Markets
Paints: Coating of price cuts makes revenue outlook pale
Summary
As customers switch to economy paints from premium products, paint companies are cutting prices in select categories of decorative paints to boost volumes and protect market shareMUMBAI : Competition in India's paints sector has heated up with the launch of Birla Opus brand by Grasim Industries Ltd. Plus, in the quarter gone by, companies saw customers switching to economy paints from costlier premium products, also known as downtrading. This usually happens when demand conditions are subdued. So, companies have cut prices in select categories of decorative paints to boost volumes and protect market share. Leader in the decorative paints business Asian Paints Ltd trimmed prices by around 4% in the March quarter (Q4FY24). Peer Berger Paints India Ltd took price reductions of 4-4.5% in mid-January, after a 1% cut in November. Kansai Nerolac Paints Ltd too followed suit.
Solid gross margin expansion (thanks to benign raw material costs) gave companies the much-needed room to reduce prices. In effect, Asian Paints and Berger saw double-digit volume growth in the decorative paints business. The momentum is expected to continue as both the companies are confident of clocking double-digit volume growth in 2024-25.
Grasim too is optimistic about its growth targets. The Aditya Birla-led company is well on track to add 50,000 dealers by 2024-25—this higher than Berger, which is the second-largest paint company by market capitalization. The products are being well received by the dealers, the management said. Further, Grasim aims to exit 2024-25 at a high single-digit market share and is going full throttle on its paint business investments. It has already spent 70% of its planned capital expenditure till Q4FY24.
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Capacity-addition spree
Here, it is worth noting that most of the listed paint companies have been on a capacity-addition spree lately, to raise their decorative paints production. According to Crisil Ratings Ltd, production capacity of the organized Indian paints sector is set to nearly double to around 7.8 billion litre per annum between 2023-24 and 2026-27 with investments of around ₹19,000 crore lined-up.
With massive capacities coming on stream, competition is likely to remain elevated. Also, as Grasim gets more aggressive on product launches and pricing strategies, Asian Paints and Berger could resort to higher dealer rebates and more price cuts. Pidilite Industries Ltd and JK Cements Ltd are among other big companies now present in the paints business.
After all, if demand fails adequately to match supply, then pricing becomes a crucial lever for paint companies to lure potential customers. A substantial portion of paint demand arises from repainting, which depends on the economic situation and overall inflation levels. Plus, demand revival in the key rural market is also crucial.
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It is not unusual for paint companies to pass on benefits of lower raw material costs to customers via price cuts. But in the current scenario, going ahead price reductions may be higher than seen before. The repercussion of price cuts is already being felt on revenue growth. An analysis by IIFL Securities Ltd showed that sector’s aggregate revenue growth was a mere 0.8% in Q4FY24, which was multi-quarter low. The volume-value gap is feared to widen in 2024-25 as revenue growth is likely to lag the anticipated double-digit volume growth.
Investment plans
Meanwhile, companies aim to invest more in brand building, marketing and promotional spends. Margin outlook would also depend on crude oil price movement, and rupee depreciation could hurt paint companies as they import raw materials.
As things stand, there is still not much clarity on how severely incumbents are likely to be impacted by the entry of new companies that have deep pockets. This has weighed on stock prices. In this calendar year so far, shares of top five listed paint companies have declined by 8-17%. Their valuation multiples range in 27-48 times based on 2025-26 price-to-earnings estimates, showed Bloomberg data. A bleak revenue growth outlook amid heightened competition leaves scope for further earnings downgrade, making valuations uncomfortable.
