Paint industry has grown at 11% CAGR in last 7 years
The paint stocks have had a stellar run over the last 6-7 years thanks to the strong industry growth momentum. The paint industry has grown at a CAGR of 11% over FY14-19 which is almost double the growth rate of India’s GDP. The reasons? Here they are – rising urbanization, shortening of re-painting cycle (from 7-8 years to 4-5 years), increased preference towards branded paints have all contributed towards this stellar run. The reduction in the GST rate from 28% to 18% has also been a big positive for the industry.
Decorative segment has led the charge
The decorative segment (74% of the paint industry) has led the charge growing at 11.5% CAGR driven by strong growth in rural and tier 2 to tier 4 cities (which is almost half of total industry sales). The organized players have also strengthened their position and now commands nearly 67% of the overall industry from 65% in 2015. But there is one more important lever to this growth story which is soft crude oil prices.
Yes, a part of the industry‘s success can be attributed to soft crude prices during the period which from a high of USD 100+ per barrel in 2014 has remained at sub USD 80 levels. In fact, the broad range for crude was at 60-70 dollars per barrel. That works in favour of paint companies as nearly 30-35% of the raw material cost for paint companies are crude oil derivatives.
Multiple re-rating for Paint stocks
These multiple growth levers (or cost benefits) have worked well for paint companies as it has led them to command premium valuations compared to their own historical averages. Historically, these companies usually traded at a multiple of ~30-40x but are now anywhere north of 60x. The reasons behind re-rating have been strong industry growth trends, soft input prices plus the company’s strong focus on premiumization through technological innovation (anti-bacteria, anti-pollution, anti-fungal, dust-resistant etc).
The installation of tinting machines at dealers have also acted as a strong barrier to entry making existing player even stronger. This is because many dealers are unable to install a new company’s tinting machine due to space constraints. Plus, the sharp focus of companies towards brand building initiatives through advertising and marketing has also resulted in brand loyalty.
Growth story remains intact but..
Not only was the past bright, but the future is also expected to paint a rosy picture for the industry. The strong growth momentum is expected to continue for the industry driven by strong focus of the government on infrastructure and housing for all.
The on-going pandemic has also made it difficult for smaller/unorganized players to survive, resulting in market share gains for large players. In fact, the strong growth prospects and high profitability shown by paint companies has lured other players (JSW Paints & Grasim) to foray into the industry.
To sum it up, there is no doubt that the growth tailwinds are quite strong for the industry and large players are better placed owing to their wide & unique distribution model, constant focus on technological upgrades (premiumization) and strong brand presence. But it is important to not forget that crude oil (highly volatile) is still one of the key raw material for paints and the recent spike in crude prices is also one of the reasons behind the recent correction in paint stocks.
Plus, even though the distribution model is hard to replicate, it is not impossible especially for companies that have deep pockets or have strong presence in allied products.
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Also, for more infographics on paint industry click here