Painting a rosy picture

SECTOR REVIEW

The future looks bright for paint companies on the back of a boom in construction and housing segment.

By the looks of it, the future is going to be painted in vibrant colours for the paint industry. Primarily driven by the boom in housing and construction segment, the sector fundamentals are looking brighter than ever, say analysts.

What is more, growth in auto, coating and industrial paints segment is also adding to the cheer. With the industry growth rate pegged at 12-14 per cent going forward, analysts are optimistic about future price potential in stocks such as Asian Paints, Goodlass Nerolac, Berger Paints etc.

Set to grow
Growing disposable incomes of people, improving lifestyles and the retail sector boom have also come as a big boost to the paint industry. Moreover, the per capita consumption of paints in India is still very low at about 700 grams per annum, in comparison to 22 kg in US, which leaves ample scope for future growth.

"The paint industry should see buoyant times ahead with the economy expected to grow at seven per cent," says Goodlass Nerolac managing director H M Bharuka.

"The demand for premium paints is on the rise due to aspirational consumers who want better homes and lifestyles," says Ashwin Dani, Asian Paints vice-chairman & managing director.

Decorative segment set for a fast climb
Among the main segments in the paint industry, decorative segment is likely to post a better growth rate than industrial paints segment. Analysts estimate that within the decorative segment, exterior paints are likely to grow at 25 per cent and interior paints at over 15 per cent. In comparison, industrial paints are expected to grow at a slower rate of 7-9 per cent.

Asian Paints is the leader in decorative paints in India with a market share of about 42-45 per cent, while it has about 12-14 per cent share in the industrial paint segment. Of its total revenues, 70 per cent come from decorative paints. Goodlass Nerolac, which has strengths in the industrial paint segment, is also planning to tap the immense potential in decoratives.

According to Bharuka, the two segments contribute almost equally to the company's revenue. But it plans to change the ratio to 25:75. Asian Paints is the overall market leader with 44 per cent share, followed by Goodlass Nerolac at 20.4 per cent, Berger Paints at 18.4 per cent, ICI at 11.9 per cent and Shalimar Paints at 4.4 per cent.

Expanding horizons
The organised sector accounts for 65 per cent of the Rs 8,000 crore paints industry in India. The top six paint companies account for 55 per cent of the total paints business in the country, while others in the organised sector account for 10 per cent. Considering the growth opportunities that are springing up, the big players are readying themselves to grab the chance with both hands.

Paint companies are aggressively enhancing capacities to grab a greater share of the pie. Goodlass Nerolac has put up a new plant in Haryana, which is expected to cater primarily to Maruti Udyog in Gurgaon. The plant is also targeting the decorative paint segment in the second phase of expansion in two years. The total existing capacity of Goodlass Nerolac is about 138.4 million litres per annum.

Asian Paints, which currently has a total capacity of 370 million litres, has also put up a water-based products plant near Chennai in January 2005 with an initial capacity of 30,000 kl. The final capacity would be 100000 kl, according to Dani. Berger Paints has also gone for a new plant in Jammu.

Unlike many other sectors exports form only a small part of paint company revenues. Asian Paints has the best exports to domestic ratio among Indian paint companies.

While about 19 per cent of Asian Paints' revenue comes from exports, Goodlass Nerolac's export revenues are marginal. The company has entered into a JV with Kansai Paints of Japan (which has a 64 per cent stake in Goodlass Nerolac), for making investments in the paints business of Sime Coatings Sdn Bhd, Malaysia, which is expected to improve the share of exports.

Analysts say that prices of paints, varnishes and lacquers have risen 10.7 per cent during last 12 months. Paints industry is raw material intensive and about 50 per cent of its raw materials are petroleum-based. Due to the rising crude oil prices, their prices are also likely to increase.

During August 2005, the prices of phthalic anhydride were higher by five per cent and styrene by 32 per cent. The titanium dioxide (another raw material) prices were more or less stagnant with around two per cent rise in the rutile grade. Although the industry may go for price hike around the festival season, the leaders are capable of managing their costs to cushion margins, say analysts.

Improving financials
According to analyst Rajee Lodha of Stratcap Securities, the performance of the leading players in the paints industry has been pretty good with strong growth in topline as well as bottomline.

For the September quarter, Asian Paints posted a 17.5 per cent y-o-y growth in consolidated net profit to Rs 59.36 crore on the back of a 16 per cent growth in net sales at Rs 772.9 crore. Goodlass Nerolac posted a 4.6 per cent growth in bottomline to Rs 30.6 crore on back of a 13.7 per cent growth in topline to Rs 264 crore.

Observers expect a 15.5 per cent topline growth for Asian Paints for FY06 and a 26 per cent bottomline growth. Rival, Goodlass Nerolac is expected to post a 16.8 per cent topline growth and 30 per cent bottomline growth.

Bharuka says that globally paint industry is valued at a P/E of 10-12, but given the expected growth in this country, Indian paint industry valuations are reasonable. On an annualised EPS of Rs 48.2 Goodlass Nerolac trades at 14.07x, while Asian Paints trades at 19.42x on an EPS of Rs 25.44. The valuations of peers like Berger Paints, ICI India and Shalimar Paints stands at 14.8x, 20.57x and 17.07x respectively.