The entry of new players has sparked a surge in capital expenditure (capex) and has led to increased competition within the sector
After registering a robust Compounded Annual Growth Rate (CAGR) of 14 per cent to 15 per cent over the five years (Financial Year 2019 to FY23), the revenue growth of long-entrenched entities in the paints sector moderated to 4 per cent in FY24. A report has revealed that revenue in second half (H2) of FY25 is expected to witness a rebound on year-on-year (YoY) basis on the back of benefits arising from the price hike taken in July-August 2024.
As per the report by CareEdge Ratings, paints companies’ operating profitability margin, which reduced to around 16 per cent in H1FY25 from around 20 per cent in FY24, is expected to further moderate to around 14 per cent by the next fiscal (FY26).
The entry of new players has sparked a surge in capital expenditure (capex) and has led to increased competition within the sector. Players are expanding their capacities, growing their dealer network, ramping up sales teams and accelerating ad spending in a bid to counter competition and secure market share. The CareEdge Ratings expects a shift in cost structures, with ad and sales promotion spending of players likely to increase by 100 basis points (bps) – 200 bps (as a percentage of revenue) in the medium term.
“Demand for decorative paint, accounting for 70 per cent-75 per cent of paint demand, is primarily driven by new construction (20 per cent) and repainting (80 per cent). The repainting segment is further boosted by population growth, a shorter repainting cycle, increased rental homes, and rising incomes. The real estate sector is expected to stay strong in FY25 and FY26 due to project completions and government spending on housing and infrastructure,” highlighted the report.
As far as the share of organised players are concerned, it is expected to grow to around 80 per cent in the medium terms with new capacities coming online. The capacity of the long-entrenched players is pegged at around 4.3 billion litre per annum (LPA) as of end of FY24. The report added that prior to the goods and service tax (GST) application on paints, organised players had an estimated market share of about 65 per cent in the domestic paint sector, which has now increased to about 75 per cent.
“Nonetheless, the sector is poised to grow at 8 per cent to 10 per cent with a somewhat lower operating margin of around 14 per cent in FY26 as compared to the average of around 18 per cent in the last five years, reinforced by urbanisation and increasing affluence, rising disposable income, shortening of the re-painting cycle, demand recovery from semi-urban and rural areas, affordable housing projects, spending on large scale infrastructure projects and demand from automobiles sector,” said Richa Bagaria, Associate Director at CareEdge Ratings.
The credit risk profile of established industry players remains robust, with an overall gearing ratio of around 0.1 times and ample surplus liquidity accumulated over the years through healthy cashflows. As per the report, new players’ capex is primarily funded through a mix of debt and equity infusion from large conglomerates with deep pockets.
