Management commentaries by paint makers indicate that demand, which was hurt by demonetization and a messy implementation of the goods and services tax (GST), is set to revive.

Now that the after-effects of GST are waning, paint companies are likely to benefit from a normal monsoon and an increase in rural demand.

That is anticipated to translate into double-digit volume growth in fiscal year 2019 (FY19).

But the most important indicator of rising demand is that paint makers are expanding capacity.

Asian Paints Ltd, the leader in the decorative paints segment, is setting up two large plants. One is a 500,000 kilolitres per annum plant in Visakhapatnam at a capital expenditure (capex) of 1,785 crore. Another is a 600,000 kilolitres per annum capacity plant at Mysuru at a capex of 2,300 crore.

Demand has improved for the paint industry during the second half of FY18, Asian Paints’ management told analysts in a post- March quarter earnings conference call. Further, rural growth was higher than urban growth for the company during the March quarter.

While the first phase of both these plants will be commissioned in FY19, the second phase will be set up and commissioned later based on the demand environment, the management said.

The company’s capex during FY18 was 1,350 crore, out of which 1,100 crore was towards these two mega plants. Asian Paints will incur an additional capex of 1,000 crore in the current fiscal year for completion of phase I.

Berger Paints India Ltd has pegged FY19 capex at around 200 crore. Recently, the company announced the setting up of a plant in the Sandila Industrial area near Lucknow.

Meanwhile, the leader in the industrial paints segment Kansai Nerolac Paints Ltd would incur a capex of 450-500 crore in FY19. The company intends to spend 1,100 crore to increase capacity by nearly 40% in the next two years by adding three greenfield plants in Gujarat, Punjab and Andhra Pradesh.

For this, Kansai Nerolac has already invested 300 crore in FY18 and the remaining of 800 crore investment is likely to be spent evenly in FY19 and FY20. Facilities in Punjab and Andhra Pradesh would cater to the decorative paints segment, while the Gujarat plant would be for industrial coatings, the company’s management told analysts.

Kansai Nerolac has guided for double-digit growth in decorative paints in FY19, but expects volume growth in the automotive coatings vertical to see some moderation.

Also, paint makers are pumping in funds to launch new products and expand dealer networks.

Although volume growth may bounce back in the coming quarters, the risk of further erosion in gross margins remains. Paint companies resorted to price hikes in the months of March and May due to a spike in raw material prices. However, it needs to be seen if these are enough to offset input costs pressures.