The colours of BIG profit

Goodlass Nerolac --- Rs 878.40 --- FY 07 --- PE 18.7

Paints are no longer mere cheap chemicals meant to give a colour to an object. Technological advances are changing this definition. Apart from looks, quality paints now also promise to provide protection against corrosion or rains. Meanwhile, changing demographics, nuclear families and rising disposable incomes are leading to higher paint demand.

Whether it is the desire to own a car that is yellow or to have the living-room walls painted in pink -- the Indian consumer is more determined to express her personality in many such ways. Plus, there's increasing customer involvement in the paint process, with a willingness to spend more.
 

One firm playing a crucial role in enabling the consumer realise their dreams, while enhancing economic value for its stakeholders, is Goodlass Nerolac Paints (GNP), a 64.5 per cent subsidiary of Kansai Paints Company, Japan, which will soon be known as Kansai Nerolac Paints.

Solid base: India's second largest paint player, GNP derives equal amount of revenues from industrial and decorative coatings. It is a dominant player in industrial coatings (45 per cent market share); it leads in powder coatings (over 70 per cent share in OEM category) and automotive coatings (over 60 per cent market share) -- the last is a major revenue contributor with nearly all auto players as its customers.

As industrial paints are technology intensive, the Japanese parent along with GNP's own research capabilities act as a strong entry barrier to rivals. Its recent innovations include an automotive paint solution that helps reduce the six-step painting process to just four, leading to significant cost-saving.

In decorative paints, while GNP ranks third (about 14 per cent market share) after Asian Paints (about 50 per cent) and Berger, the company has been trying to bridge this gap over the years.

While it signed Amitabh Bachchan as its brand ambassador in 2004 to improve brand recall, the company has also introduced new products at different price points to grow its business and expand its presence in the market. For instance, Allscapes Metallic Coatings was launched in the high-end and fast-growing emulsion category.

Last year, Beauty Emulsion was introduced at a lower-price point. GNP recently launched Nerolac Disney (wall paint and design featuring Mickey Mouse, Donald and Pluto) aimed at children.

Robust growth prospects: The paint industry's growth is pegged at roughly 1.5- 2 times the GDP growth. With India's GDP projected to grow at 8 per cent, the paint industry should grow by about 12-15 per cent annually.

Also, India becoming a manufacturing hub in automobiles, rising demand for housing and increased infrastructure spending will together ensure that companies like GNP will continue to prosper. GNP is aiming to beat industry growth rates, however.

Managing concerns well: While prices of some key raw materials (oil-based) have risen over the last 1-2 years, a few others (monomers, vegetable oils and titanium) have softened too. GNP has successfully managed its input prices and in fact has been able to increase margins through cost efficiencies, increased innovation and by passing a part of cost increases to customers (especially in the decorative segment). A potential threat is rising interest rates -- it could negatively impact housing and auto demand.

Why GNP? Robust housing and auto demand, higher investments in infrastructure and increasing industrialisation, all augur well for GNP. With the strong support of its Japanese parent, it is well equipped and is aggressively seeking to tap this demand growth.

Consistent focus on improving business processes has resulted in increased profitability year-after-year, in the past five years and hence, strong financials. Although it's just a small step, GNP's foray into Malaysia (55:45 joint venture with Kansai to takeover an existing paint company) could provide an additional kicker to growth rates. GNP has all the ingredients to deliver colourful returns over the long term.