Sector segment consists of exterior and interior

Sector growth:In the financial year 2016-17, value of the paints industry grew by 8% on a y-o-y basis. This was backed by an improvement in disposable income, rising urbanization, focus on housing, rural growth, rise in automotive segment, increasing trend of nuclear families etc. Crude oil derivatives and titanium dioxide are major inputs used in manufacturing of paints. In 2016-17, the industry however witnessed no major expansion in profit margins as increase in raw material expenses weighed on the margins.

In 201617, the industry’s value grew by 8% on a y-o-y basis to Rs.46,980 crore. The paints industry is mainly divided into two segments – Decorative and Industrial. The decorative segment accounts for a major portion of the paint industry’s value, around 75%, and the industrial segment accounts for the rest 25% of the industry’s value. Decorative paints
The decorative segment consists of exterior and interior emulsions, enamels, primer and thinner, distemper, wall putti. Emulsions and distempers are used for painting walls, enamels for wood and metals, primers and putties for bringing evenness on the walls before final paint is applied. The industrial paint includes auto OEM paints and protective coatings, auto refinish, GI (General Industrial) paints, powder coatings. The paints industry is largely dominated by organised players accounting for about 65% of the industry’s value and the unorganised players accounting for the rest 35%

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Around 80% of the organised market of paints industry is covered by the top players with the largest share of 41.4% held by Asian Paints followed by Berger Paints India, Kansai Nerolac Paint and Akzo Nobel India with a share of 13.5%, 13.1% and 9.3%, respectively, during 2016-17.

The manufacturing of paints involves a significant input cost as raw materials account for around 45-50% of the industry’s sales on an average. The raw materials used for manufacturing paints include resins (binders), pigments, solvents, additives. One of the key pigments used in the manufacture of paints is titanium dioxide. It accounts for about 15-20% of the total raw materials cost of the industry. There was expansion in profit margins in 2015 -16 which was mainly on account of input costs as raw materials as percentage of sales dropped to 49.7% in 2015-16 from 51.2% in 2014-15. The drop in this ratio was primarily because of the decline in crude oil prices. The prices of crude oils were at multi-year low during the year 2015-16 as shown below. Many of the inputs used in the manufacturing of paints are crude oil derivatives that accounts for about 30-35% of the total raw materials cost of the industry. In the year 2016-17, no major expansion was seen in profit margins compared to the expansion witnessed in profit margins during 2015-16. An increase in raw material expenses is believed to have weighed on the margins. The prices of crude oil and titanium dioxide which were lower on a y-o-y basis in the initial months of the year 2016-17 increased on a y-o-y basis in later half of the year.

Regulatory framework
Regulation of Lead Contents in Household and Decorative Paints Rules, 2016 :Any manufacture, trade, import and export of Household and Decorative Paints (hereinafter referred to as product) containing lead or lead compounds (calculated as lead metal) in excess of 90 parts per million (0.009 per cent.) of the weight of the total non-volatile content of the weight of the dried paints film is hereby prohibited.

the government has permitted 100% FDI under the automatic approval route for chemical sector too. It is also continuously reducing the list of reserved chemical items for production in the small-scale sector, thereby facilitating greater investment in technology up-gradation and modernization. Furthermore, the government has launched the Drafts National Chemical Policy, which aims to increase chemical sector’s share in country’s GDP.

Future growth
The implementation of GST is unlikely to have caused any major disturbances in demand for paints though it is believed to have resulted in de-stocking of paints. With GST, paints have been put under the highest tax rate slab of 28% compared to the earlier 24-27% taxes paid through excise, value added tax (VAT),entry taxes. The paints industry is expected to rise by 8-10% in the financial year 2017-18 backed by a growth in its two segments, decorative and industrial. The roll out of Seventh Pay Commission and salary revisions by States is expected to result in increase in income thus supporting the demand for decorative paints. Further, roll out of schemes like Housing for all and Pradhan Mantri Awas Yojna (PMAY) for affordable housing is also likely to help increase consumption of decorative paints going forward.
The demand for industrial paints is also likely to grow backed by an expected improvement in industrial output. In addition to this, CARE Ratings expects 10-12% growth in the two-wheeler segment (accounting for about 80% of the automobile industry’s sales) which is also likely to augur well for the paints industry. The automotive segment drives the demand for industrial paints as it forms a significant component of industrial paints. While the outlook for demand remains positive, concerns for paints industry would remain on the raw materials front if the yo-y growth in crude oil prices continues. The Brent crude oil prices averaged at USD 50.9 per barrel during April-September 2017, implying a y-o-y increase of 11.5%.

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