Decorative paints industry has surprised many because of its splendid growth in the first quarter of the current financial year. This performance has come on the backdrop of poor health of real estate sector and a general belief that the economy is facing slowdown. General elections and labour shortage in the first quarter too did not help the cause of construction sector which was also supposed to be a bad news for the paint manufacturers. Slow start to Monsoon further added to the prevailing pessimism in the market. However, paint manufacturers have achieved double digit growth in the first quarter of the financial year 2019-20 which is commendable under trying circumstances. For example, Asian Paints, the market leader, achieved a sales growth of 19% and volume growth of 17-18% during the first quarter. Kansai Nerolac the second largest paint manufacturer, also registered double digit growth in decorative paints segment while automotive segment saw double digit decline in revenue growth. Growth numbers of the decorative paints segment is also commendable in the backdrop of slower growth seen across most of the consumption segments.
Mass portfolio sees higher growth
However, composition of revenue throws some interesting facts. Overall growth in the decorative segment is partly due to fast paced growth in mass portfolio like putty, distempers and economy emulsions. In fact, these products were hitherto dominated by unorganised sector and with the playing field becoming almost even between organised and unorganised segments post introduction of GST, there has been a significant shift in the market share in these products towards organised sector.
Shifting focus to tier 2/3 cities
Also, in recent years, leading paint makers have shifted their focus (through expansion of dealer network) in tier 2 & 3 cities and also to rural India. Further, in major cities, including Metros, they are focusing more in suburbs where they find rate of growth much faster. Till now, this strategy has paid them rich dividends as is evident in the growth in their sales and volume.
Spreading wings to adjacent fields
One of the trends seen in recent years is the paint manufacturing companies entering the business of other related fields, viz., adhesives and construction chemicals business. Asian Paints, Berger Paints and Akzo Nobel – all have entered this business to leverage their vast distribution network to market these related products. Kansai Nerolac is the new entrant in this field. Kansai has entered the Adhesives (Nerofix brand under JV), Construction chemicals (through acquisition of Perma Constructions), coil coatings, premium wood coatings and functional powder coatings. Decision to enter the adjacent markets is the long term strategy of the paint companies as it provides head room to grow in the long term.
Unorganised sector losing market share
Despite the recent much feared slowdown, decorative paint industry is one of the rare segments of the economy who are optimistic about their future prospects – both in short term as well in long term. Organised sector manufacturers have every reason to be happy as tides are turning their favour with the government’s decision to bring down the GST rate to 18% from earlier level of 28%. This has substantially narrowed down the price gap between the organised and unorganised sector. Narrowing down of price gap between the two segments has helped the organised sector manufacturers to eat into the market share of unorganised sector manufacturers. Going forward, the unorganised sector manufacturers may find the going tougher and may find it hard to maintain their market share.
Stable raw material price
Meanwhile, raw material price has remained stable in recent months which in turn has helped the manufacturers to continue their business without hiking the prices. Also, relatively stable rupee value after high volatility in the first half of previous finance year has brought much relief to the paint manufacturers. Analysts predict further softening of the crude oil price in the coming months which may bring down the paint industry’s raw material cost as most of the raw materials are crude oil derivatives.
Decorative paint segment is expected to continue its splendid show in the second quarter too as the initial fear of poor Monsoon is waning and according to IMD forecast August and September will have normal Monsoon rainfall. Also, in the later part of the first two months of Monsoon season deficit has narrowed down considerably much to the delight of rural India. Pick up in the rural demand may help to sustain this growth momentum in the remaining part of the year or at least till the festive season.