The paints sector will see revenue growth of 10-12% in fiscal 2024, largely driven by volume expansion on the back of healthy demand from sectors such as construction, real estate, and automobiles.

Healthy revenue growth of 18% on year was witnessed in fiscal 2023 as well. However, this was primarily led by higher realisations on the back of ~6% price hike taken by the players during the year, along with the full impact of ~20% hike implemented in the third quarter of the previous fiscal.

Healthy volume growth, along with moderating crude-linked input prices will ensure operating margin remaining stable at ~15-16% in fiscal 2024, almost similar to last fiscal. Besides, nearly debt-free balance sheets will continue to support the credit risk profiles despite all major paint companies being on an aggressive capex spree even as new players foray in.

A study of five paint companies, which account for nearly 90% of the organised sector revenue totalling ~Rs 65,000 crore, indicates as much.

The sector comprises the decorative (~80% market share) and industrial paints segments.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “Demand for paint normally grows at 1.6x-2x of GDP. Decorative paints are likely to see revenue increase of 11-12% in fiscal 2024, driven by increasing renovation/ construction activity and greater preference for branded products from the increasing middle-class segment. On the other hand, 8-9% revenue growth in industrial paints will be supported by higher government spend on infrastructure and steady demand from the automotive segment.”

The sector’s key raw materials are crude linked derivatives. With ~30% fall in crude oil prices from a high of $115 per barrel in June-July 2022 to ~$85 per barrel at present, it is expected to benefit the sector’s operating margins. However, the same will be largely offset by higher selling expenses due to aggressive sales push and increase in ad spend by players to counter competition from new entrants. Also, the average rupee-dollar exchange rate is likely to remain high at Rs 82-83 per dollar even in fiscal 2024 (~Rs 80.2 per dollar in fiscal 2023), impacting cost of imported materials. For the record, domestic paint players import almost a third of overall their raw material requirements.

Says Anil More, Associate Director, CRISIL Ratings, “To maintain competitive edge and enhance product offerings, existing players have stepped up capex to enhance capacity, backward-integrate, and expand into non-paint products such as adhesives, construction chemicals, and waterproofing products. Existing and new players are likely to incur a total capex of ~Rs 12,000 crore in fiscals 2023 and 2024 against ~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.”

Despite such large capex, healthy cash flows and balance sheets (gearing estimated at below 0.05 time for existing players as of March 2023), and strong liquidity (cash surplus at ~Rs 5,000 crore) will support credit risk profiles.

That said, volatility in crude prices, currency movement, and substantially high competitive intensity will bear watching.