Q3FY23 Paints: A weak quarter

20 Feb 2023 , 10:54 AM

Paints sector reported weak revenue growth of 2.5% YoY — a significant slowdown from 20% YoY in Q2FY23. Volume growth was subdued with APNT reporting flat growth due to extended monsoon and shorter Diwali, along with high base. Value growth was further impacted because of an unfavourable base, owing to downtrading to Economy Paints. However, gross margins expanded by 196bps QoQ on the back of material deflation of ~7% in Q3.

Revenue growth tapers off: 

Paints sector reported muted revenue growth of 2.5% YoY, slowing from 19.8% in Q2FY23. Even on a 3yr Cagr basis, growth decelerated to 16.3% from 18.3% in Q2. The volume growth of APNT was subdued and remained flat in the Decorative business due to extended monsoons and a shorter Diwali, coupled with a high-volume base. Additionally, the value growth of 1- 8% YoY was further impacted by an unfavourable mix attributed to down-trading. However, demand in December saw strong rebound across markets, albeit on a low base.

Sequential improvement in gross margins: 

Industry gross margins (GM) expanded by 196bps QoQ, owing to material deflation of 7% in Q3. Moreover, higher benefit of this will kick in from 4Q leading to further improvement in GM. Consequently, Ebitda margin saw expansion of 265bps QoQ. However for BRGR, GM contracted by 61bps QoQ due to high cost inventory and unfavourable mix.

Thesis of moderating growth playing out: 

Analysts of IIFL Capital Services expect FY24 volume growth to moderate — since most low-hanging fruits related to market share gain from the Unorganised market and higher demand during WFH period — have already been plucked. We are more comfortable on margins, given the moderating inflation. However, valuations are still expensive for an industry with moderate growth outlook and increasing competition.

There is reasonable comfort on margins, FY24 revenue growth is expected to moderate as most of the low-hanging fruits in the industry have already been plucked, coupled with full anniversarisation of price hikes. Analysts of IIFL Capital Services cut their FY24/25 EPS across sector by 5-10% on lower sales growth and margins. They reiterate their cautious view on the Paints sector amidst challenging valuations, moderate growth outlook in the long term, and likely increase in competition from Grasim.