Share prices of paint companies remain under pressure, with Asian Paints, Berger Paints and Indigo Paints having declined up to 7% in the last five trading sessions. The concerns around the profitability of paint companies have increased with the depreciation in the rupee as that can lead to higher costs for petroleum products and raw materials.
Paint Sector Outlook
After showcasing significant revenue growth in FY22 and FY23 post-pandemic, the growth rate of long-entrenched players such as Asian Paints, Berger Paints India, Kansai Nerolac Paints, Akzo Nobel India and Indigo Paints have moderated to mid-single digits in FY24 and slipped into a negative zone in H1FY25 amid intensifying competition.
However, Care Edge expects the revenue in the second half of FY25 to witness a rebound on a year-on-year (YoY) basis on the back of benefits arising from the price hike taken in July-August 2024.
Higher competition to impact profitability
The entry of new players as JSW Paints Pvt Ltd, Grasim Industries Ltd, Pidilite Industries Ltd, JK Cement group, Astral group has sparked a surge in capital expenditure and heightened competition within the sector. Players are expanding their capacities, growing their dealer network, ramping up sales teams and accelerating ad spending in a bid to counter competition and secure market shares.
Amid these developments, CareEdge Ratings expects a shift in cost structures, with ad and sales promotion spending of players likely to increase by 100 bps – 200 bps (as a percentage of revenue) in the medium term.
Consequently, paints companies’ operating profitability margin, which reduced to 16% in H1FY25 from 20% in FY24, is expected to further moderate to 14% by FY26, said CareEdge Ratings.
Organised Sector has an edge
However strong credit risk profile characterised by conservative capital structure and healthy liquidity are expected to aid the incumbents in navigating through the increased competitive landscape whereby operating profitability margins are likely to moderate in the near to medium term, said CareEdge Ratings.
With existing and new players going for massive capex, the share of organised players is set to go up to ~80% in the medium term.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
