De-stocking ahead of GST impacts volume growth
Reason for report: Q1FY18 results preview
Our recent channel checks suggest paint companies in our coverage universe witnessed healthy double-digit decorative paints volume growth in Apr’17 and May’17. This is mainly attributable to increased dealer incentive schemes and upstocking ahead of the price hikes taken in May’17. However, due to uncertainty related to GST, there was significant de-stocking at dealers’ end in Jun’17. Effectively, we expect overall decorative volume growth of 3-5% YoY in Q1FY18. As all paint companies announced consecutive price hikes of ~3.0% in Feb’17 and ~2.5% in May’17, we expect value growth to be higher at 6-9% (except Akzo with 4-5% growth). Operating margins could be impacted by raw material price inflation. Average TiO2 (titanium dioxide) prices were up 27% YoY and average crude oil price was up 6% YoY in Q1FY18. However, impact on margins could be partially offset by the above price hikes. Gross margins are expected to contract by 100-150bps while EBITDA margins will likely decline 75-125bps for paint companies. We expect modest bottom line growth of 1-4% in Q1FY18.
Pidilite, though not a pure play paints company, has similar demand dynamics as the paints sector. We expect Pidilite to post sales growth of 6% YoY. EBITDA margin is expected to contract by 277bps (VAM prices are up 6.2% YoY in Q1FY18). PAT is expected to increase marginally by 1.2% YoY.
* Expect 3-5% decorative paint volume growth in Q1FY18: Paint companies witnessed double-digit decorative paint volume growth in Apr’17 and May’17 driven by increased dealer incentive schemes and up-stocking ahead of the price hike taken in May’17. However, volume growth was impacted in Jun’17 due to destocking ahead of GST implementation. Effectively, we expect an overall decorative volume growth of 3-5% YoY in Q1FY18. Industry leader Asian Paints is likely to post volume growth of 3-4% YoY. We expect Berger Paints and Kansai to report 4- 5% decorative volume growth while Akzo is expected to post ~2% growth. As all paint companies announced price hikes of ~3.0% in Feb’17 and ~2.5% in May’17, we expect value growth to be higher at 6-9% (except Akzo with 4-5% growth).
* Impact of raw material cost inflation partially offset by price hikes: In May, TiO2 price increased to an average of Rs278/kg, up 8.8% from the average price of Rs255/kg in April. Despite crude prices cooling off, TiO2 price remained at an elevated level of Rs280/kg in Jun’17. Overall, TiO2 price was up 27% YoY for Q1FY18. Note that the average TiO2 price in FY17 was Rs223/kg. Average crude oil price was up 6% YoY in Q1FY18 at US$48.2/bbl vs. the Q1FY17 average price of US$45.6/bbl. While other raw material prices remained largely stable, Vinyl Acetate Monomer (VAM) and tin prices too were trending higher in Q1FY18. However, the impact on margins in Q1FY18 could be partially offset by the above mentioned price hikes. We expect Asian Paints to report gross margin decline of 150bps YoY and EBITDA margin decline of 126bps YoY.
* Modest earnings growth: We expect the sector to post modest earnings growth in the range of 1-4% in Q1FY18 (except Akzo with 5% PAT decline). We estimate Asian Paints to post PAT growth of 1.3%.
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