Paint firms rush to up capacity, but raw material costs pinch

India’s paint makers are scrambling to add capacity to cater to rising demand from the decorative and industrial segments, but rising input costs present a challenge to growth in the coming quarters.

Increased demand for emulsions and rising offtake from the automobile sector have prompted a fresh round of capacity addition, officials said.

“The paints industry is seeing 15%-plus growth rates and there is very strong demand anticipated...There was some selective capacity addition last year, but this time it’s industry-wide,” said Anand Shah, analyst with Angel Broking Ltd.

India’s top paints maker Asian Paints, which is investing Rs735 crore for a 400,000 tonne a year plant in Maharashtra, expects the first phase of the project to be commissioned by end-2012.

No 2 paints maker Kansai Nerolac Paints also plans to invest `600 crore to raise capacity by half in three years. “The economy is expected to grow in double-digits and hence we expect a substantial rise in sales across the country...As of now, our capacity is 200,000 tonne per year. Over next three years, we would expand at various locations,” HM Bharuka, managing director, Kansai Nerolac, said. In August, the company’s board had approved investing about Rs68 crore for brown-field capacity expansion at one of its units.

Kolkata-based Berger Paints India also recently said it will invest Rs150 crore for setting up a new manufacturing unit in Andhra Pradesh. It is also investing Rs400 crore to double capacity from 250,000 tonne to 500,000 tonne over the next five years.

“The market is growing at 15-17% and in order to hold onto market share, the company will have to double capacity,” Abhijit Roy, senior vice-president, sales and marketing, Berger Paints, said.
India’s top four players account for 60% of Rs15,000 crore market, with the decoratives segment claiming about three-fourths, and industrial making up the rest.

“This round of capacity addition will take at least 2 years to come on board and considering growth in the sector is in double-digits, there will not be any major impact on prices once this capacity comes on stream,” said an analyst with a Mumbai-based brokerage.

Asian Paints posted a net profit of Rs201 crore on net sales of `1,491 crore for the June quarter. Of the 19 analysts that cover the stock, 10 have a ‘’strong buy’’ on it with 4 rating it as a ‘’buy’’, 4 a ‘’hold’’ and 1 sell rating, according to Thomson Reuters IBES estimates.

Kansai Nerolac, which expects sales to rise 18-20% in the current fiscal from Rs1,970 crore in FY10, saw one analyst rate it a ‘’strong buy’’ while one rated it a ‘’sell’’.

Only analysts cover the stock. However, in the coming months, rising input costs may squeeze margins and put the brakes on the double-digit growth rate of the sector, analysts said. “Companies have already taken three rounds of price hikes and there could be more on the anvil as prices of titanium dioxide have gone up sharply. Even prices of crude oil have risen,” said Angel Broking’s Anand Shah.

Prices of titanium dioxide, a key ingredient for paints, are currently ruling between $2,600-$2,700 per tonne, Nerolac’s Bharuka said. “Due to supply imbalance globally, we see prices of titanium dioxide rising by $150 a tonne in October and if there are other related cost pressures, only then a decision on price hike would be taken,” he added.