India’s paint sector will double by FY27 to 7.8 billion liters per annum: Crisil

MUMBAI: India’s organized paint sector is on the cusp of major expansion, with production capacity expected to almost double to about 7.8 billion liters per annum (blpa) by fiscal 2027, according to a CRISIL report.

According to a press release, this growth will be driven by investments of approximately Rs 19,000 crore, including significant contributions from a major new entrant.


However, increased competition and increased marketing expenses are likely to impact profitability in the industry.

Much of the new capacity, approximately 2.4 billion barrels, is expected to come online during the current financial year, with the new entity itself expected to add 1.3 barrels of capacity per year.

This expansion mainly concerns the decorative segment, which accounts for 75-80% of total production.

The sector is poised to continue its solid volume growth trajectory of 10-15 percent annually, in line with past trends.

However, the influx of new production capacity is expected to intensify competition for market share.

This increased competition is likely to prompt manufacturers to adopt aggressive pricing strategies to attract customers and make the most of expanded production capacity, especially in the value segment, which generates more than half of total revenues.

As a result, overall revenue growth is expected to decline to 7-10 per cent this financial year.

Moreover, operating profitability is expected to decline to 15-17 percent, which will be influenced by increased marketing expenses and pressure on product implementation.

Despite these challenges, capital expenditure (capex) will be managed through a combination of cash flow, debt and excess liquidity, ensuring the sector can sustain its growth ambitions.

The credit profiles of existing producers are expected to remain stable due to their strong financial health, characterized by near debt-free balance sheets and significant liquidity reserves, equivalent to approximately one quarter of their net worth.

Financial stability will enable them to survive competitive pressures.

A study of six companies that account for about 90 per cent of the organized sector’s gross sales of about Rs 70,000 crore confirms this optimistic forecast.

Poonam Upadhyay, Director, CRISIL Ratings, noted, “The projected volume growth of 10-15 per cent this financial year will be driven by sustained demand from both the retail and business-to-business segments, spanning sectors such as construction, real estate, and automobiles.”

He added: “Increased disposable incomes, consumer preference for quality and branded products, rising home sales and the expected recovery in rural demand will all have a positive impact. However, execution pressures will partially offset the benefits of higher volume and reduced growth revenues this fiscal.”

In the previous fiscal year, the paints sector recorded moderate revenue growth of around 4 percent.

This was due to producers cutting prices by 4-5 percent by increasing discounts and rebates due to falling prices of oil-related factors of production.

To fight competition, manufacturers also increased their promotional spending.

As a result, while gross margin improved by approximately 500 basis points, operating margin improved by only 300 basis points to approximately 20 percent, compared to 17.0 percent in fiscal 2023.

Prices of key raw materials, particularly those related to petroleum such as binders, solvents and additives, as well as titanium dioxide, are expected to remain stable, which should help maintain gross margins of 40-42% this fiscal year.

However, operating profitability will probably decline to 15-17%, which will result from higher advertising and promotion expenses aimed at supporting the development of the retail network and increasing brand recognition in the conditions of increasing competition.

Moreover, new market entrants are expected to incur operating losses in their first years of operation.

To maintain a competitive advantage and expand their product range, incumbent manufacturers are diversifying into categories other than paints, such as adhesives, construction chemicals and waterproofing products.

As a result, investments in capacity expansion, backward integration, research and development and technology are increasing.

Anil More, Associate Director, CRISIL Ratings, commented: “We expect the credit quality of existing producers to remain largely stable despite significant capital expenditure. They are likely to finance capital expenditure through excess cash and accruals, while new market entrants will rely on a mix of debt and fresh capital.”

He added: “While key debt ratios are expected to weaken, interest coverage and debt/Ebitda ratios in the selected sample will remain stable at 14-16x and 0.5-0.7x respectively in this and next financial year compared to previous peaks of over 40x and less than 0.1x, respectively.”

Key risk factors that will require close monitoring include the impact of volatile oil prices on raw material costs, currency fluctuations, an expected recovery in rural demand and an unexpected increase in competitive intensity as new production capacity becomes available.