In terms of volume, just concluded quarter was a good one for the decorative paints manufacturers as they were able to register double-digit volume growth. However, composition of sales does not bring much cheer to the paint manufacturers as much of the growth was witnessed at the lower end of product portfolio where margins are less as compared to premium products. Paint manufacturers have been seeing spurt in the sale volume in putty and distemper and emulsion while premium products witnessing lesser /stagnant growth. These lower segment items were earlier predominantly manufactured in the informal sector and post introduction of GST, there has been slow but steady shift towards organised sector. The pace of shift in the market share has slightly picked up since last year when the government reduced the GST on paints thus narrowing the price difference between organised and unorganised sector. But, according to Kansai Nerolac, informal sector hasn’t been wiped out yet as was expected when GST was introduced. Surely they are losing market share.
Growth shifts to smaller cities/towns
Interestingly, for paint manufacturers Metro and Tier I cities are no longer growth drivers. In fact, decorative paints were able to register healthy growth because of demand from Tier II & III cities. Though demand is almost evenly distributed all over the country, demand from East was slightly higher than rest of the regions.
Home improvement saves the day
Our interaction with leading paint manufacturers has also revealed that slowdown in construction sector is affecting their sales. According to them slowdown has continued in 4thquarter too and situation is unlikely to improve in near future due to general elections. However, the saving grace was home improvement market which has helped to keep the growth scale ticking.
Overall, financial year 2019 was difficult one due to challenging domestic economic environment and volatile rupee value and crude oil prices and the geo-political tensions given a potential trade war. Liquidity crunch due to NBFC crisis also added to the problems as many dealers are dependent on these NBFC for their finance requirements. General elections and unpredictable Monsoon ensure that situation would continue at least in the first half of this financial year.
Increased dealer incentives
Due to tight market conditions and intense competition, paint manufacturers couldn’t resort to price increase in the 4thquarter though there were enough provocations to resort to a hike. Instead some paint manufacturers resorted to increased incentives and discounts to dealers to maintain growth rate. For example, Asian Paints increased incentives to dealers in view of intensifying competition and tight market conditions. On the other hand, Kansai Nerolac decided to cut down rebates offered to dealers as a result of which the company saw moderate growth in its sales volume.
Increasing labour cost
Another factor which is going against the paint manufacturers is the growing labour cost on which the paint industry has no control. Earlier labour to material cost ratio was 60:40 which has gone up to 70:30 now. Thus, end consumers’ cost of painting the house has gone up though the cost of paints has remained the same. Earlier, the average cost to paint for a middle-income customer with a two bedroom house was around Rs30,000 (material + labour cost). Now this has gone up to Rs 40,000 due to increase in labour cost. According to paint manufacturers increasing labour cost may act as deterrent to reducing repainting cycle.
Increased ad spend
Increased competition has forced the industry to increase its media spend and paint manufacturers are one of the leading spenders in this season’s IPL. Nippon Paint has been aggressive in IPL and this year too not an exception. Asian Paints deliberately reduced its media spends in the 4th quarter to remain aggressive during IPL.
Entry of JSW
In one of the interesting developments JSW, owned by steel magnate Sajjan Jindal, entered the paint business with a path-breaking offer ‘Any Colour at One Price’ in a product, for the first time in India. However, existing players are not worried by the new development. According to them, “retailers anyway try to sell a large part of portfolio at uniform price to the customers, to make it simple for the customers.” In paint business dealers’ network is very important to make some headway in gaining market share and that won’t happen overnight.
Wood coating business
Wood coating business is also witnessing some interesting developments. Rs 3,500 crore wood coating business has been dominated by Asian Paints for the last three decades. However, now many new players are entering the market thus intensifying the competition. Asian Paints, as a strategy, has decided to concentrate on the premium end of the category for growth. According to the company, people are elevating to wood finish from French finish (sprit), which is fuelling growth in the premium end of this category.
According to paint manufacturers, in the short term, growth is expected to remain low to moderate, due to global scenario, inflationary environment and probable below normal monsoon. However, long term growth story is still intact and revival of realty sector is one of the positives the paint makers are desperately waiting for.