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Paints sector likely to see double-digit volume growth in Q3, says Nuvama; Asian Paints, Grasim among top picks


Domestic brokerage Nuvama Institutional Equities spoke to a number of dealers and conducted channel checks regarding the Paints & Adhesives sector. After the interaction the brokerage predicts strong double-digit volume growth in Q3, driven by the upcoming wedding season, a soft base, and favorable demand.

Due to variable monsoon and sluggish rural recovery, Q2FY24 was slightly soft, the brokerage said in its report.

Despite some inflation in raw materials, the brokerage expects margin expansion YoY. Initially, Grasim (launched in Q4FY24) primarily targets unorganized players, which account for 25-30% of the market. The brokerage reiterates “Buy” for Pidilite and Asian Paints. With the increases in market share, Berger Paints was also affected. Grasim’s larger scale remains a risk for smaller players and is an important variable to keep an eye on.

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“We are arguing that Grasim will gradually emerge (post-launch in Q4FY24) as a competitor against smaller players. The paints industry has experienced high employee attrition – Grasim’s penetration. Grasim benefits from its large distribution capacity, but largely wholesale (in white cement) and is expected to offer quality and pricing comparable to industry leaders and support good marketing push Regional depots are being established.

In terms of production cost, we expect Grasim to be on par/close to Asian Paints; this gives it a small advantage over smaller players, but usage will take many years to ramp up,” the brokerage said in its report.

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After discussions with several dealers, the brokerage emphasizes the following three main takeaways:

Double bonanza from festivals and wedding season

The brokerage report says that most paint and adhesive makers have a bright future in Q3FY24, with volume growth of 15% YoY projected due to festive demand, low base, upcoming wedding season, and increase in real estate activity. Demand for most paints was weak in Q2FY24 due to unpredictable monsoon (especially in July) and overall slump in rural areas. Demand trends reversed as a result of trading down in Q2FY24; Q1/Q2 outperformed Q3/Q4 compared to equivalent performance in Q1FY24.

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Lustrous wedding season likely

According to a survey conducted by the CAIT Research & Trade Development Association, 3.5 million weddings are scheduled to take place between November 23 and December 15, the report said.

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Confidence in expansion plans is strong

Paints players are still planning big capital expenditures. In the next three years, Asian Paints plans to invest approx 87.5 billion in capacity expansion, backward integration, and acquisitions. In order to increase capacity and secure its market position, Berger plans to invest 25 billion over the next five years. To increase its current capacity of 600 million liters, Kansai would also have to spend 2.9 billion. Indigo Paints’ water-based paint facility is expected to open for business by FY25, according to the brokerage.

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Disclaimer: The opinions and recommendations of the individual analysts presented in this article are. These do not reflect the views of the Mint. We encourage investors to check with certified experts before making any investment decision.

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Updated: 15 November 2023, 02:35 PM IST

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