Paint firms see waning auto, housing demand hit growth

Indian paint makers are expected to see growth slowing in the coming months as a dent in demand for homes, offices and cars is seen hurting the industry.

The Indian paints industry, estimated at around Rs 20,000 crore, is seen growing at a CAGR of 15% to 16%, according to analysts.

A slowdown in demand and high input costs is expected to hurt growth of companies such as Asian Paints, Kansai Nerolac, Berger Paints India and Akzo Nobel India.

"There is a slowdown in growth expected in the first half of FY12 as the consecutive rate hikes have hit housing and auto demand and that will have an impact on the paint industry," said Chitrangda Kapur, an analyst with Angel Broking.

The Reserve Bank of India this month raised its key interest rates by a larger-than-expected 50 basis points to battle stubbornly high inflation, its ninth rate increase since March 2010.

High inflation dents demand for automobiles and housing as it hurts the spending power of consumers.

Car sales in India, which saw a record 30% growth in 2010/11, is expected to slacken to 12% to 15% this fiscal year, according to a local industry body as higher interest rates, fuel prices and vehicle costs crimped demand.

While property prices are expected to dip in the coming months as inventory continues to pile up while customers stay away.

India's No 2 paints maker Kansai Nerolac, which gets 48%of revenues from the industrial segment, is expecting revenue growth slow to 15%this fiscal from 25%last year as auto demand moderates.

"We expect demand to be moderate in the medium term, especially for auto and other OEMs as end-user industry demand would be affected due to pressures of inflation as well as tightening interest rates," Managing Director HM Bharuka said.

Berger Paints which gets 80% of its revenues from the decorative segment, mainly used in houses and buildings, is also expecting a drop in volumes in the medium term.

"We are anticipating a slight dampening of demand during this year. We expect volume growth to come down to 10% to 12% this year from 16% to 17% a year ago," Subir Bose, its managing director, said.

Fresh round of price hikes

Paint makers, who have also been fighting rising input costs, have seeing margin pressure build up, triggering successive price hikes, with a new round expected in June.

In the March quarter, Asian Paints' EBITDA margins declined by 180 basis points on both standalone and consolidated basis, while Kansai Nerolac's margins contracted 250 basis points year-on-year to 11.3 due to rising input costs.

Crude-linked inputs and titanium dioxide are the main raw material for paint makers.

While Kansai Nerolac, which raised prices three times in FY11, has taken a 5% hike in the decoratives segment in May and is in the process of raising industrial prices by 4% to 5% in the near term.

Asian Paints, which hiked prices by 12% in FY11, has have hiked prices on May 1 by 4.3% and is set for another 2.4% increase in June.

"Out of the lot, Asian paints and Berger will be our pick because they don't have a significant exposure to auto and that is one sector which is definitely seeing a slowdown," said Anand Shah, an analyst with Elara Capital.