Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us  

| More

Consumer Staples & Discretionary - Worm's world view #32: Conversations with paint dealers regarding price hikes - ICICI Securities

Posted On: 2021-06-19 11:21:06 (Time Zone: UTC)

Paint companies have initiated material price hikes in a phased manner in Q1FY22 after nearly 3 years. Last price hike was in Q1FY19 (our view). In-spite of price hikes, there is no material impact on volumes and industry consolidation continue - that's the insight from our conversations with paint dealers. They told us, (1) While average price hike is 3-5%, price hike in emulsions are higher and lower in enamels, (2) As labour charges have remained largely flat over past two years, the impact for consumers will be low. The material cost to labour ratio is 35:65, (3) the companies operating in informal segment will still generate negligible profits / losses even after price hikes and industry consolidation is likely to continue, (4) there is no material impact on volumes as of now but real impact will be understood once after re-opening of markets and (5) there is no up-stocking of inventory due to price hikes as the dealers are still cautious considering localised lockdowns.

Akzo Nobel is preferred turnaround pick for CY2021 and beyond. We have ADD rating on Asian Paints, Kansai Nerolac and Indigo Paints and Hold rating on Berger Paints.

- Price hikes in multiple tranches: Paint companies which had avoided price hikes till Q4FY21, have started raising prices across sub-segments in Q1FY22. We note paint companies raised prices of emulsions by 3-4% in 1st week of May'21 and raised prices of wood coatings by 6-9% in Jun'21. They also plan to raise prices of waterproofing products, economy emulsions and primers in July'21.

- Limited price hikes in enamels till now: Most paint companies have deferred price hikes in enamels till now. As emulsions are routed through tinting machines, the price hikes have limited impact on emulsion volumes. However, as enamels are largely sold as separate products, price hikes may impact volumes of enamels.

- Overall price hikes of 3-5%: Apart from decoratives, paint companies have negotiated some price hikes with their industrial customers too. The carryover benefit of reduction in (excess) trade schemes will also drive realizations upwards till Q3FY21. Considering the portfolio mix and price hikes across products, we believe the price hikes are in range of 3-5%.

- No material impact on demand: Most dealers opined that there is negligible impact on volumes. However, we believe the real impact of price hikes will be observed only in Q2FY22 i.e. after re-opening of markets.

- Negligible inflation in labour charges limit the impact for consumers: Post lockdowns and deceleration in GDP growth, the labour rates have remained flat. As any painting contract requires 35% material cost and 65% labour charges, 3-5% inflation in paints will have negligible impact for the consumer.

- Informal segment and small players in formal segment continue to lose market shares: Most unorganized players will still be generating negligible profits/ losses even after the price hikes. Hence, the dealers believe the larger players will continue to gain market shares even after raising the prices.

- Negligible inventory up-stocking as of now: Generally, most dealers up-stock before the price hikes. However, most dealers indicated that they don't want to up-stock now due to fear of (further) lockdowns.

We do channel checks. We do network checks. However, >20 years of experience has taught this analyst that on-the-ground checks have utility, if and only if, we don't extrapolate it as a national trend (as diversity is high in India). Worm's world view is our periodic product on network checks.

Valuation and risks

We value stocks on DCF methodology (WACC and TG ranging from 10-13%, 3-6% respectively). Key upside risk is better-than-expected gross margins due to correction in input prices. Key downside risk is unexpected irrational competition due to deceleration in general consumption demand. Please refer table 1 for estimates, target prices and ratings.

Source: Equity Bulls

Click here to send ur comments or to

Disclaimer:The article above is a gist / extract of the original report prepared by the research firm / brokerage firm. This article is not to be considered as an offer to sell or a solicitation to buy any securities. This article is meant for general information only., its employees or owners or the research firms, its employees or owners won't be responsible for any liability that may arise from information, errors or omissions in these articles. or its employees or owners / the research firms or its employees or clients or owners may from time to time hold positions in securities referred in this article. For detailed research reports, please contact the concerned research firm directly.

Other Headlines:

Q1FY22 Result Update - Syngene International - ICICI Direct

Sterlite Technologies - Q1FY22 First Cut - ICICI Direct

Bajaj Auto - Q1FY22 First Cut - ICICI Direct

UltraTech Cement - Q1FY22 First Cut - ICICI Direct

HUL - Q1FY22 First Cut - ICICI Direct

Q1FY22 Result Update - Bajaj Finserv - ICICI Direct

Hindustan Zinc - Q1FY22 First Cut - ICICI Direct

Q1FY22 Analyst Meet - Company Update - Avenue Supermarts - ICICI Direct

Q1FY22 Result Update - Indian Bank - ICICI Direct

FY2020-21 AGM Update - Trent Ltd - ICICI Direct

Q1FY22 Result Update - Supreme Industries - ICICI Direct

Indian Energy Exchange - Q1FY22 First Cut - ICICI Direct

CSB Bank - Q1FY22 First Cut - ICICI Direct

Hindustan Unilever - Q1FY22RU - First cut - YES SECURITIES

Asian Paints Report - Demand rebound strong; profitability, not so much! - HDFC Securities

Maintain ADD on Supreme Industries - Demand recovery to make up for Q1 loss - HDFC Securities

Maintain REDUCE on Jubilant FoodWorks - No fireworks to sustain expensive valuation - HDFC Securities

Mahindra CIE Automotive - Continues to walk the talk - ICICI Securities

Jubilant Foodworks - Capitalizing on the opportunity (per our expectations) - accelerated store expansion - ICICI Securities

Equitas Small Finance Bank - Focus on building stable, scalable bank with prudent and conservative approach - ICICI Securities

CEAT - Challenging quarter amidst rising input costs - ICICI Securities

Havells India - Likely market shares gains across segments - ICICI Securities

I-direct Instinct - PPAP Automotive - ICICI Direct

Consumer Durables Sector Update Report - Inspiring recovery; rich valuation to sustain - HDFC Securities

CEAT - Q1 FY22 first cut - YES Securities

Havells India - Q1 FY22 first cut - YES Securities

Polycab India - Q1 FY22 first cut - YES Securities

Jubilant Foodworks - Q1 FY22 results and investor call takeaways - YES Securities

Asian Paints - Q1 FY22 results and investor call takeaways - YES Securities

Bajaj Finance - Q1 FY22 Result Report - YES Securities

CRISIL Ltd - Q2 CY21 Result Report - YES Securities

HCL Technologies - Q1 FY22 Result Report - YES Securities

Gland Pharma - Q1 FY22 Result Report - YES Securities

ICICI Prudential Life - Q1 FY22 Result Report - YES Securities

Syngene International - Q1 FY22 Result Report - YES Securities

Q1FY22 Company Update - GTPL Hathway - ICICI Direct

Supreme Industries - Q1FY22 First Cut - ICICI Direct

Bajaj Finserv - Q1FY22 First Cut - ICICI Direct

Polycab India - Q1FY22 First Cut - ICICI Direct

Rallis India - Q1FY22 First Cut - ICICI Direct

Q1FY22 Result Update - Asian Paints - ICICI Direct

Gladiator Stocks - Kansai Nerolac Paints - ICICI Direct

Q1FY22 Result Update - Nippon Life India AMC - ICICI Direct

Q1FY22 Result Update - Bajaj Finance - ICICI Direct

Q1FY22 Company Update - Mastek Ltd - ICICI Direct

ICICI Prudential Life - Strong performance in tough times - HDFC Securities

Maintain REDUCE on Bajaj Finance - Speed bumps to a fast recovery - HDFC Securities

Maintain BUY on Mastek - Strong growth engine - HDFC Securities

First cut and detailed views on Asian Paints Q1FY22 Results - YES SECURITIES

Larsen & Toubro Infotech - Margin trajectory will be the key - ICICI Securities

Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2020