Kansai Nerolac’s results suggest major impact of covid-19 on paint makers2 min read . Updated: 10 May 2020, 11:48 PM IST
- With the lack of manpower and social distancing norms, painting activity may resume only in FY21 second half
- While analysts were expecting a 10% fall in revenue, the company’s Q4 results show 14% year-on-year decline.
Covid-19 is keeping painters away, and things could get worse for paint companies in the next two quarters. Some of what lies ahead is already visible in Kansai Nerolac Paints Ltd’s fourth-quarter results. Q4 figures were paler than usual due to falling volumes in its industrial and decorative paints divisions.
While analysts were expecting a 10% fall in revenue, the company’s Q4 results show 14% year-on-year decline.
As paints are discretionary items, consumers are likely to delay renovating homes. With the lack of manpower and social distancing norms, painting activity may resume only in the second half of FY21.
Further, demand in its industrials division, which includes autos, may see a further deceleration in the next one-two quarters. Auto sales were negligible in April, and could remain lacklustre for a few quarters. Besides, construction activity is also looking bleak.
While the slowdown in the auto segment has been there for a while, investors were looking at its decorative segment to shore up volumes. In fact, much of the busy season for paint makers has been lost due to the lockdown.
“We expect 55% decline in sales in H1 as consumers are likely to defer discretionary activities such as re-painting (to avoid close contact with labour due to health concerns). Lifting of the lockdown would release pent-up demand from incomplete re-painting projects, but we do not expect much new re-painting work (especially in urban markets), nor a pickup in fresh painting (from construction). It is tricky to predict an outlook for auto coatings and rural markets," said Kotak Institutional Equities in a note to clients.
The saving grace was lower raw material costs. With crude oil prices scraping the barrel, raw material costs in coming quarters will be lower. However, gains for Kansai Nerolac could be limited as it has some inventory of raw material. Nevertheless, Ebitda margins in Q4 were similar to the year-ago period at 12.93%. Ebitda is earnings before interest, tax, depreciation and amortization.
Production at some of the company’s plants has resumed, which is encouraging. However, investors will be watching whether some of the pent-up demand will pick up in the second half.
Needless to say, FY21 looks unexciting. Kansai Nerolac’s expensive valuations may be at risk as next year’s earnings are expected to contract significantly. In fact, Kotak has slashed earnings estimates by about 41% for FY21. At the current price, the stock’s one-year forward price-earnings works out to 63 times. The stock has fallen 8.2% since the results were announced, and is down 17.1% in the past one year.