Paint companies under our coverage are expected to report robust high double- digit decorative paints volume growth (ex-AKZO) in Q3FY19 driven by strong festive season sales.
While the companies will see the positive impact of price hikes taken in CY18 (aggregating 7-7.5%), we expect adverse mix changes towards low-value products to continue in Q3FY19, thus impacting realisation. Hence, value growth is expected to be marginally lower or 1-2% higher than volume growth. Accordingly, we expect 17% revenue growth for APNT and BRGR.
KNPL is expected to report 16% revenue growth as strong decorative volume growth would be partially offset by slower high single-digit industrial volume growth due to slowdown in auto segment. AKZO is expected to report 10% revenue growth driven by high single-digit decorative paints volume.
While crude oil prices declined recently, average price in Q3FY19 still remains higher by 20% y-o-y. Hence, given raw material inventory, we expect margins to remain weak in Q3FY19 despite price hikes. We expect gross margin contraction of 80-200 bps y-o-y and Ebitda margin contraction of 100-200bps y-o-y for paint companies (including PIDI).
However, compared to an average of $60/`4,300 in Q3FY19, crude prices are at $45/`3,200 as on Jan 1 ‘19. With price hikes, we believe margins will see a stronger uptick in FY20.
Overall, we expect high single-digit to low double-digit earnings growth for paint companies. PIDI, though not a pure-play paint company, has similar demand dynamics as the paint sector. We expect PIDI to post sales growth of 15% y-o-y and Ebitda margin contraction of 200bps in Q3FY19.
While crude oil prices declined recently, average price in Q3FY19 still remains higher by 20% y-o-y. Hence, given raw material inventory, we expect margins to remain weak in Q3FY19.