Demand recovery unlikely to offset margin pressures for paint companies

Companies to post double digit volume growth in the quarter

Buoyed by robust demand for the first two months of the quarter and a favourable base, paint companies are expected to post healthy performance in the June quarter. Listed paint majors could report a 30 per cent plus revenue growth y-o-y aided by double digit volume increase in decorative paints and cumulative gains from pricing action.

In the last quarter, volumes had declined for all players due to the Omicron virus and channel disruption. Most of the 14 per cent growth in the previous quarter was on account of pricing action. Analysts led by Percy Panthaki of IIFL Research say that demand was robust across both the premium and economy ranges with limited downtrading post the steep price hikes taken. Higher growth in the waterproofing category in the quarter due to seasonal factors will also support sales growth, they add.

Within companies, market leader Asian Paints is expected to post a double digit volume growth due to full-fledged resumption of wedding season, market share gains even from organized players and healthy traction in projects business, says Vishal Gutka of PhillipCapital Research.

Revenue growth estimates vary for the companies in the sector; While Asian Paints is expected to lead on the growth front posting an increase in the 33-45 per cent range, Berger Paints and Kansai Nerolac are expected to register 22-39 per cent growth. Over a two and three-year periods, the top two paint companies Asian Paints and Berger Paints have been volume outperformers in the consumer space registering a growth of 54-62 per cent.

Even as volume growth has come back and pricing action remains strong, margins are expected to come under pressure. Most brokerages believe that gross margins will be hit by the sharp rise in the raw material basket and limited price hikes. Analysts expect gross margins to decline by 250 basis points over the year ago quarter and 125 basis points on a sequential basis for the sector with the metric at 37-38 per cent each for the top two paint players.

However, companies are expected to offset the same at the operating profit level given cost control measures and operating leverage on account of strong volume growth.

While key raw material prices such as those of titanium dioxide were flattish, prices of crude oil were up 18 cent on a sequential basis. The recent price correction in crude, according to IIFL Research, will aid margins mostly in the second half of the current financial year with price volatility adding to the uncertainty on the margin outlook. Companies had taken about 2 per cent price hike in May and June and may take calibrated hikes going ahead.

Given the uncertainty on the margin front and the rally from the lows (4-13 per cent) over the last couple of months, investors should await steady volume growth trends before considering the stocks. While Asian Paints and Berger Paints are trading at 50-60 times their FY24 earnings estimates, Kansai Nerolac trades at 31 times. For the latter, the recovery in auto volumes will be a key trigger.