Home loan rate cuts may inadvertently provide a much-needed filip to the Rs 11,500-crore (Rs 115 billion) domestic paints industry which has been reeling under production cuts and a slump in the automobile sector.
The sector, for long, has been a barometer of economic activity in any country. Demand goes up in a boom as people buy more homes and cars, and businessmen put up more commercial space and factories. Conversely, the demand slumps quickly in a slowdown.
The Rs 11,500-crore per annum Indian market has two segments -- decorative (used in houses and commercial buildings) and industrial.
Growth in the decorative segment fell from 18 per cent to 15 per cent in the last one year, while growth in the industrial segment slumped from 15 per cent to just 3-4 per cent.
"Both value and volume growth for the industry has declined. Companies which operate in the automobile sector have even seen de-growth," said Anand Shah, sector analyst with Angel Broking.
Moreover, the slump couldn't have come at a worse time. For almost two years, the industry battled with soaring input costs resulting from high crude oil prices.
As a result, though their revenues grew at a brisk pace, the profit margins were under relentless pressure. Some months back, most companies had hiked prices by 3-6 per cent to ease the pressure.
Immediately after that, the demand for paints slumped.
The industry has decided to scale down production in order to check the inventory pile-up. Some have put on hold their expansion plans and still others are figuring out if their stocks can be exported.
Those who had bet on high-end paints, as consumers moved rapidly up the value chain, now find no takers. Market leader Asian Paints, on the other hand had to temporarily close its chemical plant in Gujarat that makes phthalic anhydride, a component used in paint making, for its own use as well as for other paint makers.
"The shutdown was partly because of inventory pile up and partly for annual maintenance," a company spokesperson said.
More important, the paint manufacturers now find it difficult to roll-back prices, though crude oil prices in the world markets have fallen two-thirds in the last few months, because of the depreciation in the rupee. Naturally, they are eyeing the real estate sector to bail them out of the situation.
The automobile industry, which accounts for almost 90 per cent of the demand for industrial paint, too, is facing its worst ever crisis. The industry witnessed the worst decline in sales in 8 years this November, according to the Society of Indian Automobile Manufacturers, as buyers stayed away on account of tight liquidity.
Automobile manufacturers are learnt to be holding large inventories and some are even contemplating a production cut during the coming weeks.
"The automobile sector continues to be an area of concern where we have witnessed de-growth. The situation is likely to be severe in the first 6 months of 2009 and perhaps after that, the situation will improve," says Kansai Nerolac managing director HM Bharuka. Around 50 per cent Kansai Nerolac's sales come from the automotive and manufacturing industries.
Paint manufacturers now appear to be pinning their hopes on the revival in the real estate market.