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Why Asian Paints To Berger May Find Demand Revival Hard To Sustain

Companies and dealers say that demand has been recovering, but consumption continues to be fragmented across markets.

<div class="paragraphs"><p> Asian Paints container sit outside a hardware shop in Mumbai.&nbsp; (Photo: Usha Kunji/BQ Prime) </p></div>
Asian Paints container sit outside a hardware shop in Mumbai.  (Photo: Usha Kunji/BQ Prime)

Paintmakers are seeing an upswing in demand as consumers spend on getting a fresh coat ahead of the monsoon. But for companies, that may be hard to sustain without inflation falling meaningfully.

Companies and dealers BQ Prime spoke with indicated that demand has been recovering after an extended monsoon and early festivities curtailed third-quarter volume growth for the Rs 65,000-crore industry. It has recovered every month since January on the back of increase in trade schemes by companies, as raw material prices corrected from peak levels.

"Demand is picking up and the uptick has been higher every month since January," said Rajiv Rajgopal, managing director, Akzo Nobel India Ltd.

However, consumption continues to be fragmented across markets, he said. Recovery of housing sector and consumers' willingness to repaint their houses drove sales of decorative paints (which contributes 75% to revenue), while a harsh winter led to a delay in recovery in the northern markets, he said.

"North has traditionally been our strongest market. It was affected last quarter also, as extended monsoons hurt sales of high-margin exterior wall coatings and waterproofing items," Rajgopal said.

Berger Paints India Ltd. expects double-digit volume and value growth in the ongoing quarter. Decorative business is seeing an uptick while the outlook for industrial sales, which contributes 20% to the business, also remain strong on the back of upturn in automobile sector and government spending in infrastructure, the company said in a recent post-earnings call.

"We aren't seeing a steady pick-up in demand yet," said AS Sundaresan, joint managing director and chief executive officer, JSW Paints Pvt.

Sales of paints and waterproofing products usually rise in the first quarter of a financial year, peaking ahead of the monsoon.

This April-June, JSW Paints hopes to recoup some lost ground unless there is any new economic shock.

Dealers agreed that there has been a 7-8% increase in offtake in January and February over last November and December as prices have stabilised.

In south, according to the dealers, the demand is still "soft in some pockets" owing to rural weakness, rise in new dealership-based competition and steep price increases of 25% in the last one to two years.

Increasing trade incentives is another factor aiding demand.

"With correction in raw material prices, the paint companies are likely to recoup lost profit margins. However, they have decided to retain some benefits and pass on remaining benefits. We note the additional trade schemes are in range of 3-5%, and most of this is focused on premium products," said ICICI Securities in a recent report.

Another Round Of Price Hikes

Still, buoyant demand seems to be the only silver lining for paintmakers as input cost pressures are far from over. Several global factors including the volatility in domestic currency have offset benefits from tumbling oil prices.

Crude derivatives such as monomers and titanium dioxide are key raw materials for the industry. They collectively account for more than half of the total expenditure.

"There has been some easing here. But we continue to see about 1% higher inflation overall," said Akzo Nobel's Rajgopal. The company intends to increase prices from April across select categories, he said.

Akzo Nobel already sells at 3% above the competition and it has taken the lead in opting for price hikes, like last year. Others are also likely to follow suit to offset pressure on margins.

However, the upcoming hikes will not be as significant as the past year.

In a recent post-earnings call, Asian Paints Ltd. had told analysts that "there is still some volatility" in prices and it will decide on any pricing actions depending on how the January-March quarter finally augurs with respect to the deflation.

"We will take a call only when we are kind of very clear that there are certain kinds of cost reductions which are happening from the point of view of Q4, and they are there to stay."

Asian Paints took a hefty price hike of 10% last year in November, followed by another 5% in December, the company said.

Both Asian Paints and Berger Paints have yet to respond to BQ Prime's queries.

The price hikes, will brighten prospects for paint companies, according to analysts.

"We expect the paint companies' margins to improve sequentially on the back of pricing action," said Abneesh Roy, executive director, Nuvama Institutional Equities Ltd. "Besides, because a large part of the high-priced inventory is already consumed and raw material deflation is likely to continue, this will further result in margin improvement from Q4 onward."

Uncertain Economic Outlook

A slowdown in the economy is the biggest risk for the paint industry, as about 80-85% of demand for decorative paints arises from repainting, which in turn, depends heavily on the country’s economic conditions.

Companies, too, are worried that the global economy, widely seen as prone to recession, may actually tip into one. "Crude has come down to $72 per barrel, but again this could be temporary," Rajgopal said.

"We are all rejoicing on 2-3 days data, when on the other hand the turmoil in the banking sector, and global factors including the strengthening of the dollar, the potential effect of the Fed's interest rate decision — anything can spark the prices tomorrow...We are living in an uncertain world," he said.

JSW Paints' Sundaresan said that input prices have eased but haven't come down sharply and there is "no benign case" in terms of raw material prices that can happen without inflation coming down meaningfully.

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