PAINT COMPANIES - RED OR GREEN?
By Ruma Dubey
Have you seen TV lately? Switch to any channel and every ad break invariably shows some or the other paint company, urging us to either redo our homes or repaint or even put up false ceilings.
Festivals have come calling and all companies are hoping to make the most; after all this is THE season for all. But vying for maximum out of this season are the paint companies. The way they are going on TV, they are going all out, almost like a make and break kind of scene.
And going by the numbers of Asian Paints for Q2FY16, which came in Friday evening, looks like this fiscal could be a long haul. a 15% rise in consolidated net profit at Rs.399 crore on a 4% jump in total income at Rs.3837 crore. These numbers were much below what majority of the analysts had expected and post this, most foreign fund houses downgraded the stock, which is actually what has pulled down the stock price.
The topline was muted mainly on the back of a tepid single digit in the decorative paint segment while expectation was in the vicinity of double digit. This segment contributes 80% to topline. Lower sales in Nepal, Egypt and overall exports plus the delay in festive season impacted the performance. Lower crude oil price did help shore up the margins – EBITDA margin came in at 16.6%, up 162 bps.
The company has stated that the outlook in the coming months remains cautious as weak monsoon could impact rural demand that this would be good enough to wipe off the gains made on account of the festive season.
Kansai Nerolac, had declared its Q2FY16 numbers on 23rd Oct and its performance was a bit better – net profit rose 33%(YoY) at Rs.97 crore though revenue rose 5% at Rs.971 crore. The main reason for the surge in bottomline was a 40% rise in other income and costs were kept on a tight leash at Rs.834 crore. Raw material cost for the quarter declined 3% thanks to the fall in crude oil price. EBITDA was up 28% at Rs.154 crore while margins came in at 15.8%, up 280 bps.
In both the companies, topline was affected and it was lower cost which shored up the bottomline. Sales of these companies were affected on account of several factors – lower realization on account of lower sales. Though Asian Paints insists that it has not cut prices, it gave various discounts to dealers which led to an effective drop of 2% in prices. Nerolac had cut prices in June by 2% and it never pushed it back up again. So despite prices being lower than what they were last year, volumes remained muted. And that shows that Hi1Fy16 saw low demand.
One can blame it on the late onset of festive season due to which people pushed their need to paint the house to October and later. But now the question is – how does the second half of current fiscal look? Well, the companies have pinned their hopes on the festival season reviving demand. Monsoon is a worry as it has been deficit all around the country which in turn means that rural demand could be a dampener. In order to make up for the possible slower demand from rural India, it hopes the festival season will act as a cushion and boost demand. Now that is putting a lot of responsibility on the festivals!
What we could see during the festive season and maybe from rest of India is higher demand for high volume – low margin products like distemper and putty, as was the case in H1. And if crude remains where it is now, margins might come in better due to lower raw material prices.
The foreign brokerage houses have downgraded Asian Paints but amongst investors, it remains a favourite. Maybe in the immediate future, these stocks will see not much jump from the current levels, capping the upside but they remain good long term stocks. They are sure to bounce back once the auto sector revvs up and realty sector also catches up – these two facts will really push up demand. Thus real economic recovery is crucial for the paint companies to reap the benefit of lower crude prices.
And yes, one can continue to hold these stocks in the portfolio with a long term perspective.