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Paints: Cut customs duty

March 14, 2012 19:29 IST

Indian Paint Industry is estimated to grow by about 22% in FY11 to Rs 25,600 crore (value terms) over the previous year.

While the organized sector accounts nearly 65% of the market share, the remaining is under unorganized sector of the Industry. Traditionally growth in the paint industry is mainly driven by the decorative paint segment followed by the Automotive and Industrial paint segment.

Decorative paints constitute over 75% of the overall paint market in India followed by Automotive Coatings, General Industrial coatings, high performance Coatings, Powder coatings and specialty coatings.

Repainting constitutes major chunk of the demand for decorative paints and growth in rural economy has been steering major demand in the repainting segment.

Auto industry has been driving the primary demand for industrial paints segment. While industrial coatings attribute their usage in the FMCG industry, Powder coating is gaining more importance in the consumer durable Industry.

With the slowdown in the demand in the auto industry and new infrastructure, coupled with the higher levels of inflation, the industry has witnessed slower growth in the volumes in the nine months ended December 11.

However, paint industry has witnessed decent growth in profitability in the quarter ended December 11, thanks to the spike in realizations paired with small increase in the volume growth on festive season.

Decorative paints colored the show, thank to drive from rural demand while the industrial paints including Automotive paints continued to witness challenge on the back of economic environment.

One among the raw material intensive industries, the industry has been witnessing pressure on firming up raw material prices.

According to the industry sources, resins and binders constitute major 29% of the raw material spend followed by Titanium dioxide 20%, Packaging materials 17%, Additives 16%, solvents and diluents 8% etc.

Indian paint manufacturers depend on imported Tio2 (Rutile grade) for their consumption. The Rutile prices have peaked up on the fears of shortage although there is no actual shortage in the ground. Besides rutile, the other raw materials for the paint industry are crude based derivatives.

Average crude oil prices (Indian Basket- IOCL) have jumped up 26% to USD 109 per barrel in the quarter ended December 11 and inched up further to USD 119.56 per barrel in the month of February 12.

Resultantly, the raw material prices jumped up and fueled the price hikes despite slow down in the volume growth.

According to the Asian Paints Material price index for quarter ended December 11 was 121.59 with FY2010-11 as base 100. YTD Dec 2011, index was at 117.44.

Indian Paint Association (IPA) which is apex body of Indian paint industry has represented the industry concerns and suggestions to the Government for consideration in upcoming Union Budget 2011.

Recommendations of IPA:

i) Customs duty on Titanium Dioxide should be brought down from 10% to 7.5% (in line with the other Chemicals

ii) Increase abatement rates to minimum 35% for paints

iii) Extend Rule 21 of the Central Excise Rules, 2002 which provides remission of duty where goods are destroyed by natural causes on finished goods; to Input goods also.

iv) 100% cenvat credit should be allowed for Capital Goods in the same year of receipt itself.

v) Give time frame of at least 7 days for any change in duty structure to be made effective after the date of its announcement, so that there is sufficient time to configure the IT systems in line with the new duty structure.

vi) Suitable explicit provisions should be made to allow cenvat credit on service tax for all the activities related to the business so as to avoid litigations.

vii) Service tax credit should be allowed in full, for companies engaged in manufacturing as well as trading of goods.

viii) Include Interior Decorator service, Architect service and Management or Business Consultant services under Rule 6(5) of the Cenvat Credit Rules 2004; so that 100% cenvat credit can be claimed irrespective whether the services have been availed in respect of taxable goods/services and exempted goods/services.

ix) GST should be implemented in all states simultaneously. There should be uniformity in respect of rules, regulations and GST rates for commodities in all states. Further, sufficient time should be given to Industries for understanding and implementation of GST.

x) Extend Section 35(2AB) which provides for deduction on expenditure incurred on in-house research and development facility approved by the prescribed authority for industries not only to companies having their own manufacturing units but also for toll manufacturers.

xi) A suitable amendment should be made relaxing the criteria for some group companies to join LTU (Large Tax Payer Unit) so as to get assessed centrally at LTU along with parent company.

Analyst Expectations:

Paint industry is driven by the demand from the infrastructure, industrial and automotive sectors. The industry growth is often correlated with the Indian economy growth. Lowering inflation and improvement in the growth numbers of economy will be positive for the paint industry.

The thrust of Government on the building up infrastructure will help the industry. Rural sector has major share of the decorative paints segment of the industry. Any benefit given to the rural sector which improves their dispensable income will also aid the paint industry.

Companies to Watch:

Asian Paints, Kansai Nerolac, Berger Paints and Akzo Noble.

Outlook:

According to the Economic policy review, Indian economy is expected to grow by 7.1% in FY12 (slightly higher than advanced estimates of 6.9% for FY12). At this growth rate, the industry is expected to grow by around 12-13% in FY12. Currently, the industry is facing the spike in the raw material cost.

Any relief on the excise duty cut in the Tio2 will help the industry. Further, any measures that can accelerate growth in infrastructure sector and automotive sector will add more color to the prospects of industry.

Union Budget 2012-13: Complete coverage

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Tags: GST, LTU, FY12, FMCG, IOCL