Low-cost products are expected to lead to a near-term recovery in volumes for paint manufacturers

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MUMBAI: The June quarter results for Indian paint companies were boring. But while overall volumes have fallen sharply, a gradual improvement in sales of budget products is a silver lining. Sales of emulsions, tempera, putty, waterproofers and primers have picked up since July, according to recent channel checks with paint dealers. Post-profit management comments also indicate a similar trend, with small towns and cities being the main drivers of consumption.

A normal monsoon, an ongoing string of festivals and the gradual easing of foreclosure restrictions are expected to contribute to a recovery in paint sales in the economy segment.

“In recent times, the industry has witnessed a gradual shift in consumer preference from traditional whitewash to better quality ‘value for money’ / ‘bottom of the pyramid’ paints, especially in Tier II cities / III / IV. Growth prospects for these products (mainly putty, tempera, low-end enamels) are strong in the near term for the listed paint majors, ”analysts at Nirmal Bang Securities Ltd said in a report dated September 1st.

In recent years, rural households have also been sensitized to apply a bottom / bottom coat before applying a final coat of paint. This has boosted the demand for lower end products such as putty, primer and tempera.

According to ICICI Securities Ltd, the trade margins for primers and waterproofing are around 5%, which is similar to paints. Since these products are considered essential before painting, negligible promotions are made for them, said in a report dated August 30. According to estimates from the National Brokerage Company, paint companies generate 25-30% of volumes from primers.

Simply put, higher sales of low-end products tend to drive margins without too much ad spend. Second, it contributes to a deeper penetration in small towns and cities. In addition, listed companies are said to be aggressively pushing sales of these products to gain market share from unorganized players in this segment. Analysts say that, especially after the introduction of the goods and services tax in 2017, regional brands are losing market share. In addition, the current coronavirus crisis is expected to accelerate this shift in demand in favor of large paint manufacturers. Channel checks show listed companies quickly reestablished supply chains and logistics against regional brands with the easing of restrictions.

“The paint industry (with a market size of 50,000 crore as on FY20 including unorganized market) could decrease in FY21 as small businesses will struggle to operate and sell under COVID-19 security protocols. In addition, small businesses have little leeway to manage fixed costs and their survival will depend on cash flow levels and government support, ”analysts at Elara Capital India Pvt said. Ltd in a report dated August 30.

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