Q1FY24 Review: Paints: Back to normal growth rates

17 Aug 2023 , 11:46 AM

In Q1, revenue growth for the Paints sector moderated to 7.4% YoY vs 11.5% in Q4. But at ~15%, 4yr Cagr continued to be healthy. Decorative volumes were robust with BRGR posting 14% growth, which is higher than 10% for APNT. Driven by this, value growth of 9.8% for BRGR was also ahead of 6.7% for APNT. Ebitda margin for the sector expanded further by ~400bps YoY, owing to gross margin expansion. However, despite clocking high Ebitda margins, players reiterated earlier margin guidance probably in anticipation of an increase in competition from Grasim by FY24- end. Analysts of IIFL Capital Services reiterate a cautious view on Paints amidst challenging valuations, moderate growth outlook in the long-term and a likely increase in competition from Grasim. 

Moderation in revenue on a high base: 

In Q1, the Paints sector revenue moderated to 7.4% YoY vs 11.5% in Q4, owing to a high base. However, on a 4yr Cagr basis, revenue growth was robust at 14.6%. Decorative volume growth was also healthy with Berger leading the pack, posting 14% growth vs 10% by APNT. Further, Berger’s sales growth of 9.8% YoY (consolidated) was above 6.7% growth for APNT, driven by highest market share gains in the industry. Moreover, Decorative value growth of 11.4% for BRGR was also ahead of 8% for APNT. Indigo Paints posted the highest revenue growth of 29% YoY, owing to its strategy of expanding rapidly in tier-1,2 cities. 

FY24 margin guidance reiterated: 

Ebitda margin for the sector expanded by 404bps, driven by 493bps expansion in gross margin. APNT clocked the highest Ebitda margin expansion of 458bps YoY to 22.7%, followed by 371bps YoY expansion by BRGR at 18.4%. Ebitda margins across players were above their target margin band (18-20% for APNT and 16.5-17% for BRGR), but companies reiterated earlier guidance probably in anticipation of an increase in competition from Grasim by FY24-end. The recent increase in crude prices could weigh on margins too.

Rising competition is in sight: 

With Grasim gearing to enter the Paints market in the beginning of Q4FY24, risks from competition are expected to rise meaningfully. Further, revenue growth across players has moderated in the past three quarters; at best, analysts of IIFL Capital Services are expecting low double-digit revenue growth in FY24/25. Moreover, while Ebitda margin is expected to be healthy with headwinds expected to appear by FY24- end, expansion story is mostly played out now. In light of these issues, valuation multiples are expensive and analysts of IIFL Capital Services maintain a cautious stance on the Paints sector.