Pallid past, better future for paint firms; price hikes to support earnings

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Consumer stocks, including paints, gained in Tuesday’s trade on account of India Meteorological Department’s (IMD) forecast of a normal monsoon.

Stocks of the three major paint firms, Asian Paints, Berger Paints India and Kansai Nerolac Paints, were up 0.7-4 per cent on Tuesday.

Expectations of an uptick in demand owing to a revival in rural economy and a recovery from the aftermath demonetisation and the goods and services tax triggered the upmove. Demand in the March 2018 quarter (Q4) is projected to be muted because of seasonality factors. Besides the revival in rural economy, growth anticipated for the automobile and industrial sectors will also auger well for paint makers in the coming months. Companies such as Asian Paints have major exposure to the rural markets (around 50 per cent).

“Volume growth of paint companies would be better in the coming quarters as rural economy has started improving and even the automobile sector has seen good growth,” said Kaustubh Pawaskar, analyst at Sharekhan.

How an expected increase in volume will reflect on paint companies, given the high input cost pressure, remains to be seen. Prices of key raw materials of paint companies, such as titanium di-oxide (TiO2) and other crude derivatives (owing to high crude oil prices, which affect prices of paint makers’ other key inputs with 45-60-day lag), are at elevated levels. High input costs have affected their gross profit margins in the past quarter and are likely to have weighed on their profitability in Q4, albeit at comparatively lesser extent.

“The paint companies have taken price hikes in March 2018. Though those hikes are not sufficient enough to compensate the increase in TiO2 and crude oil prices, they will reduce some pressure on gross margin in Q4,” said Sachin Bobade, analyst at Dolat Capital.

However, the prices of TiO2 has started coming down. While companies have also undertaken price hikes in March 2018, another is expected in April-May 2018 (Asian Paints is said to have announced another price hike of 1.3-2.8 per cent, effective May 2018). Thus, analysts expect the gross margins to improve in FY19. If crude prices continue to soar (as anticipated by many experts), improving demand will allow paint companies to take additional price hikes to protect their gross margins. 

Analysts also foresee some cost saving measures to provide additional support to the paint companies’ earnings before interest, tax, depreciation and amortisation (Ebitda) margin. 

With the positive outlook, analysts are bullish on most of the major paint companies. Thus, it is also not surprising that stocks of paint companies have been doing well vis-à-vis the Sensex in the recent past.