Consumer Staples & Discretionary - Worm's world view #23: Conversations with paint dealers in Mumbai - ICICI Securities

There is reduction in trade scheme as there is material improvement in demand for decorative products (paints) - that's the insight from our conversation with dealers in Mumbai. They told us, (1) Except certain product related schemes and turnover target schemes, all other trade schemes are withdrawn now, (2) dealers are carrying higher inventory than pre-covid era as they believe disruptions (lockdowns, night curfew etc.) are here to stay for some more period, (3) there is strong recovery in projects business with improving real estate demand, (4) most dealers are not selling consumer products of Asian Paints and hence, we believe there is likely separate channel for consumer products, and (5) Late Diwali in CY20 and market share gain in putty are also key reasons for healthy volumes.

Akzo Nobel (only paint stock in our coverage rated BUY) is preferred turnaround pick for 2021 and beyond. We recommend investors to wait for better entry points in our coverage of paint stocks. We have ADD rating on Asian Paints and HOLD rating on Berger Paints and Kansai Nerolac.

- Reduction in trade schemes: Paint companies were offering 5-6% extra trade schemes from Q4FY20 to pass on benefits of lower input prices and to drive demand. However, with improving demand and higher input prices, the trade schemes are largely withdrawn. However, they have continued certain product specific schemes and turnover schemes for the dealers.

- Additional inventory with the dealers: The dealers are carrying extra inventory than they used to carry prior to covid. They indicated that events such as localized lockdown, night curfew, supply disruption due to excess rain are here to stay and hence, they need additional investments in inventory. We believe this additional investment may reduce with normalization of economy in H2CY21.

- Recovery in Projects business: There is recovery in projects business (Paint sales to real estate developers) in Dec'20 quarter with increase in real estate transactions. Also the construction activity has resumed on most sites. As the public transport has also commenced, the painters are able to travel freely from suburbs to the city.

- Possibility of price hikes: The dealers also opined that there is possibility of price hikes in Jan-Feb'20 especially in enamels. Depending on price hikes news-flows, the dealers are expected to increase inventory prior to price hike.

- Limited sales of consumer products through paint dealers: Asian Paints has introduced toilet cleaner, floor cleaner, hand-wash and wipes but most dealers said that they are not selling these consumer products. While hand sanitizers and consumer adhesives were rolled out through dealers, we believe Asian Paints plans different channel for its other consumer products.

- Late Diwali in CY20 (vs CY19) and higher volumes of adjacent products such as putty were also key reasons for healthy growth of paint companies. 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.

Source : Equity Bulls

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