Crude oil prices, competition likely to dull paint makers' margins

Paint stocks slipped in FY26 Q3 as weak decorative demand, intense competition and rising crude oil prices outweighed hopes of a volume-led recovery

The positive sentiment for the paints sector brought on by signs of improving volume growth, lower competitive intensity and lower discounting after the September quarter seemed to be short lived. The sector was a laggard in the third quarter of fiscal 2025-2026 (FY26) within the consumer discretionary space, given higher competition and weak demand in the decoratives segment. 

What compounded the woes were international oil prices, which have hit six-month highs and could rise further, given military action by the US and Israel against Iran over the weekend. Stocks in the sector have underperformed their fast-moving consumer goods (FMCG) peers and the benchmark indices as it is. The average returns of top listed paint companies over the past month is -7.4 per cent, compared to Nifty FMCG’s returns of -0.4 per cent and flat returns from the Nifty50. 

Commentary across paint players has swayed from positive outlook in Q2 to cautious optimism in Q3, Centrum Research pointed out. Domestic decorative coating was impacted by extended monsoon and shorter festive period, owing to early Diwali during the quarter. Kansai Nerolac saw flat to marginally negative volume growth in the segment, while Asian Paints and Berger Paints saw high single digit volume growth. 

Analysts led by Gaurang Kakkad of the brokerage said that most paint stocks have seen a correction over the last one to three months, owing to weak performance in Q3. They maintained a ‘Neutral’ stance on the sector, owing to elevated levels of competitive intensity, as well as lower value growth. 

The largest paint company in the country, Asian Paints, posted an underwhelming Q3, reporting a top line 1.7 per cent lower than estimates, due to slower growth in the decoratives segment at 2.8 per cent, said Elara Securities. The weak performance in the segment and growth woes of the sector were due to structural changes like delayed repainting cycle and lower spend during occasions, such as marriages, according to analysts led by Amit Purohit. Competition remained high, with firms turning aggressive and is likely to persist due to renewed focus by Akzo Nobel, they added. The brokerage has an ‘Accumulate’ rating on Berger Paints and Kansai Nerolac, and a ‘Sell’ rating on Asian Paints. 

Given the multiple headwinds, growth for the organised paints industry is expected to be stuck in the low-to-mid single digit territory this year as well as the next. Revenue growth was subdued at 2 per cent in FY25, primarily due to intense competition for market share by new entrants. Further, pricing pressure will also constrain operating profitability of established players, which were already down by 300 basis points to 15 per cent last fiscal. 

Large capacity additions by incumbents and new entrants alongside recent consolidation are putting pressure on prices, as players rely on higher trade incentives and promotional rebates to protect market share, said Anuj Sethi, senior director, Crisil Ratings. For established players, these incentives are estimated at 17-18 per cent of gross sales. Crisil Ratings expects revenue growth to be capped at 3-5 per cent for FY26 and FY27. 

In addition to pricing pressures, the rise in crude oil prices will also impact margins of paint companies. Derivatives from crude oil such as titanium dioxide and binders/resins account for over 60 per cent of raw material cost and a spike in oil prices may force players to hike prices or take a hit on the margins. 

The paint sector is entering a consolidation phase and material market share movements might be limited, said Nomura Research. It has a ‘Buy’ on the sector as it believes that the peak of competitive intensity is behind and it will be rational instead of disruptive going forward. Asian Paints is its preferred pick.