The paint industry, long an oligopolistic stronghold with high entry barriers, is undergoing a shift. The entry of new players and evolving market dynamics have intensified competition, leaving established players scrambling to defend their turf.
To retain or expand market share, both incumbents and new entrants are ramping up production capacities, expanding dealer networks, and and are set to boost their advertising spends. However, this aggressive push is straining profitability, especially with disruptive pricing strategies from entrants like Birla Opus threatening earnings growth. Companies now face a tough choice: prioritize market share or protect margins.
Against this backdrop, the tumbling rupee presents an additional challenge, intensifying cost pressures for paint companies reliant on imported raw materials. The Indian currency recently breached the ₹85 mark against the US dollar, reaching an all-time low.
“Indian paint companies import around one-third of their raw material needs, including crude oil derivatives like titanium dioxide and resins making them vulnerable to higher raw material cost due to a weaker rupee and increasing crude oil prices,” said Poonam Upadhyay, director, Crisil Ratings.
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With the rupee expected to remain range-bound in the near term, passing on these costs to consumers in an increasingly competitive market will be difficult. That, along with the anticipated increase in ad spends could moderate the sector’s operating margin to around 15-17% in FY25 from 20% in FY24, according to Upadhyay.
Price adjustments and demand
After a series of price cuts, it was only in the September quarter (Q2FY25) that paint companies raised prices by 1-2%. These cuts were aimed at partially passing on softening raw material costs and adjusting the product mix to accommodate a growing share of lower-value products. However, this weighed on revenue growth.
Expectations now are that the worst of the pricing pressures—which created a wide value-volume gap—is behind the sector. But if these hopes are dashed, primarily due to a weakening rupee and rising raw material costs, further earnings downgrades appear inevitable.
Meanwhile, decorative paint demand remains tepid, largely weighed down by muted urban consumption. In a recent interaction with Motilal Oswal Financial Services, the managements of Berger Paints (India) and Indigo Paints indicated that companies are likely to face similar growth pressures in Q3FY25 as they did in Q2FY25.
“Revenue growth is expected to be in the low single digits, with mid-single-digit volume growth. Ebitda margins are expected to remain weak on a year-on-year basis due to gross margin pressure and negative operating leverage,” added the Motilal Oswal report dated 23 December.
New players such as Aditya Birla-led Grasim Industries, JK Cement, Pidilite Industries, and JSW Paints have expanded into the decorative paints segment. Armed with deep pockets, these companies are executing capacity expansions. Going by the estimates of Care Ratings, existing and new players have planned a massive capex entailing capacity addition of about 70% over the next three to four years, out of which the majority is expected to become operational in FY25 and FY26.
The long-entrenched players’ combined capacity of 4.3 billion litres per annum (blpa) as of FY24-end has already grown by nearly 1 blpa in FY25, said the Care Ratings report dated 27 December.
The intensified competition seems to have taken a toll on valuations. Shares of Asian Paints and Berger Paints hit 52-week lows in December, falling 33% and 26% in 2024, respectively. They currently trade at FY26 price-to-earnings multiples of 43x and 39x, according to Bloomberg data.
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While the sector’s credit profiles remain stable despite the high capex intensity, lower valuations reflect the mounting pressures. For investors, these reduced multiples may not yet offer compelling entry points, given the challenges the sector continues to face.
