Industry smells colour of money
By Harish Rao
In India, paints are known more for their aesthetic values rather than for their protective properties. The awareness levels of paint as a preserver rather than a decorator are low in this country. For many paint is an item of luxury.
Again, in India, industrial coatings can be classified into marine coatings and protective coatings. The size of marine coatings is small, in the range of Rs 60-70 crore. And the sector is stagnating. Since there is not much increase in tonnage in Indian Shipping (in fact, it is decreasing), the demand for marine coating is not growing. Further, India does not have substantial shipbuilding or dry docking facilities, another factor contributing to the lower growth in demand. Besides, this sector is catered to by large players with worldwide networks. As the ships keep sailing they prefer only those companies which have representatives in major ports.
On the other hand, protective paints are used in roads, bridges, power plants, ports, refineries and natural gas installations, pipelines etc. The market size of protective coatings is around Rs 200-250 crore and it is growing at 8-10 per cent annually. Considering the hectic activity in infrastructure sector, one can expect better growth in this segment in the coming days.
Indian Railways is the largest consumer of paints and coatings in the country. Paints are used in passenger coaches, freight and tank wagons and locomotives, buildings, workshops and other railway establishments. There are many local players who meet the Railways' demand. However, foreign companies are not in the race for cornering a share of this market. The main reason is that paint specifications of the Indian Railways are outdated and most of the paints are no longer manufactured by the foreign companies.
Like any other industry, in this case too the unorganised sector plays a predominant role, contributing nearly 35 per cent of the market through 2,500-3,000 players. Most of these players are in the decorative paints segment and cater to the local demand. Their dominance is on the decline, though. Says K.B. Chabria, Managing Director, VCM Polyurethanes Pvt. Ltd, "Unless revamping and restructuring is done small-scale industries are in for large-scale trouble. Their main problem is relating to marketing." According to players in the organised sector, the consumer has become more quality and brand conscious. In addition, the reduction of excise duties from a high of 40 per cent to 16 per cent in recent years has reduced the advantage of the unorganised segment.
"SSI units do not get much benefits (as is made out to be)," Chabria further states. "The only benefit is in excise duties. Up to Rs 1 crore turnover the excise duty is 9.6 per cent and above Rs 1 crore turnover it is 16 per cent. When we deal with big companies, the excise duty rate does not make any difference as they can claim Modvat. Apart from this there are no other benefits. Banks usually offer highest permissible rate of interest for us."
Costs of raw material
The industry is raw material intensive and any variation in the cost will have a substantial impact on the margins. Raw materials account for over 50 per cent of the total cost of the product. Even worse is the fact that some of raw materials have to be imported. Industry meets nearly 30 per cent of its raw material requirements through imports.
Says M.A.M. van Diemen, Managing Director, Sigma Marine and Protective Coatings Pvt. Ltd, "Raw material costs have gone up. Some of the raw materials are imported from Europe, and the Euro in recent times has firmed up. So there is double impact." Further, the basket of raw materials is quite exhaustive. Around 600 raw materials are required by the paints industry. The most important raw material is titanium dioxide, which accounts for around 25-30 per cent of raw material costs. The price of titanium dioxide has been rising for the past six months.
Disparate tax laws
Tax laws vary from state to state. So also tax rates. Says Vivek M. Natu, Deputy General Manager, Sigma Marine and Protective Coatings Pvt. Ltd, "Different states have different tax structures. This causes a lot of hardship for us. Some states have certain rules on entry permits which creates delay and paper work. The amount of paper work to be done is the same irrelevant of the volume of business".
Many players in the industry complain about the opaque process of selection of suppliers by PSUs. Says Chabria, "PSUs are like snake pits and I am not a snake charmer. So I do not deal much with PSUs. Indeed, their mindset has been changing, especially in the last few years. That is a good sign." Quite often, product specifications are made to suit players of their choice. Despite this problem one cannot ignore PSUs as they are one of the major customers. However, things are changing for the better. Natu agrees, "The mindset of the people in government companies is changing. A lot of improvement is taking place. Earlier, these companies were giving least importance to selection and type of surface coatings to be used in their plants. Now they specify the type of coatings to be used."
Some of the major players in the paints industry have a presence in both decorative and industrial paints. In decorative paints, the margins are higher which helps them to offer relatively lower price for industrial coatings thus under quoting the competitors. Says Sigma's Natu, "Some leading players have higher margins in decorative paints which they use to cross-subsidise their sales in industrial coatings."
"But they cannot go on doing this for long. Each division has to earn its profit to sustain. This can be a short-term strategy; in the long term, this strategy cannot work," van Diemen states.
Application of paints is as important as the paint itself. But, in India, application of paints is given least importance. Says Natu, "Abroad paints account for only 30 per cent of the total cost and the balance is accounted for by application cost. In India, it is just the other way round. That shows how much importance we place on application of coatings." Concurs van Diemen, "While applying paints surface preparation is the most important aspect. Unless the surface is not properly prepared the impact of paints cannot be fully felt. Abroad we employ skilled people for application and surface preparation and that is why the application cost there is high. Also, there the efficiency is more.
The future of protective coatings appears to be good. However, the marine coatings segment may have to wait some time for a revival of fortunes. The introduction of tonnage tax system may boost the sector, albeit only in the long term. With the introduction of tonnage tax system Indian shipping tonnage is likely to go up. Experts say around 60 new ships could be added to the existing fleet and this in turn will increase the demand for marine coating.
Additionally, the development of roads, bridges, power plants, development of ports, refineries and natural gas installations etc., will enhance the use of protective paints.
(16-29 Feb 04)