Demand outlook dull for paint companies, valuations assume a bright future1 min read . Updated: 04 Jun 2020, 09:45 PM IST
Asian Paints and Berger quote at valuations of about 60 and 75 times 12-month trailing earnings, which look pricey
Checks with dealers show that consumers are postponing painting jobs, and that’s casting a dull hue on the prospects of paint stocks. Stocks of major paint manufacturers, Asian Paints Ltd and Berger Paints Ltd, fell about 4% and 2%, respectively, in trade on Thursday.
Paint volumes have reduced substantially in areas that opened up a little earlier. A dealer volume check by B&K Securities shows that though green-zone volumes picked up in the first week, they shrank once pending work was completed. Dealers are saying that there could be a revival in paint demand before the festive season, according to analysts at B&K Securities.
Nevertheless, paint volume growth is likely to be slow. With social distancing becoming the norm, households are reluctant to immediately allow painters in. Some construction work is off to a slow start, so to that extent demand for exterior paints could see some pickup. But note that construction activity slows during the monsoon season.
Growth will also depend on how soon economic activity resumes. With most key events such as marriages turning out to be low-key affairs, demand may remain dull. Besides, incomes are shrinking, which will also impact the demand for discretionary items such as paints. “The lower-income group accounts for strong demand during the festival season, so with their incomes impacted, they are not likely to take up painting, affecting overall demand. FY21 will be a challenging year for paint companies," said Dhaval Dama, director, research, FMCG, Equirus Securities.
In early May, Goldman Sachs India said it sees significant risks to sales growth as it expects consumers to down-trade in a note to clients.
In addition, recovery in FY22 could be a challenge. “Painting is a discretionary item and so people are more likely to postpone it. In FY22, even with pent-up demand recovery, a downward revision from what was built pre-covid is likely. Considering these factors, there is not much headroom for paint companies given the valuations," said Dama.
Asian Paints and Berger Paints quote at valuations of about 60 and 75 times 12-month trailing earnings, which look pricey, given the downturn ahead.