Bleak Times Ahead For The Paints Sector Due To Dull Demand, Says Macquarie

Macquarie is turning cautious on the paints space due to weak demand.

The brokerage acknowledged sustained demand weakness in the paints industry, and cut the earnings per share estimates and target prices across the sector. Weak demand along with uncertain competitive conditions make the brokerage cautious.

Macquarie believes in the long-term growth opportunity in coatings and the ability of the industry to pass input costs. However, it believes any uptick required demand pickup which is likely to be a phenomenon in the second half of the year. Its preference remains APNT (Asian Paints) with an 'outperform' rating, followed by KNPL (Kansai Nerolac) which it is neutral on.

The brokerage sees a weak demand outlook, especially in urban mass along with mix-related realisation growth headwinds. This will weigh-in on 2025 sales growth.

Macquarie also believes that income growth required for an uptick in demand is likely to be back-ended in calendar year 2025. This implies a gradual pace of recovery in the next fiscal year.

"We thus moderate our earnings per share estimates across paint peers to factor in this weakness. APNT's EPS cut is sharper given the 2Q miss was not factored in our base estimates," according to the brokerage.

These expectations of weak demand also reflected the brokerage's recent channel checks with dealers across the decorative paints and adhesive space.

The checks point to continued demand weakness and in turn another quarter of declining sales for most peers in the third quarter.

"We see BRGR and PIDI leading sales performance in the space in 3Q. While pricing intensity is unchanged in paints, dealers cited some customer pushback on APNT's entry level product NeoBharat," according to the brokerage.

While Macquarie maintains their view of Grasim's entry not having a significant impact, they acknowledge their inability to appreciate the extent of demand weakness. Further, the competitive uncertainty has increased due to Akzo's proposed sale of India decorative business, according to the brokerage.

These factors drive an increase in their weighted average cost of capital to 11% and drive 10-30% cut to target prices. "We maintain our view that APNT is best positioned in this changing competitive environment and hence assign a lower WACC rate compared to peers."