The paint industry which was aiming to continue its good show of first quarter, received a sort of jolt from Monsoon which was heavy in many parts of the country followed by floods which brought life to a standstill for many days. Paint industry’s main markets, Western and Southern India, received heavy rains and floods this time affecting the routine business. According to the available reports, North region has done well (for decorative paints) while parts of Western/Central/Eastern India were impacted due to adverse monsoons.
Growth in volume not in value
Though the Paint industry achieved double digit growth during the quarter, basing one’s conclusion on volume growth numbers alone may be misleading. Growth in the premium segment was missing, a trend we have been seeing for last few quarters. The manufacturers made up for the lost volume in premium segment by concentrating on economy products at the bottom of the pyramid. For example, Asian Paints’ newly introduced products in emulsions, Tractor Sparc and Ace Sparc, are seeing good growth. Tractor Uno in the economy segment is the largest selling distemper for Asian paints which is also aggressively priced.
Going forward, leading paint manufacturers see tremendous growth opportunity at bottom of the pyramid products. They also expect market share shift from unorganised to organised segment taking place at the bottom of the pyramid. In the coming months one may hope to see many new launches by the leading paint manufacturers in this (emulsion) segment.
Curtailed festive season
One of the greatest disappointments for the Paint dealers was in the form of curtailed festive season. This year Diwali was celebrated much earlier than last year and at the same time Monsoon’s withdrawal was extended to mid October. As a result, festive season for the paint makers was hardly for two weeks. Normally, festive season is looked forward by paint makers to push their products due to the custom of many Indian homes to paint their houses before festival.
Hoping for farm sector revival
Better Monsoon also means better farm output. Increased farm income may lead to higher demand, especially for economy level products, from rural India in the coming months. Even otherwise leading manufacturers have seen faster growth in rural area as compared to urban area in the first half.
Tier 3/4 towns to the fore
Another trend seen in recent months is the higher growth seen in Tier 3/4 towns while Metro cities are showing the signs of stagnating demand. This has forced the paint manufacturers to re-work their distribution strategy and expand their marketing network in Tier 3/4 towns. Further, in these towns it’s easier to get lot of shelf space for sale of economy ranged paint products.
However, dealers in small towns on an average hold larger inventory, say, 30 days of inventory, whereas in cities and larger towns average inventory levels stands at, say, 15 days. Dealers in Large town relatively hold less inventory vis-a-vis counterparts in smaller cities due to better servicing levels and lower lead distance from regional distribution centres. In other words, dealers in smaller towns need relatively larger amount of working capital as compared to dealers in larger cities.
Also, solvent paints require higher stocking up at dealer level as some dark shades (which usually don’t exceed 20% of the total shades available) cannot be tinted in tinting machine.
Poor project business
However, project business from new construction sites has been affected due to tight liquidity conditions in the market. Further, new launches of residential projects have stagnated due to mounting unsold inventories among the leading developers. Though office segment is doing well it cannot compensate for the subdued new launches in residential segment. What is disturbing is the fact that there are no signs of its revival in the near term.
Benign raw material price
Benign raw material price is the only saving grace for the paint manufacturers during the quarter. Prices of almost all the raw materials remained at the same level as in the previous quarter, and in some cases they have gone down slightly, helping the manufacturers to maintain the prices of finished products at the previous quarter level. In fact, there are instances of manufacturers resorting to nominal price cuts to push the sales. For example, Asian Paints took aggregate price cut of 0.4% in few solvent-based products to pass on input cost benefits during the second quarter. The price cut was in addition to the aggregate price cut of 0.4% in the first quarter. Ahead of festive season, the company relatively increased discounts and schemes to the dealers.
Post flood demand anticipated
But paint manufacturers expect some demand from those affected by floods during the Monsoon. However, demand from short-cycle customers (those who paint once every 2 years) is unlikely to be recovered. Demand strength post Diwali would be a key indicator to gauge underlying consumption trends. However, volatile crude price is a matter of concern for the manufacturers as some of the raw materials are crude based and their prices are closely linked to crude oil price. Any increase in raw material price may force the manufacturers to hike the price of finished products which may impact demand to an extent.