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Paints: High frequency indicators #3

Highlights:

(1) Some paint companies have linked revenue targets of dealers in FY22 to FY20 (two-year CAGR approach, the right one, in our view). Volume CAGR over Q1FY20- Q1FY22 is likely to be in low-mid single digits. We also believe there will be higher realization growth (after almost three years) due to price hike of ~3%, reduction in trade schemes YoY and higher revenues of premium products.

(2) Projects business (10% of paint sales) has outperformed in Q1FY22 as there were limited restrictions of construction activities.

(3) Passenger vehicle production growth (+12%) and two wheeler production growth (+10%) remained strong in Q4FY21 and Apr-May’21, YoY. Price hikes by auto companies are likely to drive demand for auto-refinish segment too (potential beneficiaries: Kansai and Akzo Nobel).

(4) There were price hikes in last week of June and even in July. We believe it would have resulted in higher trade inventory at June-end.

(5) There is steep inflation of 14-171% across major input prices. There is sharp increase in freight and transportation cost too with higher diesel prices. Must see figures are 1-7.

Akzo Nobel (only paint stock in our coverage rated BUY) is preferred turnaround pick for 2021 and beyond (though, we reckon that short-term remains cloudy, may be a tad underwhelming). We have ADD rating on Asian Paints, Kansai Nerolac and Indigo Paints and Hold rating on Berger Paints.

* Revenue targets benchmarked to Q1FY20: Many paint companies have linked Q1FY22 revenue targets of the dealers to Q1FY20 instead of Q1FY21. We believe paint companies reported strong revenues in 1st Apr- 20th Apr but the consumer offtake was weak over 20th Apr - 31st May. There was strong revival in volumes in June’21 (also due to pent-up demand and higher growth in waterproofing). Realization growth in Q1FY22 is likely to be strong due to (1) price hike of ~3%, (2) reduction in trade schemes YoY. Due to lower input prices, trade schemes were higher in Q1FY21 and (3) higher revenues of premium products.

* Strong growth in passenger vehicle production: Passenger car production reported growth of 11.9% in Q4FY21 YoY. The production growth was strong even in Apr-May’21 due to favorable base. The production growth in two wheelers was also healthy at 10.1% in Q4FY21 YoY. Price hikes by auto companies are likely to revive second-hand car market and result in higher demand for auto-refinish paints.

* Increase in production of Consumer durables: The production of consumer durables (IIP) has also increased MoM post Q2FY21. Due to pent-up demand and very low base, the production of consumer durables was up 1944% in Apr’21. It was up 20.4% in Q4FY21, YoY.

* Price hikes in range of 4-5%: Most paint companies have raised selling prices by 4-5% during the quarter. However, most prices were initiated in last week of June’21 or in 1st week of July’21. The schemes were also lower YoY and it will result in higher net realizations. The price hikes were done in 3-4 tranches. However, most paint companies have not yet raised selling prices of enamels.

* Steep inflation in raw material prices: The prices of all key raw materials such as TiO2, crude oil (solvents), packaging materials are inching upwards sharply. Apart from raw materials, we also note there is steep inflation in freight and transportation cost too due to higher diesel prices.

We recently started a new series analyzing the high frequency indicators in paints. We track real estate registrations, auto sales, price hikes and trade schemes, launches/ relaunches and input prices. This product also covers channel and network checks (Worm's World View series).

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