But intensifying competition and higher marketing spend to impact profitability
The organised paints sector's production capacity is set to nearly double to ~7.8 billion litre per annum (blpa) between fiscals 2024 and 2027 with investments of ~Rs 19,000 crore lined up, including by one large entrant.
A large part of this, around 2.4 blpa will be operational this fiscal, with the new player alone adding 1.3 blpa, primarily in the decorative segment, which accounts for 75-80% of the total production.
While volume will continue to rise at a healthy pace of 10-15% annually in line with past trends, sizeable capacities coming onstream will lead to increased competition for market share.
Consequently, manufacturers could price products aggressively to draw customers and utilise their expanded capacities, especially in the value segment, which accounts for over half of the total revenue.
In the context, overall revenue growth is seen moderating to 7-10% this fiscal. Even operating profitability would moderate to 15-17% due to increased marketing spends and pressure on realisations. That said, capital expenditure (capex) will be managed through a mix of cash flows, debt and surplus liquidity.
The credit profiles of existing manufacturers are seen stable due to their near debt-free balance sheets and robust liquidity (equivalent to nearly one-fourth of networth), helping them withstand competitive pressures.
A study of six firms, accounting for ~90% of the organised sector's gross sales of ~Rs 70,000 crore, indicates as much.
Says Poonam Upadhyay, Director, CRISIL Ratings, "The volume growth of 10-15% this fiscal will be driven by steady demand from retail and business-to-business segments - catering to construction, real estate and automobiles - which is salutary. Rising disposable incomes, increasing consumer preference for quality and branded products, rising home sales and an expected recovery in rural demand will be supportive. However, pressure on realisations will partially offset the benefit of higher volume, tempering revenue growth this fiscal."
Says Anil More, Associate Director, CRISIL Ratings, "We expect the credit quality of existing manufacturers to be largely stable despite high capex. They are likely to fund capex through cash surplus and accruals, while new entrants will utilise a mix of debt and fresh equity. While the key debt metrics are expected to moderate, interest coverage and debt/Ebitda1 ratios of the sample set will stay comfortable at 14-16x and 0.5-0.7x, respectively, in this and next fiscal compared with previous peaks of over 40x and less than 0.1x, respectively." |
