Paints: Demand may grow

Historically paint industry has grown at 1.5x-2x GDP, depending on the performance of the housing and industrial sectors. Last year, the sector grew by 13%. With the government emphasizing more on infrastructure development, industrial paint demand could rise over a period of time. Housing sector is likely to outpace industrial paint demand in the future. In such a scenario, decorative majors like Asian Paints are likely to benefit going forward. The budget, per se, did not have any direct proposals for the sector.

The Indian paint sector, in the last six years, has grown at 1.5 times to 2 times GDP on the back of robust housing sector growth, shift in market share from unorganised to organised players and new product launches. The fastest growing segment in the paint sector in the last four years has been exterior paints (CAGR of 15% to 20%). With the fall in customs and excise duty, we expect organised players to further consolidate their presence in the paint sector in the future. With the housing sector cushion and increased demand for industrial paints, we expect the paint sector to grow at 1.5 times to 2 times GDP growth rate in the next three years. Asian Paints is likely to outperform the industry.

The government has given great impetus to the housing industry and one hopes that the same consideration will be given in the current budget also. Housing sector revival boosts the growth of the general economy and thereby the paint industry.

The government should give incentives to companies that invest money in R&D activities by way of weighted deductions for revenue spends and accelerated depreciation rates for investment in R&D equipments. This will help the Indian industry to become globally competitive.

Continuation

Administered interest rates lower by 50 basis points.

Peak custom duty reduced from 30% to 25%.

Spending in health, education and housing given priority by the government.

Income from housing projects for the construction of residential units of prescribed specification is exempt from income tax.

Allocation of Rs 22 bn to provide a subsidy upto Rs 10,000 and loan upto Rs 40,000 for the eligible households.

1.0 m dwelling units financed so far and National Housing Bank has offered to reduce the rate of refinance by 25 basis points this year.

Steady growth:  Very low consumption levels compared to other developing economies. Decorative segment growing at 1% per annum, while the industrial paint segment (led by powder and protective coatings) is shifting to a new growth trajectory.

A mixed bag:  A robust housing sector is likely to boost demand in the decorative segment. Long-term growth potential of the auto sector is also a big positive.

Structural shift:  Continuous fall in excise duty in the past has benefited organised players and the impending consolidation will add to the pricing power.

Capex cycle booster:  With investment cycle showing signs of momentum, industrial paint demand could grow at a much higher rate than the last five years.

Raw material worries:  Since the paint sector is highly raw material intensive, rise in crude and petrochemical prices affects performance and the reliance is unlikely to reduce going forward.

Monsoon blues:  The performance of the decorative division also hinges on rainfall. In the last five years, the country has witnessed three years of poor rainfall, which has impacted paint demand.