Paint stocks trade weak on concern of demand destruction in near term

Asian Paints, Berger Paints India, Kansai Nerolac Paints and Akzo Nobel India slipped in the range of 2 per cent and 5 per cent on the BSE.

Shares of paint manufacturers extended their decline into Thursday and slipped up to 5 per cent on the BSE on concerns of demand destruction in the near term due to the outbreak of coronavirus (Covid-19).

Asian Paints, Berger Paints India, Kansai Nerolac Paints and Akzo Nobel India were down in the range of 2-5 per cent on the BSE. In comparison, the S&P BSE Sensex was down 0.5 per cent at 31,525 points at 01:08 pm. These stocks have slipped 19 per cent-34 per cent from their respective 52-week highs on the BSE.

Kansai Nerolac Paints' stock dipped 4 per cent to Rs 378 today, after the company reported 23 per cent de-growth in net profit at Rs 72 crore in March 2020 quarter (Q4FY20), over the same quarter of the previous year.

The company’s net revenue, too, declined 14.3 per cent at Rs 988 crore on a year-on-year basis. Ebitda (Earnings before interest, taxes, depreciation, and amortization) during the quarter under review declined 14.6 per cent to Rs 128 crore over the previous year quarter.

The management said sales and bottomline were impacted in Q4 due to the outbreak of Covid-19. Demand for automotive paints continued to be severely impacted due to the unprecedented slowdown in auto, while decorative growth was better.

Despite the year being extremely challenging, due to an aggressive cost control program and judicious management of overheads the company was able to improve EBITDA by 5.3 per cent and improve EBITDA margin by 150 basis points, it said.

Going forward, the prolonged uncertainty due to COVID-19 has created further demand destruction in the near-term. However, good growth in infrastructure, core sector as well as automobile and real estate is likely to have a positive effect on the overall demand of paint for the industry in the long run.

The raw material costs account for 55 per cent of total cost to the paint industry. Majority of the raw material comprises crude based derivatives and titanium dioxide. Therefore, profitability and margins fluctuate with the volatility in the raw material prices.

UBS expects a pick-up in oil demand as virus-hit economies relax lockdowns and travel restrictions ease this month, with production to remain subdued in the backdrop of current low prices and aggressive capital spending cuts by oil and gas producers.

“The bank expects global oil supply to contract by nearly 6 million barrels per day or mbpd year on year in the second quarter, citing forced production shut-ins in North and South America as current low price environment fails to cover operating costs,” a Reuters report suggested.