Is Paint Sector on Recovery Path?

Sector update paint
by Nikita Bhoota 27/11/2020

The paints sector has seen a strong recovery in 2Q, with major players recording double-digit decorative volume growth as economic activity normalised. Recovery was led by economy-end emulsions and driven by rural upcountry towns, even as metros continued to witness sequential improvement. Benign input costs and continuation of cost-control measures taken post-Covid, led to higher than expected Ebitda. Companies remain confident of maintaining margins with festive demand led volume growth seen in Oct and sustainable cost savings.

Decorative demand led recovery:

Decorative volume growth was healthy across paint players Asian Paints (APNT)-11%, Berger Paints (BRGR)-17%, Kansai Nerolac (KNPL)-15%. BRGR saw the highest sales growth, given its focus on economy end emulsions, while Akzo Nobel (Akzo) reported a YoY decline, given higher salience of industrial and premium deco products.

Ebitda beat across the board:

Paint companies registered strong EBITDA margin, as a result of benign input costs and lower than estimated fixed costs, as aggressive cost reduction initiatives taken previous two quarters sustained, even as sales witnessed strong recovery.

Outlook on paint sector:

Overall, we continue to remain cautious on the prospects of the paints sector over the longer term, despite near-term tailwinds resulting from pent-up demand as lockdown eases and economic activity resumes. We believe the sector is highly overvalued, given moderate growth outlook.

Stock Performance:

S&P BSE Sensex has rallied 53.6% (March 25, 2020- November 25,2020) since the first nationwide lockdown was announced by Prime Minister Narendra Modi Here, we have discussed some paint companies’ stocks that have given positive returns or have outer performed the benchmark index S&P BSE Sensex in the same period.

Company name

25-Mar 2020

25-Nov 2020

Gain

Kansai Nerolac Paints Ltd.

326.9

522.7

59.9%

Berger Paints India Ltd.

450.3

635.8

41.2%

Asian Paints Ltd.

1,594.1

2,154.3

35.1%

Akzo Nobel India Ltd.

1,990.9

2,114.0

6.2%

Source: Ace Equity

The stocks in the paints sector have given healthy returns in the past 8 months Kansai Nerolac Paints Ltd. gave a magnificent return of 59.9% from March 25,2020 to November 25,2020.  Kansai Nerolac Paints (KNPL), the Indian subsidiary of Kansai Paints, Japan, has a presence across industrial and decorative coatings. Within the Industrial segment (45%), automotive coatings constitute ~75% of sales. Within the decorative coatings segment, KNPL’s product range spans the entire portfolio from high-end emulsion (~35% share) to low-end distempers/primers (~35% share).

Berger Paints India Ltd. rallied 41.2% in the same period. Berger has presence in the decorative paints, industrial coatings segments in the domestic and international markets. Further, it has a presence in external insulation finishing systems. In the industrial coatings segment, Berger caters to the protective coatings, automotive (primarily two-wheeler and three-wheeler and commercial vehicles) and general industrial segments. Its FY20 revenue mix stood as decorative paints 82%, Industrial paints 10% and rest 8% was contributed by international business.

Asian Paints Ltd. jumped 35.1% from March 25,2020 to November 25,2020. Asian Paints, the largest paint manufacturer in India, operates in the decorative as well as the industrial coatings segments (through its JV with PPG Industries) and has been the market leader in the Indian paints industry since 1968. The company is the second-largest automotive coatings player in India and caters for the auto OEM and refinish markets. Asia contributes the largest share of revenue to its international business (48%), with the rest coming from the Middle East (26%), Africa (20%) and South Pacific regions (6%). It has a strong distribution network in India, with more than 65,000 dealers across the country. Akzo Nobel India Ltd. has given the lowest return of 6.2% in the same period.

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