Some tailwinds for paint firms
Faster recovery in rural and semi-urban areas, cheaper oil augur well for Asian Paints, Berger and Nerolac
The March 2020 quarter (Q4) results of decorative paint majors — Asian Paints and Berger Paints — announced on Tuesday after market hours gave hopes to investors, and rubbed off well on all paint stocks on Wednesday. Shares of Asian Paints, Berger Paints, and Kansai Nerolac gained between 3.7 and 7 per cent, even as the Sensex fell 1.5 per cent on Wednesday. Akzo Nobel, too, was up 4 per cent during the day but ended only marginally higher.
The commentary from the management of Asian Paints and Berger Paints indicates a faster-than-expected recovery in the decorative segment, which earns these firms 85 – 90 per cent of revenues; Kansai gets about 55 per cent of its revenue from the segment. The Street, on the other hand, was anticipating a delayed recovery given the discretionary nature of the decorative segment and social-distancing concerns (customers avoiding workers into their house for painting).
However, sales in June for these companies are at 80 per cent of the year-ago levels. Underlining this in their note on Asian Paints, analysts at Kotak Institutional Equities say: “According to our checks, decorative paints sales were at 45-50 per cent of normative levels in May and have improved to 75-80 per cent in June.”
According to the management of these paint companies, demand from rural and semi-urban areas is returning faster. And, this should help improve overall sales as a sizeable chunk of the business comes from these pockets. While rural and semi-urban areas account for around 50 per cent of
Asian Paints' business, it is higher for Berger Paints and Kansai Nerolac, estimate brokerages in the absence of actual data.
Moreover, Asian Paints eluded that some metro cities, such as Hyderabad and Bengaluru are doing better. It also believes consumers spending more time at home should lead to higher demand for paints, as many social events would now take place at home. Additionally, benign input costs, led by a steep decline in crude oil prices, are tailwinds. This should help push overall volumes further as many paint players intend to pass on the benefits of lower raw material prices to consumers. Paint companies’ key raw materials, such as titanium dioxide or monomers, are crude derivatives.
There are, however, some caveats, of which investors should be cognizant.
First, the volume offtake would likely be driven by low-priced mass products, such as putty and distemper, which was also highlighted by Asian Paints’ management during its Q4 earnings call on Tuesday. This would not only restrict top-line growth but also margin gains.
According to Vishal Gutka, vice-president, Phillip Capital: “Volume growth would mainly be driven by the economy segment and a recovery in the premium segment would take time. This would drag the top line and restrict gains in margins.” Gutka believes there would be multiple challenges on the demand (due to the weakness in real estate and the lost opportunity in waterproofing) and labour fronts.
Second, the industrial paints segment continues to face challenges because of the sustained pressure on the automotive industry.