The paint industry is divided into two segments for the purpose of reporting their revenues, Decorative and Industrial. Decorative Paints segment caters to the retail consumers and Industrial Paints segment caters to the corporate customers. Asian Paints is the market leader in the decorative paints segment while Kansai Nerolac is the market leader in the industrial paints segment of the paint industry in India.
Decorative paints account for over 75% of the overall paint market in India. Demand for decorative paints arises mainly from the households in the rural and urban areas. Demand in the festive season is significant, as compared to other periods. Decorative segment is price sensitive and is a higher margin business as compared to industrial segment. User industries for industrial paints include automobiles engineering and consumer durables.
Asian Paints, Kansai Nerolac and Berger Paints have reported revenue growth in the range of 11% to 16%. Akzo Nobel India has delivered poor growth of 3% in revenues on a year on year basis. The net profit for Akzo Nobel India and Berger Paints has declined while that for Asian Paints and Kansai Nerolac have increased in the same time period. Asian Paints was the only company that has reported higher double-digit growth in the net profit on a year on year basis.
The decorative paint business in India registered high single digit volume growth in Q2FY18. Kansai Nerolac reported double digit volume growth due to the decorative paint segment of the business. Most of the companies have witnessed recovery from the impact of GST during the month of September 2017 due to restocking of inventories while the Automotive coating (OEM) & general industrial segment has witnessed subdued demand during Q2FY18. The implementation of the GST had affected the consumption based paint industry as a significant amount of destocking was witnessed in the first and second quarter of FY 2017-18 due to uncertainty.
Most of the Paint companies have seen drastic fall in the net profit margins and EBITDA margins on a year on year basis. Raw material prices continue to spiral upwards as seen in the recent months and a sustained rise can hurt profitability further. The paints sector is raw material intensive, with over 300 raw materials (30% petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the industry benefits from softening crude prices.
However, crude oil price has continued to rise from a low of USD 44 per barrel in the month of June 2017 to the current price of USD 63 per barrel in the beginning of December 2017. Due to the dynamics playing out in global demand and supply of crude oil, the prices in the international market are not expected to rise significantly from hereon. But the recent rise in the price has put a cap on the profitability for paint companies.
The decorative segment of the paints industry is expected to continue its sustained growth due to implementation of the 7th Pay Commission which would increase the disposable income of individuals and families. Growth in infrastructure and demand for automobiles is expected to revive performance of the industrial segment of the paint industry.
The valuations for most of the paint companies are expensive in the current scenario but would continue to remain in the expensive zone as most of them are expected to deliver double digit growth in the quarters ahead.