The production capacity of organised paints sector is expected to double to approximately 7.8 billion litre per annum (blpa) between FY24 and FY27 with investments of around Rs 19,000 crore lined up, including by one large entrant, reveals a report by CRISIL.
The report further suggests that out of these, around 2.4 blpa will be operational in FY25. Additionally, this will have a share of 1.3 blpa from the new entrants into the industry, primarily in the decorative segment, which accounts for 75-80 per cent of the total paints production.
Meanwhile, the volume will increase at a pace of 10-15 per cent annually in line with the past trends, however sizable capacities coming onstream will lead to increased competition for the market size.
Consequently, the report adds, manufacturers could price products aggressively to draw customers and utilise their expanded capacities, especially in the value segment, which accounts for over half of the total revenue. In the context, overall revenue growth is seen moderating to 7-10 per cent this fiscal, while operating profitability would moderate to 15-17 per cent due to increased marketing spends and pressure on realisations.
That said, capital expenditure (capex) will be managed through a mix of cash flows, debt and surplus liquidity.
Poonam Upadhyay, Director, CRISIL Ratings, said, “The volume growth of 10-15 per cent this fiscal will be driven by steady demand from retail and business-to-business segments, catering to construction, real estate and automobiles. Rising disposable incomes, increasing consumer preference for quality and branded products, rising home sales and an expected recovery in rural demand will be supportive. However, pressure on realisations will partially offset the benefit of higher volume, tempering revenue growth this fiscal.”
Revenue during the last fiscal grew by approximately 4 per cent as manufacturers cut prices by 4-5 per cent via higher discounts and rebates after crude-linked input prices softened, and increased promotional spending to counter competition.
This resulted in gross margin growth of ~500 basis points, and operating margin rising by only 300 basis points to ~20 per cent last fiscal from ~17.0 per cent in fiscal 2023.
Per the report, prices of most raw materials, especially crude-linked derivatives, including binders, solvents and additives, besides titanium dioxide, are seen steady, ensuring gross margins would remain stable at 40-42 per cent this fiscal. However, the operating profitability, Crisil said, is likely to moderate to 15-17 per cent this fiscal from ~20 per cent last fiscal due to higher advertising and promotional spending to support retail network expansion and to reinforce brand recall as competition intensifies, coupled with operational losses in the initial years for new entrants.
Existing manufacturers also have been introducing new products and expanding into non-paint categories such as adhesives, construction chemicals and waterproofing products, in order to maintain competitive edge and enhance product range. This has resulted in rise in investments in capacity, backward integration, research & development and technology
Anil More, Associate Director, CRISIL Ratings, said, “We expect the credit quality of existing manufacturers to be largely stable despite high capex. They are likely to fund capex through cash surplus and accruals, while new entrants will utilise a mix of debt and fresh equity. While the key debt metrics are expected to moderate, interest coverage and debt/Ebitda ratios of the sample set will stay comfortable at 14-16x and 0.5-0.7x, respectively, in this and next fiscal compared with previous peaks of over 40x and less than 0.1x, respectively.”
According to Crisil, the impact of volatile crude oil prices on key raw material prices, currency movement, an expected recovery in rural demand and a higher-than-expected increase in competitive intensity with new capacities coming onstream will bear watching.
