Budget 2005-06: Paints

The Indian paints sector is valued at Rs 66 bn in value terms and is very fragmented. The organized sector accounts for about 70% of the business while around 2,000 players in the unorganized players accounts for the remaining. Read more

Budget Measures Construction of residential complexes having more than twelve residential houses or apartments together with common areas and other appurtenances. Exemption on tax deductible housing loan to continue. Under the rural development programme, 6 m additional houses to be constructed for the poor. Peak customs duty reduced from 20% to 15% The new income tax brackets, the change in exemption and deductions available to individuals and the increase in exemption for women. IT to generate around 7 m jobs till 2009. Budget Impact The paint sector will benefit from the reduction in the peak customs duty on imports of raw materials. Since raw material typically account for 55% to 60% of sales for paint majors (of which around 50% will be accounted for by imports), this will lower the cost of raw materials, even as input costs continue to trade firm. Packaging material costs will also be lower going forward. While the lowering of customs duty is a positive on the costs side, the threat from imports from select South East markets exists. On the balance, though cost of select residential flats would go up, higher savings and the focus on job creation by the government will percolate into higher demand for houses in the long-term. Sector Outlook Historically, the paint sector has grown at 1.5 times to 2 times GDP. But if the government is able to execute its rural focus in the long-term and increased investment in select urban cities in the medium term, we will not be surprised if the growth shifts to a new trajectory. While we are positive at the topline level, in the next one-year, the challenges of firmness in input costs will subdue growth in profitability. To that extent, investors have to exercise caution. Overall, we believe that this sector is a play on the economy, for which prospects are promising. Industry Wish List 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. Budget over the years Budget 2002-03 Budget 2003-04 Budget 2004-05 Peak customs duty reduced to 30% from 35%. Continuation of housing incentive. Administered interest rates lower by 50 basis points. Continuation in interest exemption on housing loans. 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. [Read more on Budget 2002-03] [Read more on Budget 2003-04] [Read more on Budget 2004-05]
Key Positives 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.		Key Negatives 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.
Budget Impact: Paints Sector Analysis for 2004-05 | Paints Sector Analysis for 2006-07 Latest: Performance Of Paints Stocks | Paints Sector Report

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