Indian Paint Industry: Riding Growth Waves While Defending Margins

The Indian paint industry has witnessed a remarkable transformation over the past few years, driven by rising incomes, urbanization, and evolving consumer preferences. Once a high-growth, high-margin sector, it is now navigating a new phase where strong demand is met with intensified competition, pricing pressures, and margin challenges. While volume growth remains robust, revenue expansion has slowed due to price cuts and a shift toward lower-value products.

As new entrants backed by deep-pocketed conglomerates shake up the competitive landscape, established players are balancing expansion with profitability. With rising raw material costs, aggressive pricing strategies, and a battle for market share, the industry is at an inflection point. Will capacity expansions and financial strength help incumbents maintain dominance, or will the new wave of challengers redefine market dynamics? Let’s dive into the key trends shaping the future of the Indian paint industry.

Paint Industry Trends & Outlook

1. Revenue Growth Moderation: After a strong 14-15% CAGR (FY19-FY23), revenue growth slowed to 4% in FY24, despite 10%+ volume growth, due to price cuts and a shift toward lower-value products.
2. Challenges in H1FY25: Stiff competition, general elections, a prolonged monsoon, and continued price reductions further impacted revenue. New entrants are gaining traction with aggressive branding, promotions, and dealer incentives.
3. Price Hikes to Offset Costs: Existing players raised prices by 1.5-2.5% (July-August 2024) to manage rising raw material costs (mainly crude oil derivatives). However, margins are under pressure.
4. Decorative Paints Dominate: Accounting for 70-75% of demand, repainting (80%) outweighs new construction (20%). Demand is supported by population growth, shorter repainting cycles, rising incomes, and rental home growth.
5. Industrial Paints (25-30% Demand): Driven by automotive, oil & gas, aerospace, marine, and electronics industries.
6. Margin Pressure:
   • Gross margin which averaged 40% between FY20-F24, is expected to be rangebound. 
   • Operating margins fell to ~16% in H1FY25 from a five-year average of 18%, it might further decline to ~14% by FY26 due to pricing pressures.
7. Capacity Expansion: Established players had 4.3 billion LPA in FY24 and plan a 70% expansion over the next 3-4 years. In FY25, ~1 billion LPA was added by Birla Opus Paints.
8. Market Share Shift: The organised sector’s share rose from 65% (pre-GST) to ~75% and is expected to reach 80% as major players expand capacity.
9. Financial Strength: Established players have strong credit profiles, low debt (~0.1x gearing ratio), and ample cash flows, enabling aggressive expansion without high leverage. New entrants rely on debt and equity, backed by large conglomerates.
10. Industry Growth Outlook: Expected to grow at 8-10% CAGR, driven by urbanization, rising incomes, shorter repainting cycles, rural demand recovery, affordable housing, infrastructure, and auto sector growth. However, competition from well-funded new entrants will intensify pricing pressure and erode margins.

Key Insights & Industry Implications

1. Growth Slowdown Despite Strong Demand:
   • While volume growth remains strong, revenue growth has moderated due to price cuts and competition. The industry is shifting from a high-growth, high-margin phase to a volume-driven, low-margin environment.
2. Competitive Disruption by New Entrants:
   • New players are aggressively expanding with branding, dealer incentives, and promotional strategies, forcing established firms to adjust pricing and defend market share. This will permanently lower margins for the industry.
3. Structural Shift in Market Dynamics:
   • The organised sector is consolidating (market share to reach 80%), but within this, new entrants backed by conglomerates are reshaping competition. This will lead to a battle for distribution networks and pricing power.
4. Profitability Under Threat:
   • Operating margins, which averaged 18% in the past five years, are expected to drop to ~14% by FY26. Cost inflation, aggressive pricing strategies, and new entrants will keep profitability under pressure.
5. Capacity Expansion vs. Demand Growth:
   • With a 70% capacity expansion planned, supply could outpace demand, leading to increased pricing wars. While long-term growth prospects are strong, short-term overcapacity risks exist.
6. Financial Resilience Matters:
   • Established players have low debt and strong cash flows, allowing them to expand without financial strain. New entrants, relying on debt and equity funding, will need sustained revenue growth to remain competitive.
7. Sector Tailwinds Support Long-Term Growth:
   • Despite short-term pricing and margin pressures, industry fundamentals remain strong, with urbanization, infrastructure spending, and auto sector growth driving long-term demand.

Conclusion:

The paint industry is undergoing a competitive transition, with new entrants challenging market leaders, leading to intensified pricing pressure and margin compression. While demand fundamentals remain robust, the industry is shifting from a high-margin growth story to a volume-driven, competitive landscape. Established players must focus on branding, innovation, and dealer expansion to sustain growth, while financial strength will be crucial in navigating market disruptions.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.