Paint companies are yet to beat the goods and services tax (GST) blues.

“We still maintain that the demand is not as good as we would like it to be. It has not reached the levels of the pre-GST period", K.B.S. Anand, managing director and chief executive of Asian Paints Ltd, said in his latest post-earnings conference call with analysts.

In the December quarter, Asian Paints Ltd’s decorative paints segment saw single digit volume growth. This business contributes more than 70% to its overall revenue. Also, intensifying competition and an extended monsoon kept demand subdued in its key market of south India.

In the same quarter, peers Berger Paints India Ltd and Kansai Nerolac Paints Ltd saw low double-digit volume growth in the decorative paints segment, thanks to a favourable base.

For the third straight quarter Berger Paints India Ltd’s decorative paints volume grew better than market leader Asian Paints Ltd. According to analysts, while this does indicate market share gains for the former, overall paints demand is not very encouraging yet.

As for industrial paints, Kansai Nerolac Paints Ltd, market leader in this business, saw double-digit volume growth for the third quarter in a row.

“Apart from a low base, the industrial segment also benefited from increased sales of two-wheeler and commercial vehicles during the quarter since the automobile sector is the key contributor for industrial paint demand," vice-chairman and managing director H.M. Bharuka said in an interview.

Weak demand on the one hand and rising raw material costs on the other have taken the sheen off the sector.

As the accompanying chart shows, so far in this calendar year, shares of paint makers have declined more than the National Stock Exchange’s benchmark Nifty. The saving grace is that last calendar year, they had outperformed the market.

Meanwhile, prices of raw materials titanium-dioxide (TiO2) and crude-based solvents have eased sequentially, but remain high when compared to a year ago. So the pressure on gross margins remains.

And the only way to protect further margin erosion is by raising prices. Paint makers took two consecutive price hikes aggregating 5.5% in March and May of 2017. They didn’t take any in the December quarter. “Factors including increased competition, macro-economic scenario and trade disruption following GST implementation have delayed the decision to increase prices, despite significant input costs inflation," Anand said. More often than not, given its market dominance, competitors follow Asian Paints Ltd when it comes to pricing decisions.

Analysts foresee a 1.5% price increase in March, but it has to be seen if this quantum would be enough to offset elevated cost pressures.

Paints fall in the 28% GST slab, so tax outgo of paint makers has increased marginally. Pre-GST, they paid around 24-27% in the form of excise, value added tax (VAT) and entry taxes. Secondly, since 75% of paints production is already in the formal sector, the industry would hardly benefit from the expected shift in business from the unorganized to organized sector.

In short, the downside in paint stocks could be limited from current levels, but there are no significant upside triggers either.

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