Berger Paints Initiating Coverage - Myiris.com

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Per capita consumption of paints is low at 1.5 kgs/year Berger Paints Initiating Coverage Annexure - I Industry overview The Indian Paints Industry, estimated at USD 3.8 bn, is growing at 1.8-2x GDP growth since the last few years. This industry is characterized with many players in the unorganized sector. However, the organized segment that cons titutes 80% of total paint industry is concentrated with top 4 players commanding more than 90% share of the organized market. The per capita consumption of paints in India remains very low at 1.5 kgs, against 15-20 kgs in developed countries. This industry is categorized in two segments – decorative, which contributes 70% and industrial that contributes 30% to the total industry size. Decorative paints (70% of total paint industry) Decorative paints constitute 70% of total paints market of Rs 170 bn and has witnessed a 17% CAGR over FY06-11. The demand for decorative paints is highly co-related to the GDP growth of the country. While 70% of the decorative demand is from re-painting needs and is driven by rising purchasing power of the consumer and the economic growth in the country; emergence of a sizeable middle class and growing urbanization drives the demand for new painting requirements , which forms 30% of the decorative segment. Decorative paint demand led by re-painting requirements… Driven by increasing middle class, growing urbanisation and higher availability of affordable housing Source: Industry, Emkay Research Emkay Research 27 June 2011 12 30% Industrial paints (30% of total paint industry) 70% Re-painting Fresh painting Driven by rising purchasing power, increasing re-painting cycle and higher economic growth The industrial paints category, estimated at Rs 50 bn constitutes 30% of the overall paints industry. This category is further sub-divided into different segments based on the user industry and constitutes automotive paints, protective paints, powder coatings and coil paints. Hence, the key demand driver for this category of paints depends on the industrial activity in its user-industries like automobiles, power, marine, consumer durables, etc. Demand drivers – Short term pain…. Long term remains strong… For decorative paints Demand for decorative paints emanates from new house construction (30%) and repainting needs (70%). While the demand for re-painting could be linked to the economic activity, demand for new house construction would depend on the construction activity in the commercial and residential space. Encouraging economic growth and an improvement in business environment are likely to drive the demand for commercial space over a long run. According to a report by Cushman & Wakefield in October 2010, 240mn sq ft of commercial property and 4.25mn units of residential property will be required to meet demand over 2010-2014. Similarly, demand for office space will be 55mn sq ft and hotels will witness a demand for 78mn room nights over the same period. This signifies the robust growth potential that the paints industry is poised for, over the ensuing years.
Berger Paints Initiating Coverage Distribution of demand Estimated demand for 2010-14 Residential property 4.25 mn units Commercial property 240 mn sq ft Office space 55 mn sq ft Hotels 78mn room nights Source: Cushman & Wakefield For Industrial paints Demand for industrial paints is derived from its application in the user-industries like automotive, consumer durables and the capital goods industries. As automotive segment constitutes 40% of total industrial paints, operating environment in this segment is a major demand driver for the industrial paints category. Further, infrastructural development in sectors like power, ports, roads, oil and gas etc, will be another key driver of volume growth in industrial paints. Automotive segment While rising macro headwinds like increase in interest rates, fuel prices and inflation will lead to subdued demand in 1HFY11, it is likely to recover from 2HFY11 once the consumer makes the psychological adjustment for higher fuel prices and interest rates. We expect growth rates to revert to healthy levels from FY13E. Our auto team estimates a 10% YoY growth agains t ~30% growth in passenger cars and 9% YoY growth against 36% growth In M&HCV segment for FY12. In FY13E, the growth rates are expected to recover to 17% and 12% for passenger cars and M&HCV segment, respectively. Trend in passenger car segment Trend in commercial vehicles segment 3.0 2.5 2.0 1.5 1.0 0.5 FY07 FY08 FY09 FY10 FY11 FY12e FY13e Source: Company, Emkay Research Cars (mn units) % YoY 35% 30% 25% 20% 15% 10% 5% 0% Emkay Research 27 June 2011 13 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0.0 Consumer durables segment FY07 FY08 FY09 FY10 FY11 FY12e FY13e M&HCV Trucks (mn units) % YoY 60% 40% 20% 0% -20% -40% -60% According to CEAMA, the consumer durable market is currently pegged at around Rs 350 bn and has witnessed a growth of approximately 13% in the last few months. However, with tightening credit situation, it is likely to witness some short term pressure. Nevertheless, over a longer period, consumer durables market is poised to grow at healthy double-digit growth driven by increasing per capita income and higher discretionary spend in the country.
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