PAINT SECTOR OVERVIEW

Introduction to Paint Industry

The Indian Paints & Coatings industry is valued at $3.5 billion in terms of value and 2
million metric tons by volume. The current per capita consumption is 1.5 kilograms
which is far lower than that of global and Asian per capita consumption of 20
kilograms and 5 kilograms respectively. Thus, the industry is expected to continue to
exhibit double-digit growth from 2014 to 2015.
Team Ficus!
11/8/2014

Paints & Coatings:

The Indian Paints & Coatings industry is valued at $3.5 billion in terms of value and 2 million metric tons by volume. The current per capita consumption
is 1.5 kilograms which is far lower than that of global and Asian per capita consumption of 20 kilograms and 5 kilograms respectively. Thus, the industry
is expected to continue to exhibit double-digit growth from 2011 to 2015.
To meet this market demand, BASF develops and delivers innovations in the areas of Architectural and Industrial Coatings and help manufacturers to
improve their cost competitiveness, quality and sustainability.
Being the worlds leading chemical company, BASF supplies innovative and environmentally friendly raw materials to the manufacturers in the paints
and coatings industry. With the acquisition of Ciba, our product portfolio has expanded significantly and covers products ranging from resins to
additives, pigments, dispersions, solvents, acrylates & intermediates.
The portfolio also encompasses environment friendly dispersions, lead-free pigments, oxygenated solvents and intermediates like Propylene
Carbonate for architectural, automotive & industrial coatings, which reinforce our commitment to grow sustainability in the Paints & Coatings industry.
List of the major public companies that compete in this industry

Asian Paints

Kansai Nerolac

Berger Paints

Paint Sector Analysis:

The paint industry is expected to grow at 12-13% annually over the next five years from Rs 280 bn in FY13 to around Rs 500 bn by FY18. FY13 was a
challenging year for the industry as a whole due to subdued demand across key sectors and rising inflation.
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 paint manufacturing plants. Top organised players include Asian Paints, Kansai Nerolac,
Berger Paints and ICI.

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 77% 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 (50% petro-based derivatives) involved in the manufacturing process. Since most of the raw materials
are petroleum based, the industry benefits from softening crude prices.

Portor 5 Forces:
Supply: Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented.
Demand: 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.
Threat of new entrants: 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.
Rivalry among existing competitors: In both categories, companies in the organised sector focus on brand building. Higher pricing through product
differentiation is also followed as a competitive strategy.

Financial Year '13

FY13 was a mixed bag for the paint companies. While all the 3 players viz. Asian Paints, Kansai Nerolac and Berger Paints reported a strong growth in
sales, operating margins came under severe pressure due to raw material price inflation. Top-line growth was boosted by strong demand from the rural
markets. Nonetheless, the demand environment in the industrial segment continues to remain challenging due to hawkish interest rate environment.
Performance on the margins was impacted by the rising prices of crude oil and titanium dioxide which increased the overall expenditure, thereby
impacting profitability growth. However, companies are undertaking a gradual and calibrated price increase in order to shield margins. Nonetheless, as
a complete pass on of raw material price increase is not possible in the industrial segment, the blended margins continue to suffer.
However, a good monsoon this year is expected to boost demand in the rural areas. A good harvest and festival season demand can boost volumes in
the second half of FY14.
All the key players are in an expansion phase. Asian Paints plant in Khandala, Maharashtra has recently got comissioned. Kansai Nerolacs capacity
expansion plans at Jainpur and Bawal has culminated. Berger Paints has also undertaken capacity expansion for its plants located in Andhra Pradesh
(AP). Further, expansion of water based plant at Rishra and Goa is also on track. As per estimates, paint capacities are expected to go up by 50-70% in
the coming 3 to 5 years.

GDP relation:

Industries Big Guns:

Asian Paints:
Asian Paints is one of the best discretionary plays on macro recovery given that paint volumes surge a healthy 1.52.0x GDP. Moreover, decisive policy
measures by the new businessfriendly government will spur urban demand. Diversification into water proofing, modular kitchen s and bath fittings places the
company in a sweet spot to corner higher wallet share (Masco Corp in US has done this successfully). With 22% EPS CAGR, 347bps RoCE spurt over FY1417E and
metamorphosis into a home dcor company, we anticipate valuations to remain rich.

Berger Paints:

Berger Paints (Berger) is the second largest paint company in India after Asian Paints. The company has a strong brand name with brands like Berger Easy Clean,
Silk, Rangoli, WeatherCoat etc. The company has a strong distribution network of ~16,500 dealers and has ~12,000 tinting machines. As far as international
operations are concerned, Berger has presence in Russia where it has a production facility with a manufacturing unit in Krasnodar. The company entered Nepal in
2000 when it acquired Jenson & Nicholson. It has also acquired Bolix SA of Poland and also tied up with Becker of Sweden. In 2013, Berger acquired the
decorative business of Sherwin Williams India. Berger recently commissioned its Hindupur plant (total capacity of 300,000Kl) in Andhra Pradesh and will
increase its capacity in a phased manner.
Kansai Nerolac
Kasai Nerolac is the third largest decorative paint company in India. The company has good brand strength, particularly in the interior paints segment with
brands like Nerolac Impressions, Nerolac HD etc. It has high exposure to the industrial paints segment (~45% contribution), which has resulted in the companys
subdued performance. The company has taken significant initiatives to improve revenue from the decorative business. It recently launched HD paints under
Nerolac and was the first player to launch ecofriendly Zero VOC, low VOC, low odour range of decorative paints.

Asian Paints:
Since its foundation in 1942, Asian Paints has come a long way to become Indias largest and Asias third largest paint company, with a
turnover of Rs. 127.15 billion. Asian Paints operates in 17 countries and has 23 paint manufacturing facilities in the world servicing
consumers in over 65 countries.
Asian Paints has always been a leader in the paint industry, pushing new concepts in India like Colour Worlds, Home Solutions, Colour
Next, and Kids World.

Kansai Nerolac:

Berger Paints:
The driving forces of Berger Paints - reflect the very spirit of its founder Lewis Berger - who laid the foundations of brand Berger way back
in 1760 in the UK. With modest beginnings in India in 1923, today, Berger Paints India Limited is the second largest paint company in the
country with a consistent track record of being one of the fastest growing paint company, quarter on quarter, for the past few years.

Future Prediction:
The paint industry estimated to double by 2016: Leading players hopeful
AC Nielsen in its latest report based on the data available on the coating industry for the year 2011-12 has valued the Indian paint industry at Rs 26,000
crore with 71 per cent of it being decorative paints and the remaining being industrial.
In volume terms, the size of the industry is 3.1 million tonnes with decorative paints being 2.4 million tonnes and industrial paints being 0.7 million
tonnes. The per capita paint consumption has been estimated to be 2.57 kgs.
The paint market is estimated to double to Rs 50,000 crore by 2016 with per capita consumption increasing to over 4 kgs. Industry leaders are hopeful
of achieving the ambitious growth over the next four years.
The growth in the market is going to be driven by emergence of the middle class in India, increase in the propensity to spend and growing young
population tending to stay in nuclear families.
The demand for industrial paint is going to be driven by the pick-up in the automobile industry and growth in infrastructure in a country like India.
"Infrastructure is at the lowest level in the country today, hence we see a sustained growth in the industrial paints business", said H M Bharuka,
managing director, Kansai Nerolac Paints.

Prospect:
The market for paints in India is expected to grow at 1.5 times to 2 times GDP in the next five years. With GDP growth expected to be between 5-6%
levels, the top three players are likely to clock above industry growth rates in the future, considering they have a strong brand and good reach.
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.
If the new capacities do not get utilized well, companies may face margin pressures in the near term.

Recommendation:
We are bullish on the Paint Industry looking at both Top-Down and Bottom-Up Approach. Hence we Rank the companies captured as follows:
1. Asian Paints
2. Berger paints
3. Kansai Nerolac
We recommend these stocks with a long term view!!

Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The
information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such.Ficus
Securities Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this
report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.