The paints industry in India has been grappling with inflationary pressures on raw materials for the past few months. The rise in crude prices and Titanium Dioxide (it constitutes ~20percent of raw material cost), had their biggest toll on the margins of the paints companies in the last four decades. The situation was more perilous for unorganized players which lack muscle power to negotiate the raw material prices.
However, things have now started looking up for the sector on the back of price hikes implemented by the companies in the second and third quarter of this fiscal and also raw material prices are witnessing some softness which will help improve the margins for all players.
Paints Industry
The Indian paint industry grew at a CAGR of 11 percent over FY11-FY19. Decorative paints, which, is the largest segment within the paints industry constitutes about 74 percent of total paint sales. Decorative paints segment is immune to the industrial slowdown to a large extent which has helped the paint sector grow at a robust rate.
April and May are the two key months for re-painting activities in the domestic market generating ~25 percent of total annual paint sales in the country. Unfortunately, FY21 was affected by the pandemic, led by lockdown, resulting in almost no business in Q1FY21 and the business in Q1FY22 got impacted by the second wave. However, a faster recovery was seen from Q2FY22 which boosted the sentiments.
Demand Growth
The paints industry is expected to post robust volume growth led by demand from repainting and new construction. Strong festive demand coupled with good monsoon aided the growth in repainting segment in both urban and rural areas. Further, “anticipated growth in construction activity over the next five years creates opportunity for fresh painting”, said Deepak Jasani, Head of Retail Research, HDFC Securities. Acceptance of better paint products in smaller towns, and upgradation to premium brands in cities and large towns will enable the value growth, he added.
Kotak Institutional Equities said that the demand for decorative paints has been witnessing strong traction over the past four quarters. This is led by strong demand across urban and rural markets, continued share gains of organized players from unorganized, further accelerated by RM pressure impacting price competitiveness of smaller players (largely economy-end portfolio), and good growth in adjacent categories (waterproofing, wood finish).
Adjacent categories – New trigger for growth
Paint companies are aiming to make waterproofing as default product with paints. “We expect all paint companies to enjoy high double-digit penetration led revenue growth in this category”, said IDBI Capital in its report. This category is significantly under-penetrated and unexploited. “Overall size for water proofing industry stands at 15-20percent of paint industry (at Rs 6,000 crore) and is growing at faster rate compared to paints” added the brokerage.
The technology involved in producing water-proofing products and its business economics is very much similar to paints. Hence, this does not require any significant resources from paints companies and can be sold through their existing distribution channels.
However, the nature of this category creates some amount of entry barriers for new players. This is due to the fact that, “water-proofing products doesn’t sell due to better advertisements but on quality of solution being offered, skill-sets imparted to the contractor and warranty given on the products”, IDBI Capital said. To be sure, Pidilite runs Dr. Fixit academy for training contractors on waterproofing.
Inflationary Issues to be mitigated by calibrated price hikes
Input prices (crude oil & derivatives, TiO2 and packaging material) have risen 40-50percent in past 12 months. “Crude prices affect the decorative paints business more than any other as it is a raw material intensive industry with more than 300 materials needed to manufacturer paints, most of which are petroleum based”, added Jasani of HDFC Securities. It may be noted that raw materials constitute ~55-60percent of total costs. Additionally, due to disruptions in supply chain, there has been a shortage of tinplates required for making paint cans, which has lead to sharp uptick in paint packaging costs.
To counter these inflationary trends in raw material costs, the paint companies have taken two rounds of calibrated price hikes post the festive season. Asian Paints, the market leader, hiked its prices by 9-10percent from Nov 12, 2021 and there was an additional price increase of 4-5percent from Dec 5, 2021. Cumulative price increase taken by the company since April 2021 stands at 21-22percent.
Berger Paints, the second largest player, has also taken year to date price hikes of ~18percent-19percent.
“This price increase should almost fully mitigate gross margin pressure starting 4QFY22 and drive swift recovery in profitability for the industry”, said Kotak.
“While we note paint companies have initiated corrective actions such as price hikes, cost-saving initiatives and are focusing on sourcing & formulation efficiencies, we believe some impact on profitability in FY22 and H1FY23 is unavoidable”, said ICICI Securities in its report.
Recently witnessed stability and reduction in crude prices may bode well for paint companies hoping to restore margins to last year’s levels by March 2022, added Jasani.
The industry had faced a trend in FY08-10, when most input prices had increased by 40-60percent in FY09 over FY08. “The profitability had declined sharply in FY09 but swiftly recovered in FY10 due to price hikes, cost-saving initiatives and some correction in input prices”, added ICICI Securities.
Entry of New Players
The recent entry of large business houses like Grasim and JSW is now heating up the Indian paints industry with competition set to intensify. However, business economics is expected to remain strong.
“Better quality product, cheaper price and superior incentive to dealers are the three levers that had always been used by new players to compete”, said IDBI Capital in its report. However, historically we do not see these levers to have any meaningful impact on market share loss for the leaders, the brokerage added.
The profit pool of the paints industry is likely to shrink in FY22-23 as market leaders will protect their volumes and market shares even at the cost of profitability for some quarters as a signal to new entrants, said ICICI Securities.
Asian Paints dominates the profit pool of the industry. If it takes a hit on its margins then in all likelihood, the no.2 and no.3 players will also forgo some profitability resulting in the industry profit pool to decline. It will act as a signal to the new competitors like Grasim and JSW that the incumbents will protect volumes/ market shares even at the cost of profitability.
As time progresses, the paints sector will continue to generate interest as it will be interesting to see how the new players will unfold their strategies to take on the already established players.
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