 "Asian Paints, Indigo Paints hit 52-week low; slip up to 25% in 6 months")
Shares of paints companies, Asian Paints (Rs 2,219.55) and Indigo Paints (Rs 1,230.60) hit their respective 52-week lows, falling up to 2 per cent each on the BSE in Wednesday’s intra-day trade in anticipation of a soft December quarter (Q3FY25) and concerns of further decline in operating profit margin.
In the past six months, the stock price of Asian Paints slipped 25 per cent and Indigo Paints 17 per cent. Berger Paints and Shalimar Paints were down 11 per cent and 13 per cent, respectively, during the period. In comparison, the BSE Sensex was down 4.9 per cent.
Significant moderation in sales volume due to sustained slowdown in the rural market or impact of heightened competition or a substantial increase in raw-material prices were seen impacting the profitability of paint sector.
The paint industry faced a subdued demand environment during the September quarter (Q2FY25). Asian Paint said its domestic decorative coatings segment volumes declined marginally while overall domestic coatings revenue declined by 5.5 per cent for the quarter impacted by muted consumer sentiments and extended rains and floods in some parts of the country. Operating margins were impacted by the price reductions taken last year, higher material prices and increased sales expenses, the company said.
Asian Paints’ management expects margins to recover in the coming quarters on the back of anticipated softening in material prices coupled with price increases implemented in the last few months.
Meanwhile, after showcasing significant revenue growth in FY22 and FY23 post-pandemic, the growth rate of long entrenched players1 moderated to mid-single digits in FY24 and slipped into a negative zone in H1FY25 amid intensifying competition. However, revenue in H2FY25 is expected to witness a rebound on year-on-year (YoY) basis on the back of benefits arising from the price hike taken in July-August 2024.
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The entry of new players has sparked a surge in capital expenditure and heightened competition within the sector. Players are expanding their capacities, growing their dealer network, ramping up sales teams and accelerating ad spending in a bid to counter competition and secure market shares. Amid these developments, CareEdge Ratings expects a shift in cost structures, with ad and sales promotion spending of players likely to increase by 100 bps – 200 bps (as a percentage of revenue) in the medium term. Consequently, paints companies' operating profitability margin, which reduced to ~16 per cent in H1FY25 from ~20 per cent in FY24, is expected to further moderate to ~14 per cent by FY26, the rating agency said in the paint sector update.
Recent price increases along with expected demand pickup are likely to lead to a rebound in revenue growth, albeit expected to remain muted. Future growth shall be driven by effective branding, growth in tinting machines and dealer networks, product innovation networks, and expansion into new categories, rating agency had said in its December report.
The sector is poised to grow at 8 per cent-10 per cent with a somewhat lower operating margin of around 14 per cent in FY26 as compared to the average of around 18 per cent in the last five years, reinforced by urbanisation and increasing affluence, rising disposable income, shortening of the re-painting cycle, demand recovery from semi-urban and rural areas, affordable housing projects, spending on large scale infrastructure projects and demand from automobiles sector, said Richa Bagaria, Associate Director at CareEdge Ratings.
According to Mirae Asset Sharekhan, the paints industry is expected to grow at a steady rate with strong demand in the luxury segment, while the brokerage firm expects a recovery in the demand in tier-3 and tier-4 towns. Entry of large players in the decorative paints industry might put stress on the market share of smaller players in the near term.
In the medium-long term, the decorative paints industry is expected to register a 12 per cent compound annual growth rate (CAGR) over FY2023-FY2027 to Rs 1 trillion, led by a reduction in the re-painting cycle to 4-5 years (from 8-10 years earlier), increased construction activities of new real estate projects, acceptance of better paint products in smaller towns, and upgradation of premium brands in cities and large towns. A better product mix and efficiencies would help paint companies post higher margins in the long run, the brokerage firm said.