Gross profit is calculated by deducting the cost of goods sold (raw material, inventory drawdown, goods purchased) from net sales. Companies
could not pass on the high input costs due to the goods and services tax (GST)-related disruptions. Most of them had last revised their selling prices in May 2017.
The good thing is that most of them still managed to improve their earnings before interest, tax, depreciation and amortisation (Ebitda) margins in Q3, albeit marginally, aided by cost-control measures and an effective product mix.
Asian Paints and Berger Paints have also hiked prices by 1.5 per cent, effective March 2018. This, however, may not ease the gross margin pressure in the January-March 2018 quarter (Q4).
Sachin Bobade, analyst at Dolat Capital, said, “Since till February 2018 (two months of Q4) the companies did not pass on the high input cost pressure, the gross margin of paint firms will continue to remain under pressure in Q4.”
Nevertheless, FY19 could be brighter for paint firms, as titanium dioxide prices (accounting for a major chunk of raw material costs) seem to have stabilised. “The (paint) companies did not hike prices due to the GST for a long time. So, there might be margin pressure for one more quarter. However, they will now surely pass on the input cost pressure even as titanium dioxide prices have started to soften. Hence, their margins will improve (in FY19),” said Sameer Deshmukh, analyst at Reliance Securities.
Volume growth is also seen improving. Given the pickup in the rural economy and expected growth of the automobile and infrastructure sectors, major paint players are likely to clock double-digit growth in volume in the next financial year. “Though volume growth was not up to the mark in Q3, it will be higher in Q4. Companies like Asian Paints are likely to report double-digit volume growth FY19 onward on the back of a continued premiumisation trend and strong growth in rural markets, coupled with recovery in urban demand,” Deshmukh said.
Overall, investors can expect paint companies to do well in FY19, which should also help them deliver better stock returns. Analysts’ target prices for the paint stocks indicate a potential upside of 14-21 per cent.