Paint companies to have colourful days ahead with 10-12% growth
Paint manufacturers will make a significant recovery this fiscal year, reclaiming ground lost during the pandemic's second wave in the first quarter. Revenue will increase by 10% to 12%, driven by improved consumer optimism and economic recovery in both the ornamental and industrial areas.
At the opposite end of the spectrum, operational margins will contract by 200 basis points. However, stable credit profiles are maintained by strong cash accruals, well-managed balance sheets, and considerable cash surpluses.
As seen by an analysis of six players who account for 96% of the organised sector's earnings, this is the case.
Organized players dominate the Rs 53,000 crore market, accounting for 70% of revenue. Within the organised sector, ornamental paints account for 77% of revenue, while industrial paints account for the remainder.
According to Anuj Sethi, Senior Director, CRISIL Ratings, "increased spending on house remodelling and refurbishment, as well as a gradual resurgence in real estate activity, are predicted to result in an 11% revenue recovery in the decorative paints market." Additionally, revenue recovery is projected to be more widespread this year. Accelerating vaccination rates and eliminating pandemic-related restrictions will encourage growth in metropolitan areas. On the other hand, improved rural incomes as a result of a nearly normal monsoon would aid in the recovery of the hinterland, which accounts for a sizable portion of decorative paint volumes. While the whole paint sector grew at a 4% rate last fiscal year, the decorative segment outperformed due to robust demand from the hinterland, which was less affected by the initial wave."
Additionally, new opportunities have arisen as a result of the network's distribution of building chemicals, adhesives, wall putties, and wood polish finishes. These categories generate less than 5%-10% of sales but enable decorative segment players to offer more options in the home décor space.
Industrial paint revenue is expected to rebound sharply this fiscal year, growing at a rate of 13%, compared to a 6% decline previous fiscal year due to weak automobile sales (which account for 50% of demand) and a sluggish economy. The rebound will be fueled by increased automotive sales, with numerous new car launches expected, particularly in the passenger vehicle segment, and the government's infrastructure push.
Operating margin, on the other hand, is forecast to remain solid at 17%, though slightly lower than the decadal high of 19% last fiscal year. This is because rising crude prices have resulted in a significant increase in raw material prices (55-60% of costs) this fiscal year, which has not been totally offset by player pricing increases. Paint makers are gradually increasing prices in a controlled manner as demand improves following two years of sluggish growth.
According to Shounak Chakravarty, Associate Director, CRISIL Ratings, "despite some moderation in operating profitability, the credit quality of CRISIL-rated paint players will remain stable, owing to their healthy cash generation ability, strong balance sheets, and sizable cash surpluses (Rs 7,000 crore as of March 31, 2021)." With capacity utilisation now hovering between 75 and 80%, players are unlikely to invest significantly in the next 12-18 months, albeit moderate investments in backward integration/capacity debottlenecking will continue."
Notably, despite the introduction of new players in recent years, the top five players account for 95% of income in this business. Strong brand recognition, customer relationships (automotive paints), and established distribution networks continue to be significant entry obstacles. Given the sector's favourable growth prospects, corporations with significant financial flexibility and an established distribution network for complementary items are preparing to enter.
In this context, the severity of the pandemic's third wave, the movement of crude prices, the competitive intensity, and the rate of economic recovery all remain variables to monitor.