Top Paints Stocks

Paint Industry in India

The Indian paints and coatings industry is poised for remarkable growth in the coming years, backed by a surge in competition, softening raw material prices, and an increasingly robust industrial landscape. This report delves into the factors driving this growth, the evolving industry dynamics, and the challenges and opportunities that lie ahead.

Sector Growth and Market Potential

The Indian paints and coatings industry is on track to reach new heights, with the market size projected to expand from the current Rs 62,000 crore to Rs 1 lakh crore within the next five years. According to Akzo Nobel India's annual report, the sector's expansion is intrinsically tied to the growth trajectory of the Indian economy, influenced by factors such as income levels, industrial production, and infrastructure development.

Margins Boosted by Raw Material Price Correction

The year FY23 witnessed a pivotal development for the paints and coatings industry. A notable softening of raw material prices, particularly in crude oil and other essential components, has contributed to enhanced profit margins. Given that raw materials constitute a significant portion (55-60 percent) of input costs, this positive price correction has directly contributed to improved margins across the sector.

Escalated Competition and Industry Transformation

The entry of new players, including Grasim Industries, Pidilite, and JSW, has sparked a surge in competition within the paints and coatings industry. These entrants are strategically investing in infrastructure, technology, and marketing to establish their presence and capture a slice of the market. In response, established players like Asian Paints, Berger Paints, Kansai Nerolac, and Akzo Nobel India are bolstering their capabilities and innovating to maintain market dominance.

Segmentation and Consumption Patterns

The Indian paints and coatings industry can be broadly categorized into two segments: architectural and industrial. The architectural segment takes the lead, accounting for approximately 69 percent of paint consumption by volume. This segment caters to residential, commercial, and institutional constructions, along with repainting and renovation projects. The industrial segment, constituting the remaining 31 percent, is witnessing growing demand due to the robust growth of consumer durables, automobiles, and related industries.

Industrial Coatings: A Growing Share

The industrial segment's expansion is fueled by the strong growth of the industrial sector, coupled with the steady fundamentals of consumer durables, automobiles, and allied industries. This growth has led to increased demand for industrial coatings, which find applications in sectors such as automotive, infrastructure, machinery and equipment, functional and domestic appliances, and packaging.

Challenges and Promising Outlook

While the paints and coatings industry faces challenges stemming from fluctuating crude prices, macro-economic conditions, and inflationary pressures, the overall outlook remains promising. The optimism is grounded in India's projected medium-term growth rate of 6-7 percent, providing a favorable backdrop for the industry's expansion and development. Akzo Nobel India, operating through its Dulux brand, expresses confidence in its ability to capitalize on growth opportunities and navigate potential challenges through innovation and customer-centric strategies.
The Indian paints and coatings industry is in the midst of a transformative phase, fueled by heightened competition, softened raw material prices, and a thriving industrial landscape. The sector's prospects are deeply intertwined with the nation's economic growth, which remains promising despite challenges. By leveraging strengths, focusing on innovation, and staying attuned to customer needs, industry players are well-positioned to not only seize growth opportunities but also overcome challenges on the road ahead.

Overview of the Best Paints Stocks to invest in India

1. Asian Paints Ltd

Key Operational Highlights:

Steady Decorative Volume Growth: Notable decorative volume growth of 10% has been observed, with both rural and urban markets exhibiting synchronized expansion. This growth trend underlines a balanced demand from diverse market segments.
Robust Industrial Paints Segment: The industrial paints segment is positioned strongly, supported by favorable conditions in both automobile and non-auto industrial domains. This resilience is attributed to softened raw material prices and sustained demand in key sectors.
Challenges in International Business Division (IBD): The outlook for the IBD is mixed, primarily due to currency issues impacting certain Asian markets, such as Nepal. This uncertainty has led to varied performance within this segment, highlighting the importance of currency stability.
Increased Competitive Intensity: The competitive landscape is evolving with new entrants like Grasim Industries, Pidilite, and JSW. This has triggered the need for existing players to enhance their capabilities and differentiate themselves to maintain their market positions.

Financial Performance:

Encouraging Revenue Growth: Consolidated revenues registered a YoY growth of 6.7%, amounting to Rs 91.8 billion. This growth has been sustained through both urban and rural markets, reinforcing the industry's broad-based demand.
Margin Expansion: Gross margins saw a significant expansion, growing by 523 basis points YoY to reach 42.9%. This margin improvement is attributed to the softening of raw material prices, a factor that significantly impacts input costs.
Profitability Surge: EBITDA surged by 36.3% YoY, reaching Rs 21.2 billion, accompanied by an EBITDA margin expansion of 502 basis points YoY to 23.1%. This performance underscores the sector's ability to capitalize on favorable market conditions.
Standalone Performance: Standalone revenues grew by 7% YoY to Rs 81.1 billion, with gross margins expanding by 546 basis points YoY to 43.6%. The robust EBITDA margin expansion of 537 basis points YoY to 24.6% showcases the industry's operational efficiency.

Key Risks:

Currency Volatility Impacting IBD: The uncertain currency outlook in specific Asian markets has exerted pressure on the International Business Division's (IBD) margins and performance. This volatility underscores the need for strategic currency risk management.
Intensifying Competition: The entry of new players like Grasim Industries, Pidilite, and JSW has amplified competitive pressures. The industry's established players are required to strengthen their differentiation strategies to navigate this competitive environment.
Macro-Economic Environment: The industry's performance remains influenced by macro-economic conditions, including fluctuating crude prices and inflationary pressures. These external factors can impact both costs and demand dynamics.
Segment-Specific Challenges: While the industrial paints segment showcases robust performance, the home décor segment's growth trajectory exhibits variations due to a high base in certain segments like kitchens and baths.

Outlook:

Positive Demand Outlook: The industry's demand outlook remains positive, with double-digit volume growth during the first quarter of FY24. Positive factors include the progress of the monsoon and the upcoming festive season, supporting buoyant market sentiment.
Stable Raw Material Environment: The raw material landscape appears favorable with a benign outlook, supported by a 2% QoQ deflation in the raw material basket. This stability contributes to the industry's improved margins and profitability.
Continued Innovation and Growth: Innovation continues to play a pivotal role, contributing to 11% of the overall revenue. Long-term growth prospects are reinforced by market share gains in decorative paints, expansion of distribution networks, and a focus on high-growth segments.
Limitations to Re-Rating: While long-term growth levers remain intact, the industry's valuation potential is constrained by anticipated competition intensification and existing rich valuations.

Asian Paints Ltd Share Price

2. Berger Paints India Ltd.

Key Operational Highlights:

Decorative Segment Driving Topline Growth: Berger Paints (BRGR) reported consolidated revenue growth of 20% YoY, primarily propelled by an impressive 11% volume growth in the decorative segment. The decorative segment showcased a robust 23% growth in value, contributing significantly to the company's overall performance.
Market Share Expansion in Decorative Business: BRGR gained market share in the decorative paints segment during the first half of FY22, exhibiting a growth from 18% in FY22 to 18.8% in H1FY23. This increase in market share reflects successful strategies and a strong demand for the company's offerings.
Network Expansion and Tinting Machine Installations: The company aggressively expanded its network by adding 6,233 distributors and retailers. Additionally, BRGR nearly doubled the installation of tinting machines, with a total of 31,630 machines as of 2QFY23. This increased accessibility enhances customer engagement and drives sales.
Geographical Growth Disparities: Tier 1, Tier 2, and Tier 3 cities demonstrated high double-digit growth compared to the corresponding quarter of the previous year. However, the rural market experienced slower growth, particularly noticeable in the northeast region.

Financial Performance:

Margin Contraction due to Input Cost Inflation: BRGR's gross margin contracted by 300 basis points YoY, the steepest decline compared to competitors like APNT and KNPL. This contraction, down to 35%, is attributed to input cost inflation, affecting profitability.
Stable EBITDA with Marginal APAT Decline: Despite the challenges in margins, BRGR managed to maintain its EBITDA growth at 3% YoY. However, the company experienced a marginal decline of 1% YoY in adjusted profit after tax (APAT).

Key Risks:

Input Cost Volatility: The company's profitability remains exposed to input cost inflation, which could continue to impact margins and profitability.
Market Competition and Share Retention: While BRGR has gained market share in the decorative segment, the intensifying competitive landscape necessitates sustained efforts to maintain and expand its market share.

Outlook:

Anticipated Mix Improvement: BRGR expects a mix improvement in Q3 and Q4, driven by increased sales of exterior wall coatings and waterproofing products. These products typically offer higher margins, which could contribute to improved overall profitability.
Operational Expansion: The Sandila facility is expected to become operational in December 2022, adding capacity for solvent, putty, and resin production. Additionally, BRGR's acquisition of land in Panagarh, West Bengal, reflects the company's commitment to expanding its manufacturing footprint.
Gross Margin Expansion Expectation: Management anticipates an improvement in gross margins to 37%-38% by the end of Q3 and further enhancement by Q4. This expected improvement could alleviate the pressure from input cost inflation and support profitability.

Berger Paints India Ltd. Share Price

3. Kansai Nerolac Paints Ltd.

Key Operational Highlights:

Standalone Revenue Growth: KNPL reported a robust standalone revenue growth of 13.6% YoY in Q4FY23, reaching INR 16.1 billion. The company's revenue has maintained a steady four-year CAGR of 9%, reflecting consistent performance.
Strong Industrial Segment Performance: KNPL's industrial segment remains a key driver of its performance, with particular strength in the automotive sector. The company has experienced robust demand within the automotive industry, contributing to its growth.
Decorative Market Share Strategy: KNPL's decorative market share is estimated to be at 9-10%, although it has witnessed a decline in share over the past three years. To address this, the company plans to enhance its portfolio by introducing a new premium product with a broader range.
Focus on Premium Products and New Offerings: The salience of premium products within KNPL's product mix is rising, contributing to an expansion in gross margins. New products are also gaining importance, accounting for 7-8% of the company's sales.

Financial Performance:

Gross Margin Expansion: KNPL's gross margin (GM) expanded by 359 basis points YoY and 136 basis points QoQ, reaching 31.6%. This improvement can be attributed to previous price hikes that compensated for raw material inflation, the growing significance of premium products in the product mix, and moderating input costs.
EBITDA Growth and Margin Flexibility: EBITDA grew significantly by 84% YoY to INR 1.52 billion. However, despite the sequential GM improvement, EBITDA margin (EBITDAM) experienced a decline of 148 basis points. Management employed marketing strategies to regain lost ground in the decorative segment, resulting in an EBITDAM of 9.5%.
Robust APAT Growth: Adjusted profit after tax (APAT) surged by 2.6 times YoY, reaching INR 940 million. This substantial growth is primarily due to a low base effect and reflects the company's efforts to enhance its profitability.

Key Risks:

Intensifying Competition: The entry of new competitors, like Grasim, into the high-margin decorative segment is expected to intensify competition. To fend off this competition, KNPL may need to increase its marketing spending, impacting profitability.

Outlook:

Competitive Landscape and Marketing Strategy: The outlook indicates increased competition, particularly due to the entry of Grasim in the decorative segment. This calls for a proactive response through higher marketing spending to maintain market share and competitiveness.
Earnings Estimate Revision: In light of the competitive landscape and the need for higher marketing spending, FY24 and FY25 earnings per share (EPS) estimates have been revised downward by 3.3% and 4.1%, respectively.

Kansai Nerolac Paints Ltd. Share Price