Organized paints sector to double production capacity by FY27, CRISIL

The organized paints sector in India is poised for substantial growth, with production capacity expected to double to approximately 7.8 billion litres per annum (blpa) between FY24 and FY27. This expansion is underpinned by significant investments totaling around Rs 19,000 crore, including contributions from new market entrants, according to a recent report by CRISIL.

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India’s organized paints sector is set for remarkable expansion, with production capacity projected to reach approximately 7.8 billion litres per annum (blpa) by FY27, doubling from current levels. This growth is driven by substantial investments amounting to around Rs 19,000 crore, bolstered by the entry of new players into the market, as highlighted in a recent CRISIL report.

CRISIL’s analysis indicates that approximately 2.4 blpa of this new capacity will become operational by FY25. Notably, new entrants into the industry will contribute around 1.3 blpa, primarily focusing on the decorative segment, which constitutes 75-80% of total paint production. Despite this influx, the market is anticipated to grow at an annual rate of 10-15%, consistent with historical trends. However, the substantial new capacities will heighten competition, prompting manufacturers to adopt aggressive pricing strategies to attract customers and utilize their expanded production capabilities. This is especially relevant in the value segment, which generates over half of the sector’s total revenue.

Consequently, the overall revenue growth for the sector is projected to moderate to 7-10% this fiscal year, with operating profitability expected to decrease to 15-17% due to increased marketing expenditures and pressures on pricing. Nonetheless, the capital expenditure (capex) required for this expansion will be managed through a combination of cash flows, debt, and surplus liquidity.

Poonam Upadhyay, Director at CRISIL Ratings, commented, “The volume growth of 10-15% this fiscal will be driven by steady demand from retail and business-to-business segments, including construction, real estate, and automobiles. Rising disposable incomes, a growing preference for quality and branded products, increased home sales, and a predicted recovery in rural demand will support this growth. However, pressure on realizations will partially offset the benefits of higher volume, tempering revenue growth this fiscal.”

In the previous fiscal year, revenue grew by approximately 4%, as manufacturers reduced prices by 4-5% through higher discounts and rebates following a decline in crude-linked input prices. This was coupled with increased promotional spending to combat competition. These factors resulted in a gross margin increase of about 500 basis points, with the operating margin rising by only 300 basis points to approximately 20%, compared to 17% in fiscal 2023.

The report forecasts that the prices of most raw materials, particularly crude-linked derivatives like binders, solvents, and additives, along with titanium dioxide, will remain stable. This stability is expected to maintain gross margins at 40-42% this fiscal. However, operating profitability is likely to moderate to 15-17% from around 20% last fiscal, due to higher advertising and promotional expenditures aimed at expanding retail networks and reinforcing brand recall amidst intensifying competition. Additionally, new entrants may face operational losses in their initial years.

Existing manufacturers are also diversifying their portfolios by introducing new products and expanding into non-paint categories such as adhesives, construction chemicals, and waterproofing products. This strategic expansion necessitates increased investments in capacity, backward integration, research and development, and technology.

Anil More, Associate Director at CRISIL Ratings, noted, “We expect the credit quality of existing manufacturers to remain largely stable despite high capex. They are likely to fund capex through cash surplus and accruals, while new entrants will utilize a mix of debt and fresh equity. Although key debt metrics are expected to moderate, interest coverage and debt/Ebitda ratios for the sample set will remain comfortable at 14-16x and 0.5-0.7x, respectively, in this and the next fiscal, compared to previous peaks of over 40x and less than 0.1x, respectively.”