Investors in paint stocks can heave a sigh of relief as cost inflation pressure is easing. Prices of key inputs such as crude oil-based monomers and titanium dioxide required to make paints declined sequentially in the December quarter (Q3FY23). In response, paint companies increased prices marginally in the last quarter, according to dealer channel checks by some brokerages.
“After increasing prices for five consecutive months from May-September 2022, paint companies hold back on raising prices in Q3 FY2023,” said a January 10 report by ICICI Securities Ltd. -Launching in Q3, added to the report.
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Paint companies were increasing prices to counter the huge increase in input costs, which has hit their profits. The recent stagnation in price rise is not only due to the easing of the crisis of cost inflation. According to analysts, the pick-up in demand in the third quarter has not been very impressive and this may also have prompted paint companies to refrain from increasing prices. Therefore, volume growth of paint makers is likely to remain sluggish in Q3. Also, companies may see downsizing due to high inflation.
Jai Gandhi, Institutional Research Analyst, HDFC Securities Ltd. said, “This move of negligible price hike was largely expected as there have been massive price hikes in the last one year and paint companies are trying to meet demand by increasing prices more. Don’t want to destroy the elasticity. ,
He added that a major near-term trigger for Paints shares would be the pace of gross margin revival. But note that profitability improvements for paint companies will be gradual based on the exhaustion of their high-cost inventory.
Meanwhile, competition in the sector is increasing with the entry of new heavyweights such as Aditya Birla Group company Grasim Industries Limited and JK Cement Limited. Share, and this is a concern.
Given the high entry barriers, how the new entrants scale their operations remains to be seen. Until more clarity emerges, increased competition is a deterrent for the sector.
In CY22, shares of Asian Paints Ltd. and Berger Paints (India) Ltd. gave lower returns with the latter falling sharply by around 25%. These stocks trade at 54.2 times and 43.4 times estimated FY24 earnings, respectively, Bloomberg data show.
Though valuations have softened in the recent past, but against the current backdrop, they are not exactly cheap.
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