Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Markets / Mark To Market/  Is down-trading a new concern for investors in paint stocks?
BackBack

Is down-trading a new concern for investors in paint stocks?

As of now, down-trading is happening at limited scale as current demand is coming from metros and tier-I cities, where people prefer premium products

Investors would reckon market share gains from the unorganised sector has been of the key positive triggers for paint stocks. (Photo: iStock)Premium
Investors would reckon market share gains from the unorganised sector has been of the key positive triggers for paint stocks. (Photo: iStock)

The picture is not pretty for investors in paint stocks amid rising competition and persistently high input cost inflation. The exact impact of the former on incumbents is yet to be known. As far as the latter is concerned, companies have taken several rounds of price hikes in FY22 to contain gross margin erosion.

Also, managements of top decorative paint makers have indicated price hikes in June. Consequently, with branded paints getting expensive, customers seem to be shifting back to unbranded paint products.

A report by ICICI Securities Ltd. highlights that the price gap between unorganised and organised players had declined in calendar year 2021. However, with around 20% price hikes post November by large paint makers, this gap has widened again, and is likely to result in higher sales for unorganised companies, the domestic brokerage house said.

Their channel checks with dealers in Maharashtra indicated down-trading. "Some consumers paint their houses with fixed budgets. With higher paint and labour costs, they choose low priced paint. For premium paints, more labour days are required. Hence, if a consumer chooses low end paint, he saves labour cost," said the domestic brokerage house in a report on 7 June.

An impact of this trend, if it lasts for too long, could be felt on volume growth and market share of listed paint companies. Investors would reckon market share gains from the unorganised sector has been of the key positive triggers for paint stocks.

"Our channel checks show that down-trading is also happening in the eastern part of the country. Historically, we have seen that down-trading mostly happens in the economy segment rather than premium paints. The former is lower-margin accretive. So, we don't see a significant impact on operating profit margin or volumes for incumbents, as of now. That said, postponement of decision to paint could be a bigger worry," said Varun Singh, analyst at IDBI Capital Markets and Securities Ltd.

Note that the managements of Berger Paints India Ltd and Kansai Nerolac Ltd had also pointed to down-trading playing out in some segments, in their earnings conference calls, post Q4FY22 results.

Himanshu Nayyar, lead analyst at Yes Securities Ltd., also does not expect the current trend of down-trading in the paints sector to accelerate in a meaningful way, hereon. He feels raw material prices are close to peaking out and demand from metros and tier-I cities would remain robust given the strong growth in premium residential real estate.

"At the current juncture down-trading is happening on limited scale as current demand is coming from metros and tier-I cities, where people prefer premium products," he said. Simply put, down trading in paints is expected only for short-term in some pockets.

Meanwhile, so far this calendar year, paint stocks have been under pressure, with shares Asian Paints Ltd and Berger correcting over 20% each. Even though the valuation multiples of these stocks have declined from their peaks, they remain expensive, said analysts.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 08 Jun 2022, 12:28 PM IST
Next Story footLogo
Recommended For You
GENIE RECOMMENDS

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie