From inflation to competition; Here's why paint stocks are declining

Several paint companies' stocks were under selling pressure, falling up to 5%- 10% in the last one month.

For instance, the shares of Asian paints have been falling in the last couple of months. In just the last month, it has fallen 11.65%, while it has lost 9.91% in the last 3 months. Furthermore, in the last one year, the stock has corrected almost 3%.

Besides, the market leader, Berger Paints has also lost up to 12.67% in the last 3 month period. Shares of Indigo Paints have delivered negative returns of 10.65% over the last three months.

Shares of Berger Paints have fallen from ₹717 to ₹605 levels, logging a more than 16 per cent dip in the last one month.  

Indigo paints and Akzo Nobel both hit fresh 52-week lows in the recent week.

The following are a few of the factors weighing on paint stocks.

Input cost pressure

The paint industry is divided into water-based paints and solvent-based paints. In water-based paint, the primary ingredients are emulsion and mono, which are dependent on monomers, which are crude derivatives.

Other raw materials used in the production of paints and coatings include pigments (titanium dioxide, zinc oxide, etc.), solvents (mineral turpentine), resins, and various additives.

The cost of emulsion and monomer rose in Mar 2022 but has been steady from Apr-May ’22. On the other hand, the key raw material, titanium dioxide (TIO2 is a derivative of crude oil),  has too shot up with the rise in crude oil prices. Crude oil prices have risen by 50% this year as a result of the geopolitical crisis, according to reports.

Due to the surge in raw material prices, the cost of production has increased and has impacted the gross margins of paint companies. 

Of the total raw material costs incurred by paint manufacturers, 50%–60% are due to crude oil and its derivatives. In recent months, many Indian paint companies have raised their prices numerous times to protect their margins.

Asian paints have taken cumulative price hikes of 24% on a YTD basis and 15% in the international business to protect the margins from RM inflation. The management reiterated that it expects further 5-7% RM inflation in Q1FY23.

Due to raw material inflation across the RM basket, Asian Paints' gross margins fell by 450 basis points year on year to 38.7 per cent.

Entry of New Players

Grasim industries have accelerated the execution of paint capacity of 1.33 billion litres of paint per annum and will launch a nationwide campaign starting in Q4FY24. The company will try to mitigate inflationary pressures through economies of scale and backward integration. 

Grasim aims to accelerate capacity implementation given the changing market structure and optimistic industry growth prospects.

The project cost is revised up to ₹10,000 crore by FY25 versus the earlier indicated target CAPEX of ₹5,000 crore by FY24. In FY22, it set a paint Capex of ₹3,580 crore on the acquisition of land parcels.

"Decorative paints market dynamics have changed, with new capacities announced, backed by strong growth and outlook." entry into this consumer-oriented business will further diversify its portfolio, provide scale and growth, and will also offer a wide choice to Indian consumers as the company plans to introduce the latest as well as a wide range of paint products, "Grasim said in its earnings release.

Analysts at research and brokerage firm Jefferies India said Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure, which may have a greater impact on smaller players, but Asian Paints, the current market leader, may also be at risk. "This is reminiscent of Jio’s foray into the telecom industry, with significant capacity additions, which ultimately resulted in lower industry tariffs," said Jefferies in a report earlier this week.

"The 1.3-billion-litre capacity expansion outlook for Grasim is meaningful and compares to 1.7 billion litres capacity for Asian Paints (top player in paints segment) and much higher versus smaller peers like Berger (0.7 billion litres) and Kansai Nerolac (0.6 billion litres)," said Jefferies India in a note to investors.

"Grasim’s large Capex plan in paints indicates its commitment towards becoming a serious player in this segment," said Motilal Oswal Securities in a note to investors.

Further, JSW Paints, which entered the market just before the Covid-19 pandemic, is also gaining ground. Sajjan Jindal promoted JSW Paints had grown about 120% in the first half of FY22.

JSW Paints supplies industrial paints to the customers of JSW Steel and JSW Cement. It is also ramping up its retail presence with Colourvista Senses retail stores across the country.

On the other hand, JK Cement Ltd. has announced its intention to enter the paint business. The company said its board has approved an investment of up to ₹600 crore, spread over the first five years, in the subsidiary.

According to industry estimates, currently, the paint industry in India is worth over ₹62,000 crore ($8 bn), and is one of the fastest-growing paint economies, with double-digit growth over the past 2 decades.

The decorative paint category accounts for nearly 75% of the overall market, while the industrial paint category accounts for the remaining 25%. Asian Paint dominates the space with over a 50% market share.

Going forward, analysts expect the entry of several new players in the paint business may reduce the market share of dominant players.