PAINTS STOCKS – COLOR, COLOR, WHICH COLOR?

Q2 is usually seasonally the best time for paint companies and this time, despite the pandemic, the paint companies were all donned in the brightest of colours.

The market leader, Asian Paints, for Q2FY21, posted a 2% (YoY) rise in net profit at Rs.85 crore on a 6% jump in net sales at Rs.5350 crore.

Last week, Berger Paints, on a 9% (YoY) increase in consolidated revenue from operations at Rs.1743 crore, recorded a 14% rise in net profit at Rs.221 crore.

Kansai Nerolac disappointed on the bottomline front, with a 18% drop in net profit at Rs.193 crore despite a 4% rise in net revenue at Rs.1243 crore.

Shalimar Paints will declare its performance tomorrow.

The trend which we have been seeing, like in most sectors, is that the demand is driven mainly by Tier-2 and Tier 3 towns in comparison to Metro and Tier 1 towns. And what we have also seen is that the demand is for decorative paints, which is basically home paint while industrial paint continued to lag.

The good news for the coming quarter is that the auto industry, which is what majority of “industrial” paint segment is about could see an uptick too as auto sales have been robust in Oct and probably will run into November too.

On the decorative paints front, demand is expected to be robust in Q3 on account of the festivals and beginning of the marriage season. Rural markets are expected to do well as monsoon has been good.

But on the flip side, while demand is indeed good and season outlook is positive, what is very difficult to judge is the consumer sentiment post this festive season.

Secondly, the benign raw material prices which helped boost the margins in Q2 could soon start raising its ugly head as crude is expected to rise. Thus rising input costs could force a price rise and if companies decide to sit tight on the price to keep demand robust, margins could get affected.

We are past the “pent up” demand uptick and what we need to see is whether this momentum will continue into the rest of the fiscal. Q3 will see the tapering effect of this demand, with Oct being the best, followed by Nov and finally tapering off into Dec.

Asian Paints is undoubtedly the market leader and the best long term bet in this sector.