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Shares of Asian Paints, Berger Paints and Kansai Nerolac jumped sharply on Wednesday, after they announced fourth quarter results. While shares moved up as sales, especially in rural areas, picked up in June, most analysts, still remain cautious on the sector, as the fear Covid-related slowdown will not revive the sector any time soon.
Asian Paints reported a 7 per cent decline in sales and 3 per cent fall in EBITDA; Berger Paints India posted an eight per cent decline in consolidated revenue while EBITDA margin was up marginally by 5 bps.
Shares of Asian Paints jumped to a high of ₹₹1,813.10 on the BSE on Wednesday before closing at ₹1,748; Berger Paints, which surged to an intra-day high of ₹551.4, closed with a gain of 5.7 per cent at ₹544.85. Similarly, Kansai Nerolac India, after hitting a high of ₹443, closed with a gain of 6.7 per cent at ₹429.3.
Headwinds
According to domestic brokerage Emkay Global, “Recent channel checks indicate mixed demand trends for paint companies, with small towns showing stronger-than-expected recovery, while urban towns witnessing steep declines due to the lack of labourers and demand postponement.”
Decorative paints category growth was sharply affected during the lockdown, said Motilal Oswal Financial Services. Also, the industry is highly vulnerable to the economic downturn impact on discretionary consumption. Further, it will be impacted due to social distancing becoming a new normal, particularly due to lack of do-it-yourself culture with regards to house painting in India, Motilal Oswal said and added: “Moreover, the impact of severe real estate slowdown on demand for paints in new construction (nearly 15 per cent of decorative segment sales) will also affect growth prospects.” Motilal Oswal maintains ‘sell’ rate on Asian Paints with a price target of ₹1,315.
According to Emkay Global, margin benefit could be lower than expected in the near term due to high-priced inventory and forward covers. Gains are also weakening due to the rise in crude prices, moderate correction in Tier-2 cities, rupee depreciation and weak product mix.”
Gradual recovery in demand
However, ICICI Securities believes a gradual recovery in the demand of decorative paints from 2HFY21. Regions such as East and South India are witnessing faster recovery in demand of paints post lockdown. Berger Paints being a dominant player in these regions would benefit from faster demand recovery and thus recoup its lost sales, said ICICI Securities.
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