After the washout of a key quarter for two back-to-back years, the Summer of ’22 proved to be a double delight for paint makers. Brent crude oil prices peaked out in the last week of May and fell below the $100/bbl level over the next two months. Paint makers also witnessed robust demand across the decorative and industrial segments in Q1FY23. 

It’s no wonder then, that leading players like Asian Paints and Kansai Nerolac saw their stock prices zoom over 25% between June and August. Meanwhile, stock prices for other key players like Berger Paints and Akzo Nobel rose 10-15%. 

Now the key question is whether these companies can sustain their strong growth trajectory in the upcoming quarters and if real gross margin recovery is on the anvil. 

Paint companies regain their shine on robust volume growth in Q1FY23

Paint makers across the board saw their topline jump by over 45% YoY in Q1FY23 led by robust volume and double-digit realization growth. Healthy volumes on the decoratives side played a much bigger part in driving revenue growth for all four players. This is a welcome change, as growth in the previous two quarters was driven primarily by higher realizations. Notably, paint companies have increased their product prices by over 20% from the start of FY22. 

The market leader Asian Paints saw the highest volume growth in Q1FY23 backed by robust offtake from metros, tier-1 and 2 cities. New product launches in waterproofing and premium segments, and continued expansion of distribution channels added to its sales volumes. The company also believes that there was some amount of pent-up demand coming in from the past two years which benefited the sector in Q1FY23.

Another positive aspect was that the demand for industrial paints, especially from the auto sector, rebounded in a big way in Q1FY23. This worked to the advantage of players like Kansai Nerolac, which saw its volumes rise 30% YoY in Q1FY23 after reporting dismal growth in the previous two quarters. Kansai Nerolac derives 45% of its sales from the industrial segment within which the auto sector has the lion’s share. 

Kansai Nerolac also saw its gross margins recover sequentially after declining between Q1FY22 and Q4FY22. Its focus on high-tech and premium products within the industrial segment aided margin expansion. This is especially commendable as other companies in the fray saw their gross margins fall sequentially in Q1FY23. The prices of key inputs rose by another 6-7% QoQ in Q1FY23 causing this downward pressure on margins.

However, there is a silver lining here. Asian Paints improved its EBITDA margins both on a YoY and QOQ basis in Q1FY23 owing to cost optimization efforts, despite witnessing gross margin contraction. Meanwhile, Kansai saw a bigger bounce-back from the Q4FY22 lows, helped by a rebound in sales. 

Paint makers bet on premium and luxury products

The trends witnessed in Q1FY23 have been very encouraging for paint makers, and they are now eyeing higher sales particularly in the premium and luxury segment. The customers in this category mainly reside in metros and tier-1 cities, and are relatively less sensitive to significant price increases. They don’t mind paying more to brighten their living rooms as they repaint once in 4-5 years. Both these key segments are dominated by Asian Paints currently. The company continues to strengthen its position in the top end of the market via new product introductions in the ‘Royale’ brand. Now, players like Berger Paints and Kansai are trying to bite off a larger share of this pie. 

Berger Paints is aiming to invest into building its brand value on the luxury side where it has a weak presence currently. Kansai Nerolac, which has a higher market share in the economy and value segments, is also focusing on the premium side of decoratives. Most of its new product launches were in the premium ‘Nerolac Impressions’ and ‘Nerolac NXT’ brands in Q1FY23. 

Notably, Kansai has lost considerable market share, even in its stronghold economy segment, to Asian Paints in the past two years. Cuts in advertising expenses and slower product launches in the decoratives segment worsened Kansai’s case. Asian Paints was particularly aggressive in deepening its channel footprint and introducing products across segments (putty, distemper, premium and economy emulsions). This also explains why it could occupy a higher share in the overall paints market while others either stayed put or lost share. 

Kansai now looks to recoup its lost share by gradually raising the contribution of high-margin decoratives in its sales mix. It will be spending Rs 290 crore over the next 2-3 years on two new capex projects in this regard. However, this is easier said than done, especially in the light of a major competitor  Grasim entering the market in FY25.

Waterproofing segment is emerging as a strong growth driver

Asian Paints witnessed strong demand acceleration for its waterproofing products, which fall under the brand of ‘SmartCare’, in Q1FY23. The company also launched two new products in this segment. Notably, the waterproofing division falls under the B2B business category within the overall decoratives business. In the B2B business, the company caters to demand from residential builders, factory owners and the government. 

These strong trends have caused the No.2 player Berger Paints to pull up its socks. The company is set to launch two new waterproofing products in this month alone. It is focusing on growing this category along with the luxury one for the next 2-3 years.

A few years ago, Pidilite’s ‘Dr Fixit’ was the only formidable product in the waterproofing market. Asian Paints saw a big opportunity in this market and made inroads by collaborating with cement dealerships. These dealerships also helped the company in expanding its paints business. Ultimately, it is the strength of Asian Paints’ distribution model built over the years that kept new competitors in check and enabled market share gains. 

Overall demand trends for FY23 look healthy, margin recovery to take some time

In a major relief to paint makers, prices of brent crude and titanium oxide, key inputs used in paints, started to correct in the latter part of Q1FY23. However, prices of key solvents like Rutile continue to inflate, according to Asian Paints’ management. Basically, there are uneven price trends being observed for different inputs. Companies are also apprehensive of how long crude oil prices will trend down.

Even analysts are divided on the direction of Brent crude prices. While JP Morgan sees Brent crude at $380/bbl in its worst case scenario, Citi expects it to fall to $65/bbl by 2022 end. On a positive note, brokerages like Barclays and Goldman Sachs have recently revised their crude oil forecasts downwards due to a subdued demand environment. 

Given these uncertain times, paint companies are not too bullish on gross margin expansion. The management of Berger Paints and Azko Nobel believe that the impact of lower raw material costs will be visible on margins only towards the end of FY23. 

While inflationary pressures will take time to subside, it’s the demand side of the story that is more appealing here. With the early onset of the festive season, paint companies are anticipating demand to be robust from September 2022 onward. Their focus will also be to keep price increases at minimal levels in order to cash in on the upcoming festivities. Paint markets also expect rural demand to recover strongly backed by good monsoons. 

Consensus estimates of analysts, according to Trendlyne’s Forecaster, see the top paint makers clocking at least 20% YoY revenue growth in FY23, given the positive demand environment. The net profit of these players is set to grow over 25% YoY in FY23. The profit estimates for most paint makers were also revised upwards by 5-10% in the past 90 days. 

For an industry that has witnessed many gray days owing to cost concerns since Q2FY22, FY23 has started on a bright note, and with plenty of promise.