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The dealer count has likely increased 2x in last 3-4 years in Chennai. While it has resulted in higher paint sales, it has impacted revenue/dealer - that's the insight from our conversation with the paint dealers in Chennai. They told us: (1) Most dealers are now trying to sell paints of only one company in order to achieve higher turnover-led trade schemes. As per dealers, market leader Asian Paints has benefitted most. (2) Nippon Paints has emerged stronger and is no.2 in Chennai. JSW is also performing well. MRF Paints has high consumer recall in wood coatings. (3) There is higher demand from projects business but dealers are selling to real estate developers only to meet certain targets. The working capital days are high in projects business. (4) Off-take has improved in Jan-Feb’23 vs. Q3FY23 likely led by higher trade schemes. March appears soft, as of now. We advise investors to stay underweight in paints stocks. We have REDUCE rating on Asian Paints, Berger, Kansai Nerolac and Indigo. Akzo Nobel is the only paint stock in our coverage rated BUY.

*Steep increase in the number of dealers: The number of dealers in Chennai has increased by ~100% in the past 3-4 years. While overall demand for paints has increased, volumes (revenues) per dealer are impacted now. Hence, many dealers are not able to achieve the annual targets and do not qualify for ‘turnover based trade schemes’.

* Focus on selling more products of one paint company: Earlier, the dealers used to sell paints of multiple companies. Now they are selling paints of only one company as they want to achieve turnover-based targets. Hence, large paint companies such as Asian Paints are likely to gain market shares.

* Off-take better in Jan-Feb’23 than Oct-Dec’22: There was a lean period in OctNov’22. However, the offtake has recovered in Jan-Feb’23. The dealers indicated that there are no apparent reasons for slowdown and subsequent recovery. They believe additional trade schemes in Jan-Feb’23 have likely led to higher sales.

* Nippon Paints doing well: While Berger has healthy presence in Chennai and Tamil Nadu, Kansai and Akzo have limited presence. The dealers indicated that Nippon Paints is now no.2 in Chennai. JSW Paints is also growing well. However, they indicated that MRF Paints is doing well only in wood coatings and is yet to become a serious player in decorative paints.

* Strong demand from Projects business: The demand from Projects business is very strong. However, the margins and working capital days are extremely high for the dealers. Hence, the dealers are selling to real estate developers only if they have to achieve the turnover targets.

* No price hikes and no new launches: There were no new product launches in past 3-4 months. Considering weaker consumer sentiment due to steep inflationary pressures, new product launches were limited. Akzo has taken a marginal price hike but others have not yet raised prices.

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