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Paint producers: Margin compression is off, but brightness is still a few quarters away

  • Analysts say an expansion in margins will be a key trigger for further upsides in paint stocks
  • On the volumes front, sales of decorative paints in the December quarter were largely in line with the Street’s expectations

Softening raw material prices and a stabilizing rupee have come as a welcome relief to investors in paint stocks. Paint makers saw their December quarter gross margin erode 100-450 basis points year-on-year, squeezed by higher input costs.

However, the drop in input prices coupled with the price hikes taken by paint producers would aid margin expansion. Prices of decorative paints have been raised thrice in calendar year 2018, adding up to a 7-7.5% increase.

With that, the worst may be over for these companies in terms of margin compression. However, investors will have to wait for a few quarters for these positives to yield the desired results on margins. Analysts foresee margins of paint companies substantially improving only from the next fiscal year. So, earnings per share estimates for paint stocks, which have been unimpressive, will also improve only gradually.

On the volumes front, sales of decorative paints in the December quarter were largely in line with the Street’s expectations. Subdued demand in industrial paints, though, is a concern for companies such as Kansai Nerolac Ltd, say analysts.

Meanwhile, the paint sector is seen as an indirect beneficiary of the steps announced in the budget to boost the housing sector. Reacting to it, shares of paint stocks ended Friday’s trading on the National Stock Exchange 1.5-3% higher. However, analysts see these announcements only as a sentiment booster because these measures may or may not translate into actual demand anytime soon.

Analysts say an expansion in margins will be a key trigger for further upsides in paint stocks. As for valuations, these stocks continue to trade at rich one-year forward price-to-earnings multiples of 35-50 times.

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