There is nothing much for the decorative paint makers to complain about as the sector has been able to keep head above water even when the economy is showing the signs of fatigue. Benign raw material prices and reasonable performance on growth front in the second quarter must have brought cheers for most of the paint makers.
Growth in difficult times
While all others in consumer goods segment were struggling to come to terms with slowing down economy, decorative paints turned out 4.8% growth in volume in the second quarter which was better than other consumer goods sector but much lower than the first quarter when it clocked volume growth of 12.9%. Second quarter’s festive demand was adversely affected by extended Monsoon this time. Despite the vagaries of Monsoon, decorative paint makers were able overcome the hurdles through better product mix. They were also aided by the steady shift in the market share from the unorganized to organized sector.
However composition of sales may not be to the liking of the paint makers as their growth was led by economy segment where realizations are lower. While Berger Paints showed the highest growth at 14%, it was closely followed by Asian Paints at 13%. On the other hand, Kansai Nerolac and Akzo Nobel recorded single digit growth numbers.
Indeed growth didn’t come easily for the pain manufacturers who had to fight it out and make some sacrifices. Asian Paints had to cut the prices of enamels to drive up the growth in volume. On the other hand, Berger Paints had to spend more for carrying higher inventory.
While extended Monsoon affected their festive season demand, floods in many parts of the country too had their impact on the sales. However, paint makers are sure that demand for decorative paints would pick up in the third quarter especially in those areas which were affected by the floods.
Going forward, the strategy of the decorative paint makers is simple: grab as much market share from unorganized sector as possible. Thus, paint makers like Asian Paints and Berger Paints are focusing more and more on economy segment and also indulging in selective price cuts. Also, they are expanding their network to tier 3 and 4 cities where they will get more shelf space.
Future is bright
However, most of the paint makers are confident about the future prospects of the industry due to various reasons. (1) sustained growth in housing stock, short-term slowdown notwithstanding, (2) gradual but continuous shift of kutcha to pucca houses, (3) shortening repainting cycles led by aspirational and rental housing, and (4) unorganized-to-organized shift. After all, Painting remains a fairly affordable and an aspirational home décor solution in India. According to market leaders per capita income growth would determine the pace of premiumization.
Shift from unorganized to organized sector
In the short to medium term the paint manufacturers will enjoy the benefit of shift of market share from unorganized to organized sector. The share of unorganized sector in decorative paints is estimated to be 25%/30% in value/volume terms. Unorganized players are predominantly manufacturing low-priced products. The reduction in GST rate to 18% from 28% (in June 2018) and higher compliance under GST has reduced the price gap between unorganized and organized players’ products. Additionally, organized players are expanding distribution reach and have stepped up focus on economy segment products such as economy emulsions, distempers, putty etc.
An interesting characteristic of the Indian decorative paints industry is the high degree of pricing discipline exercised by the top four players. There seems to be an unwritten law to follow the market leader. Price increases/decreases are usually made by the market leader Asian Paints and followed by the rest of the players. Intense competition through price cutting which we have seen in tiles and MDF is unheard of in Paint industry. Interestingly, the companies have successfully passed on higher raw material (RM) cost to consumers during RM inflation cycles (typically crude-inflation cycle) and managed to retain most of the upside in RM deflation cycles. In a nutshell, gross margin profile of incumbents has improved after every RM up-cycle, with some lag.
It’s the future prospects of decorative paints industry which makes the case very interesting. India’s per capita consumption has increased to about 4 kg in FY2019 from about 2.2 kg in FY2008. Even at about 4 kg, India’s per capita paint consumption is much lower than 12-15 kg in China and the US. In the coming years this gap is likely to narrow down as per capita GDP and per capita consumption expenditure continue to rise. In other words, there is considerable scope for the market to expand which will be a cheerful news for the decorative paint manufacturers.