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The paint industry is bracing for subdued growth in the December quarter (Q3FY24) amid weak demand, downtrading to the economy segment, and stiff competition, not withstanding the festive cheer and wedding season. Even price cuts, a result of slow sales, might not be enough to push value growth beyond single digit.
The silver lining for paint manufacturers is the drop in key raw material prices, thanks to falling crude oil prices. While this could lead to increased margins, investors are awaiting signs of volume growth before they get excited about the sector. Given the muted sentiment, it’s no shocker that the average returns of large listed players in the sector over the past six months is a mere third of the benchmarks, at 4.5 per cent.
Despite a low base, the Street apprehending a sub-par performance from paint companies in the December quarter. Analysts, led by Amit Purohit, at Elara Capital, noted: “Overall demand continues to be soft, contrary to expectations of a good recovery in Q3 due to the long festival and marriage seasons.” While October witnessed robust year-on-year growth due to the shift in the festival season demand, sales have been poor after Diwali and this may impact overall volume growth in Q3.
Volume growth of paint firms was lower in the September quarter (Q2FY24) versus previous quarters. Market leader Asian Paints posted a 6 per cent expansion in volumes, after double-digit growth in the last two quarters. With Q3FY24 volumes also expected to be on the lower side, it may be a tall order for the firm to return to its double-digit volume growth trajectory in Q3.
Weak volume growth, coupled with lacklustre value growth, is expected to weigh on revenues in Q3FY24. Downtrading to economy paints and the recent price reduction of 1-2 per cent are likely to impact value growth of paint firms. “We believe value growth could be in the mid-to-low single digits,” said Elara Capital.
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The Q3FY24 trends may be like the September quarter for which Asian Paints reported flattish revenue. The firm’s volume growth was offset by an adverse product mix (impact of -5 per cent) and lack of scale. It cited erratic rainfall and postponement of sales to the December quarter, given a late Diwali, as reasons for the lower-than-expected topline during Q2.
Berger Paints, on the other hand, fared better with 11 per cent overall volume growth in Q2 and it expects to maintain its double-digit volume growth trend in Q3. It posted 4 per cent revenue growth last quarter with the benefit of higher volumes being negated by an extended monsoon, which hit sales of exterior and interior premium emulsions, even as the economy segment products displayed higher traction.
Though top-line and demand growth is likely to be muted, paint companies should benefit from lower raw material prices. In a report earlier this month, Nomura Research highlighted that the prices of titanium dioxide, the key raw material for paint firms, has slipped 4 per cent on a sequential basis and 6 per cent over the year ago quarter. But firms have passed on part of the gains as price cuts to remain competitive and support volumes and demand.
Gross margins of Asian Paints and Berger Paints in the September quarter were their highest over the past 10-11 quarters on the back of lower raw material costs. These, however, did not fully percolate down to the operating profit margin level given weaker leverage, and higher employee and other expenses. While Asian Paints, which posted an operating profit margin of 20.2 per cent, expects profitability to be 18-20 per cent going ahead, Berger Paints believes that it will remain at the 16-17 per cent (17.1 per cent in Q2) level in the current year.
While weak commodity prices should be beneficial, the Street is cautious given the imminent launch of Grasim’s paint portfolio in Q4. This may shift focus on volumes and market share, thus weigh on profitability.
At the current price, Asian Paints is trading at 55 times its FY25 earnings estimates, while Berger Paints is available at just under 49 times. While valuations are below their long-term averages, demand trends and competitive pressures may not lead to further price-to-equity expansion in the near term.
