InvestorQ : What is this down trading risk for paint companies in India and why has it become such a big issue now?
Mitali Bhutta made post

What is this down trading risk for paint companies in India and why has it become such a big issue now?

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3 weeks ago
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To understand down trading in the paints sector, you need to understand how the organized segment gained in the first place. For instance, the unorganized sector was already under a lot of pressure post GST. That led to narrowing price gap between organized and unorganized paints manufacturers. Post 2021, organized players hiked prices by 20-25%, making unorganized paints much cheaper. In decorative paints, the buyers also save on labour costs as the labour for cheaper paints also comes cheaper.

But, the bigger risk about downtrading is not just the loss of sales but the loss in valuation multiples. Put differently, it is about the loss of premium valuation multiples that most of these large paint companies like Asian Paints and Berger command in the market. Down trading could raise some questions about the lofty valuations. Events like down trading can accentuate this loss in valuations. If that happens, then the FMCG style valuations that paint companies command, could be under a cloud. That could be the big worry for paints.

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