Why paint margins look beautiful on a good year and disappear on a bad quarter
Paint margins look beautiful on a good year. They disappear on a bad quarter.
India’s paints industry is growing toward Rs 1.4 lakh crore by 2030. The market structure is being redrawn by Birla Opus and JSW Paints. New capacity is being added at a pace never seen before. Every CEO in the sector is talking about market share, distribution depth, and brand positioning.
Nobody is talking loudly enough about the raw material trap. And that is the more structural risk.
Titanium dioxide. Vinyl acetate monomer. Acrylic emulsions. Crude derivatives. Solvents. Resins. Add them up and raw materials account for 50 to 60 percent of total production costs in Indian paint companies. Of that, the overwhelming majority is import-linked. India does not produce enough TiO2 to meet its own industry demand. It does not produce the full spectrum of crude derivatives it needs. The supply chain runs through Germany, China, South Korea, and global petrochemical markets.
Reality: Paint companies in India have almost no raw material sovereignty. When global commodity markets move, Indian paint margins move with them — one quarter later, with nowhere to hide.
The 2022 episode proved it beyond any further debate.
What the 2022 Crisis Actually Revealed
In FY22, crude oil surged 78 percent due to the Russia-Ukraine conflict.
Titanium dioxide prices swung 15 to 20 percent. Freight costs as a percentage of revenue for Asian Paints had already risen from 5.6 percent in FY16 to 6.6 percent in FY22. The combined input cost shock was severe. Paint companies had two choices: absorb the hit or pass it on. They attempted both, imperfectly.
Asian Paints hiked prices by 22 to 24 percent across the cycle. Gross profit margins still fell by 350 to 450 basis points in the following quarters. The price hike was necessary. It was not sufficient. The lag between RM cost increase and price realisation in the market typically runs one full quarter. In a fast-moving commodity spike, that quarter is where the margin destruction happens.
Warning: In late FY22 to early FY23, Asian Paints raised prices by 2 to 4 percent following 15 to 25 percent crude oil hikes. Gross margins still contracted by 350 to 450 basis points. The lesson: pricing power in paints is real but limited. You can pass on costs. You cannot pass them on fast enough or completely enough to protect the quarter.
Kansai Nerolac’s situation in Q3 FY26 is the most recent reminder. Consolidated net profit fell 82 percent year on year to Rs 117 crore on a 2.7 percent revenue uptick. Operating margin narrowed to 12 percent. This was not a demand crisis. It was a margin architecture crisis.
The Raw Material Map
Understanding the exposure requires mapping where the costs actually sit.
Titanium dioxide is the most critical single input. It alone accounts for 12 to 35 percent of raw material costs depending on product mix and pigment intensity. India imports significant volumes from Germany, China, and South Korea. Domestic production capacity exists but is limited, tightly regulated, and insufficient to buffer against global supply shocks. China is the dominant TiO2 exporter to India. TiO2 imports from China represent 8 to 10 percent of total raw material costs for the major listed players.
The second layer is crude oil derivatives. Solvents, resins, acrylic emulsions — these are all petrochemical derivatives. Together with TiO2, crude-linked inputs account for roughly 50 percent of raw material cost in decorative paints. This is the number that explains why paint stocks and crude oil prices have a correlation that analysts track every quarter.
• Titanium dioxide: 12 to 35 percent of RM cost. Import-dependent. China-dominated supply. Anti-dumping duty risk adds a second layer of price uncertainty.
• Crude oil derivatives: solvents, resins, acrylic emulsions. 50 percent of RM cost is crude-linked. One geopolitical event away from a 15 to 20 percent swing.
• Vinyl acetate monomer (VAM) and vinyl acetate emulsion (VAE): critical for water-based paints. Asian Paints has announced backward integration into VAM-VAE manufacturing — a recognition that this input is a structural vulnerability.
• Freight: not a raw material but a cost that multiplies every RM shock. Asian Paints’ freight cost as a share of revenue rose 100 basis points over six years even before the 2022 crisis.
Reality: The industry has no natural hedge. Paint companies are price-takers on every major input. They are price-setters in a market where competition is intensifying and consumer discretionary demand is elastic. The gap between those two positions is where margins live – and die.
What Passes for Hedging Today
Let us be honest about the current state of RM risk management in Indian paints.
There is no futures market for titanium dioxide. There is no standardised forward contract for VAM-VAE. There is no financial instrument that lets an Indian paint company lock in its TiO2 cost for the next four quarters the way a metals processor might use exchange-traded contracts. The hedging toolkit is limited.
What companies actually do falls into four categories. Some do it well. Most do it reactively.
Inventory buffering
Companies build raw material inventory ahead of anticipated price spikes. This works when the timing of the spike is predictable. It fails when the spike is sudden, as in February 2022. Inventory buffers also carry working capital cost and shelf-life risk for certain chemical inputs. The buffer strategy is real but imprecise.
Supplier diversification
Asian Paints and Berger have been actively diversifying TiO2 sourcing beyond China — adding German, South Korean, and domestic Indian sources. This reduces concentration risk but does not eliminate price correlation. When global TiO2 prices move, they tend to move across geographies simultaneously. Diversification improves supply security. It does not improve price security.
Product mix shift toward water-based paints
Water-based formulations use less crude-derived solvent and more TiO2 and acrylic emulsions. The shift reduces crude oil dependency but increases TiO2 dependency. It is a partial hedge, not a structural one. India has been shifting toward water-based paints for regulatory and consumer health reasons as much as for RM strategy.
Backward integration
This is the most structurally significant move available — and the only one with real long-term impact. Asian Paints has announced its VAM-VAE manufacturing project and a white cement plant in Fujairah, UAE, as part of backward integration strategy. The logic is direct: if you manufacture your own key inputs, you internalise the margin rather than paying it to a supplier.
The challenge is capital intensity and lead time. A VAM-VAE plant is a multiyear, multi-thousand-crore investment. It solves the problem for the 2030s, not for the next RM crisis, which may arrive in 2026.
Reality: The honest summary: Indian paint companies manage RM risk tactically. They inventory-buffer, diversify sources, and shift product mix. They do not structurally hedge. The 2022 crisis exposed this. The current crude oil pressure is testing it again. Backward integration is the right long-term answer. It is not yet mature enough to protect the near term.
The Double Compression of 2025 and 2026
The current moment is particularly dangerous because RM pressure is arriving simultaneously with competitive pressure.
In 2022, the RM crisis hit a market with limited new competition. Companies could pass on price increases because the market structure supported it. The oligopoly held.
In 2025 and 2026, the RM cycle is turning upward again — crude prices are rising, TiO2 volatility has resumed — but the market has changed. Birla Opus and JSW Paints are aggressively buying volume share with dealer incentives and aggressive pricing. This creates a structural constraint that did not exist in 2022.
• In 2022: RM spike, limited competition, price hikes possible. Margins fell but partially recovered.
• In 2025-26: RM spike, intense competition, price hike ability constrained. Margins fall further with less recovery pathway.
• CRISIL projects: organised paint industry revenue to grow only 3 to 5 percent in FY27 and FY28 despite volume growth of 7 to 8 percent. The gap between volume and value growth is price compression — companies absorbing rather than passing on input costs.
• Operating margins: averaged 18 percent from FY20 to FY24, fell to 16 percent in H1 FY25, and analysts project further moderation to 14 percent by FY26 due to combined RM and competitive pressure.
Warning: The 2022 crisis was a commodity shock in a stable competitive environment. The 2025-26 pressure is a commodity shock in a disrupted competitive environment. The pricing lever is harder to pull. The margin destruction will be deeper and the recovery will take longer.
Three Company Trajectories
The Backward Integrator
This company has recognised that RM sovereignty is the only structural hedge available.
It is investing in manufacturing key inputs — VAM-VAE, specialty resins, TiO2 precursors — even if the payback horizon is five to eight years. It is accepting short-term capex drag for long-term margin architecture. Asian Paints’ VAM-VAE investment is the clearest public example of this direction.
The risk is execution. Backward integration projects are complex, capital-intensive, and require sustained management focus across a period when the company is simultaneously fighting a market share war. The companies that can hold discipline on both fronts simultaneously will define the next decade.
Reality: The marker to watch: management commentary specifically addressing RM sovereignty – not just sourcing diversification – as a stated strategic priority backed by announced capex.
The Tactician
This company manages RM risk quarter to quarter.
It builds inventory ahead of anticipated spikes, diversifies sourcing, shifts product mix seasonally, and adjusts pricing with a quarter lag. This approach has worked reasonably well in a stable competitive environment. In the current environment, it is increasingly insufficient.
The tactician can survive a single RM cycle. It cannot survive overlapping RM pressure and competitive price compression without meaningful margin deterioration. Berger Paints sitting at 20 percent market share in a war with Birla Opus while crude oil rises is the archetype of this position.
The Exposed Mid-Tier
For smaller and regional paint companies, the RM trap is existential, not strategic.
Players below Rs 500 crore in revenue typically have no forward purchasing capability, no supplier leverage to negotiate preferential pricing, and no ability to invest in backward integration. When TiO2 prices swing 15 to 20 percent annually and crude derivatives follow, these companies face a choice between margin destruction and volume destruction. Many will not survive the next full cycle. The consolidation that Akzo Nobel’s exit hinted at will accelerate.
The 90-Day CEO Action Plan
Map the actual RM exposure by input line – Days 1 to 20
Most paint companies know their RM cost as a percentage of revenue. Far fewer have mapped the exposure by specific input, by supplier geography, and by price correlation with tradeable indices like crude oil. Build this map. It will tell you where your genuine exposure concentrations are and which inputs have the most available hedging alternatives.
Model the double-compression scenario explicitly – Days 20 to 40
Run the specific scenario: crude rises 20 percent, TiO2 rises 15 percent, and competitive pressure limits your price hike to 5 percent. What does operating margin look like? What does working capital look like? This scenario is not hypothetical. It is approximately what the industry is navigating in 2025 to 2026. If you have not stress-tested against it, you are flying blind.
Accelerate supplier diversification with documented alternatives – Days 40 to 60
For every major RM input, you should have at least three qualified supplier alternatives across at least two geographies. This is not about using all of them simultaneously. It is about having the contractual relationship and quality approval in place so you can switch within 30 days when your primary supplier has a disruption. Most mid-tier paint companies have single-source dependency on two to three critical inputs. That is not a sourcing strategy. It is a single point of failure.
Evaluate backward integration feasibility for your top two RM inputs – Days 60 to 80
This does not mean committing to build a TiO2 plant. It means building the business case, understanding the capital requirement, and assessing whether a joint venture or toll manufacturing arrangement with a chemical company provides a partial integration benefit without the full capital outlay. Asian Paints is building VAM-VAE manufacturing. You should at minimum understand what the equivalent move looks like for your specific RM profile.
Build a pricing discipline framework- Days 80 to 90
The 2022 crisis exposed that most paint companies hike prices reactively, triggered by RM cost levels rather than by a pre-built pricing protocol. Define in advance the RM cost threshold at which a price hike is automatically initiated, the product categories where you have pricing power versus those where you absorb, and the dealer incentive trade-off between margin protection and volume retention. Having this framework decided in advance means you execute faster when the next spike arrives. And it will arrive.
The Closing Question
The Indian paints industry is entering a period of simultaneous pressure from three directions: raw material cost volatility, competitive intensity, and margin compression from overcapacity. Any one of these would be manageable alone. The three together, arriving in the same window, represent a structural stress test.
The companies that emerge with margin architecture intact will be the ones who treated RM sovereignty as a strategic investment, not a procurement exercise. The ones who invested in backward integration before the next crisis, not during it. The ones who built pricing discipline frameworks when margins were healthy, not when they were collapsing.
The irony of the paints industry is that the margins look best precisely when you need to invest hardest. Raw material prices are low, consumers are painting, and the temptation is to distribute rather than integrate. Every cycle, companies defer the RM sovereignty investment. Every cycle, the next spike punishes them for it.
The paint on your wall dries in four hours. The margin damage from a raw material crisis takes four quarters to recover. Act in the window before the crisis, not after it.
What is your plan if crude rises 25 percent in the next six months – and Birla Opus does not raise prices when you do?
About the Author
Abinash Mishra is a CEO with 28+ years in India’s building materials and infrastructure sector. He is an alumnus of IIT Bombay and Olin Business School, and a PhD Scholar at IIT Patna. He publishes the LinkedIn newsletter AI + Building Materials and is open to leadership, advisory, and board roles in building materials, infrastructure, and manufacturing.
