For the first time in a decade, revenue of the domestic paint¹ sector, pegged at Rs 51,000 crore in fiscal 2020, is expected to de-grow this fiscal – by as much as 8-10% – as the Covid-19 pandemic drastically curbs both consumer and industrial demand. That compares with a compound annual growth rate of 13% seen between fiscals 2011 and 2020.

The forecast is based on an analysis of five CRISIL-rated paint makers, which accounted for ~95% of the organised sector revenue.

As much as 75% of the sector’s revenue comes from the decorative segment and the rest from the industrial segment. Within decorative, repainting accounts for 70% of revenue.

Steady demand from the rural and semi-urban markets will help cushion the impact of low urban sales of decorative paints and curb the segment’s revenue decline to 6-8%. But the industrial segment will see a sharper fall of 14-16% because of the second consecutive fiscal of slack demand.

More than two-thirds of the consumers of decorative paints are in the rural and semi-urban areas where consumption drivers are better poised compared with the urban areas. While improved sentiment due to good harvest and rise in income levels are supporting rural demand, semi-urban markets are benefitting from better availability of painters compared with urban centres. On the other hand, urban demand for decorative paints remains dull given safety concerns, social distancing, and low demand for real estate.

Says Sameer Charania, Director, CRISIL Ratings, “Overall revenues of paint makers were under severe pressure in the first quarter of the current fiscal and fell 45-60%. We are seeing a gradual recovery now, with utilisation levels rising to 70-80% from ~50% in the first quarter. With more people working from home and festive season approaching, sales of decorative paints will see increased traction in the near term. That, and opportune diversifications into hand sanitisers and adhesives, should partially offset the impact of tepid sales of industrial paints, on overall revenues.”

Industrial paints are bearing the brunt of the second fiscal of weak automotive sales and closure of automotive service centres in the initial 3-4 months of this fiscal. Postponement of demand from manufacturing and marine sectors has also affected sales of protective, powder and performance coatings.

Discounts being offered in certain decorative segments such as enamel paints and higher share of economy and premium paints in rural consumption are likely to impact operating profitability. However, softer input prices (60-65% of overall costs), mainly crude derivatives, will provide some offset, limiting the impact to ~100-150 basis points; operating profitability is estimated at ~14.5-15% this fiscal (refer to annexure).

Says Aparna Kirubakaran, Associate Director, CRISIL Ratings, “Healthy profitability and strong balance sheets have, and will continue to, support the credit quality of paint makers. CRISIL-rated paint makers have historically managed with low debt levels (~Rs 367 crore as on March 31, 2020), and have shored up liquidity over the years (cash surplus was over Rs 2,500 crore as on March 31, 2020).”

¹ The domestic paints sector revenue is split between the organised sector (68%; Rs 34,000 crore) and unorganised sector (32%).