Indian Paints Sector Q2 FY22 analysis- Revenues rise by 17-33%


by 5paisa Research Team Last Updated: Nov 17, 2021, 10:13 PM IST

Due to the unanticipated double digit raw material cost inflation of 20%, the paints sector reported a sharp decline in gross margins by 450-1000bps in Q2 FY22. Post the 15% inflation registered in Q1 FY22, there was a 6% increase in the inflation in Q2. The key raw material prices were driven up by the increase in price of crude oil, supply chain disruption and increased freight charges. Among all its peers, Berger paints reported the least amount of Gross margin compression of 450 bps.

The players in the industry chose to engage in an aggressive price hike of 10%, following the 6% hike in the first half of FY22. Asian paints has announced a 5% price hike from 5 December and rest of the companies are expected to follow suit. If there are no further price hikes in raw materials, then this price hike will help in offsetting the margin pressures thus leading to an increase in the gross margins.

The companies have witnessed a 17-33% YoY rise in revenue and 8-19% 2 year CAGR. The decorative segment of the business grew substantially in this sector. There was a high amount of pent up demand this quarter, which has more or less been fulfilled and there is speculation that the high volume growth period is ending. The price hikes will surely increase the revenue but demand growth is not expected to rise as much.

Sales growth of all the players:

COMPANIES

Q2 FY22

Q1 FY22

Asian Paints

32.6%

91.1%

Berger Paints

27.7%

93.2%

Kansai Nerolac Paints

17.1%

121.3%

Akzo Nobel

22.1%

142.3%

Indigo Paints

26.7%

49.2%

 

EBITDA Margins of all the players: (In %)

COMPANIES

Q2 FY22

Q1 FY22

Asian Paints

12.7

16.4

Berger Paints

15.9

13.3

Kansai Nerolac Paints

10.0

13.6

Akzo Nobel

12.8

14.5

Indigo Paints

11.9

12.9

 

Gross Margins of all the players: (In %)

COMPANIES

Q2 FY22

Q1 FY22

Asian Paints

34.7

38.4

Berger Paints

38.3

38.6

Kansai Nerolac Paints

28.9

33.9

Akzo Nobel

40.2

42.4

Indigo Paints

41.7

45.5

 

1. Asian Paints:

In Q2 FY22, the sales/revenue of Asian Paints grew by 33% YoY which was 8% more than the analysts estimates. This high growth was offset by the weaker than expected gross margin which decreased by 370bps QoQ. The PAT was reported to be 37% lower than what was estimated. Despite these issues, management made a very prudent decision to use excess revenue to cover a large part of the rise in raw materials, which was one of the main reasons behind the steep drop in gross margin in the second quarter.

The company plans on using this exact method to overcome the problem within the next three months and aims at reaching an 18-20% EBITDA margin by the 4th Quarter.

The increase in the revenue was mainly because of the increased demand in the Tier 3 and Tier 4 cities. According to the Management, a strong demand is expected to sustain for the near future amid the upcoming festive season and the pick up in the housing sector as the lock-down rules are taken off the table. The specialty waterproofing paints segment also saw significant growth during this monsoon season, which is reflected in second quarter results. There are a few advantages of Asian Paints that make it a very good addition to anyone's portfolio- a very strong brand name, a highly diversified portfolio which will help company overcome tough times and also sustain its growth due to its specialty segments.

The company has also added some new and innovative products to its portfolio such as emulsion, wood coating and water repellent products. Furthermore, Asian Paints dominates in the field of decorative paints which is expected to sustain a volume growth of 12-15% (according to the 2 year CAGR), which in itself is very attractive to potential investors and will help the company to grow long term.

The EPS is expected to grow by 42.7% in FY23, along with a 22.5% growth in ROE in FY22 itself. The EV/EBITDA value is also estimated to increase from 58.3 in FY21 to 60.9 in FY22.

In the Home Decor segment of the company, 26 home stores were opened in Q2 FY22. 500 sites were booked in Q2 for home décor and painting services along with the launch of a new range of wallpapers.

Overseas business

The revenue growth in this side of the business was very weak due to the long drawn lock-down in the Middle east and some local issues in Africa. Due to this, a good decision by the management was taken to increase the prices of the products in order to mitigate the increase in raw material cost.

Home Improvement

The modular kitchen making segment registered an increase in revenue of 70% YoY and the bath segment registered a growth of 69% YoY due to the premium products offered by the company.

2. Berger Paints:

The value growth of Berger paints exceeded the volume growth by 5-5.5% due to the price hike of 5% in the decorative segment and 10% in the industrial business. Tier 1 and Tier 2 cities have shown a much stronger volume growth than Tier 3 and Tier 4 cities. The demand for the decorative segment took off in larger towns. The company expects the price hikes to help offset the inflation in Q3 and lead to increase in margins. The cost of materials has shot up from Rs.750 crore to a whopping Rs.1,303 crore. Revenue from operations showed a significant increase of 27.70% YoY, from Rs.1,743 crore in Q2 FY21 to Rs.2,225 crore in Q2 FY22. But, the total expenses witnessed an increase of Rs.468 crore in Q2 FY22. The EBITDA margin has been compressed by 333bps YoY.

3. Kansai Nerloac Paints:

Nerolac paints reported a 48% fall in PAT from Rs.167.96 crore in Q2 FY21 to Rs.87.28 crore in Q2 FY22. In contrast, the revenue from operations increased by 17.1% YoY from Rs.1383.21 crore in Q2 FY21 to Rs.1619.64 crore in Q2 FY22. The total expenses also reported an increase of 29.88% YoY. The Board of directors approved an interim dividend of Rs.1.25 per share. The company also launched two new products in the construction chemicals segment.

4. Akzo Nobel:

Sales in Kerela contributes 30% to the total amount of sales, which saw a very low demand till July due to the Covid norms and it bounced back in August and September when it grew more than the company average. The company reported a decrease in PAT from Rs.66.28 crore in Q2 FY21 to Rs.55.72 crore in Q2 FY22. In contrast, the total income of the company showed a 21% YoY increase.

5. Indigo Paints:

Indigo paints saw the highest value growth and volume growth of 43% and 31% respectively, in the category. The revenue from operation increased by 26.65% YoY from Rs.154.8 crore in Q2 FY21 to Rs. 196.11 crore in Q2 FY22. The net profit reported a decrease of 27.95% YoY. The company increased prices in the cement paint segment as well as all other categories. Another price hike is planned fro Q3 to support the gross margins in Q3 and Q4. Indigo also expects to complete the expansion of its Tamil Nadu manufacturing facility by Q2 FY23.

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