In the last few quarters, the paint industry had its own set of problems in India. It was not just about rising input costs but also about falling demand. Amidst this chaos, down trading is a new risk.
Problems for paint companies
The sharp rise in crude oil prices in the last few months has led to a spike in the input cost for paints. Crude and linked chemicals are key inputs for the paint industry. The crude spike has made input costs very steep for paints. To add to their woes, even the packaging costs have gone up sharply. As if the cost aspect was not enough, paint companies are also up against weak demand, mainly in the rural and semi-urban areas, where inflation has hit people a lot harder.
Paints in the unorganized sector
What do we mean by down trading as an economic process?
It is all about consumers shifting to cheaper options since the principal branded product may have become too expensive. In India, there has always been the paint industry in the organized and the unorganized segment. While the big names like Asian Paints, Berger Paints and Kansai Nerolac represent the organized sector, there are thousands of small companies that manufacture paints at much lower costs. While this advantage had narrowed for the unorganized sector in the last few years, recent price hikes have again led to down trading in the paints segment.
Enter down trading in paints
That is where the down trading in the paint segment comes in. It refers to users shifting to cheaper alternatives in the unorganized sector. In 2021, the gap between paint prices in these 2 segments had sharply narrowed. The unorganized sector was already under a lot of pressure post GST. That led to the price gap narrowing across various sectors, paints included. However, in the last 1 year, the organized players in the paint industry have hiked prices by as much as 20-25%. This has led to a wide gap in prices and made buying paints from the unorganized sector more attractive for the buyers. That is the down-trading risk that is actually hitting the paint industry.
Creating valuation risks
The biggest worry about down trading is not the loss of sales, but the loss of the premium valuations. Companies like Asian Paints and Berger Paints have traded at premium valuations and this down trading is going to raise some serious questions about the feasibility of such lofty valuations. That is what the markets are actually worried about. As it is, valuations are under stress when the rates go up in the economy. Events like down trading can only accentuate this loss in valuations. If that happens, the paint companies could have a larger problem to contend with. For now, it looks like the crude rally is here to stay and that is not good news for paints!
Would you think of this as a piece of bad news for paints?
Post your thoughts in the comment section below.