Q3FY24 Review: Paints: Weak quarter despite festive push

26 Mar 2024 , 03:16 PM

Revenue growth for the paints sector was moderate at 5.9% YoY in Q3 vs. 1.4% YoY in Q2, despite festive season falling in Q3 this year. While BRGR outperformed its peers in revenue growth terms at 7% YoY vs 5.7% for KNPL and 5.4% for APNT, decorative volumes for APNT were higher at ~12% YoY growth vs 9% for BRGR and ~4.5% for KNPL. RM cost deflation continued in Q3 as well which led to ~540bps YoY Gross margin expansion (~30bps expansion QoQ) across the board, which primarily aided the Ebitda margin expansion of ~350bps YoY (~130bps expansion QoQ). Companies invested the incremental gross profit in their marketing spend in Q3 keeping festive season in mind. Expensive valuations, moderate outlook and competition headwind are key concerns. 

Q3FY24 revenue below estimates across companies: 

In Q3, paints sector revenue came in at 5.9% YoY growth which was weak considering festive season in mind and was below analysts of IIFL Securities expectations. Looking on a combined basis (Q2+Q3) to neutralise the mismatch impact, there was a mere 5.6% YoY growth. Berger’s revenue growth of 7% YoY was above 5.4%/5.7% growth for APNT/KNPL as BRGR continues to gain market share, which is currently at stood at ~20%. Indigo Paints posted the highest revenue growth of 21.3% YoY, ~3- 4x of industry as it is still a small player in context of overall industry. 

FY24 margin guidance intact: 

Ebitda margin for the sector expanded by ~350bps led by 540bps expansion in gross margin, however Ebitda margin expansion were lower QoQ (~350bps YoY expansion in Q3 vs ~480bps YoY expansion in Q2), impacted by lower sales growth. APNT clocked the highest Ebitda margin expansion of 393bps YoY to 22.6% followed by 368bps YoY expansion for BRGR at 16.7% and 343 bps YoY expansion for AKZO at 16.1%. Despite increased Ebitda margins the management have reiterated their margin guidance for the medium term, APNT at 18-20%; BRGR at 15- 17%.

Competitive headwind likely to impact margins going forward: 

The paints sector is faced with the risk of increased competition from Grasim with the launch of “Birla Opus” scheduled for Q4FY24. Analysts of IIFL Securities believe in an environment which is not very upbeat, additional competition angle could put pressure on the margins with an expectation that a new player could enter with favourable pricing terms.