Indian paint companies face the down trading risk
Most people may not have heard this term too often, but it has long been a bane for many of the Indian sectors like paints, electrical goods etc. When we talk of downtrading, it is all about the risk of losing market share to the unorganized sector.
In the last few years, since the time GST came into the picture, the focus has largely shifted in favour of the organized. Now, sectors like paints are seeing, what is called Down Trading, where the competition from the unorganized sector is actually heating up.
That is not great news for paint companies like Asian Paints and Berger Paints which are already caught in the middle of twin problems. On the one hand, they are seeing their operating margins get compressed on account of higher input costs.
On the other hand, the demand for paints has been gradually going down due to the sharp rise in prices. When the input costs starting going up, it looked like the top ranked paint companies would be better off as they had the pricing power. Now they are facing 2 additional problems.
The first problem, of course, is that the demand is shrinking. Remember, paint demand is normally a demand that can be postponed and when the going gets tough, people prefer to put off such expenses. But the second challenge is what is worrying the paint companies.
Most of the large paint companies have been hiking prices to compensate for the higher input costs. But now, there is a situation wherein this has led to widening of the price gap with unorganized sector. The result is customers down trading against paint companies.
Most of the paint companies have taken several rounds of price hikes in FY22 to contain gross margin erosion. In addition, the decorative paint manufacturers have already indicated at another round of price hikes in June.
As branded paints get more expensive, customers appear to be shifting their loyalties back to unbranded paint products. Some of the statistics on the price gap in the past and the price gap today are quite telling and give you an idea of why this downtrading is actually happening in the cement industry.
For instance, the price gap between unorganised and organised players in the cement industry had declined very sharply in the calendar year 2021. Now that prices have been hiked by the organized paint companies by around 20%, this gap has widened again.
In a market that is highly price sensitive like India, this is likely to result in higher sales for unorganised companies and the organized paints players may end up footing the bill. This trend has also been confirmed by most of the dealers of paints across India.
Remember, it is not just about the cost of paints but also the cost of labour, which has surged sharply in the last few months. This is forcing consumers wanting to paint their houses with fixed budgets to gravitate towards unorganized paint segment.
Since premium paints need more labour days, most are preferring the plain vanilla paints of the unorganized sector over the established names. So the consumer not only saves the cost of paints but also saves substantially on the labour cost.
Most of the leading paint companies are currently putting up a brave face. Their contention is that down-trading mostly happens in the economy segment rather than premium paints. The former is lower-margin accretive but it is likely to start pinching the overall paint sector sooner rather than later.
Even if it does not hit their demand in a big way, the very idea of postponement of decision to paint could be a bigger worry. This is something companies like Nerolac and Berger had even indicated in their conference calls.
The impact is visible in the big daddies of the paints industry. The shares of Asian Paints and Berger Paints have corrected more than 20% each. That is not something you get to see too often.
Even though the valuation multiples of these stocks have declined from their peaks, they remain expensive. The downtrading is creating a lot of uncertainty and analysts perceive that the biggest risk could be that it could impact valuations.
Share Market Today
|Price Change (% change)
|S&P ASX 200
|US Tech Composite
About the Author
DisclaimerInvestment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.
Bumper Listing for Exicom Tele-Systems IPO
- Mar 05, 2024Read More
Purv Flexipack IPO Sees Astonishing Listing
- Mar 05, 2024Read More
Morgan Stanley is setting new standards in the investment world with the introduction of pre-IPO share trading through its wealth management division, giving clients exclusive access to high-potential private companies, often termed as "unicorns," valued over $1 billion.
- Mar 05, 2024Read More