Analyst Corner: Marginal pickup in demand from Q2 level likely in Paints

Our survey of ~30 dealers across decorative coatings and adhesives points to flattish-to-marginal pickup in demand from Q2 level, given a healthy festive season and restoration activity post-monsoon.

We expect double-digit decorative volume growth in Q3 and marginal recovery in PIDI’s volumes (2% in Consumer Bazaar vs 1% decline in Q2). APNT should see strongest sales growth (8%), followed by BRGR (6.5%), while KNPL sales should benefit from lower drag in Auto (volumes down 15% in Oct-Nov vs 20% decline in Q2).

Benign input costs should drive 30% PBT growth for PIDI, followed by BRGR (20%), KNPL (16%) and APNT (10%). We turn positive on KNPL (upgrade to ‘add’), as it is well placed to benefit from the expected up-cycle in the auto industry over the next 2-3 years.

Expect APNT to see sector-leading growth: Our dealer survey suggests that decorative demand remains flattish-to-marginally up, given a healthy festive demand, restoration post monsoons, elevated promotions (sustained from Q2) and continued market share gains in the economy segment. We believe APNT will see the strongest growth, as it continues to benefit from its economy-end Tractor Sparc launch in Q2. PIDI’s sales growth should marginally recover to 5% vs 3% in Q2.

Benign input costs to aid margins: Price cut in enamels (2% in Dec- 19) should partly offset mix improvement and lead to marginal 20- 40bps QoQ gross margin expansion for paint companies. PIDI’s gross margin should be flattish QoQ, as VAM prices are near Q2 average. Favourable base should result in PAT growth being the strongest for PIDI (46%), followed by BRGR (37%), KNPL (33%) and APNT (25%).

Upgrade KNPL to ‘add’: Recent uptick in crude prices may weigh on near-term margins across paint companies, if crude fail to cool off.

However, we believe paint companies like APNT should be able to pass on such cost pressures through price increases, as demand remains healthy. While near-term performance for KNPL would remain weak, we believe the expected up-cycle in the auto industry over 2-3 years should aid earnings over FY21. We upgrade KNPL from ‘reduce’ to ‘add’.