Demand for paints on the mend, focus on driving premiumization
2 min read . Updated: 10 Mar 2023, 01:57 PM IST
Premium- The industry's gross margin should gradually improve hereon and that would aid the industry’s earnings outlook. Even so, rising competition with the entry of Grasim Industries Ltd and JK Cement Ltd, remains a worry for investors in paint stocks
The December quarter (Q3FY23) earnings performance of paint manufacturers was lackluster with subdued volumes, even as input cost inflation has started to ease.
A recent paint dealers channel check conducted in Mumbai by ICICI Securities Ltd showed that demand for paints remained strong in January and February, with a likely volume growth of around 10%.
“The paint demand is steadily recovering post steep slowdown in October-November 2022 as the dealers indicated that December 2022 was better than November 2022 and off-take in January-February 2023 is also better than offtake in December 2022," said the ICICI Securities report dated 8 March.
According to paint dealers in Mumbai, there has been an increase in trade schemes as raw material prices have corrected. Also, companies are focusing more on premium paints via trade schemes. To protect margins, amid rising input costs, paint companies had undertaken steep price hikes. And that has weighed on demand for premium products. In its recent earnings call, the management of market leader in decorative paints Asian Paints Ltd said that it saw downtrading in Q3FY23.
Also, considering weaker consumer sentiment due to steep inflationary pressures, new product launches were limited in recent months, said the ICICI report.
Further, paint companies have not taken price hikes since September 2022 as input prices have corrected. Yes, the industry's gross margin should gradually improve hereon and that would aid the industry’s earnings outlook. Even so, rising competition with the entry of Grasim Industries Ltd and JK Cement Ltd, remains a worry for investors in paint stocks. While the impact on incumbents remains to be seen, a significant revival in performance of paint stocks is unlikely.
Although valuation multiple measured via the price-to-earnings has moderated for key listed companies Asian Paints Ltd and Berger Paints India Ltd, in the current backdrop, they are not cheap by any means.