Budget Measures Hike in allocation for rural and urban hosing infrastructure development Reduction 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  Budget Impact Increased spending on rural and urban housing infrastructure development to increase demand for paint companies Lower custom duty on chemicals to ease some pressure on profitability by paring the pressure on cost of inputs Higher education cess and dividend distribution tax to impact net profits and retained earnings  Sector Outlook The focus on urban and rural housing to increase demand for paint companies shall lead to increase in demand for paint companies. Also, lower custom duty on chemicals is likely to ease some pressure on profitability by paring the pressure on cost of inputs. We expect the paint sector to grow at 2 times long-term GDP growth in the future. With GDP growth expected to around 8% to 9% per annum, the top three players are likely to clock above industry growth rates.  Company Impact Market leaders like Asian Paints, Kansai Nerolac and Berger Paints to benefit from increased spending on rural and urban hosing These companies will benefit in terms of lower custom duties on raw materials like chemicals  Industry Wish List Increase in the rate of abatement from the MRP (minimum retail price) to 50% from 40% at present. Reduction of duty on import of raw materials used in the paints industry to 8% from the current 16%, while retaining the rate of import duty on finished products at 16%. Continued impetus to the housing industry as the revival of the same boosts the growth of the general economy and thereby the paint industry. The government should give incentives to companies that invest money in R&D activities by way of weighted deductions for revenue spends and accelerated depreciation rates for investment in R&D equipments. This will help the Indian paint industry to become globally competitive.  Budget over the years Budget 2004-05 Budget 2005-06 Budget 2006-07 A sum of Rs 400 bn will be pooled in by a consortium of financial institutions to provide finance for various infrastructural activities like power, ports, roads and civil aviation. Continuation in interest exemption on housing loans. Besides, income from housing projects for the construction of residential units of prescribed specification and approved from local authorities is exempt from income tax. This exemption is available for project that is approved upto March 31, 2005. Allocation of Rs 22 bn to provide a subsidy upto Rs 10,000 and loan upto Rs 40,000 for the eligible households. 1.0 m dwelling units financed so far and National Housing Bank has offered to reduce the rate of refinance by 25 basis points this year. 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. 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. [Read more on Budget 2004-05] [Read more on Budget 2005-06] [Read more on Budget 2006-07]
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 five years, the country has witnessed three years of poor rainfall, which has impacted paint demand.

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