Cost inflation negates demand for relaxations, revival paints cos

Gradual easing of restrictions imposed to contain the spread of coronavirus ahead of the festive season are the demand drivers for the sector.

Rural demand, especially the economy paints, is expected to remain in good shape on strong kharif crop and rabi sowing. Analysts expect the leading listed paint manufacturers to witness double digit volume growth in the decorative paint segment. The industrial paint business is also expected to improve, but at a slower pace.

The demand outlook is relaxed, but cost inflation remains a concern for investors in paint stocks.

Paint makers may see decent volume growth in the September quarter, as demand for discretionary products picks up.

Gradual easing of restrictions imposed to contain the spread of coronavirus ahead of the festive season are the demand drivers for the sector.

Rural demand, especially the economy paints, is expected to remain in good shape on strong kharif crop and rabi sowing. Analysts expect the leading listed paint manufacturers to witness double digit volume growth in the decorative paint segment. The industrial paint business is also expected to improve, but at a slower pace.

The demand outlook is relaxed, but cost inflation remains a concern for investors in paint stocks.

|#+|

Prices of titanium dioxide (Tio2), a key input for paint makers and other crude-based monomers, remain high, threatening margins. Raw materials account for about 55% of the total operating cost of the sector.

Analysts at Motilal Oswal Financial Services Ltd expect market leader Asian Paints Ltd to see 45% year-on-year (YoY) volume growth in Q2 of FY12. However, the Tio2 price is up 25.6% year-over-year. The domestic brokerage firm thus anticipates gross margin to decline from 44.4% in Q2FY21 to 40% in Q2FY22.

Besides, analysts have cautioned that unless companies pass on the entire cost to consumers, margins could remain under pressure for the entire financial year. Unlike in the past, paint companies are not hiking in a calibrated manner to sustain volume growth.

Credit rating agency CRISIL Ltd estimates that the revenue of paint companies will improve by 10-12% in FY12. On the other hand, operating margin is expected to decline by about 200 basis points (bps) to 17% in FY22 from a peak of 19% in FY19. One basis point is one hundredth of a percentage point. Operating costs are expected to see an improvement as travel and advertising-related expenses make a comeback.

That said, analysts at Crisil don’t see a reduction in operating profitability impacting the paint companies’ credit quality. Backed by healthy cash-generating ability and strong balance sheet, credit quality will remain stable.

An analysis of the top six paint manufacturers, which account for about 96% of the organized sector’s revenue, shows that they have an almost total cash surplus. ₹7,000 crore by 31 March 2021.

Despite the consumer discretionary sector being the worst hit during the coronavirus pandemic, paint stocks have seen decent growth in the past one year.

In this time, Asian Paints Ltd. and Berger Paints Ltd. have grown by around 55% and 36% respectively. Analysts said the rally was supported by an increase in market share of smaller companies led by moderation in raw material costs and consolidation.

With these positives already in price, the outlook on margin is important. Analysts said valuations have fallen below their peak, but are still costly in the context of cost inflation concerns.