What investors in paint stocks should expect from Q2FY23 earnings

But the good news is that on a three-year CAGR basis, analysts at Nirmal Bang Institutional Equities are reporting double-digit volume growth for the home decorative paint business. He expects Asian Paints Ltd to see better growth on the back of Putty Mix. CAGR is the compound annual growth rate.

In the case of the ailing industrial paint segment, the improvement in passenger vehicle production is a good sign.

“The production of passenger cars grew by 19% in the 22 years July-August. Production of two-wheelers also grew by 6.9% in the same time frame,” said ICICI’s October 11 report. Moreover, price hike by auto majors is likely to revive the second hand car market and result in increased demand for auto-refinish paints. Kansai Nerolac is likely to benefit the most from higher automotive production, followed by Asian Paints and Berger.

Investors would remember that the paint sector has been reeling under severe inflationary pressures in recent quarters. Paint makers are increasing prices to save margins.

According to an ICICI Securities report, prices in the decorative segment have increased by 0.5-1.5% in all three months of Q2 FY23. Price hikes were introduced in industrial paints as well. “We have observed that the overall price hike in the last 12-15 months is close to 25 per cent,” the report said.

Note that prices of major inputs titanium dioxide and crude-based monomers have declined from recent peaks. Still, it can take some time for gross margins to improve, depending on how quickly companies eliminate their high-cost inventory.

“On the margin front, we expect the paint sector to see an EBITDA margin expansion of ~300 basis points (but a decline of 70 basis points QoQ) on a year-on-year basis,” the Nirmal Bang report dated October 9 said. One basis point is 0.01%.