Mumbai: The organised paints sector in India is on the verge of significant expansion. production capability This is expected to almost double to about 7.8 billion litres per annum (BLPA) by 2020. Fiscal Year 2027As per Crisil report.
According to the press release, this surge will be driven by investments of around Rs 19,000 crore, including a significant contribution from a new major player entering the market.
However, increasing competition and rise in marketing expenses are likely to impact the profitability of this sector.
A large portion of the new capacity, around 2.4 BLPA, is expected to come on stream within the current financial year, with new entrants alone adding 1.3 BLPA.
This expansion is mainly in the decorative segment, which accounts for 75-80 per cent of total production.
The sector is set to continue posting healthy volume growth rates of 10-15 per cent per annum, in line with past trends.
However, the advent of new capabilities is expected to increase competition for market share.
This increased competition may push manufacturers to adopt aggressive pricing strategies to attract customers and make the most of their expanded capacities, especially in the value segment, which accounts for more than half of total revenues.
As a result, overall revenue growth is estimated at 7-10 per cent this fiscal year.
Further, operating profitability is expected to decline to 15-17 per cent due to increased marketing expenses and pressure on product realisation.
Despite these challenges, capital expenditure (capex) will be managed through a combination of cash flows, debt and surplus liquidity, ensuring the sector can maintain its growth ambitions.
The credit profile of existing manufacturers is expected to remain stable due to their strong financial health, virtually debt-free balance sheets and adequate liquidity reserves, equivalent to about one-fourth of their net worth.
This financial stability will enable them to withstand competitive pressures.
A study of six companies, which contribute nearly 90 per cent of the organised sector's gross sales of about Rs 70,000 crore, supports this optimistic view.
Poonam Upadhyay, Director Crisil Ratings“The projected volume growth of 10-15 per cent this fiscal will be driven by sustained demand from both retail and business-to-business segments, fuelled by the needs of sectors such as construction, real estate and automobiles,” it said.
“Rise in disposable income, consumer preference for quality and branded products, growth in home sales and an expected improvement in rural demand will all contribute positively. However, pressure on realisations will partially offset the benefits of higher volumes, leading to slower revenue growth this fiscal,” he said.
The paint sector had a marginal revenue growth of around 4 per cent in the last fiscal.
This happened because due to softening of input prices related to crude oil, manufacturers reduced prices by 4-5 per cent by increasing discounts and rebates.
To counter the competition, manufacturers also increased their advertising spending.
As a result, while gross margins improved by about 500 basis points, operating margins expanded by only 300 basis points to around 20 per cent, up from 17.0 per cent in FY23.
Prices of key raw materials, particularly crude oil-related substances such as binders, solvents and additives, as well as titanium dioxide, are expected to remain stable, helping maintain gross margins in the range of 40-42 per cent this fiscal.
However, operating profitability is expected to decline to 15-17 per cent due to higher advertising and promotional expenditure aimed at retail network expansion and boosting brand identity amid rising competition.
Additionally, new entrants are expected to incur operating losses during their initial years.
To maintain their competitive edge and broaden their product range, existing manufacturers are diversifying into non-paint categories such as adhesives, construction chemicals and waterproofing products.
As a result, investments in capacity expansion, backward integration, research and development and technology are increasing.
Anil More, Associate Director, Crisil Ratings, commented, “We expect the credit quality of existing manufacturers to remain largely stable despite significant capex. They will finance capex through cash surplus and accruals, while new entrants will rely on a mix of debt and fresh equity.”
“While key debt metrics are expected to soften, interest coverage and debt/EBITDA ratios for the sample group are expected to remain comfortable at 14-16x and 0.5-0.7x for this fiscal and next fiscal, respectively, compared to previous peaks of over 40x and less than 0.1x, respectively,” he said.
Key risk factors that will need to be closely monitored include the impact of volatile crude oil prices on raw material costs, currency fluctuations, expected improvement in rural demand, and unexpected increase in competitive intensity due to coming up of new capacities.
According to the press release, this surge will be driven by investments of around Rs 19,000 crore, including a significant contribution from a new major player entering the market.
However, increasing competition and rise in marketing expenses are likely to impact the profitability of this sector.
A large portion of the new capacity, around 2.4 BLPA, is expected to come on stream within the current financial year, with new entrants alone adding 1.3 BLPA.
This expansion is mainly in the decorative segment, which accounts for 75-80 per cent of total production.
The sector is set to continue posting healthy volume growth rates of 10-15 per cent per annum, in line with past trends.
However, the advent of new capabilities is expected to increase competition for market share.
This increased competition may push manufacturers to adopt aggressive pricing strategies to attract customers and make the most of their expanded capacities, especially in the value segment, which accounts for more than half of total revenues.
As a result, overall revenue growth is estimated at 7-10 per cent this fiscal year.
Further, operating profitability is expected to decline to 15-17 per cent due to increased marketing expenses and pressure on product realisation.
Despite these challenges, capital expenditure (capex) will be managed through a combination of cash flows, debt and surplus liquidity, ensuring the sector can maintain its growth ambitions.
The credit profile of existing manufacturers is expected to remain stable due to their strong financial health, virtually debt-free balance sheets and adequate liquidity reserves, equivalent to about one-fourth of their net worth.
This financial stability will enable them to withstand competitive pressures.
A study of six companies, which contribute nearly 90 per cent of the organised sector's gross sales of about Rs 70,000 crore, supports this optimistic view.
Poonam Upadhyay, Director Crisil Ratings“The projected volume growth of 10-15 per cent this fiscal will be driven by sustained demand from both retail and business-to-business segments, fuelled by the needs of sectors such as construction, real estate and automobiles,” it said.
“Rise in disposable income, consumer preference for quality and branded products, growth in home sales and an expected improvement in rural demand will all contribute positively. However, pressure on realisations will partially offset the benefits of higher volumes, leading to slower revenue growth this fiscal,” he said.
The paint sector had a marginal revenue growth of around 4 per cent in the last fiscal.
This happened because due to softening of input prices related to crude oil, manufacturers reduced prices by 4-5 per cent by increasing discounts and rebates.
To counter the competition, manufacturers also increased their advertising spending.
As a result, while gross margins improved by about 500 basis points, operating margins expanded by only 300 basis points to around 20 per cent, up from 17.0 per cent in FY23.
Prices of key raw materials, particularly crude oil-related substances such as binders, solvents and additives, as well as titanium dioxide, are expected to remain stable, helping maintain gross margins in the range of 40-42 per cent this fiscal.
However, operating profitability is expected to decline to 15-17 per cent due to higher advertising and promotional expenditure aimed at retail network expansion and boosting brand identity amid rising competition.
Additionally, new entrants are expected to incur operating losses during their initial years.
To maintain their competitive edge and broaden their product range, existing manufacturers are diversifying into non-paint categories such as adhesives, construction chemicals and waterproofing products.
As a result, investments in capacity expansion, backward integration, research and development and technology are increasing.
Anil More, Associate Director, Crisil Ratings, commented, “We expect the credit quality of existing manufacturers to remain largely stable despite significant capex. They will finance capex through cash surplus and accruals, while new entrants will rely on a mix of debt and fresh equity.”
“While key debt metrics are expected to soften, interest coverage and debt/EBITDA ratios for the sample group are expected to remain comfortable at 14-16x and 0.5-0.7x for this fiscal and next fiscal, respectively, compared to previous peaks of over 40x and less than 0.1x, respectively,” he said.
Key risk factors that will need to be closely monitored include the impact of volatile crude oil prices on raw material costs, currency fluctuations, expected improvement in rural demand, and unexpected increase in competitive intensity due to coming up of new capacities.