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How paint makers plan to tackle slowdown

February 20, 2024 13:26 IST

Berger Paints, the country’s second-largest decorative paint maker, continued to outperform its peers and gain market share in the 2023-24 (FY24) October-December quarter (third quarter, or Q3).


Photograph: Agusti Torres/Reuters

The company posted a consolidated revenue growth of 7 per cent compared to the year-ago quarter, surpassing Asian Paints (5.4 per cent) and Kansai Nerolac Paints (5.7 per cent).

While standalone volumes for Berger Paints were up by 9.1 per cent, it achieved double-digit volume growth in decorative volumes.

However, the value growth (6.4 per cent) for the company trailed volume growth in the quarter.


Analysts at Elara Securities, led by Amit Purohit, state, “The value-volume disparity in decorative coatings stemmed from a November price reduction and a greater proportion of economy-grade products.

"Nonetheless, compared to the second quarter, the gap has narrowed due to reduced emphasis on putty products.”

Decorative paint sales were also aided by the festival season.

However, after a robust October, paint demand in India has moderated over the past three months (November 2023-January 2024).

The company expects demand momentum in industrial and decorative paints to continue in the January-March quarter.

While gross margins were at a 10-quarter high, the gains did not percolate down as operating profit margin expansion was limited to 370 basis points (bps) at 16.7 per cent.

This was due to higher advertising and promotional costs, which increased by 150 bps due to the ICC Men’s Cricket World Cup.

The company has revised its margins downward to 15–17 per cent from 16–17 per cent earlier, given the price cuts, with higher competitive intensity also being cited as a reason for the same.

Kotak Research has a ‘sell’ rating.

“Even as Berger continues to execute well, we stay cautious due to the changing competitive landscape given Grasim’s foray,” says the brokerage.

For the market leader, Asian Paints, revenue growth of 5.4 per cent missed Street estimates.

While volume growth in the decorative segment at 12 per cent was powered by both urban and rural segments, it was marginally lower than what the Street was working with.

While revenue growth was supported by an extended festival season, it has been sluggish due to price reductions and an unfavourable mix or low mix of the luxury segment, says Motilal Oswal Research.

The company expects double-digit volume growth to continue going ahead, while the volume-value gap is also expected to reduce to 4 per cent.

Like its smaller peer, Asian Paints, too, turned in a strong gross margin performance at 43.6 per cent, which was the best in the last 11 quarters.

Analysts at Motilal Oswal Research, led by Naveen Trivedi, said that the gross margin in 2024-25 (FY25)/2025-26 (FY26) will be the key monitorable, considering the changing competitive landscape and dwindling raw material price benefits.

The operating profit of the company grew by a strong 27.6 per cent while margins came in at 22.6 per cent, up 393 bps and above estimates.

The gains were on the back of soft raw material prices and sourcing efficiencies.

Given the brand-building activities, the company has maintained its medium-term margin guidance of 18–20 per cent.

IIFL Research has downgraded its revenue estimates by 2-4 per cent over FY24-FY26 to factor in the miss in Q3.

However, the brokerage, which has a ‘reduce’ rating on the stock, broadly maintains its operating profit estimates going forward, factoring in some gross margin improvement.

Kansai Nerolac also posted double-digit growth in the decorative paint segment.

Led by a strong show in the urban markets (Tier-I and Tier-II), the company posted a 5.7 per cent growth in net sales.

However, downtrading and a higher proportion of putty and tile adhesives meant that value growth lagged behind volume growth.

The management expects near-double-digit volume growth in the decorative segment to sustain in FY25 (and 8–10 per cent in the medium term) with a pickup in rural demand.

The company has taken a 2.7 per cent price cut over the past three months, which, like its peers, will moderate value growth in the near term.

The company, a large player in the industrial coating business, witnessed good demand and is expected to grow at double digits, led by government spending as well as a richer product mix.

The company posted a gross margin expansion of 598 bps year-on-year (Y-o-Y) to 36.2 per cent on the back of soft input prices.

Margins at the operating level expanded by 224 bps Y-o-Y to 13.2 per cent and were pegged back by higher staff costs and advertising and promotion costs.

The company expects to maintain margins at 14 per cent.

Elara Capital has a ‘reduce’ rating, citing muted demand and rising competitive intensity, which may keep earnings growth in the slow lane.

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Ram Prasad Sahu
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