Given that the growth of the Indian paints industry to a large extent hinges on GDP growth, the performance of the paints industry last year was healthy on the back of a robust growth in the Indian GDP. Demand especially for decorative paints was strongly led by increased construction activity and in the industrial paints business, powder and protective coatings logged in healthy growth rates.

In the next five years, the industry is expected to grow at a CAGR of around 11% to 12% and paint companies are expected to clock strong growth rates backed by capacity additions undertaken by them. Having said that, rising crude prices will have a major bearing on the operating margins going forward.

Industry wish list

R.J. Jeyamurugan, GM accounts and tax, Asian Paints [Get Quote]

• Reduction of duty on import of raw materials used in the paints industry. All raw materials imports to attract a common duty.
• Removal of surcharge on tax.

Budget over the years

Budget 2005-2006

• 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 2006-2007

• Peak rate of customs duty reduced from 15% to 12.5%. Basic inorganic chemicals reduced from 15% to 10%.
• Excise duty is being reduced from 24% to 16% on small motor vehicles.
• Duty to be reduced on major bulk plastics like PVC, LDPE and PP from 10% to 5%; on naphtha for plastics to nil; on styrene, EDC and VCM which are raw materials for plastics to 2%.
• Emphasis on the Bharat Nirman project and its timely completion.

Budget 2007-08

• Hike in allocation for rural and urban housing infrastructure development.
• Reduction in custom duty on chemicals from 12.5% to 7.5%.
• Dividend distribution tax to be hiked from 12.5% to 15%.
• Additional education cess of 1% to fund secondary and higher education.

Key positives

Steady growth: The Indian paint industry has very low consumption levels as compared to the other developing economies. While the decorative segment is growing at 1% per annum, the industrial paint segment (led by powder and protective coatings) is also expected to record strong growth rates going forward.

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 six years, the country has witnessed three years of poor rainfall, which has impacted paint demand.