Mumbai: An extended monsoon will add to the woes of decorative paint manufacturers who have already seen their sales slow this year as higher prices and rising interest rates have cooled demand for new homes.

“The months of September and October account for close to 40% of the overall sales of the decorative paint manufacturers. With rain still falling, the consumer is not doing any repainting work, which will lead to a drop of 10-20% in business," said Percy Jijina, director of decorative paints at Jotun India Pvt. Ltd.

Paint cans from the Dulux Paints company on display. Photo: Bloomberg

“We have accordingly factored a 170-200 basis points moderation in volume growth for paints," said a 15 September report by Emkay Global Financial Services Ltd. One basis point is one-hundredth of a percentage point.

Over the past year, demand for decorative paints has slowed as companies including Asian Paints Ltd, AkzoNobel India Ltd, the owner of the Dulux brand, Kansai Nerolac Paints and Berger Paints India Ltd raised prices because of a rise in raw material costs. Titanium dioxide, mineral turpentine oil and other crude oil-linked raw materials are used by the paint industry. Such raw materials, “pigments, extenders and minerals account for 36% of total input costs and 17% of sales for Asian Paints," said the Emkay Global Financial Services report.

“The industry has taken about 8% price hike year-to-date on the back of 14% price hike in fiscal 2011," Manoj Menon and Amrita Basu, analysts at Kotak Institutional Equities Research, said in a 29 September report.

Companies are also expected to be affected by the weakening of the rupee against the dollar and their ability to raise prices further as demand drops, affecting margins. “AkzoNobel expects margins to decline by around 2%, if input cost does not correct," said the Kotak report cited earlier.

Rising interest rates and funding constraints have also delayed completion of realestate projects, hurting demand. “Painting demand from new homes will be impacted four to five months from now," said Singh.

The Reserve Bank of India has increased interest rates 12 times in the past 19 months in an effort to curb inflation.

To prevent consumers from buying cheaper products, AkzoNobel has broadened its portfolio to cater to the mid- and mass-segment consumers. In September, AkzoNobel introduced ICI Magik, targeted at the mass market, and earlier in the year it started selling Promise, a mid-tier exterior paint.

The competition in the mid and mass market is increasing with new companies entering the segment and companies such as Jotun, Nippon Paint (India) Pvt. Ltd and Sherwin Williams Paints India Ltd extending their geographical presence. Moreover, mid-market companies, such as Berger, have also stepped up introduction of new products with the addition of two new exterior and interior emulsions paints to its portfolio during the year.

“The industry is getting more competitive," said Singh, who has increased his advertising spends for the year.

For the quarter ended September, Asian Paints, Berger Paints and Kansai Nerolac underperformed the BSE FMCG Index.

Asian Paints’ stock fell 0.37% in the three-month period, Berger Paints dropped 4.3% and Kansai Nerolac was down 5.19%, while the BSE FMCG Index gained 0.75% in the same period. AkzoNobel’s stock rose 8.1% during the quarter.