Revenue Of Paint Companies To Grow 10-12% This Fiscal: CRISIL

The revenue momentum of paint companies is expected to continue, leading to 10-12% growth in fiscal 2023, and will come on the back of a robust 30-35% growth logged last fiscal, CRISIL has stated. The growth will be broad-based, driven by higher realisations and sustained demand in the decorative and industrial segments alike.

Operating margin is expected to expand 150-200 basis points (bps) in fiscal 2023 from a low of 15-16% logged last fiscal, assuming crude oil prices ease in the second half of this fiscal, while robust balance sheets will support stable credit profiles, an analysis of six paint companies, which account for ~96% of the organised sector revenue, indicates.

Organised paint manufacturers account for 72% of the sector revenue of Rs 68,000 crore. Within this segment, decorative paints have a 78% revenue share, and industrial paints the balance.

Says Anuj Sethi, Senior Director, CRISIL Ratings, "Volume growth this fiscal is expected to moderate to lowto-mid single digit, with full impact of the record price hike of ~20% taken last fiscal. In fiscal 2022, volume growth was strong at 20-25%, albeit on a low base. We expect demand for industrial paints to be better than the decorative segment this fiscal, supported by both auto and non-auto segments. Demand from the auto segment, in particular, is expected to recover with gradual easing of chip shortage, benefitting new auto sales."

Demand from residential real estate projects, which accounts for ~30% of decorative paints, will outpace growth in the repainting segment (~70% of decorative paint revenue) this fiscal. This is on the back of increase in the pace of construction activity in urban and semi-urban areas, and the government's thrust to affordable housing. Demand from rural markets, which are more price sensitive, is expected to witness flattish-to-marginally negative growth due to sharp increase in the price of paints.

Overall revenue growth in fiscal 2023 would also be driven by higher realisations due to the full-year impact of the record price hikes of 20% taken last year - of which ~15% was taken in the third quarter - to partly counter the surge in crude oil prices, which have increased 50% over the past 1 year (crude-linked raw materials form 55-60% of costs). Despite the hikes, operating margin contracted sharply to an estimated 15-16% in fiscal 2022 from 19% in fiscal 2021.

Crude oil prices have spurted further since Russia's invasion of Ukraine in February this year. This will continue to weigh on profitability in the near term as paint players may effect only modest price hikes to ensure price-sensitive consumers do not shift to unorganised players. Already, competitive intensity in the decorative segment has increased with the entry of new players with sizeable financial flexibility and established distribution network for allied products. Moreover, increased spending is expected for shoring up distribution networks to counter the challenges from new entrants.

Says Shounak Chakravarty, Associate Director, CRISIL Ratings, "Crucially, eventual normalisation of crude prices may result in margin recovery as the full benefit of decrease in raw material price may not then be passed on to customers. This was also witnessed in fiscal 2016 when margins expanded on easing crude oil prices. Assuming crude oil corrects to an average $85-90 per barrel for the fiscal, margins can expand by 150-200 bps to 16.5-17%."