Paints: Disappointing top line growth

15 Nov 2023 , 10:46 AM

Revenue growth in Q2FY24 for the paints sector was subdued at 1.6% YoY vs. 7.4% in Q1, owing to festive mismatch and sporadic rainfall. Among analysts of IIFL Capital Services coverage universe, decorative volumes for BRGR were higher at ~10% YoY growth vs 6% for APNT while KNPL posted mild negative volume growth. Moderation in RM prices helped Gross margin expansion of ~690bps YoY (~55bps expansion QoQ) across companies which led the Ebitda margin expansion of ~480bps YoY (~220bps decline QoQ). Analysts of IIFL Capital Services cut their estimates ~3-4% to account for sales miss inFY24. They expect the revenue growth to recover in H2FY24 on the back of long festive and wedding season. Analysts of IIFL Capital Services continue to maintain their cautious view on Paints on account of modest growth potential and high valuation in the context of increased competitive intensity. 

Q2FY24 revenue below analysts of IIFL Capital Services expectations: 

In Q2, paints sector revenue came in at 1.6% YoY growth and was below analysts of IIFL Capital Services expectations. The weak demand sentiment in the decorative segment impacted the growth, while industrial segment was relatively better. Berger’s sales growth of 3.6% YoY was above 0.2%/1.3% growth for APNT/KNPL driven by market share gains of ~70bps over March’23. Indigo Paints posted the highest revenue growth of 11.5% YoY, ~2-3x of industry on a low base. 

FY24 margin largely intact: 

Ebitda margin for the sector expanded by 480bps led by 690bps expansion in gross margin, however Ebitda margins were lower QoQ, impacted by lower sales growth. APNT clocked the highest Ebitda margin expansion of 573bps YoY to 20.2% followed by 364bps YoY expansion for KNPL at 14% and 349 bps YoY expansion for BRGR at 17.1%. Despite increased Ebitda margins in Q2 the FY24 margins are broadly intact. APNT’s management reiterated its medium-term guidance of 18-20% despite clocking a 20%+ Ebitda margin in the recent quarters. 

Competitive intensity to stay: 

Management of companies like APNT, BRGR and KNPL mentioned about the increased competitive pressure from smaller local players, with discount intensity going up further. Additionally, the sector is also faced with risk of increased competition from Grasim with the launch of “Birla Opus” which is scheduled for Q4FY24.