Analysis of Paint Industry with respect to Godlass Nerolac

Submitted By: Sandesh Mokal PGDBM Marketing

Analysis of the Paint Industry

Project Report On

SUBMITTED BY

Sandesh Mokal
PGDBM MARKETING BATCH: 2007-09

Under the guidance of

PROF. R. Subramaniam

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH SHRISHTI, SECTOR 1, MIRA ROAD (E), MUMBAI 401104

CERTIFICATE
This is to certify that Mr. Sandesh Mokal, student of N.L. Dalmia Institute of Management Studies and Research, has successfully carried out the project titled ANALYSIS OF THE PAINT INDUSTRY, under my supervision and guidance as partial fulfillment of the requirements of PGDBM course, Mumbai University Batch 2007-2009

Prof. Subramaniam
Project Guide

Prof. P.L. Arya

Director

Date: Place: MUMBAI

ACKNOWLEDGEMENT
THE SUCCESS OF ANY PROJECT IS THE RESULT OF HARD WORK & ENDEAVOR OF NOT ONE BUT MANY PEOPLE AND THIS PROJECT IS NO DIFFERENT. I TAKE THIS AS A PROSPECT TO AVOW THAT IT WAS AN ACHIEVEMENT TO HAVE SUCCEEDED IN MY FINAL PROJECT, WHICH WOULD NOT HAVE BEEN POSSIBLE WITHOUT THE GUIDANCE OF PROF. P. L. ARYA (DIRECTOR N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH) AND MY PROJECT GUIDE PROF. SUBRAMANIAM AT NLDIMSR. I ALSO EXPRESS MY APPRECIATION AND GRATITUDE TOWARDS ALL THE FACULTY MEMBERS AT N.L. DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH FOR MAKING THE PGDBM DEGREE AND THIS PROJECT A MEMORABLE LEARNING EXPERIENCE. FINALLY I AM THANKFUL TO ALL MY FRIENDS, FACULTY MEMBERS AND STAFF WHO HAVE GIVEN THEIR FULL SUPPORT IN COLLECTING THE REQUIRED INFORMATION AND CONTINUOUS HELP DURING THE PREPARATION OF THE PROJECT.

SANDESH MOKAL PGDBM MARKETING

4

TABLE OF CONTENTS
SR. NO 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. CONTENTS EXECUTIVE SUMMARY PAINT INDUSTRY AT A GLANCE PAINT INDUSTRY INDUSTRY STRUCTURE SECTOR SPECIFICS EMERGING TRENDS AND OPPORTUNITIES COMPETITOR ANALYSIS COMPANY ANALYSIS SWOT ANALYSIS PRIMARY RESEARCH RESEARCH PROBLEM RESEARCH OBJECTIVE RESEARCH DESIGN CONSUMER SURVEY CONCLUSIONS RECOMMENDATIONS APPENDIX PAGE NO. 6 7 10 13 15 19 23 29 36 37 37 37 37 39 47 48 51

EXECUTIVE SUMMARY

Goodlass Nerolac is one of Indias largest paints company second only to Asian Paints in the decorative segment. Paints sector can be segmented application wise, as decorative paints and industrial paints. Both the sectors are characterized by low capital costs and high working capital. The intense working capital requires special technology. Capacities are normally set up close to markets, so as to be able to offer a multitude of shades and colors to customers. Brand building and dealer network act as effective entry barriers. Demand is seasonal in nature - low during monsoon, high during festivals. Domestic paints sector, dominated by decorative paints (70%), is expected to undergo a structural shift towards industrial paints, as cross-border tieups in industrial paints are becoming order of the day. Most organized sector players are established with well-entrenched distribution network and established brands. Threat of global competition is minimal. The underdeveloped industrial paints market holds maximum growth potential, albeit on a lower base. In future the industry will witness brand competition, product innovations and a fight for superior distribution network. Focused on decorative paints segment, GNPL is set to gain the maximum amongst the peer members from the up trend in the housing sector. The company is restructuring its operations into three SBUs and has set target to be amongst the top ten decorative manufacturers in the world. GNPL is investing heavily in dealer tinting machine and IT technologies to keep ahead of competition. GNPL has set a target of earnings growth of above 20% per annum. It also has set a vision to be among the top five paint

companies worldwide by 2005. On export front, the company is looking out for alliances/ takeover in the emerging markets of Asia.

PAINT INDUSTRY AT A GLANCE

The Indian paint industry is worth Rs49bn and can be divided into two

main sectors namely the organized sector and the unorganized sector. The Organised sector comprises of 60% of the total paints market while the Unorganised sector comprises of the remaining 40%.

Organized Sector can be divided into 2 distinct segments:

Industrial Segment growing at 15% (US$ 230 million). Decorative Segment growing at 8% (US$ 500 million). The Overall growth of the paint industry is 10 to 12%. Basis of competition in decorative segment are: 1. Distribution Brand Image 2. Range of Products

Basis of competition in Industrial Segment are:

1. Access to technology 2. Technical Servicing 3. Brand equity of present players 4. Distribution network 5. Cost of modification of products The unorganized sector has historically been dominant due to the high

excise structure. Over the last five years, the excise rates have come

down drastically from 40% to 18% resulting in erosion of the unorganized sector's share.

Working Capital intensive:

The number of shades is very large and a sufficient stock of every shade has to be maintained at all levels of the distribution channel, the working capital cycle is very high. The extent can be gauged from the fact that Asian Paints has a 12000 strong dealer network selling more than 150 shades. Also, the number of raw materials required can stretch upto 300. As majority of these raw materials are either imported or sourced from small chemical manufacturers, a large stockpile needs to be maintained. Low Fixed asset requirement:

A plant for the manufacture of decorative paint can be set up with a small capital investment. However, the major investment is in setting up distribution channels and building up a brand. The demand for paints is relatively price-elastic but is linked to the

industrial and economical growth. The per capita consumption of paints in India is very low at 0.5 kg per

annum if compared with 4 kgs in the South East Asian nations and 22 kgs in developed countries. The global average per capita consumption is 15 kg. In India the organised sector controls 70 percent of the total market

with the remaining 30 percent being in the hands of nearly 2000 smallscale units.

In India the industrial paint segment accounts for 30 percent of the

paint market while the decorative paint segment accounts for 70 per cent of paints sold in India. All the industry majors have a vast dealership network and are

required to maintain high inventory levels. Most of the paint leaders have technical tie-ups with global paint

leaders.

Seasonal nature of demand:

The demand peaks during festival season while is very lean during monsoons. Thus, a major part of the sales are achieved in the second half of the fiscal year. The paint market is expected to grow at 8-10% p.a. over the next few

years. The growth could be higher if industrial activity picks up as the industrial paint segment is gaining more importance. New trends are emerging in technology and marketing. Introduction of

tinting machines at the dealer/ retailer level will bring down working capital costs. Also new technology is being used for increasing the utility and lifespan of paints. Indian industry will have to keep pace with global technological changes to maintain their competitiveness. Already, a few alliances have been entered into and the number is likely to increase in the future.

PAINT INDUSTRY

Decorative Industrial

Exteriors Coatings Paints

Interiors

Automotive

High performance Powder coatings Emulsions Enamels Industrial coatings Distempers Wood finish Others
10

Decorative Sector Composition

Enamels Distemper Emulsions Exterior Coatings Wood Finishes (Table 1)

50% 19% 17% 12% 2% (source: isspa)

Decorative Sector Features

Enamels Emulsions Steady growth Shift from distemper and enamels to emulsions.

High growth area Distemper High growth in low priced low quality distempers s Exteriors as consumers are upgrading from lime wash Exterior emulsion is the fastest growing segment in the Indian Paint market. (Table 2)

Industrial Sector Composition

Automotive Paints High Performance Coating Powder Coating Coil Coating Marine Paints 50% 30% 10% 5% 5%

(Table- 3) (source: isspa)

11

Industrial sector features

Automotive Sector:
This segment is a high growth sector with a number of new entrants like Mercedes Benz, Mitsubishi, Daewoo, Hyundai, Honda, Fiat, General Motors and Ford. However, recently there is some slackness in Auto demands. Two wheeler markets are booming due to demand from large Indian middle class.

Powder Coatings:
This segment is showing increasing growth due to increase in sale of white goods and auto ancillaries.

High Performance Coatings:

This segment is registering steady growth due to the increase in investments in refinery segment and power sectors, particularly Thermal and Nuclear.

12

INDUSTRY STRUCTURE
Organized sector
The organized sector has a market share of 60% valued at Rs26bn. The share has increased from 55% three years back as the excise on paints was reduced. Asian Paints is the leader with a share of 41% in the organized segment followed by Goodlass Nerolac, and ICI respectively. Asian Paints and ICI are mainly decorative paint producers, Goodlass has major share in the industrial paints segment whereas Snowcem is almost a generic name for cement paints.

Organized Sector Market Shares Value

Company Market Share Asian Paints Goodlass Nerolac ICI Berger Paints J&N Shalimar Others (Table: (source:isspa) 37% 15.9% 11% 15.9% 5.7% 4% 12% 4)

13

Unorganized Sector
There are estimated 2500 small-scale producers accounting for 40% of the market. The unorganized sector proliferated due to low capital investment required and fiscal concession by the government. The high excise duty of over 40% before 1992 created a large price differential. The steady decrease in excise to the present 18% has taken away the advantage. Moreover, the introduction of MODVAT has further reduced the incidence of excise. Over the long run, the share of the small scale is likely to come down further and would be restricted to low quality, low price paints.

14

SECTOR SPECIFICS
Decorative segment
On product lines, paints can be differentiated into decorative and industrial paints. While the former caters to the housing sector, the automotive segment is a major consumer of the latter. Decorative paints can further be classified into premium, medium and distemper segments. Premium decorative paints are acrylic emulsions used mostly in the metros. The medium range consists of enamels, popular in smaller cities and towns. Distempers are economy products demanded in the suburban and rural markets. Nearly 20 per cent of all decorative paints sold in India are distempers and it is here that the unorganised sector has dominance. The demand for decorative paints is highly price-sensitive and also cyclical. Monsoon is a slack season while the peak business period is Diwali festival time, when most people repaint their houses. In the decorative segment, it is the distribution network that counts. Demand for decorative paints arises from household painting, architectural and other display purposes. Demand in the festive season (SeptemberDecember) is significant, as compared to other periods. This segment is price sensitive. The housing industry is likely to grow at around 8% in the next five years considering the shortage of housing and Governments thrust to encourage housing activity. This is likely to favorably impact the demand for the decorative paints.

APIL dominates the decorative segment with a 41 percent market share. The company has more than 15,000 retail outlets and its brands Tractor, Apcolite, Utsav, Apex and Ace are entrenched in the market. GNPL, the number-two in the decorative segment, with a 14 percent market share too, has now increased its distribution network to 10,700 outlets to compete with

15

APIL effectively. Berger and ICI have 9 per cent and 8 per cent shares respectively in this segment followed by J&N and Shalimar with 1 and 6 per cent shares.

Industrial segment
The share of industrial paints in the total paint consumption of the nation is very low compared to global standards. It accounts for 30 per cent of the paint market with 70 per cent of paints sold in India for decorative purposes. With the decorative segment bottoming out, companies are increasingly focussing on industrial paints. The future for industrial paints is bright. In the next few years, its share would go up to 50 per cent, in line with the global trend. The demand for industrial paints comes from industries like automobiles, consumer durable, shipping, engineering, etc. Industrial paints include powder coatings, high performance coating and automotive and marine paints. But two-thirds of the industrial paints produced in the country are automotive paints. The industrial paints segment, on the other hand, is a high volume-low margin business. In the industrial segment the deciding factor are technological superiority and tieup with automobile manufacturers for assured business. GNPL dominates the industrial paints segment with 41 per cent market share. It has a lions share of 70 per cent in the OEM passenger car segment, 40 per cent share of two wheeler OEM market and 20 per cent of commercial vehicle OEM market. It supplies 70 per cent of the paint requirement of Maruti, Indias largest passenger car manufacturer, besides supplying to other customers like Telco, Toyota, Hindustan Motors, Hero Honda, TVS-Suzuki, Mahindra & Mahindra, Ashok Leyland, Ford India, PAL

16

Peugeot and Bajaj Auto. GNPL also controls 20 per cent of the consumer durables segment with clients like Whirlpool and Godrej GE. The company is also venturing into new areas like painting of plastic, coil coatings and cans. APIL, the leader in decorative paints, ranks a poor second after Goodlass Nerolac in the industrial segment with a 15 per cent market share. But with its joint venture Asian-PPG Industries, the company is aggressively targeting the automobile sector. It has now emerged as a 100 per cent OEM supplier to Daewoo, Hyundai, Ford and General Motors and is all set to ride on the automobile boom. Berger and ICI are the other players in the sector with 10 per cent and 9 per cent shares respectively. Shalimar too, has an 8 per cent share.

Price sensitivity factors

Various factors that have influenced the pricing of paints are summarised below: The industry is raw-material intensive. Of the 300 odd raw materials, nearly half of them are imported petroleum products. Thus, any deficit in global oil reserves affects the bottomline of the players.

The major raw materials Titanium Dioxide, Phthalic Anhydride and Peutarithrithol constitute 50 per cent of the total cost. Besides, this, there are other raw materials such as castor, linseed and soybean oils, turpentine. The raw materials cost sums up to a whopping 70 per cent. Any increase in the prices of these raw materials could adversely affect paint prices.

Most of the paint majors have to import nearly 30 per cent of their raw material requirements thus changes in import policies can affect the industry.

Overseas expansion

17

If the global Goliaths are foraying into the Indian paints market aggressively, the Indian paint companies are also spreading their wings. Asian Paint exports its paints to over 15 countries. It also has joint ventures in Fiji, Tonga, Nepal, Vanuatu, Solomon Islands, Australia, Oman and Mauritius. In October 1999 it acquired 76 per cent equity stake in Delmege Gorsyth & Co (Paints) Ltd, the second largest paint company in Sri Lanka with a 12 per cent market share in Sri Lankas Paint Industry. Within a short span of just five years, the company has emerged as the number one player in these markets.

Technology collaboration
All the paint majors have tie-ups with global paint leaders for technical know-how. Asian Paints has formed a JV with PPG Industries Inc to service the automotive OEMs. Berger has a series of tie-ups for various purposes. It has a technical tie-up with Herbets Gmbh of Germany in addition to its joint venture with Becker Industrifag. With the agreement with Herbets coming to an end in 2001, Berger has now allied with the Japanese major Nippon Paints to boost its OEM turnover since the Indian roads are being flooded with Japanese automobiles. It also has an agreement with Orica Australia Pvt. Ltd. to produce new generation protective coatings. The company also has tie-ups with Valspar Corp and Teodur BV for manufacturing heavy duty and powder coatings. Incidentally, ICI makes paints with the technical support of Herbets, which has been recently acquired by by E I Du Pont de Nemours of the US. Interestingly, Du Pont, which is a leader in automotive coatings in the US, has a technical tie-up with Goodlass Nerolac for the manufacture of sophisticated coatings for the automotive sector. Goodlass also has

18

technical collaborations with Ashland Chemcials Inc, USA, a leader in the petrochemical industry, Nihon Tokushu Toryo Co and Oshima Kogyo Co Ltd, Japan.

EMERGING TRENDS AND OPPORTUNITIES

Technology:
The introduction of tinting machine has significantly changed marketing technology. These machines each costing approximately Rs 60mn are installed at dealer outlets and enable the customer to choose between any of several hundred shades. These are then generated by mixing dyes with the base paint, and delivered almost instantly. The two major implications of this machine are: Differentiation on color range is reduced: Prior to this technology, a major competitive advantage of a company was the range of colors it offered. For instance, Asian Paints offered almost 150 shades in its synthetic enamel range, unmatched in the industry. This now stands changed as almost 2000 shades can be created in seven minutes through these machines.

19

Simplified logistics management: With the machines generating shades instantly, dealers can now stock only the base material and thus save almost 20-25% in the working capital cycle.

Expansion of Product Profile:

The lowering of excise has opened the high volume but low value market in the semi urban and rural areas, which is currently dominated by the unorganized sector.

Increased Thrust on Brand Creation And Distribution:

The increased share of organized sector implies that brand awareness will be a thrust area. Also, strong brands are emerging as the most important entry barrier. The opening up of rural markets has also necessitated the expansion of distribution reach.

20

Dealer Network Asian Paints Goodlass Berger ICI (Table 5) (source: indiainfoline)

Nos. 14500 7000 5500 4500

Industry Consolidation:
The small-scale industry is expected to witness a shake out as the share of organized sector increases. Also, outsourcing requirements are likely to be reduced as new capacities go on stream in the organized sector.

New Segments Opening Up:

With increased industrialization, new segments like auto refinishing market are likely to expand rapidly. Already companies like ICI have launched specialized brands for this segment.

Outlook:
The industry is expected to grow at 10% CAGR for the next five years driven by increasing industrialization and increasing disposable incomes. According to Indian Paints Association, demand will rise from the current 0.6mn tonnes per annum to almost 1mn tpa by 2003. Demand for decorative paints will be led by the household construction industry which is expected to grow at almost 8% over the next five years considering the extreme shortage of housing and the governments thrust on encouraging housing activity. The

21

centers of housing activity are also likely to shift more towards rural areas. The industrial segment will grow faster due to the lower base and fast growth in major user industries like consumer durables and automobiles. The emerging trends in technology and marketing imply that the industry is likely to consolidate over the next few years with the marginal players being wiped out and industry leaders gaining market share. Thus, critical success factors will shift from manufacturing to marketing and distribution. Large international players are likely to either enter India or enhance their presence in India in view of the growing market. Thus joint ventures and strategic alliances will be the order of the day. Indian companies will also need to tie up with international majors to have access to the latest technology.

Growth Areas for the Indian Paint Industry:

Automatic Tinting System Indian Rural Market Auto OEM Finish Auto Refinish Exterior Coatings

22

COMPETITOR ANALYSIS
ASIAN PAINTS
APIL, Indias largest Paints Company, is the market leader in decorative paints. Asian Paints India Ltd. (APIL) has the distinction of being the market leader in the paints industry and commands a market share of 37 per cent. It commands 38% in the decorative paints segment and 15% share in the industrial paints segment It has remained focussed on core business and has consistently improved operating efficiencies. The company has registered a net profit of Rs 1064mn in FY01 as compared to Rs 973mn in the previous year. Focussed on decorative paints segment, APIL is set to gain the maximum amongst the peer members from the uptrend in the housing sector. The company is restructuring its operations into three SBUs and has set target to be amongst the top ten decorative manufacturers in the world by 2003. APIL is investing heavily in dealer tinting machine "Colour World" and IT technologies to keep ahead of competition. APIL has set a target of Gross sales of Rs21bn by 2003 and earnings growth of above 20%. It also has set a vision to be among the top five paint companies worldwide by 2005. On export front, the company is looking out for alliances/ takeover in the emerging markets of Asia. "Utsav" brand enamel was launched in FY01 to provide a complete painting solution for rural customers at moderate prices. The company has launched
23

a number of wood finishes in recent years. Asian Paints has installed around 2000 dealer tinting systems under the "Colourworld" programmes. It is proposed to further install around 500 to 600 tinting systems in FY02. The company has acquired the powder coatings business of Mumbai based Hawcoplast Chemicals Ltd for a consideration of Rs 160mn.

Financial Analysis
The net profit of the company increased by 9% to Rs 1064mn in FY01 as compared to Rs 973mn in the previous year. The operating profit rose by 10% to Rs 2096mn. The operating margin declined to 16% from 17% last year. The lower growth in profits is due to depressed market conditions for paints and increase in operating expenditure. Net sales grew by 12% to Rs 11965mn while other income rose by 36% to Rs 185mn. Total expenditure of the company increased by 13% to Rs 10054mn. Staff cost increased by 25% to Rs 730mn while raw material expenditure rose by 10% to Rs 6958mn. Interest cost rose by 9% while depreciation charges grew by 14%. The debt of the company rose by 30% to Rs 2268mn. The debt equity ratio stood at 0.6:1 while Return on Net Worth was 26%.

Distribution channel
The critical success factors in the decorative paints business are availability of wide range of shades and extensive distribution network. The company
24

has 4 manufacturing facilities and more than 2800 stock keeping units (SKUs). These are supported by 6 regional distribution centers, which cater to 55 depots. Each depot has a branch manager for supervision of several salespersons who cater to more than 14,500 dealers in the more than 3,500 big and small cities all over the country. Moreover, APIL has consistently improved its IT systems over the years. It has already linked all of its factories and 55 depots through V SAT terminals, which in turn has given benefits in streamlining the distribution channel.

BERGER
BPIL has become third largest paints company with 16% market share in the decorative paints market after merging Rajdoot Paints in itself. It is predominantly engaged in the decorative paints segment, which is responsible for two-thirds of its sales, remaining earnings come from the industrial paints segment. multinational companies. Merger of Rajdoot Paints with BPIL will benefit the later in terms of increasing the market share in highly competitive decorative paints segment, expanding the product portfolio and reduction in the overheads. BPIL is aggressively expanding the market reach in the decorative paints market through Colourbanks (Colour tinting machine). In automotive paints segment BPIL has tied up technical alliance with Nippon Paints Co to cater to OEM segment. In overseas market BPIL is contemplating plans to setup green field projects in African countries. The company enjoys the benefits of The company is increasing its presence in the industrial paints segment through technical tie-ups and joint venture with

25

technical tie-ups with Valspar Coatings, USA and Herberts, Germany for heavy-duty coatings and automotive coatings respectively.

Financial Analysis
Net sales and profit has registered a CAGR of 15.3% and 33.9% in the past 4 years. In FY99, net sales jumped by 22% yoy primarily on account of the incremental sales from the amalgamation of Rajdoot Paints wef 1st Oct 98. However growth in net profit was not proportionate with sales growth primarily due to decline at the operating level. Operating profit margin has declined below 10% in the past 4 years primarily due to intense competition at the market place. Selling expenses as % of net sales as also increased in the past 4 years. Effective tax rate has declined substantially in FY99 as the company has enjoyed tax benefit from the amalgamation of Rajdoot Paints. Return on networth has declined consistently from 24% in FY96 to 20% in FY99 mainly due to lower asset utilization and squeeze on the margins. Return on capital employed has also followed the similar trends. In the past 4 years the fixed assets have registered a CAGR of 46.9% both on account of organic and inorganic growth. The company has expanded its own manufacturing besides acquiring Rajdoot Paints in the past 4 years. In FY99 working capital requirement increased by more than Rs490mn mainly due to amalgamation of two companies. The real benefits of the amalgamation are expected to come in the next two years.

26

ICI
ICI India Ltd. (ICIIL) is a part of the Imperial Chemicals Industries (ICI), UK which is a world leader in paints. The company has diversified interests and is not purely a paints company. Backed by a market share of 13 per cent, ICIIL is recognised as the fourth largest paints manufacturing company. The company, which was a leader in the premium emulsion paint market, has now lost out to Asian Paints in the same category. The decision of the parent to invest more funds in the company could prove extremely beneficial. ICIs restructured operations consist of paints, speciality products, rubber chemicals, pharmaceuticals, surfactants, polyurethane, acrylics, catalysts and nitrocellulose

Financial Analysis

27

Comparing the growth on non explosive business, the sales grew by 16% to Rs8.13bn from Rs7bn. Overall sales of non explosive business have grown at a CAGR of 16% in last five years. Other income for the year was at Rs290.6mn as compared to Rs393.1mn for FY 99. This includes Rs75.4mn (Rs89.57mn) from write of provisions of excise with a court ruling in the company favor. Other components include commission, miscellaneous receipts, income from investments etc. Net profit was higher by 4.5% to Rs642mn for FY 00 as compared to Rs614mn for FY 99. The current year profit includes a one time write off of Rs120mn & exceptional income of Rs170.3mn as compared to Rs264.8mn of exceptional income in FY 99. Overall net profit has grown at a CAGR of 14% in last five years. Material consumes increased by 10.1% to Rs4.66bn from Rs4.23bn. In terms of break up, raw material cost decreased by 0.5% to Rs3.02bn, packaging material costs decreased by 9% to Rs343.3mn while purchase of finished goods increased by a steep 53% to Rs1.29 (Rs845mn). The total material consumes as percentage of sales increased from 51.3% to 53.5%, an increase of 2.1% percentage points. Other expenses increased by 2.86% to Rs2.51bn as compared to Rs2.45bn. As a proportion of sales other expenses were down by a 0.8% percentage points to 28.7% of sales from 29.5%. The decrease was on account decline in power & fuel costs by 14.8% to Rs238.2mn as compared to Rs274.6mn and salaries by 10.6% to Rs424.7mn from Rs461.3mn. While the decline in power & fuel costs was due to transfer of explosive business to a joint venture, employee costs decline due to implementation of a VRS scheme. Provision for bad debts was Rs118.2mn as compared to Rs59.9mn. The company has paid interest of Rs171.5mn for FY 00 as compared to Rs282.4mn for FY 99 as it repaid loans to the tune of Rs1bn. Interest received was to the tune of Rs10.6mn as compared to Rs6.8mn. The interest paid is expected to decline further this year as the company repays more

28

loans as also due to the increase in interest received as the company has invested surplus cash into deposits.

COMPANY ANALYSIS
Goodlass Nerolac Paints Ltd.
Goodlass Nerolac Paints Ltd (GNPL) is a 65% subsidiary of Japan based Kansai Paints. It has its presence in decorative paints as well as industrial paints, coatings, varnishes, enamels etc. Goodlass Nerolac Paints (GNPL) is the No.2 Paint company in India and the market leader in the industrial paints segment. GNPL reduced the prices of its products including its major brand Nerolac synthetic enamel due to the reduction in raw material costs in FY02, in a bid to enhance it share in the household sector.

29

GNPL has several collaborations with different companies to cater to different segments: Kansai Paint Co Ltd., Japan - For all automotive coatings DuPont Automotive Coatings, USA / UK - For all automotive coatings Nihon Parkerizing Co Ltd., Japan - For Pretreatment chemicals Nihon Tokushu Toryo, Japan - Sealants and Underbody Compounds. Valspar Corporation, USA - Powder coating Ameron Coatings Inc., USA - High Performance Coatings Drew Chemicals, USA - Water Treatment Chemicals

Background
GNPL was established in 1920, by Tata stable in collaboration with Goodlass of UK, a part of the Cooksons group. The Tatas had a 40% stake in the Company, through group company Forbes Gokak Ltd. In 1983, the Company entered into a technical cum financial collaboration with Kansai Paints, Japan. Kansai who currently has a stake of 40% is the other major shareholder. Manufacturing activities began with the establishment of a paints unit at Parel in 1920. In 1971 another plant was established at Thane. The Thane plant also has facilities to manufacture pigments, one of the major ingredients in paint manufacture. In FY92, the Company made a rights issue, for part funding its new Kanpur plant, which was commissioned in August 93. Last year Kansai bought over the stake of Tatas, thus making GNPL its subsidiary. Kansai Paint Company is the largest paint company in Japan & among the top 10 in the world. It has 21 subsidiaries in 12 countries. It has a global strategic partnership with Dupont Herberts Automotive Coatings. It has 64.5% holding of the equity capital in GNPL.

Industrial paints
30

GNPL is the market leader in industrial paints segment with a 43% share. The industrial paints segment is far more technology intensive than the decorative segment. In the Industrial segment, Goodlass offers a wide range of liquid and Powder coatings to service spectrum of industry, ranging from automotive, Marine, White goods etc. and also High Performance Coatings to meet the corrosion protection needs of chemical industries, power plants etc. In the automotive segment, all multinational companies except Hyundai are using GNPL paints as the company provides the entire painting system right from pre-treatment to final coating. The company supplies to all major two-wheeler and car manufacturers. Maruti is the biggest customer of GNPL Other user industries for industrial paints include engineering and consumer durables.

Decorative Paints
Decorative paints accounts for 70% of the total market and includes acrylic & oil-bound distempers, enamels, and plastic emulsions. GNPL currently has 14% market share in the decorative segment. GNPL relaunched Nerolac Allscapes, the premium interior paint, in late-2001, as 24Carat Emulsion paint for the interior use in the premium segment. The relaunch of Allscapes is likely to improve the sales and profitability of the company. The company also roped in film stars like Malayalam superstar,

31

Mohanlal, to endorse brands like the acrylic exterior paint, excel, for the southern markets starting in April 2002. GNPL has introduced a new technologically advanced exterior premium paint - Nerolac Excel Everlast in Kerala. This paint has outstanding durability due to various features such as excellent lasting adhesion on most surfaces, all weather application, minimum surface preparation, unique aging characteristics and protection from fungal attack. The unique selling proposition of the product is that it can be immediately applied on newly built surfaces immediately after construction. It is available in over 21 readyto-use decorative shades in value package sizes. The company has introduced 15 spectrophotometers (a hand-held device that scans any color that needs to be replicated) branded 'Magic Eye'. This is apart from the 1,500 Colourscapes (computerised color dispensing machines) that Nerolac has installed across the country. The company has also introduced products like anti-bacterial paints for use in places where hygiene is paramount and others like anti-carbonation paints for buildings facing highways or heat insulating paints. GNPL has been constantly creating value for its customers by continuous upgradation of technology resulting in reduction in paint consumption per vehicle, increasing the utility and life span of paints, reducing energy consumption and manufacturing environment friendly paints. GNPL is the first company to introduce latest environment friendly lead free electro deposition distributors. GNPL management has been focussed on paints business in the last three decades. It has a network of 11000 dealers. GNPLs prospects are inextricably linked to those of the user sectors in automobiles and other industrial sectors. The two subsidiary companies primarily manufacture paints & enamels for parent company on contract basis. Paint in India. With changing business and industrial environment, GNPL has introduced just- in- time (JIT) delivery system with its

32

In Q1 2002, companys sales grew marginally by 3%, from Rs5.7bn in Q1 2001 to Rs5.8bn. Other income increased by 31% yoy from Rs115mn to Rs151mn in 2002. Operating profit increased by 10% from Rs595mn to Rs658mn in Q1. Interest expenses declined sharply from Rs64mn to Rs37mn. Net profit increased by 21% yoy to Rs274mn in Q1 2002 from Rs226mn in Q1 2001.

Sales breakup
No. of months 12 Period ended 03/99 Sales value(Rs mn) Paints, varnishes, enamels 5,235.4 & oils Others 222.4 Sales volume(unit) Paints, varnishes, enamels 55,002.0 & oils (Ton) Unit realisation (Rs/unit) Paints, varnishes, enamels 95,186 & oils (Ton) ( source: indiainfoline) 12 03/00 6,211.4 80.9 12 03/01 6,744.4 91.5 12 03/02 6,961.6 67.7

64,933.0

73,448.0

76,765.0

95,659

91,825

90,687 (Table- 6)

Financial Analysis
Goodlass Nerolac Paints (GNPL) has continued to report attractive numbers. After registering a 14% rise in Sales and a 67% rise in net profit for the quarter ended December 2002, it has bettered the same in the quarter ended March 2003.

33

GNPL has registered a 15% rise in its net sales to Rs 159.12 crore for the quarter ended March 2003. Cost reduction in its other expenditure (as a % to sales, net of stock down from 24.0% to 15.9%) increased its OPM from 6.4% to 9.6%. The increase in OPM was despite rise in staff cost from 9.2% to 14.6%. OP was, thus, up by 70% to Rs 15.27 crore. Other income rose 25% to Rs 4.22 crore. As a % to PBT other income stands at about 40% against 62%. Interest cost fell 7% to Rs 40 lakh and depreciation rose 29% to Rs 8.39 crore. Thus PBT rose 97% to Rs 10.70 crore. Provision for taxation rose 27% to Rs 2.59 crore while that of deferred tax fell 47% to Rs 54 lakh. Finally PAT spurted 96% to Rs 8.65 crore. For the FY ended March 2003, its sales rose 11% to Rs 653.37 crore and OPM increased from 9.4% to 11.2%. Thus OP was up 32% to Rs 73.03 crore. Other income fell 14% to Rs 8.85 crore and interest cost was down by 56% to Rs 1.65 crore. After providing for depreciation (down 2% to Rs 24.14 crore), PBT rose 50% to Rs 56.09 crore. Provision for current tax rose 44% to Rs 18.39 crore and deferred tax write back fell by 22% to Rs 2.14 crore. Finally PAT rose 46% to Rs 39.84 crore. The results for the quarter and the year ended March 2003 are inclusive of results of entire year of both the subsidiaries and hence not strictly comparable. However, since the impact of the merger is negligible on the company's sales and net profit, it is compared and discussed the same. The consolidated PBT for the FY ended March 2002 was Rs 37.24 crore against the reported standalone PBT of Rs 37.36 crore. The company has now decided to concentrate on the decorative segment that forms 70% of the Indian paint market. Also, it has lined up new plans for the general industrial segment.

34

It has introduced specialty products in the decorative segment and it hopes to grow better than the industry. The company has launched host of new products in the recent past. It has launched Pliolite-based products and had entered an exclusive tie-up with Goodyear Chemicals. This product gives the company an edge over other products. Anti-carbonation products, used on flyovers, protects the structure from carbon monoxide and other gases. The other pliolite-based product it introduced was 'Clear' - where the original look of the surface is protected. The company has extended this same concept to its exterior paint as there are no products in the premium-finish segment that have this property. The company believes that this will give it an edge in the market. The company's network constitutes 12,400 dealers. Last year it increased it by 10% and it hopes to increase this number this year too.

Distribution network
Factory

35

Regional Distribution Centre Depot

Dealer Customer

SWOT ANALYSIS
Strengths
No. 1 in industrial paints Highest growth in 4 years
36

Vast dealer base Considered the best in whites

Weaknesses
Advertising salience not enough Is not able to create and sustain a brand pull

Opportunities

Can be no. 1 Paint Company in India

Threats
Competition Low profitability

37

PRIMARY RESEARCH

RESEARCH PROBLEM
To study the consumption pattern, decision making process and consumer preference of plastic paints.

RESEARCH OBJECTIVE
1. To study the brand awareness of Nerolac paints in the plastic paint category. 2. To understand the decision making process during the purchase of paints. 3. To determine the importance of various factors while purchasing paints.

RESEARCH DESIGN
The research was exploratory in nature.

Consumer survey
To study the consumption pattern, consumer preferences and brand awareness of plastic paints a consumer survey was done.

38

Sampling Plan
The sampling plan is as follows: The universe of study consisted of the households of Mumbai. Due to constraints with respect to time and other resources a sample of 100 was taken. It was found out during exploratory research that 70 to 80 percent of plastic paint users belong to SEC A and SEC B. The sampling pattern used was convenience sampling . From each zone, two posh localities were judgmentally selected to include people from SEC A and SEC B. Primary data was collected through questionnaire and personal interviews. From each household one member was selected judgmentally.

39

CONSUMER SURVEY
Sample size - 100
Which companys brand you use?

Majority of the people is not aware of the brand they use.

When did you last paint your house?

40

Most of the people paint their house once a year. What is the time of your purchase?

Festivals are peak time for painting house followed by post rainy season.

Who decides which brand to buy?

41

In most if the cases painters or dealers decides which brand to use.

Source of information influencing purchase decision Column1 TV Newspaper Magazines Radio Painters Shopkeeper s Friends High Influence 63 18 36 11 83 76 31 (Table 11) Moderate influence 37 82 64 89 17 24 69 Total 100 100 100 100 100 100 100

42

As can be seen from the above table and graph, painters and shopkeepers play a major role in decision making process.

How far you agree with the following statements?

Statement A price is an important factor in your purchase decision.

43

Statement B you are particular about the brands of paints you buy Statement C you have full knowledge of the different aspects of paints you buy. Statement D you feel that some brands have better quality than others.

In most of the cases price is an important factor.

Most of the people are not brand conscious and they dont have much knowledge about paints.

Have you seen advertisements of the following companies?

44

Most popular brand is of Asian paints followed by Nerolac. Have you heard about the following brands?

Suraksha is the most popular brand followed by Excel among the four brands.

45

How do you rate the quality of the following brands?

Colum Excelle Good Okay Bad Cant Total n1 nt say NAE 14 21 19 5 4 63 Allscap 13 16 18 2 6 59 es Suraksh 24 34 14 1 73 a Excel 12 27 26 2 1 68 (Table 12)

Suraksha is perceived to be of good quality but NAE and Allscapes lags behind.

46

Monthly household income

Majority of the people are in the 15001-20000 and above 25000 category

CONCLUSIONS

Most of the consumers are not aware of the brands of paints they use.
47

 Most of the consumers do not have much knowledge about paints.

Painters and dealers play a major role in decision making process.

Awareness level of Nerolac as a brand is quite high second only to the market leader namely Asian Paints. Awareness level of Nerolac brands like Suraksha is very good followed by Excel and Allscapes. Majority of the consumer paints their house once a year during Diwali.

The quality of NAE and Allscapes are not perceived to be good when compared to Suraksha.

Price plays a major role in purchase of paints. Awareness about CCD machines is low.

RECOMMENDATIONS
RECOMMENDATION 1

48

GNPL needs to increase and defend its share in the industrial segment: It needs to take the following steps: Introduce new products/innovations NEROLAC already has a market position, which is very established. In order to maintain its position it has to go about making new products and innovations. Leap Frogging into next generation technologies Technologies are not too competitive in this segment as there is less competition. What GNPL can do is get technology tie up with a foreign player specializing in this area. This will help GNPL to reduce variable cost over a period of time.

RECOMMENDATION 2 Dealer awareness level

GNPL has around 120 shades out of which there are many dealers who are not aware of this wide a range of shades. Also the use of the tinting m/c is not known to them due to which often the customer does not get what he sees on the screen of the tinting machine. This will lead to the customer being dissatisfied which is a big threat to GNPL. Hence the overall dealer awareness has to improve, as dealers are the hubs between the company and the customers. Company Sales persons need to be posted at these outlets to help the dealers for some time say 1 month.

RECOMMENDATION 3 Tie-ups
Now the market is getting saturated. What GNPL needs to do is tap the bulk users of paints. GNPL needs to tie-up with Interior designers & Architects who can get them bulk orders for a long time.

49

RECOMMENDATION 4
Also the ad spends need to be evenly spread out. A lot is spent in the urban areas when GNPL also has lower end brands available. Advertisements for rural need to be specially designed after getting the pulse of the customer, also shades shown there should be of more liking to the rural population. It could make use of other media such as pamphlets, hoardings and print ads in the local newspaper.

RECOMMENDATION 5
The company should increase activities in market such as sales promotion schemes, painters meet etc.

RECOMMENDATION 6
Painters play a very important role in paint market. Most of the times they are involve in decision making process. Majority of the painters is not satisfied with the company. Painters meet should be organized frequently and any schemes provided to them should be given on spot i.e. when they purchase materials. Some sort of recognition should be given to the painters like identity card etc that they are recognized by the company.

RECOMMENDATION 7
Company should carry on its effort of brand building. Suraksha is doing well in market so it should concentrate on it. Awareness for Allscapes is still low and more advertising is needed, as Dulux VT is very strong in this category.

RECOMMENDATION 8
Nerolac should quickly launch some product in the 2nd quality category as Tractor Acrylic Emulsion is doing well.

RECOMMENDATION 9
The concept of CCDs should be made clearer to the consumers. More advertisements should be given showing CCD and its use.

50

With implementation of such strategies hopefully APIL will become No. 1 in all the segments not only in India but the whole world.

APPENDIX
QUESTIONNAIRE

51

1) Which company's paint you use? a) ICI b) Nerolac c) Asian paints d) Berger

e) Any other, Please specify 2) When did you last paint your house? a) 1 year ago years b) 1 3 years a c) 3 5 years ago d) above 5

3) What is the time of your purchase? a) During festivals please specify b) after the rainy season c) any other,

4) The following source of information influences your purchase decision. Write 2 for high influence TV Newspaper Write 1 for moderate influence Magazines Friends Radio others, please specify

Painters/shopkeepers 5) Who decides which brand to buy? a) Father/Husband Dealers

b) Housewife

c) Painters

d)

6) Please indicate how far you agree or disagree with the following statements. Write 1 for "strongly agree, 2 for "agree, 3 for "neither agree nor disagree, 4 for "disagree" , 5 for "strongly disagree" a) price is an important factor in your purchase decision b) you are particular about the brand of paints you buy
c)

You have full knowledge of the different aspects of paints you want to buy.

52

d) You feel that some brands have better quality than others. 7) Have you seen advertisements of following companies? Yes Asian paints Nerolac paints Berger paints ICI paints 8) Have you heard about these brands? Yes NAE Allscapes Suraksha Excel If the answer is "no" skip question no. (9) 9) how do you rate the above brands on the following a) Quality Excellent b) Price High good okay bad low bad very bad very bad No No

reasonable

c) Availability in the market Excellent good okay What is your monthly income? b) 15001 20000

10)

a) 10000 1500 25000

c) 20001 25000 d) above

53

54