According to the management of these paint companies, demand from rural and semi-urban areas is returning faster. And, this should help improve overall sales as a sizeable chunk of the business comes from these pockets. While rural and semi-urban areas account for around 50 per cent of Asian Paints' business, it is higher for Berger Paints
and Kansai Nerolac, estimate brokerages in the absence of actual data.
Moreover, Asian Paints
eluded that some metro cities, such as Hyderabad and Bengaluru are doing better. It also believes consumers spending more time at home should lead to higher demand for paints, as many social events would now take place at home. Additionally, benign input costs, led by a steep decline in crude oil prices, are tailwinds. This should help push overall volumes further as many paint players intend to pass on the benefits of lower raw material prices to consumers. Paint companies’ key raw materials, such as titanium dioxide or monomers, are crude derivatives.
There are, however, some caveats, of which investors should be cognizant.
First, the volume offtake would likely be driven by low-priced mass products, such as putty and distemper, which was also highlighted by Asian Paints’ management during its Q4 earnings call on Tuesday. This would not only restrict top-line growth but also margin gains.
According to Vishal Gutka, vice-president, Phillip Capital: “Volume growth would mainly be driven by the economy segment and a recovery in the premium segment would take time. This would drag the top line and restrict gains in margins.” Gutka believes there would be multiple challenges on the demand (due to the weakness in real estate and the lost opportunity in water-proofing) and labour fronts.
Second, the industrial paints segment continues to face challenges because of the sustained pressure on the automotive industry.
This should mainly impact players, such as Kansai Nerolac
which gets around 45 per cent revenue from the automobile sector. The positive, as indicated by the company management, is that 90 per cent of the shops Kansai sells through are now open, and there are some green-shoots in the automotive segment (most except, commercial vehicle).
Yet, some analysts are cautious. Manoj Menon, head of research at ICICI Securities, warns: “The market is under-appreciating the impact of a weak economy on discretionary consumption.” He also believes there is indeed lost demand for paint companies, which should delay the overall recovery.
Overall, while the initial signs are positive, FY21 is unlikely to see higher revenues and profits as compared to the last year. Moreover, stock valuations are also rich, mainly for Asian Paints and Berger Paints, which are trading between 63 and 75 times FY20 earnings. Kansai, too, trades at a high valuation of 44 times FY20 earnings.