Paint Industry: Shades Of Success
The Indian paints industry seems to have hit a purple patch. The good run that kicked off in the third quarter of fiscal year 2022, thanks to a massive 20 per cent increase in prices, has stuck on. FY2023 looked even better with an 18 per cent spike in revenue helped by higher realisations due to a 6 per cent rise in prices during the fiscal. The uptrend is very much intact and expected to continue during FY24 and even further.
In fact, the industry expects its revenue to grow 10-12 per cent in FY2024. Experts say strong volume growth, coupled with stabilising input prices linked to crude oil, will likely help keep operating margins at around 15-16 per cent in the current fiscal, similar to the previous fiscal year. A third straight year of price rise may become necessary if input costs go up.
The sector’s success is tied to the fortunes of the five major paint companies namely Asian Paints, Berger Paints, Kansai Nerolac Paints, Akzo Nobel, and Indigo Paints, which together represent nearly 90 per cent of the organised sector's revenue, totalling around Rs 65,000 crore, out of a total estimated market size of Rs 70,000 crore.
So bullish are the experts and the industry players about the sector’s prospects that they see the total market size expanding to Rs 1 lakh crore over the next 50-60 months, on the back of the growth of existing participants, new entrants, increased investments, rising demand, and market expansion. Along with substantial growth, the industry may also witness mergers and acquisitions.
Despite major paint companies aggressively pursuing capital expenditures as well as the entry of new players, experts maintain that the sector has benefitted from the nearly debt-free balance sheets of leading companies, which help support their credit risk profiles. The industry consists primarily of the decorative paint segment, accounting for approximately 80 per cent of the market share, with the remainder dedicated to industrial paints.
Pushing Growth
Building on two years of strong growth, Asian Paints, the market leader, achieved net sales of Rs 30,000 crore by the end of FY23. Over the past four years, the company has consistently achieved volume growth between 15 and 20 per cent. As of FY23, it had approximately 1.5 lakh retail outlets, with an additional 6,000 to 10,000 retail points added in Q1FY24. Amit Syngle, MD and CEO of Asian Paints, emphasised their commitment to maintaining a presence in every geographic region, including Tier-3 and Tier-4 towns.
In pursuit of this commitment, the company has allocated Rs 8,750 crore for expansion and growth over the next three years. Outlining the strategic rationale behind these investments, Syngle states, "Our investments will enable us to meet the growing demand in the paint industry while achieving sustainable cost advantages through critical backward integration. This will be complemented by strategic acquisitions to expand our home décor offerings, thereby reinforcing our leadership position in the core business."
The need for capacity expansion becomes evident when considering the rapid expansion of the Indian paint industry, projected to reach Rs 1 lakh crore by 2028. Asian Paints aims to be well-prepared to meet this surge in demand by expanding its manufacturing capacity through both greenfield and brownfield expansions. Brownfield expansion is underway at existing decorative paint plants located in Kasna, Khandala, Ankleshwar, and Mysuru, with a capital expenditure of approximately Rs 3,400 crore, supporting the growth plan for the next three years. Collectively, this expansion will add 5.40 lakh kilo litre per annum to the company's existing capacity. Furthermore, the company plans to establish a new water-based paint manufacturing facility with a capacity of 4 lakh kilo litre per annum, involving an estimated investment of Rs 2,000 crore. This facility is expected to become operational three years after land acquisition.
Berger Paints, a Kolkata-based competitor, also achieved a significant milestone by surpassing Rs 10,000 crore in FY23. Abhijit Roy, MD and CEO at Berger Paints, attributes their success to a well-rounded performance across their decorative, protection, auto, and industries divisions. Notably, the protection division crossed the Rs 1,000-crore mark in FY23, and strategic entries into key accounts within the industry and auto segments bode well for their long-term growth prospects. "Berger paints outperformed the competition and was the fastest growing paint major in FY 23 in the Indian paint industry," Roy tells BW Businessworld. "Crossing the Rs 10,000 crore milestone fills us with great pride and presents us with a scale to make the next leap ahead," he adds.
Kansai Nerolac, another prominent player in the sector with more than a century of history, witnessed remarkable revenue growth in FY23, exceeding 18 per cent and reaching Rs 7,543 crore.
Growth Drivers
What will drive the growth? Arunava Paul, Associate Director, CareEdge Ratings points to the real estate sector that accounts for about 70 per cent of the total demand for paint. "The demand from real estate is expected to be robust in FY24. The demand from repainting, which accounts for 80 per cent of total decorative paint demand, is also expected to pick up due to factors such as a growing population, an increase in rental homes and growth in income levels of consumers," says Paul. New construction accounts for 20 per cent of the demand for decorative paints, Paul adds.
Anuj Sethi, Senior Director, CRISIL Ratings says the demand for paint normally grows at 1.6x-2x of GDP. “Decorative paints are likely to see revenue increase of 11-12 per cent in fiscal 2024, driven by increasing renovation/construction activity and greater preference for branded products from the increasing middle-class segment." Revenue for FY24, as per Sethi, is expected to grow 10-12 per cent mainly on the back of higher volumes in the absence of any price increase. "Here too, growth in the decorative segment – which accounts for 75-80 per cent of the organised paints market – is expected to be higher at 11-12 per cent as compared to the industrial segment," Sethi adds.
The growth in the industrial segment, however, is expected to be around 8-9 per cent on the back of steady rise in demand for automobiles while revival in demand from non-auto segment will depend on overall economic conditions, says Sethi.
Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities points to the positive impact on the industry due to a gap between Diwali and the monsoon. "Industry expects a strong festive season demand given Diwali is later towards November versus last year when it was in October. Generally, a gap between monsoon and Diwali gives more time for consumers to prepare and plan for Diwali season," says Thakur. "The repainting cycle has reduced as well. The consumers are getting their houses repainted at shorter intervals," says Paul of CareEdge as one of the reasons that is driving growth.
Karan Chechi, Director at TechSci Research says the paint manufacturers are increasingly venturing into the rural markets, recognising the untapped potential for growth in these regions. "Escalating rural incomes and aspirations for improved living conditions have spurred paint consumption in rural India," Chechi says.
Acquisitions & Competition
The paint industry, in last few years, have seen a spate of acquisitions in the paint and related industries. Astral has entered the paint industry via the acquisition of Gem Paints in Karnataka and Indigo has strengthened its presence via acquisition of Hi-Build Coatings in South India and Apple Chemie in waterproofing segment. JK Cement acquired Acro Paints in North India while Kansai and Berger acquired Perma and STP, respectively, to strengthen their waterproofing business. However, the market leader Asian Paints acquired companies in kitchen, bath and electrical segments as it changed its strategy from ‘share of wall’ to ‘share of space’. Sector-watchers do not rule out mergers/acquisitions between established players in coming times if separately they continue to lose market share. Can Akzo Nobel be one such player of interest for the market leaders? Only time will tell!
A recent research report by ICICI Securities says: “With multiple players (Grasim, JSW, JK, Astral, Pidilite) entering the paints business, we believe the (somewhat) oligopolistic structure of the paint industry will likely change to a perfect competition structure. It could eventually hurt the industry profit pool, in our opinion (as observed in FY22).” As a result, the existing and new players are likely to incur a total capex of around Rs 12,000 crore till FY24 against around Rs 7,000 crore incurred in the four fiscals through 2022. “With new players expected to add nearly one-third of total existing capacity (~4.2 billion litres) by fiscal 2025 end, competition will intensify,” says a senior analyst from CRISIL.
But here is the upside. The top five players have a combined annual capacity of 4.22 million kilo litre as of FY23-end. The industry plans a Rs 20,000-22,000 crore capex over the next 3-4 years, with Grasim Industries and Asian Paints investing Rs 10,000 crore and Rs 8,750 crore, respectively. This 20 per cent capacity increase will heighten competition and pressure margins for leading players in the long run. Besides competition, paint industry profitability hinges on raw material prices. Approximately one-third of raw materials are imported. In FY24, a strong dollar-rupee parity raises industry vigilance. Amid India's vibrant palette, the sector anticipates sustained growth. We share that optimism!
ashish.sinha@businessworld.in
