- Advertisement -
[ad_1]
MUMBAI: The organized paints sector in India is on the cusp of significant expansion, with production capacity expected to nearly double to about 7.8 billion litres per annum (blpa) by fiscal 2027, as per CRISIL report.
According to a press release, this surge will be fuelled by investments amounting to around Rs 19,000 crore, including significant contributions from a new major player entering the market.
However, heightened competition and increased marketing expenses are likely to impact profitability in the sector.
A substantial portion of the new capacity, approximately 2.4 blpa, is anticipated to become operational within the current fiscal year, with the new entrant alone adding 1.3 blpa.
This expansion is predominantly within the decorative segment, which represents 75-80 per cent of total production.
The sector is poised to continue its healthy volume growth trajectory of 10-15 per cent annually, consistent with past trends.
However, the influx of new capacities is expected to intensify competition for market share.
This increased competition is likely to drive manufacturers to adopt aggressive pricing strategies to attract customers and maximize the utilization of their expanded capacities, particularly in the value segment, which accounts for over half of the total revenue.
Consequently, overall revenue growth is forecasted to moderate to 7-10 per cent this fiscal year.
Moreover, operating profitability is projected to decline to 15-17 per cent, influenced by increased marketing expenditures and pressure on product realizations.
Despite these challenges, capital expenditure (capex) will be managed through a combination of cash flows, debt, and surplus liquidity, ensuring that the sector can sustain its growth ambitions.
The credit profiles of existing manufacturers are expected to remain stable due to their robust financial health, characterized by nearly debt-free balance sheets and substantial liquidity reserves, equivalent to about one-fourth of their net worth.
This financial stability will enable them to weather the competitive pressures.
A study of six firms, which account for roughly 90 per cent of the organized sector’s gross sales of approximately Rs 70,000 crore, supports this optimistic outlook.
Poonam Upadhyay, Director of CRISIL Ratings, remarked, “The projected volume growth of 10-15 per cent this fiscal will be driven by sustained demand from both retail and business-to-business segments, catering to sectors such as construction, real estate, and automobiles.”
He added, “The increase in disposable incomes, consumer preference for quality and branded products, rising home sales, and an anticipated recovery in rural demand will all contribute positively. Nevertheless, pressure on realizations will partially offset the advantages of higher volume, moderating revenue growth this fiscal.”
In the previous fiscal year, the paint sector experienced a modest revenue growth of approximately 4 per cent.
This was due to manufacturers reducing prices by 4-5 per cent through increased discounts and rebates as crude-linked input prices softened.
To combat competition, manufacturers also ramped up promotional spending.
Consequently, while the gross margin improved by around 500 basis points, the operating margin increased by only 300 basis points to about 20 per cent, up from 17.0 per cent in fiscal 2023.
Prices of key raw materials, particularly those linked to crude oil, such as binders, solvents, and additives, as well as titanium dioxide, are expected to remain stable, which should help maintain gross margins in the 40-42 per cent range this fiscal year.
However, the operating profitability is likely to moderate to 15-17 per cent, driven by higher advertising and promotional expenses aimed at supporting retail network expansion and bolstering brand recognition amid rising competition.
Additionally, new entrants are expected to incur operational losses during their initial years.
To maintain their competitive edge and broaden their product range, existing manufacturers are diversifying into non-paint categories such as adhesives, construction chemicals, and waterproofing products.
Consequently, investments in capacity expansion, backward integration, research and development, and technology have been increasing.
Anil More, Associate Director of CRISIL Ratings, commented, “We expect the credit quality of existing manufacturers to remain largely stable despite significant capex. They are likely to finance capex through cash surplus and accruals, while new entrants will rely on a mix of debt and fresh equity.”
He added, “Although key debt metrics are expected to moderate, the interest coverage and debt/Ebitda ratios for the sample set will remain comfortable at 14-16x and 0.5-0.7x, respectively, for this and the next fiscal, compared to previous peaks of over 40x and less than 0.1x, respectively.”
Key risk factors that will require close monitoring include the impact of volatile crude oil prices on raw material costs, currency fluctuations, an anticipated recovery in rural demand, and an unexpected surge in competitive intensity as new capacities come online.
According to a press release, this surge will be fuelled by investments amounting to around Rs 19,000 crore, including significant contributions from a new major player entering the market.
However, heightened competition and increased marketing expenses are likely to impact profitability in the sector.
A substantial portion of the new capacity, approximately 2.4 blpa, is anticipated to become operational within the current fiscal year, with the new entrant alone adding 1.3 blpa.
This expansion is predominantly within the decorative segment, which represents 75-80 per cent of total production.
The sector is poised to continue its healthy volume growth trajectory of 10-15 per cent annually, consistent with past trends.
However, the influx of new capacities is expected to intensify competition for market share.
This increased competition is likely to drive manufacturers to adopt aggressive pricing strategies to attract customers and maximize the utilization of their expanded capacities, particularly in the value segment, which accounts for over half of the total revenue.
Consequently, overall revenue growth is forecasted to moderate to 7-10 per cent this fiscal year.
Moreover, operating profitability is projected to decline to 15-17 per cent, influenced by increased marketing expenditures and pressure on product realizations.
Despite these challenges, capital expenditure (capex) will be managed through a combination of cash flows, debt, and surplus liquidity, ensuring that the sector can sustain its growth ambitions.
The credit profiles of existing manufacturers are expected to remain stable due to their robust financial health, characterized by nearly debt-free balance sheets and substantial liquidity reserves, equivalent to about one-fourth of their net worth.
This financial stability will enable them to weather the competitive pressures.
A study of six firms, which account for roughly 90 per cent of the organized sector’s gross sales of approximately Rs 70,000 crore, supports this optimistic outlook.
Poonam Upadhyay, Director of CRISIL Ratings, remarked, “The projected volume growth of 10-15 per cent this fiscal will be driven by sustained demand from both retail and business-to-business segments, catering to sectors such as construction, real estate, and automobiles.”
He added, “The increase in disposable incomes, consumer preference for quality and branded products, rising home sales, and an anticipated recovery in rural demand will all contribute positively. Nevertheless, pressure on realizations will partially offset the advantages of higher volume, moderating revenue growth this fiscal.”
In the previous fiscal year, the paint sector experienced a modest revenue growth of approximately 4 per cent.
This was due to manufacturers reducing prices by 4-5 per cent through increased discounts and rebates as crude-linked input prices softened.
To combat competition, manufacturers also ramped up promotional spending.
Consequently, while the gross margin improved by around 500 basis points, the operating margin increased by only 300 basis points to about 20 per cent, up from 17.0 per cent in fiscal 2023.
Prices of key raw materials, particularly those linked to crude oil, such as binders, solvents, and additives, as well as titanium dioxide, are expected to remain stable, which should help maintain gross margins in the 40-42 per cent range this fiscal year.
However, the operating profitability is likely to moderate to 15-17 per cent, driven by higher advertising and promotional expenses aimed at supporting retail network expansion and bolstering brand recognition amid rising competition.
Additionally, new entrants are expected to incur operational losses during their initial years.
To maintain their competitive edge and broaden their product range, existing manufacturers are diversifying into non-paint categories such as adhesives, construction chemicals, and waterproofing products.
Consequently, investments in capacity expansion, backward integration, research and development, and technology have been increasing.
Anil More, Associate Director of CRISIL Ratings, commented, “We expect the credit quality of existing manufacturers to remain largely stable despite significant capex. They are likely to finance capex through cash surplus and accruals, while new entrants will rely on a mix of debt and fresh equity.”
He added, “Although key debt metrics are expected to moderate, the interest coverage and debt/Ebitda ratios for the sample set will remain comfortable at 14-16x and 0.5-0.7x, respectively, for this and the next fiscal, compared to previous peaks of over 40x and less than 0.1x, respectively.”
Key risk factors that will require close monitoring include the impact of volatile crude oil prices on raw material costs, currency fluctuations, an anticipated recovery in rural demand, and an unexpected surge in competitive intensity as new capacities come online.
[ad_2]
Source link
