Aresurgence of growth in the residential real estate and automobile markets augurs well for their suppliers. Paint companies top the list for several reasons. A revival in production of cars and construction of houses means higher sales for paint manufacturers. More importantly, the return of consumer confidence as the outlook on jobs and incomes improves leads to a big improvement in the market for repainting homes. This business is the one that delivers on margins for paint companies. And last, the inputs used by paint companies have actually become cheaper compared with the year-ago period, which is resulting in very high margin levels for the firms.
Decorative paints contribute nearly three-fourths of revenue for the Rs15,000 crore paint industry, with industrial paints contributing the rest. In the December quarter, Asian Paints Ltd’s domestic paint sales rose by 26.5%, Kansai Nerolac Paints Ltd’s sales grew by 33%, while Berger Paints Ltd’s sales rose by 18.7%. ICI India Ltd’s sales grew a more modest 4.5%. The December quarter is typically a good one for paint companies due to the festival season. But part of the sales growth is also due to a low base effect, since both the auto and real estate markets slowed last year, and the excise reduction as part of the fiscal stimulus package.
Graphics by Naveen Kumar/Mint
Nevertheless, profitability has improved, too, as the price hikes that paint companies effected in previous years have widened their margins, together with sharply lower raw material prices. Asian Paints’ material costs (stand-alone) grew by just 12% while sales grew at twice the rate. But its management cautioned investors recently that it does not expect margins to remain at these levels, as material costs are inching up. However, the pace of the increase does not seem threatening yet. But the real kicker for paint companies is demand growth, which is on the upswing. All the leading paint companies are investing in new capacities in anticipation. If the revival in economic growth is sustained, demand for cars and homes will be robust and rising disposable incomes will keep demand in the repainting market high. At the moment, all the conditions are in favour of paint companies.
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