Outlook of Decorative Paints Industry Post Pandemic.

Decorative paints industry to some extent is an underpenetrated industry and there is a scope for moderate to robust long-term growth. The common belief that the industry is underpenetrated is based on the much higher per-capita consumption in developed markets such as the US, where per-capita paint consumption is over 20 kg against 3 kg in India. This data gives an impression of India being hugely under-penetrated which is not totally true. USA being a developed country has a higher proportion of industrial paints which account for 40% of the volume of its paint industry, hence, per-capita decorative paints consumption is just 12 kg in USA (still 4 times bigger than India). Now, we need to understand why such a big gap. Firstly, the per-capita household size in the US is 2.5 as against 4.8 for India. Lower household size means more houses. Secondly, the average size of a house in the US is 1740sqft, which is more than 3x of India. Both the factors result in the paintable per-capita area in USA being 7x of that in India.

Growth Drivers

Increase in no. of Houses: There is a shortage of 45m pucca houses (permanent accommodation) in India as of last year. This will get gradually bridged over the next several years. No. of household will further increase due to, a) increase in population (CAGR 0.9%) and, b) reduction in the no. of family members from 4.8 to 4.3 by 2030,as families become more nuclear, no. of houses increases. Over the next ten years India will cumulatively build over 108m houses, bolstering the no. of paintable houses from 227m to 335m in 2030.

Increase in Dwelling Area per House: New dwelling unit size will increase from 550sqft to 700 sqft by 2030, a CAGR of 2.5%. Existing dwelling units would also increase in size by adding new rooms. Overall, dwelling unit size to steadily increase over the next ten years.

Reducing Repainting Cycle: Currently, repainting cycle is 20-25% more than the optimum level and contraction (Distemper from 2/3 years to 2 years, interior emulsion and enamel from 5/6 years to 4 years and exterior paints from 9/10 years to 7 years) in this will result in growth for the industry.

Kuchcha to PuccaHouse Conversion. Kuchchahouse (made from temporary materials such as un-brunt brick, mud, bamboo, reed, thatch etc.) to Pucca house (made from concrete materials such as cement, burnt brick, stones etc.) conversion. India has witnessed a 4-fold surge in Pucca house number in last 30 years, 56m in 1989 to 227m in 2019, a CAGR of 4.75%. This would like to continue in next ten years.

Non-paint to Paint Conversion: Use of non-paint coatings, such as whitewashing (lime) will convert into paint coating. Paint demand will further grow as people convert from stone/timber houses to cement houses.

Over and above the growth drivers mentioned above, there are two more factors which will further add into value growth:

Firstly, Price Increase: With a CAGR of 4%, ASP (Average Selling Price) would like to increase from little over Rs 150 to Rs 225 by FY30. Out of this, 3% would be on account of pricing and 1% on account of premiumization.

Secondly, Premiumization: Within premium emulsion category, per-liter price ranging from around Rs 250 to well over Rs 500. While, the coverage (sq-ft/ltr) is not too different, however, life at the lower end is three years and the higher end isfive years. As consumers seek more benefits such as stronger anti-fungal and anti-bacterial properties, smoother finish, higher stain resistance, better wash ability etc., they up-trade to higher price points. Conversion from distemper to popular emulsion is not a premiumization at least not for sales due to higher coverage of emulsion vis-à-vis distemper as well as the longer repainting cycle of emulsion, though it may be a driver for profit margins. However, premiumization from entry-level emulsion to premium emulsion is certainly add to revenue.

Industry Growth Estimates & Forecast

Decorative paints industry currently stands at Rs 435 billion. Over the last 20 years decorative paints industry has been clocking a CAGR of around 13%. Covid-19 pandemic will certainly bring future CAGR down with a negative growth of anything between 5 to 15% in FY21. Effectively, in next ten years, the decorative segment would like to grow at a CAGR of10 to 11%. However, estimated growth in FY22 is as high as 21% for the top four companies.

Sales: Sales growth is expected to decline for all four players (Asian, Berger, Nerolac and Akzo) in FY21 with 1QFY21 sales declining by more than 40% for each player. As Covid situation normalizes, it is expected a very strong recovery with over 21% in FY22 followed by a normal growth from FY23 onwards.

Gross Profit: Gross margin has a strong correlation with crude oil and titanium di-oxide prices. It is expected that the input cost to remain friendly in FY21, helping gross margin expansion for all players.

EBITDA: The benefit of input costs, lower ad-spends and tighter cost control should help offset the impact of negative operating margin in FY21. Overall in short term, EBITDA CAGR would likely be around 11%.

Net Profit: Leverage in depreciation costs would help profits grow slightly ahead of EBITDA for all companies and accordingly in short term PAT CAGR would likely to be around 12%.

Key Players & Market Share

The top four paints companies CAGR have been higher than the industry over the last ten years. In the past five years, market share of the top paint players has increased due to:

- The Implementation of GST in July 2017 and subsequent lowering of the tax rate from 28 to 18% in 2018, have created a level playing field between the organized and the unorganized players.

- Increased Penetration in rural areas has enabled organized companies to grow at the cost of unorganized players.

- Focus on Low End Emulsions as well as primers by top companies has left unorganized players with a weak USP.

- Market share of the top four company currently at around 75% and this can climb up in short term, however, further increase in market share going forward would be challenging, as:

- There are few organized players such as Indigo Paints, Nippon Paints and JSW Paints are set for good growth.

- Watch-out for Decorazzi Paints, with a differentiated business model, Decorazzi is aiming for an exceptional growth.

- There will always be handful of unorganized players in any industry and as their share drops to single digit, there is not much scope left for topplayers to gain.

Last Word

The decorative paints industry can achieve a CAGR of around 11% over the next 10 years, provided the economy is stable and growing at 5-6% year-on-year in real terms and input cost inflation is modest enough to control a price increase within 3% per annum.

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