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TOPICS 1. HISTORICAL PERSPECTIVE 2. CURRENT SCENARIO 3. INDUSTRIAL ANALYSIS 4. MARKET SHARE 5. COMPANY ANALYSIS 6. COMPARATIVE PERFORMANCE OF THE THREE MAJORS 7. MARKET POTENTIAL 8. CONSTRAINTS AND THREATS 9. FUTURE OUTLOOK PAGE 1 2 4 8 10 19 20 21 22
LIST OF FIGURES
FIGURE 2.1: PER CAPITA CONSUMPTION OF PAINTS FIGURE 3.1: SECTORAL SIZE OF PAINT INDUSTRY FIGURE 3.2: SEGMENT WISE DISTRIBUTION OF SALE FIGURE 3.2: PAINT COMPOSITION IN THE DECORATIVE SEGMENT FIGURE 3.2: PAINT COMPOSITION IN THE INDUSTRIAL SEGMENT FIGURE 4.1: OVERALL MARKET SHARE FIGURE 4.2: DECORATIVE SEGMENT MARKET SHARE FIGURE 4.3: INDUSTRIAL SEGMENT MARKET SHARE FIGURE 5.1: NET SALES OF ASIAN PAINTS FIGURE 5.2: PBT AND PAT OF ASIAN PAINTS FIGURE 5.3: RETURN ON NET WORTH OF ASIAN PAINTS FIGURE 5.4: SALES/GROSS FIXED ASSETS OF ASIAN PAINTTS FIGURE 5.5: NET SALES OF KANSAI NEROLAC FIGURE 5.6: PBT AND PAT OF KANSAI NEROLAC FIGURE 5.7: RETURN ON NET WORTH OF KANSAI NEROLAC FIGURE 5.8: NET SALES OF BERGER PAINTS FIGURE 5.9: PBT AND PAT OF BERGER PAINTS FIGURE 5.10: RETURN ON NET WORTH OF BERGER PAINTS FIGURE 6.1: CAGR COMPARISON OF ASIAN PAINTS, KANSAI NEROLAC AND BERGER PAINTS
3 4 5 6 7 8 9 9 11 11 12 12 14 14 15 16 17 17 19
FIGURE 6.2: PAT COMPARISON OF ASIAN PAINTS, KANSAI NEROLAC AND BERGER PAINTS FIGURE 6.3: TURNOVER COMPARISON OF ASIAN PAINTS, KANSAI NEROLAC AND BERGER PAINTS
1. HISTORICAL PERSPECTIVE
The earliest paint factory in India dates back to 1902, when Shalimar Paints, Colour & Varnish Company, A Pinchin Johnson unit, was established at Calcutta. Growing industrialization, expansion of the railways and introduction of electric power a couple of years earlier had all kept business confidence soaring high. However, this did not provide a ready and expanding market for the nascent paint industry then. Imports from Britain continued to swarm the market and raw materials were not easy to come by. The industry still consisting of one lone unit went through a rather prolonged period of infancy, till the World War II brought in dramatic opportunities. With the stoppage of imports owing to war conditions, the domestic market at last became almost the exclusive reserve of the domestic industry. European manufacturers, hitherto exporting to India, readily saw the advantages of setting up manufacturing facilities here. The period between the wars thus saw the greatest ever influx of foreign paint companies into India- Goodlass Wall (1918), Elphant Oil Mills (1917) in Bombay, and British Paints, Jenson & Nicholson and Macfarlances in Calcutta. Macfarlanes was brought over by the Poddars and became a completely Indian company, while the other three: Shalimar Paints (Pinchin Johnson), British Paints and Jenson Nicholson continued as British operated units. While talking about the post independent development of the Paint industry in India, mention must be made of Asian Paints, a completely Indian unit which started on a very small scale, grew so big and so beyond recognition over the years that it is today not only the largest unit in India but way ahead of the second largest, Kansai (Goodlass) Nerolac Paints Ltd., formerly a unit of Goodlass Wall (UK). Besides Asian Paints, numerous factories, wholly Indian in ownership and with rare exceptions in technology as well were set up in Calcutta, Kanpur and Bombay. The British units, though a few in number, were technically strong and financially sound and, with the active support and patronage of the Government, controlled a vastly higher share of the market. The post independence period witnessed a steady growth in the paint industry. From a mere Rs.200 million turnover in 1950, the paint industry crossed the Rs.14000 million mark in 1990-91. But even in this period, paints were considered a luxury item. Only people with high incomes were expected to decorate their houses with the use of paints. Paints, as a protective element, were totally unheard of. The industrial segment, which was traditionally a low user of paints, vis-à-vis its counterparts in the decorative segment, too contributed to this notion. In line with this misconceived notion, the government drastically increased duties on paints in the early nineties with an aim to bolster exchequer revenues. The result was obvious. This inevitably brought about a downturn in the fortunes of the industry. The products, which are highly price elastic, saw a negative growth rate of 20 % in 1991-92. The next year was also not good, registering a growth of only 2%, bringing it back to the 1990-91 level, thus corroborating the fact that the industry needed lower excise levels to grow. The industrial slowdown during that period -1-
also did not help matters. In line with the liberalized policies and the realization that paints are not necessarily a luxury item, duties were progressively reduced from 1993-94. This squared growth as most companies passed on duty reductions. Further, the entry of world majors in the automobile and white goods market in India since 1993 helped the market to expand. Demand for auto paints shot up suddenly. Form a modest 8% growth rate in 1993-94, paint demand touched 12% in 1995-96. Rapid industrialization and improvements in the infrastructure such as transport, energy and communication during the last decade gave a further fillip to the growth of the paint industry. Aided by Government’s liberal policy of technology import, the automotive and consumer durable segments expanded phenomenally, with a flurry of foreign collaboration. Increased demand for decorative, protective and functional coatings was a natural fall out, which brought, in its stride, a host of indigenous developments as well as the injection of new technology.
2. CURRENT SCENARIO
For many years the Indian paint industry was content with manufacturing and supplying low technology products such as cement paints, oil bound distempers, general purpose enamels and low-build-low-solids protective and industrial coatings. But the picture has changed now. The industry makes large gamut of products, including some real high technology products, targeted towards architectural and industrial end use segments. Increased customer awareness and consumer demand has been as much the reason for the change as the technological progress made by the paint industry and the raw material suppliers. Stringent quality specification, introduced by foreign collaborators and consultants, newer concepts in design and construction, increased usage of newer materials such as plastics and non-ferrous metals, limited but definite improvements in the methods of application and above all, openness on the part of manufacturers and customers towards new technology were responsible for quality upgradation in paints. Even the small scale sector - particularly companies set up by technocrats is now focusing attention on high value specialty products. "Value for money" and "Progress through technology" have become buzzwords in the industry. The country’s per capita consumption of paints at 800-900 grams is negligible compared to the 15-25 kg in the developed countries. While developed nations like USA, Japan etc. have per capita consumption in excess of 25 kg, even developing nations like Taiwan and Philippines have higher per capita consumption than India. Such a low level is mainly due to poor awareness about preservation of assets in India. -2-
The Indian paint industry is marked by the high cost and erratic availability of various raw materials. Moreover certain synthetic raw materials such as some resins, high performance pigments and additives are either proprietary or specific to certain formulations and their exact equivalents are not available indigenously. The in-house R&D Centres of various paint manufacturers and institutional R&D laboratories in India have done considerable work in the paint field, especially in areas such as development of new products and processes, absorption of foreign technologies and improvements in the existing manufacturing processes. The R&D expenditure in the Indian corporate sector, is, however, quite low, as compared to the major foreign paint manufacturers. Small scale units continue to play a vital role in the paint industry by manufacturing a large range of products and mainly catering to localized customers. The high purchase price of raw materials (due to low volumes) adversely affects the cost of the finished products. The technology transfer from the larges sector to the small sector may improve, in view of the recent policy announcement allowing equity participation (up to 24%) by the organized sector units in the small sector units.
3. INDUSTRIAL ANALYSIS:
The Indian Paint industry has a size of about US $2 billion. Surprisingly, the industry has no public sector manufacturing unit and complete ownership is vested in the hands of the private sector. This may be indicative of the fact that in the past, the government perceived paints to be a luxury product as mentioned before and taxed the industry heavily, thereby relegating this industry to a non-core status. The classification of the paints industry can be made either product-wise or sector-wise. In the sector-wise segmentation, this industry can be classified into the organized and unorganized sectors. The sectoral share is shown in the following pie chart:
Sectoral Size of Paint Industry (in $billion)
Organized sector Unorganized sector
The Organized sector is dominated by six large players and in the unorganized sector there are about 2500 units manufacturing various categories of paints. The total volume of the market is about 717,000 MT and the industry is growing at 14% approximately. It can be seen from the graph that though the organized sector controls 70% of the market, the unorganized sector with 30% of the market share is still a force to reckon with. The organized sector can itself be divided into two distinct segments (Product wise): Industrial segment which is growing at 15% approximately and the Decorative segment which is growing at 8% approximately. As shown in the graph on the next page, most of the sales are accounted for primarily by the decorative segment
Distribution of Sale
Industrial segmannt Decorative segment
In contrast to global trends, wherein industrial paints with a share of nearly 60 per cent take prime importance, the domestic industry is dominated by decorative paints with an imposing share of nearly 70 per cent of the paints market. A major portion of demand for decorative paints is from fresh coats on existing wall finishes. Thus, the fortune of this segment is closely linked to the construction activity in the country.
DECORATIVE SEGMENT The Decorative paints cater to the housing sector. 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 sub-urban and rural markets. The distribution network is the key for the success of this segment. Brand image and the range of products is the other basis for competition. These features also act as entry barriers in the decorative segment. As sophisticated technology is not a prime requisite for manufacturing decorative paints, the industry is flooded with a number of small players catering to the lower-end of the market by supplying low value unbranded products in small quantities. In this segment both the organized and the unorganized sectors have a share of nearly 50 per cent each. Within the Decorative segment the composition of the paints can be seen in the graph on the next page
Emulsions Exterior Coatings Wood Finishes
This graph shows that nearly three fourths all decorative paints sold in India are either Enamels or Distemper. Among paint majors, Asian Paints produces all types of paints excepting cement paints. Berger Paints, ICI and Jenson & Nicholson (J&N) manufacture synthetic enamels and emulsions while Goodlass Nerolac (currently known as Kansai Nerolac) makes synthetic enamels. In the organized sector, Snowcem (India) specializes in cement paints. One of the notable features of this industry is that each major player has a specialty product in its portfolio of decorative paints. Currently, Enamels are showing a steady growth but there is a gradual shift from Enamels and Distempers to Emulsions. So Emulsions is also a high growth area. There is a high growth in low priced low quality Distempers also as consumers are upgrading from limewash. Moreover, Exterior Emulsion is the fastest growing segment in the Indian paint market. INDUSTRIAL SEGMEENT In terms of volume, though the industrial paints segment has made significant gains, it still trails behind decorative paints. As against the Decorative segment, the share of the unorganized sector in industrial paints is limited to roughly 35 per cent. This is because technology is the overriding factor in this segment and industrial paints require constant upgradation and servicing. In contrast to the decorative paint business, tapping the industrial paint segment is not by brand-building or establishing a distribution network but through getting the right foreign partner (for technology) and captive customers. While decorative paint manufacturers need to offer variety and have a wide reach to stay ahead of competition, industrial paint producers need to be competitive in terms of technology and service. -6-
Industrial paints comprise automotive paints, high performance coating, marine paints, powder coatings and coil coatings. Goodlass Nerolac is the market leader in this segment. The user industries are automobiles, engineering and consumer durables. The industrial coating segment in India has grown by 15% over the year and companies like Asian Paints have registered a growth of 48% for the same period. Automotive paints constitute a large share of industrial paints market which requires high quality standards, supplier reliability and ability to offer complete coating systems. They are used for giving high quality finish to automobiles. High performance coatings are applied in plants for fertilizers, petrochemicals and offshore oil and atomic energy installations where anticorrosion is very important. Powder coatings (water-based) are free of solvent and are used in consumer goods like washing machines, refrigerators etc. Marine paints are used for painting ships and vessels to make them water resistant and corrosion free. Within the industrial segment, the composition of the major paints is shown in the following graph FIGURE 3.4
5% 5% 10%
Automotive Paints High Performnace Coating Pow der Coating
Half of the Industrial paints produced in the country are Automotive paints and close to one third is the high Performance Coating. Automotive sector is a high growth sector with a number of new entrants like Mercedes Benz, Mitsubishi, Daewoo, Hyundai, Honda, and Fiat. However, recently there is some slackness in Auto demand. Two wheeler markets are booming due to demand from large India middle class. In the Powder Coatings sector, there is high growth due to increase in sales of white goods and auto ancillaries. Similarly, in the High Performance Coating sector, there is a steady growth due to higher investments in Refinery Segment and power sector, especially Thermal and Nuclear. -7-
4. MARKET SHARE
The overall organized sector market share is shown in the following graph. Asian Paints leads with a market share of 37 per cent; Goodlass Nerolac has 16 per cent while Berger Paints has 14 per cent share. FIGURE 4.1
Others, 12% Shalimar, 4% Jenson and Nicholson, 5.7% Asian Paints, 37%
ICI, 11% Berger paints, 13.8%
Goodlass Nerolac, 15.9%
The leader in the high volume medium and mass segments of decorative paints, Asian Paints has been consolidating its market leadership over the last six years and now has the biggest slice of 37 per cent of the market for decorative paints in the organized sector as shown in the Figure No. 4.2 on the next page. Trailing behind are Goodlass Nerolac and Berger Paints with market shares of 13 per cent and 11 per cent respectively. Other major players from the organized sector include Jenson & Nicholson with a low 6 per cent and ICI with 8 per cent. With the exception of Asian Paints, the market shares of most of the major players have been stagnating over the last few years. This was primarily due to extensive focus on urban markets and neglecting the high-potential semi urban and rural markets.
Others, 19% Shalimar, 6% Jenson and Nicholson, 6.0% ICI, 8% Berger paints, 11.0% Goodlass Nerolac, 13.0% Asian Paints, 37%
On the other hand, one of the earliest entrants to take a lead, Goodlass Nerolac dominates the market for industrial paints with an impressive share of 43 per cent of the market as shown in the following graph. Though other players trail behind Goodlass Nerolac by a wide margin, competition in industrial paints is increasing. While Asian Paints and Berger have a market share of 14 per cent each, ICI’s share is lower at 8 per cent FIGURE 4.3
Shalimar, 8% Jenson and Nicholson, 8% ICI, 8% Berger paints, 14%
Asian Paints, 14%
Goodlass Nerolac, 43%
5. COMPANY ANALYSIS
I. ASIAN PAINTS
Asian Paints is India's largest paint company and the third largest paint company in Asia today, with a turnover of Rs 30.2 billion (around USD 680 million). The company has an enviable reputation in the corporate world for professionalism, fast track growth, and building shareholder equity. Asian Paints operates in 21 countries and has 29 paint manufacturing facilities in the world servicing consumers in over 65 countries. Asian Paints is a great marketing success in a branded consumer product business. The company succeeded where others failed in three areas: First, it understood the requirements of the Indian paints market better than the MNCs which did not bother to respond to local consumer needs. It was the first to introduce small pack sizes, a variety of shades and a wide range of paint types (enamels, distempers, emulsions) to suit different pockets. Thus, in the sixties, the company came out with plaster distemper, Tractor, to suit the needs of the mass market for a product that was much cheaper than costly emulsions but much better than the widely used whitewash and crude powder distempers. This opened up a huge market and today distemper accounts for 25% of the decoratives market in volumes and 15% in value. And as recently as in 1992, the company introduced a synthetic distemper, branded Utsav, aimed at the same rural and low income urban markets. Secondly, in the highly competitive market emulsions segment, the company introduced as many as 151 shades in its Apcolite range when the competition was offering a maximum of 40 odd shades. The strategy paid off and Asian Paints today commands a 40% share in this segment. It set up an extensive national distribution network to tap demand in smaller towns. Today it has direct dealers in 3,200 towns and 10,000 stockists. Investments were also made in computer technology to ensure up-to-date information interface between the marketing and production sides of the business. And finally, the company has displayed considerable savvy in its advertising campaigns, dealer relations, point of sale publicity and product demonstrations to consolidate and expand markets. In fact, the company has played a pioneering role in expanding the Indian paints market by identifying high demand potential areas and then tapping them to maximum effect.
NET SALES 25,000 Rs. in million 20,000 15,000 10,000 5,000 0 ‘01-’02 ‘02-’03 ‘03-’04 ‘04-’05 FINANCIAL YEAR ‘05-’06 13,714 19,546 15,350 16,961 23,192
5 years Net Sales CAGR: 13.5%
PROFIT 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,385 2,750 1,814 2,249 2,379 1,735 1,868 PBT PAT
Rs. in million
‘03-’04 FINANCIAL YEAR
5 years PBT CAGR: 16.8%
RETURN ON NET WORTH 33 32 31 30 29 28 27 26 25
‘03-’04 FINANCIAL YEAR
This ratio is defined as profit after tax divided by the shareholders fund. It measures the profitability of the funds invested in the firm. It is regarded as a very important measure because it reflects the productivity of the risk capital employed in the firm.
SALES/GROSS FIXED ASSETS 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 ‘01-’02 ‘02-’03 ‘03-’04 FINANCIAL YEAR ‘04-’05 ‘05-’06 2.3 2.4 2.6 2.7 3.2
This ratio measures sales per rupee of Investment in fixed assets. It measures the efficiency with which the Fixed Assets are employed- a high ratio indicates a high degree of efficiency in asset utilization and a low ratio indicates inefficient use of assets. It can be seen form the graph that this ratio is increasing for Asian Paints indicating good asset management.
II. KANSAI NEROLAC (GOODLASS NEROLAC)
It was established in 1920 as Gahagan Paints and Varnish Co. Ltd. at Bombay. In 1930, three British companies merged to formulate Lead Industries Group Ltd. In 1933, Lead Industries Group Ltd. acquired entire share capital of Gahagan Paints in 1933 and thus, Goodlass Wall (India) Ltd. was born. Subsequently, by 1946, Goodlass Wall (India) Ltd. was known as Goodlass Wall Pvt. Ltd. In 1957, Goodlass Wall Pvt. Ltd. grew popular as Goodlass Nerolac Paints (Pvt.) Ltd. Also, it went public in the same year and established itself as Goodlass Nerolac Paints Ltd. It is among the oldest paint companies of the country and the undisputed market leader in industrial paints, with a 43% share of this segment. It is a dominant player in the auto paints market which accounts for around one-third of the industrial paints segment. Goodlass Nerolac paints’ strength comes from the higher end of the auto paints market passenger cars and light commercial vehicles (LCVs) account for 60% of the company’s auto paint sales. The rest comes from heavy trucks and two wheelers. In auto paints, the market share of Goodlass is now estimated to be around 50% with a 90% share in passenger cars, 60% in LCVs, 40% in two wheelers and heavy trucks. Right now, the company is the only significant producer of CED (cathodic electro-deposition) primer, with technical know-how from its Japanese promoters, Kansai Paints. Goodlass is the only company offering a complete automotive paint system comprising pre-treatment chemicals, primers, anti-rust coatings, intermediate and top coatings as well as auto refinishes. GNPL supplies 90% of the requirements of Maruti Udyog Ltd., which produces 300 cars a day. The company has a tie-up with Nihon Toshuku Tokyo of Japan for sophisticated coatings for automotive and industrial sectors. Having lost Daewoo’s Cielo contract to Asian Paints, GNPL is pursuing business opportunities with car majors planning to enter the country. It recently tied-up with Dupont, USA for supplying automotive paints to DuPont’s clients in India. Goodlass Nerolac Paints Ltd. Changed its name to Kansai Nerolac Paints Ltd. in 2006. The present human asset consists of over 2000 professionals and a sales turnover of 1226 crores. It is the second largest coating company in India with a market share of over 20% and also the leader in powder coatings.
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Rs. in millons
14,840 12,260 9,250 7,080 7,910 10,690
PROFIT 2,500 Rs. in million 2,000 1,500 1,000 500 0 370 270 ‘01-’02 890 560 400 ‘02-’03 560 ‘03-’04 ‘04-’05 ‘05-’06 ‘06-’07 920 1,370 1,390 2,000 1,560 1,020 PBT PAT
RETURN ON NET WORTH 40 30 20 10 0 ‘01-’02 ‘02-’03 ‘03-’04 FINANCIAL YEAR ‘04-’05 ‘05-’06 13.1 17.4 % 28.4 21.9 34.1
III. BERGER PAINTS
Berger Paints is the culmination of over seven-decade process of evolution and growth that began in 1923. Its growth has been closely linked with the business and industrial development of modern India. The performance of this company is anchored today in a wide variety of Decorative and Industrial paints which continue to gain an increasing share of the highly competitive Indian paint market. Being an ISO 9001 company its quality products have attained instant and worldwide recognition, and continues to meet quality requirements that are demanded today even in the domestic market. The Country's third largest paint manufacturer, with its Headquarters in Calcutta, Berger controls a distribution network comprising of 66 stock points and approximately 10,000 dealers, spread across the country. BPIL has technical tie-ups with Herberts, a subsidiary of the German pharmaceutical major Hoechst for automotive paints, Tendor NV of Holland for powder coatings and Valspar Corporation, USA for heavy duty coatings. The company is particularly active in the powder coating segment and is a supplier to most OEMs in the white good segment. With its thrust shifting to industrial coatings, the company is expanding its powder coating capacity from 840 metric tons to 1,840 metric tons at its existing plant. Recently, it introduced Color Bank, a computerized mixer tinting machine in technical collaboration with Ital Tinto of Italy. Special software, Tintovision installed in the Color Bank gives the customers a choice of more than 5,000 shades and can even produce the -15-
colors offered by the company’s competitors. Another achievement of Berger is the setting up of Berger Prolinks. Prolinks is Berger Paints' response to a market environment that is increasingly driven by technology and calibrated by expertise. Prolinks is aimed at placing the initiative in the hands of builders, architects and designers to enable them to directly source innovative products and services. The team is entrusted with maintaining a seamless interface between paint specifiers and Berger Paints. The objective is to provide specifiers with a complete basis for recommending products and processes databases, technical services, color consultancy, site inspection, etc. Prolinks experts ensure specific solutions to specific problems, whether it is a particular shade that needs development, special climatic factors to be provided for, or application factors that have to be maintained. From know-how to legwork, the Prolinks team delivers total support.
FINANCIAL PERFORMANCE FIGURE 5.8
12,000 10,000 Rs. in millons 8,000 6,000 4,000 2,000 0 ‘01-’02 ‘02-’03 ‘03-’04 FINANCIAL YEAR ‘04-’05 ‘05-’06 6,016 7,702 6,684 9,475 11,174
1,000 800 600 400 200 0
916 614 346 313 452 334 440 662 702 521 PBT PAT
Rs. in million
RETURN ON NET WORTH 35 30 25 20 15 10 5 0
30.8 20.8 20.2 23.2 25.6
‘03-’04 FINANCIAL YEAR
IV. ICI INDIA
ICI India was the subsidiary of the $15bn British multinational company ICI Plc. Brunner Mond & Co., one of the four Companies that combined to form ICI in UK in 1926, opened a trading office to sell alkalis and dyes in Calcutta. In 1923, Brunner Mond & Co. (India) was incorporated and the company's name was subsequently changed to Imperial Chemical Industries (India) Ltd., in 1929. ICI (India) is ranked fourth in the paint business, after Asian Paints, Goodlass Nerolac -17-
Paints and Berger Paints. Unlike the other paint companies, ICI (India) was a diversified unit and paint constituted 43% of its net sales. It identified paints as a thrust area and was aggressively moving to improve its position. The company invested $11 million in a new decorative paints plant near Bombay and constructed a $16.7 million plant for industrial paints near Chandigarh in North India. In order to increase its presence in the paints market, ICI’s growth plan is to beef up its distribution network, widen the purview of specialty products, access newer technologies through joint ventures and of course, targetting the urban and semi-urban markets by introducing more products in the lower and middle segment of the paints market. In order to be amongst the top two players in the industry, the company is firming up plans to aggressively market its products in the country. The Gliddens brand is being positioned in the middle segment to supplement Maxilite in the mass-segment and Dulux in the premium segment. In response to Jenson & Nicholson’s Instacolor, ICI launched Color Solutions which can be used for both exteriors and interiors. This comprises a menu driven, user friendly touch color screen on a computer that helps consumers visualize as many as 6,000 shades on house structures resembling their homes.
V. JENSON AND NICHOLSON
Jenson & Nicholson, a leading paint company in the country today was established in the year 1922. It has a country wide presence with 33 branches and stock points across the country and manufacturing plants at Naihati (near Kolkata), Sikandrabad (near Delhi) and Panvel (near Mumbai). In 1955, it launched India’s first Plastic Emulsion paint, under the brand name of Robbialac. It ventured into the Powder coatings market in 1986, thus becoming the first company in the organized sector to offer this extremely environment friendly coating technology. Subsequently, it introduced Instacolor, in technical collaboration with M/s Tikkurilla OY of Finland. It is the first company in the country to introduce computerized dispensing system. Jenson and Nicholson launched the Standox brand of products in 1996 which offers over 45,000 colours to the Indian car owner. In the very next year, the company in order to cater to highly specialized Marine paints sector, entered into a 50:50 joint venture project with M/s Chugoku Marine paints of Japan. Chugoku is the second largest supplier of marine paints in the world with 30% market share. The new company also handles heavy duty coatings. -18-
6. COMPARATIVE PERFORMANCE OF THE THREE MAJORS
Compounded Annual Growth Rates
30 25 % Growth 20 15 10 5 0 ASIAN NEROLAC BERGER 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 24.38 24.97 23.75 26.28 20.63 25.64 18.75 19.14 21.21 15.87 15.62 18.81 14.87 14.8 19.49 15.31 14.79 19.32 14.79 13.8 18.15 14.82 12.38 16.7 14.67 12.26 16.06
Profit After Tax
2000 1800 1600 Rs. million 1400 1200 1000 800 600 400 200 0 1997-98
Turnover- Value Sales
30000 25000 Rs. million 20000 15000 10000 5000 0 1997-98
7. MARKET POTENTIAL
Boom in Indian housing sector: Increasing urbanization, cheaper housing loans and a shift from semi-permanent to permanent housing structures have been driving growth in Decorative paints segment which constitutes major part of the industry Strong industrial growth: There is an average growth of 10% in the automobile sector which provides 50% of the revenue in the industrial paints segment Heavy infrastructure spending: New projects in roads, ports and industrial segments increases revenues from protective coatings for civil applications and road-marking paints to all parts of the building paints sector, whether interior, exterior, waterproofing or floor coatings. Increase in manufacturing activities: Over 40% of the industrial sector takes the form of OEM finishes, which is expected to grow steadily as a result of increasing demand for consumer goods in India as well as India’s position now as a leading manufacturing hub for the supply of goods to the South East Asian and other world markets. Less Seasonality: About 65% of the demand for Decorative paints stems from repainting. Rising aspirations, shift in the perception of paints as having a protective value rather than a mere decorative have diminished the impact of seasonality. -20-
Rise in Income: Lifestyle based spending by the Indian middle class is helping decorative segment of this industry. Contemporary wood finish formulations are replacing the more traditional lacs and exterior emulsions taken over from cement paints.
8. CONSTRAINTS AND THREATS
One of the problems of the paint industry is the high working capital requirement.. Working capital intensity is reflected by the fact that this forms 14 to 16 per cent of sales each year. Usually, it is the small players who are badly hit for funds because - one, they are not in a position to demand credit from suppliers and two, because of cutthroat competition; they have to supply products on credit. Paints are produced in batches and companies need to maintain a wide range of shades throughout the year even though sales are concentrated in the second half of the year due to seasonality of demand. This naturally translates into holding large inventory levels. Also, given the wide distribution network for most large companies, finished stocks at the dealer level are also substantial. Over the last few years, the growth of the organized sector has been at the expenses of the unorganized sector. This is because a large number of the players rely heavily on outsourcing from the unorganized sector, especially paints in the lower end segment as they find it more economical. Outsourcing is likely to show declining trends as new capacities are coming up in the organized sector. Within a few years, manufacturing of paints would not be profitable for most small players and a shakeout appears to be on the cards. Progressive reduction in duties is reducing the price advantage of unorganized players; naturally, this situation is beneficial to large players as they would be in a better position to utilize their capacities more efficiently. Once these major players foray into segments dominated by unorganized players in a big way, inroads would be made into their market shares. With large players targeting the unbranded low value, mass volume segment, the unorganized players would have to make way for large companies. Therefore, growth in decorative paints is likely to come at the expenses of the unorganized sector.
9. FUTURE OUTLOOK
As the market becomes more sophisticated and purchasing power rises, customers are more inclined towards superior quality, branded products and greater choice. Along with some consolidation expected in the organized sector, the top few players in the industry will gain a stronger hold on this market in the future. At the same time, though demand for sophisticated and niche finishes is growing, most people do not want to pay too much more for these. The trends towards more choice in shade and effects, and better quality shifts the balance in favour of the larger players, who have the finances to invest in R&D and are also able to exploit economies of scale to deliver affordable options. The Indian paint industry has come a long way in terms of branding, distribution and product quality. Paint companies are moving away from being a commodity business and shifting their focus towards becoming a part of an FMCG setup where the need to concentrate and build brands is very high. Today, the industry has taken a different shape where it has become a painting solution consultant and consumers decide the appropriate color or paint to match their desires. Continuous product awareness and increasing disposable income have resulted in growing demand for quality paints and varnish and thus the industry is witnessing a shift from the traditional whitewash. Another major change in the consumption pattern within the decorative segment is the preference for water-based paints. In India, the most widely-used paints, till recently, were the solvent-based paints, even when water-based paints are more eco-friendly and easy to use. The main reason is the government policies themselves. The government regarded water-based paints as a luxury item and consequently, taxes on inputs as well the finished products were kept high, thus making them unaffordable to the middle class. While the western world was moving away from solvent-based paints for environmental reasons, India was, in a way, promoting the use of these paints. But with duties rationalized, and costs and prices coming down, water-based paints have become the most preferred ones for decorative purposes. Marketing strategies of players are undergoing a sea change with the theme shifting to ‘surface protective nature’ of the product. Goodlass Nerolac started off by marketing all brands under the umbrella of ‘Nerolac’. Trying to break free from the clutter of shade and color related advertisements, Goodlass Nerolac is positioning its brand “Allscapes” on attributes like technology and multi-surface applicability. Over the years, Asian Paints successfully developed region-specific communication by associating its brands with local festival. For semi-urban and rural markets, companies are introducing new products and repositioning existing brands as cheaper alternatives to generate higher volumes in the lower and middle end of the market
An extensive dealer network is a crucial success factor in decorative paint segment as it ensures easy accessibility for customers. Asian Paints superiority is underlined by its distribution muscle advantage. It has a network of nearly 12,000 dealers and has 45 warehouses across the country for its four manufacturing facilities. The next largest player in the industry, Goodlass Nerolac has a distribution network of nearly 8000 dealers. With India being a geographically huge land mass, players would have to sink in large amount of funds for broadening of their distribution network. Realizing the potential of the vast rural markets, players are firming up plans to establish proper dealer network in these areas. Moreover, there has been a hike in allocation for rural and urban housing infrastructure development in the budget this year. This increased spending will increase the demand for the paint industry. Also, there has been a reduction custom duty on chemicals from 12.5% to 7.5%.This will ease some pressure on the profitability by paring the pressure on the cost of inputs. It is expected that the paint sector will grow at 2 times the long-term GDP growth in the future. With GDP growth expected to around 8% to 9% per annum, the top three players are likely to clock above industry growth rates. With a great demand potential and the right tax and price structure now in place, the scope for domestic market expansion is thus enormous and it seems that there is a bright future ahead for the Indian Paint Industry.
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