Paints, tiles players stand to gain from realty rebound

Favourable macros, market share gains for larger players, pent-up demand are key growth drivers

The real estate industry is hoping for a housing revival and also a bounce in commercial space. The beneficiaries of such a revival will include the paints industry and ceramic tiles industries.

Both were hit hard in financial year 2020-21

(FY21) by a drastic drop in demand and then rising input costs. The market performance in the recent past has been volatile with some shares doing well and others not so well.

High crude and gas prices affect both industries since petroleum products are raw materials (for paints) and fuel (for ceramics). In addition, displacement of migrant workers and new competitors have been challenges.

However, the paint industry may be seeing a shift towards the organised sector, and the listed companies have diversified into hygiene products, waterproofing and other related areas.

Both industries may benefit from the new focus on hygiene and are seeing welcome export orders. The listed ceramics companies may be gaining from the fact that smaller unlisted units operating out of Morbi in Gujarat have been struggling to cope with higher gas prices. This could result in a shift towards larger brands. The bigger ceramics firms have also diversified to other products such as faucets, showers, and bathroom fittings.

Going forward, margin pressures may force all manufacturers to hike prices — this has already started happening in many cases. However, due to the low base of the last fiscal, there is pent-up demand and it is likely that there will be volume growth anyway.

In the longer term, the policy focus on affordable housing, growing urbanisation, higher rural incomes, etc., are trends that could drive demand. The paints industry can also hope for a revival in the industrial sector. If the automobile industry recovers, for instance, that would be another revenue stream that would grow after two bad fiscals.

The ceramics tile industry projects a potential doubling of turnover for listed companies at the least by 2027. The market size was valued at $3.7 billion in 2019, and is projected to grow at a compound annual growth rate (CAGR) of 8.6 per cent to reach $7.14 billion by 2027. The paints industry is worth around ~50,000 crore and the large players could see two or three years of high growth off the low base of last fiscal and servicing of pent-up demand. Both industries have scale in terms of large capacities.

The big listed players in paints include Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, and Indigo Paints. They are all likely to grow quickly this fiscal with positive advisories from analysts for Asian Paints and Berger. In terms of market returns, only Akzo has a negative return in the past three months with Asian Paints (up 13 per cent) and Kansai (up 6.2 per cent) leading the pack.

There’s been less investment interest in the ceramics tile industry and given margin pressures, it is a somewhat countercyclical play. The largest listed firms would include Kajaria Ceramics, Cera, Hind Sanitaryware (HSIL), and Somany Ceramics. Analysts have positive recommendations on these as well.

The market performance has been less stable for tile companies. Kajaria is up 19 per cent in the last three months, while Somany is up by 16.7 per cent. But the other companies in the mix have negative returns.