Yet, gross profit margin remained flat at the year-ago level of 38 per cent, restricting the operating leverage benefits. Volatility in exchange rate and crude oil prices have kept raw material prices at higher levels, compared to the year-ago levels. Price cuts, too, are expected to have contributed to the pressure on gross profit margins.
Analysts at IIFL said Nerolac had joined Asian Paints in cutting prices for enamel portfolio (decorative paints), aiding a double-digit growth rate in the volumes of decorative segment. Even Asian Paints reported high double digit-volume growth (estimated at 17 per cent) in the decorative segment last week.
However, the industrial paint segment, which constitutes around 45 per cent of the company’s top line, remained under pressure, thanks to the sustained slowdown in the automotive segment.
Though Nerolac is entering into other niche markets such as adhesives and construction chemicals to diversify the risk in the industrial segment, it is unlikely to make much headway in the near term, given the stiff competition from Pidilite, said an analyst at a domestic brokerage.
Also, there is no visibility of recovery in the automotive segment, which might put pressure on the company’s margins and profit in the coming quarters. Thus, investors are recommended to wait for a clear upward volume trend before taking an exposure to the stock. The stock currently trades at 37 times FY21 estimated earnings, which is at a 15-20 per cent discount to Asian Paints and Berger Paints.