings. It has tied up with Teodur Corporation of Holland for powder coatings. Besides, in 1998-99, the company entered into a technical collaboration with Nippon Paints of Japan for automotive paints after its tie-up with Herberts of Germany was discontinued.

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