The picture gets brighter

Paints companies have fared well, thanks to growth in decorative and industrial segments

Paint companies have shown solid performance in the recent June quarter, despite an increase in the cost of raw materials. Companies such as Asian Paints and Kansai Nerolac have taken sustained efforts to pass on the higher costs to customers, thus cushioning their margins. This move, along with improved market conditions, has contributed to revenue and profit growth. Most companies recorded double-digit volume and value growth, particularly in the decorative and industrial segments.

Demand growth

The demand for paints has been growing steadily, thanks to the Centre’s push towards affordable housing and normalisation of GST. Similarly, the industrial segment too witnessed good growth due to robust performance in the two-wheeler and commercial vehicles markets.

In this regard, Asian Paints’ overall revenue rose 15 per cent Y-o-Y (net of excise duty) in the June quarter. The company has retained its leadership position in the decorative segment, which contributes nearly 75 per cent of its revenue. The company reported double-digit volume growth in this segment.

 

Similarly, Kansai Nerolac too has reported double-digit volume and value growth in its core segments — decorative and industrial. The company derives about 55 per cent of its revenue from the decorative segment and 45 per cent from the industrial segment. Strong recovery in both segments has helped the company register 17 per cent Y-o-Y (net of excise duty) increase in revenue. Profits, though, dipped marginally by 0.7 per cent Y-o-Y.

Following the same trail, Berger Paints and Akzo Nobel’s revenues grew 21 per cent and 10 per cent Y-o-Y respectively in the first quarter of FY19.

The reduction in GST rates to 18 per cent from 28 per cent is likely to increase demand levels for paint-makers in the coming quarters.

Price hike

Volatility in crude prices can impact the margins of paint companies, since most of their raw materials such as titanium di oxide, zinc oxide are crude derivatives. Most leading paint companies in India are able to cushion their margins by passing on the cost increase.

Asian Paints, for instance, reported a14 per cent Y-o-Y increase in raw material cost in the June quarter; raw material cost as a percentage of sales stood at 55 per cent. It took a price hike of 1.9 per cent this May. The company’s operating margin improved to 20 per cent Y-o-Y in the recent quarter, an increase of two percentage points over the same period last year. Asian Paints had already taken a 1.4 per cent price hike across its products in March 2018. The company’s net profit grew 30 per cent Y-o-Y in the June quarter.

The margin of another leading paint maker, Kansai Nerolac, was impacted due to rising crude prices. The raw material cost (as a percentage of sales) increased sharply to 59 per cent in the first quarter of FY19 compared with 55 per cent the same period last year. Despite the company’s efforts to pass on cost increases to customers, the margins declined by 2 percentage points to 16 per cent during the June quarter. Profit dipped 1 per cent Y-o-Y.

Operating margins of Akzo Nobel and Berger Paints remained more or less stable in the June quarter compared to the same period last year. Berger Paints registered a profit growth of 19 per cent, while Akzo Nobel reported single-digit profit growth of 9 per cent in the June quarter.

The continued increase in the crude prices is likely to put pressure on the margins of paint makers in the coming quarters. Further, other factors such as trade war and rupee volatility are likely to impact the earnings of these companies.

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