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Listed paint companies could report over 30 per cent revenue growth year-on-year (YoY), aided by double-digit volume growth in decorative paints and cumulative gains from pricing action
Buoyed by a robust demand in the first two months of the quarter and a favourable base, paint companies are expected to see a healthy performance in the April-June quarter.
Listed paint majors could report over 30 per cent revenue growth year-on-year (YoY), aided by double-digit volume growth in decorative paints and cumulative gains from pricing action.
During the last quarter, volumes had declined for all players due to Omicron 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 said 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 during the quarter due to seasonal factors will also support sales growth, they added.
ICICI Securities, too, expects volume growth to remain strong in the June quarter especially in urban markets. Delay in monsoon and marriage season in June-July also helped in registering high-sales growth. The paint sector generates 10 per cent of its revenues from the projects (real estate developers) business and a strong trend in bookings and registrations bodes well for the sector.
The industrial segment (auto, consumer durables) too have seen good demand with a 44.7 per cent increase in passenger car production in April-May and is a positive for Kansai Nerolac which has the highest exposure (27 per cent of sales) to this segment.
Within companies, market leader Asian Paints is expected to post a double-digit volume growth. This is due to a full-fledged resumption of the wedding season, market share gains even from organised players and a healthy traction in the projects business, said Vishal Gutka of
PhillipCapital Research.Revenue growth estimates vary for companies in the sector.
While Asian Paints is expected to lead on the growth front, posting an increase of 33-45 per cent, Berger Paints and Kansai Nerolac may register 22-39 per cent growth.
Over two and three-year periods, the top-two paint companies — Asian Paints and Berger — have been volume outperformers in the consumer space. They registered 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 a sharp rise in the raw material basket and limited price hikes.
Analysts expect gross margins to decline by 250-basis points (bps) over the year-ago quarter and 125 bps on a sequential basis with the metric at 37-38 per cent for the two 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 titanium dioxide were flattish, prices of crude oil were up 18 per 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. Price volatility will add to the uncertainty on margin outlook.
Companies had taken about 2 per cent price hikes in May and June and could take calibrated hikes, going ahead.
Given uncertainty on the margin front and rally from the lows (4-13 per cent) over the last couple of months, investors should await steady volume growth before considering the stocks.
While Asian Paints and Berger are trading at 50-60 times their FY24 earnings estimates, for Kansai Nerolac, it is 31 times.
Also, recovery in auto volumes with the easing of semiconductor issues will be a key trigger for Kansai.