Sell

We believe that demand conditions in the Indian paint industry have likely bottomed out, and we expect a gradual recovery over the upcoming quarters.

We expect the demand environment is likely to remain weak in coming quarters while increasing competition intensity in the sector will impact the outlook. we further reduce FY26/FY27 earnings by 7/8%, respectively....

APNT aims for single digit value growth, with 18-20% EBITDA margins in FY26 APNT has given a cautious outlook for FY26 with single digit topline growth and EBIDTA margins in the band of 18-20%. Demand scenario has been tepid and organized decorative demand has seen a decline in FY25. Rural and tier3/4 demand is better than urban India, however normal monsoons benefit of tax cuts and benign inflation. The competitive intensity remains high in decorative paints; however current discounts and the pricing environment are...

While there will be a favourable base starting from Q4FY25, Asian Paints is likely to post muted growth rates in CY25 considering: (1) The stress in urban markets is likely to continue. It has also resulted in downtrading impacting the profit pool.

A potential sale of the Company’s Powder Coatings business and its International Research Centre (R&D operations) to a separate indirect wholly owned subsidiary of the parent. Potential acquisition of Decorative Paints Intellectual Property/ies (owned by the parent) by Akzo Nobel India.

Paint industry has likely declined by ~2% in Q2FY25. Considering industry slowdown and steep increase in competitive pressures, we believe Berger reported moderate results with volume growth of 3.6% YoY. While EBITDA margin contracted 147bps YoY to 15.6% in Q2FY25.

Similar to peers, Berger Paints (Berger) has reported double-digit volume growth (13.9%) in Q4FY24 but value growth was dismal at 3.1% YoY.

Indigo’s strategy 2.0 is resulting in industry-leading revenue growth and market share gains. While we are enthused by Indigo’s strong volume-led revenue growth across segments, we believe steep increase in tinting machines (18.1%YoY) is also one of the chief reasons for growth.

Akzo’s reported Q2FY24 was largely in line with peers with a) low-single-digit revenue growth due to erratic monsoon and shift of pre-Diwali sales to Q3FY24 and b) >300bps EBITDA margin expansion led by lower commodity prices. We reckon it continues to gain value market shares in Paints.

We reckon paint volumes declined for APNT in 2QFY24. We expect growth triggers to be muted in the near term considering (1) weak consumer sentiment may impact volume offtake, (2) international business will likely be under pressure due to geopolitical concerns, (3) rising competitive pressures due to entry by Grasim.

Berger reported market share gains in Q1FY24 in East, West India (overall shares moved up to 20.2% from 19.3% in base (FY18: 18%)) (Source: Company data) driven by (1) distribution expansion and (2) launch of differentiated products. Projects segment (~10% of net sales) outperformed retail sales.

Indigo has been investing in strategy 2.0 (focus on 750 non-metro towns and higher investments in distribution and influencers) since Q1FY23. Benefits are visible now with >3x industry growth in Q1FY24 and likely market share gains across segments.

While Akzo reported strong Q1FY24 led by strong growth across segments, we are enthused by board recommendation to re-appointment Mr. Rajiv Rajgopal as MD for five years. Rajiv had turned around Akzo Nobel India and initiated multiple investments such as increase in distribution and portfolio expansion.

Kansai reported revenue growth of +5.1% compared to Asian Paints (+7%) and Akzo (+6.6%) YoY. Its EBITDA margin expansion (+294bps) was also lower than Asian Paints (+537bps) and Akzo (+331bps) YoY. While Kansai is biggest beneficiary of revival in Automotive sector, it has likely lost market shares decorative paints in our view.

While Q1FY24 PAT growth of 48.9% YoY was higher than consensus estimates, the results were qualitatively weaker in our view as (1) In-spite of delay in monsoon and stronger Apr’23, the revenue growth was muted at 6.7% YoY, (2) volume growth was 330bps higher than revenue growth indicating mix deterioration and higher volumes of low value products such as putty and (3) B2B portfolio (Industrial paints and Projects) has reported double digit revenue growth indicating weaker growth of consumer portfolio.

There was sequential recovery in almost all segments of Indigo in Q4FY23 and Apr May’23 are also strong months. We attribute this improvement to likely success of ‘Strategy 2.0’ as tier 1 and 2 cities are growing at ~100% higher than tier 3 and 4 cities and rural markets.

While Berger’s near-term outlook remains strong due to (1) healthy offtake in decorative, (2) strong growth in construction chemicals, (3) revival in profitability of Industrial paints and (4) correction in input prices, we note three structural trends as (i) the company plans to increase the ad-spend to sales by 0.5%-0.7%, (ii) aggressively increase the outlet reach even if it results in lower throughput/store.

Asian Paints delivered a big margin beat in 4Q. It highlighted portfolio diversification in analyst meet. While it has the ability to retain input cost correction benefits (in FY24), the willingness may not be there as the template appears to be to keep industry profit pool low as competition intensifies.