Q4FY23 result review: Paint companies witness revenue rebound; sharp margin recovery

1 Jun 2023 , 11:12 AM

Decorative volume growth was also healthy at 16% for Asian Paints followed by 15% for Berger. Margin recovery was sharper than expected with sector gross margin expanding 321bps YoY. This led to 243bps YoY expansion in EBITDA margin. However, despite clocking high EBITDA margins, players reiterated previous margin guidance, probably in anticipation of increase in competition from Grasim by FY24-end. Analysts at IIFL Capital Services have reiterated their cautious view on Paints amidst challenging valuations, moderate growth outlook in the long term and likely increase in competition from Grasim.

Recovery in revenue

In Q4FY23, Paints sector revenue bounced back to 12% YoY from 3% in Q3, partly aided by a favorable base. Growth was led entirely by volumes as the price effect has largely normalized. Growth was broad-based across rural and urban markets. Asian Paints posted 16% volume growth in Decorative business, followed by 15% for Berger. However, on value basis, Decorative sales growth of 14.5% for Berger was ahead of 13% growth for Asian Paints. Further, demand in April has been robust and companies expect May and June to follow the trend.

Sharper-than-expected gross-margin recovery

EBITDA margin for the sector saw healthy expansion of 243bps YoY, due to sharp recovery in gross margin (GM). Sector’s GM expanded by 321bps YoY due to material deflation of ~9%. Asian Paints saw sharp EBITDA margin expansion of 293bps YoY to 21.2%; nevertheless, the company reiterated margin band of 18-20% in the medium term. However, at 20.4%/20.5% in FY24/25, analysts at IIFL Capital Services are building slightly higher EBITDA margin in their estimates for Asian Paints. Similarly, Berger’s EBITDA margin ex-one-offs was around 16.5% (standalone), in line with its target band of 16.5-17%; the company is aiming to sustain it in FY24.

Rising competition is in sight

With Grasim gearing to enter Paints market in the beginning of Q4FY24, risks from competition are expected to increase meaningfully. To some extent, this was also reflected in management commentary where despite clocking higher margins in Q4, players reiterated earlier margin guidance, in anticipation of higher ad/other expenses in FY24-end. On sales outlook, revenue growth for companies is expected to be in low double digits, in line with industry growth.