Competition: Phasing consolidation

Anup Menon

THE INDIAN paints industry largely globalised. With virtually no entry barriers, most international paint majors have made their presence felt in the country.

However, the increasing competition may create problems for the marginal players who operate in conditions of low capacity and regional markets. Therefore, over the next couple of years there may be further consolidation in the industry.

Another recent interesting trend has been of Indian players eyeing opportunities abroad. For instance, both Berger Paints and Asian Paints have targeted international markets such as Sri Lanka, Russia and Bangladesh. Berger Paints has also been very active in the acquisitions market in recent times. The acquired include Jenson and Nicholson (Nepal) and Rajdoot Paints. The company's strategy has been to tap the potential of other markets where there is scope for the per capita consumption of paints to improve.

Asian Paints has also adopted a similar strategy. Among domestic manufacturers, it has the maximum number of international subsidiaries. Asian Paints has units located in growth markets such as Sri Lanka, which is growing at around 5 per cent per annum. The ability of paint companies to attain geographic diversification reduces the overall operational risk profile of the players and provides scope for achieving greater bottomline growth.

Cause for concern?

Rising raw material costs have also been a cause for concern for the companies. On an average the raw material costs as a percentage of sales work out to around 45 per cent. In the recent past, prices of key raw materials, such as titanium di-oxide and phtalic anhydride, have been strengthening. Around 80 per cent of the total raw materials are indigenously available. Therefore, the impact of the rupee's depreciation on the cost structure may not be significant.

The impact of rising input prices might not be felt evenly across all companies. For instance, Asian Paints has its own phtalic anhydride plant which produces for captive consumption. The total capacity of the unit was increased to around 24,000 tonnes recently. Around 35 per cent of the production is for consumption by Asian Paints and the rest is sold in the open market. The strengthening of prices in recent times is likely to have a positive impact on the bottomline of the company.

Industry prospects

The paints market is becoming increasingly consumer oriented. Given the level of competition, companies may find it hard to pass on the cost increases to its consumers. Therefore, apart from various external factors, corporates also have to compete in terms of costs. The major companies have invested heavily to upgrade operations through information technology. This could increase the operational efficiency of the companies.

The prospects for the industry in the near- to medium-term looks stable. As for the demand the Indian market provides huge potential for the players. According to figures provided by Chemicalweekly, the total demand in India is around 650,000 tonnes per annum, which works out to around 2.7 per cent of the world demand. The per capita consumption in India works out to around 200 gm, lower than some other Asian countries. So, the industry is not likely to face a demand crunch.

The industry's performance in the near future is likely to be impacted by the recent slowdown in some sectors of the economy. If the current trend in the broad economy persists, the industry's performance in the first half of 2001-02 could be under pressure.