The picture is not good for investors in paint stocks amid increasing competition and persistently high cost inflation. The exact effect of the former on the incumbents is not yet known. As far as the latter is concerned, the companies have done multiple rounds of price hikes in FY22 to check the fall in gross margins.
In addition, the management of the top decorative paint manufacturer There are indications of a hike in prices in June. As a result, with branded paint becoming costlier, customers are shifting back to non-branded paint products.
A report by ICICI Securities Ltd revealed that the price gap between unorganized and organized players had declined in the calendar year 2021. However, with large paint makers increasing prices by around 20% post-November, the gap has widened again, and is likely to be the result. Higher sales for unorganized companies, the domestic brokerage house said.
His channel indicated down-trading with dealers in Maharashtra. “Some consumers paint their homes with a fixed budget. With higher paint and labor costs, they choose lower priced paints. For premium paint, more labor days are required. Therefore, if a consumer Chooses low-end paint, so it saves labor costs,” the domestic brokerage house in a report on June 7.
The impact of this trend, if it lasts for a very long time, could be felt on the volume growth and market share of listed paint companies. Investors believe that gain in market share from the unorganized sector has been the major positive factor for paint stocks.
“Checking out our channel shows that down-trading is also taking place in the eastern part of the country. Historically, we have seen that down-trading is mostly in the economy segment rather than premium paints. First low-margin active Therefore, Varun Singh, Analyst, IDBI Capital Markets & Securities Ltd., said, “We do not see any significant impact on operating profit margins or volumes as of now.”
Note that the management of Berger Paints India Ltd and Kansai Nerolac Ltd had also pointed to down-trading play in certain segments in their earnings conference call after the fourth quarter FY12 results.
Himanshu Nayyar, Principal Analyst, Yes Securities Ltd. also does not expect the current down-trading trend in the paint sector to intensify in a meaningful way. They feel that raw material prices are peaking and demand from metros and Tier-I cities will remain strong, given the strong growth in premium residential real estate.
“At present, down-trading is happening on a limited scale as the current demand is coming from metros and tier-1 cities, where people prefer premium products,” he added. Simply put, down trading in Paints is expected to take place in few pockets only for short term.
Meanwhile, paint stocks have been under pressure so far this calendar year, with shares of Asian Paints Ltd and Berger falling over 20% each. Analysts say that though the valuation multiple of these stocks has fallen from their peak, they remain costly.