Lower Input Costs Are No Solace For Paint Makers In A Lost Summer

Sales of paints and waterproofing products usually rise in the first quarter of a financial year, peaking ahead of the monsoon. This April-June, companies hoped to recoup lost ground after an extended monsoon weighed down sales in October-December and demand remained subdued in January-March even before Covid-19 spread outside China.

The pandemic and the world’s biggest lockdown has now frozen most of the economy, crimping demand for both household and industrial paints. Even after the lockdown is lifted, it isn’t expected to recover quickly.

Three Reasons That Will Hurt Demand

The Rs 50,000-crore Indian paints industry gets 75 percent of its revenue from decorative or household segment, according to Investec. Within that, repainting accounts for three-fourths of the sales and the rest comes from new constructions.

Consumers are expected to cut discretionary spending because of job losses and salary cuts as the virus outbreak has halted all economic activity barring essential services. That will hurt the decorative paints category.

Industrial demand, too, is not expected to rebound in the near term. Automotive companies, infrastructure builders and appliance makers, the biggest industrial users of paints, are unlikely to resume output at the pre-Covid-19 levels anytime soon.

As a result, Edelweiss Securities sees no meaningful recovery in overall demand for paints before the festival season in the second half of the ongoing fiscal.

There’s one more factor: shortage of workers to do the paint job—that impacts both industries and consumers alike.

“Our channel checks suggest that whenever labour goes back home, they usually stay there for two-three months. In the current situation where they have a higher probability of getting work in villages and small towns, reverse movement to bigger cities will take some time,” said Amnish Aggarwal, head of research at Prabhudas Lilladher. “We believe labour will start coming back when the entire noise around Covid-19 goes away and they feel confident and safe to return.”

A Silver Lining That Isn’t

The only silver lining for paintmakers are tumbling oil prices. Crude derivatives such as monomers and titanium dioxide are key raw materials for the industry, collectively accounting for more than half of the total expenditure.

These have turned cheaper as the crude has fallen by more than 80 percent so far this year to its lowest in nearly two decades as demand fell and the world is running out of storage for unused oil. Lower costs may aid margins in the fourth quarter as the lockdown came into force only towards the end of March.

Yet, analysts expect gains from cheaper crude to be limited because of price cuts in the decorative paints segment in January-March.

Hunt For Volumes

Margins of paintmakers have remained under pressure in the past three quarters as volumes were driven by low-cost products such as putty, primer and distemper in a slowing economy. These offer lower margins than premium emulsion and water-based paints.

Asian Paints Ltd., India’s largest paintmaker, and Berger Paints Ltd. have yet to respond to BloombergQuint’s emailed queries.

Asian Paints., however, had said after announcing its third-quarter earnings that volume growth was aided by its economy range of products. The company, which launched two new low-cost products, will continue to focus on this segment, it said.