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Expectations are that a normal monsoon, a slew of festivals going ahead, and the gradual easing of lockdown restrictions will aid a recovery in paint sales in the economy segment. (Photo: PTI) (PTI)
Expectations are that a normal monsoon, a slew of festivals going ahead, and the gradual easing of lockdown restrictions will aid a recovery in paint sales in the economy segment. (Photo: PTI) (PTI)

Economy products to lead near-term recovery in volumes for paint makers

Awareness in rural households about using an undercoat has boosted demand for low-end products

June quarter earnings of paint producers were dull. But while overall volumes fell sharply, the gradual improvement in sales of economy products is a silver lining. Sales of emulsions, distempers, putty, water-proofing and primers has picked up since July, recent channel checks with paint dealers show. Post-earnings, management commentaries also indicate a similar trend, with smaller cities and towns being the key consumption drivers. Expectations are that a normal monsoon, the festive season and the gradual easing of lockdown curbs will aid a recovery in paint sales in the economy segment.

“In recent times, the industry has been witnessing a gradual shift in consumer’s preference from the traditional whitewash to better quality ‘value for money’/’bottom of pyramid’ paints, especially in the tier II/III/IV cities. Growth prospect for these products (mainly putty, distemper, lower end enamels) is strong in the near term for the listed paint majors," Nirmal Bang Securities Ltd analysts said in a report dated 1 September.

Geographical spread
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Geographical spread

In recent years, awareness among rural households about applying lower or undercoat before applying a final coat of paint has increased. This has boosted demand for low-end products.

According to ICICI Securities Ltd, trade margins in primers and waterproofing are around 5%, which is similar to paints. Since these products are considered as essentials before painting, negligible promotions are done for them, it said in a report on 30 August. Going by the domestic broking firm’s estimates, paint companies generate 25-30% of volumes from primers.

Simply put, higher sales of low-end products tend to aid margins without much advertising spend. Besides, it helps in deeper penetration into smaller cities and towns. Also, listed companies are said to be aggressively pushing sales of these products to gain market share from unorganized players. Analysts said, especially after the roll out of goods and services tax in 2017, regional brands have been losing market share. Further, the covid crisis is expected to accelerate the demand shift in favour of large paint manufacturers. Channel checks show that listed companies restored supply chains and logistics faster compared to regional brands as restrictions eased.

“The paints industry (with a market size of 50,000 crore as on FY20, including the unorganized market) may shrink in FY21, as smaller companies will find it difficult to operate and sell under covid-19 safety protocols. Also, small firms have little cushion to manage fixed cost and their survival will depend on cash levels and government support," Elara Capital India Pvt. Ltd analysts said in a report on 30 August.

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