Muted real estate construction, high channel inventory, poor liquidity of the channel, declining raw material prices and moderation in aspirational consumption is slowing volume growth for most ‘Home Building Material’ categories.
However, we do not find this as a dent to a structural story and expect organised players to continue gaining market share on account of: (i) differentiated product offerings, (ii) superior distribution, and (iii) higher aspirational value attached to the brand. Given paint companies’ last decade success, many ‘new’ category leaders/runners-ups are working on above factors. Valuations in all these categories have expanded considerably as scale and RoCEs (returns on capital employed) expanded.
Paints: Near-term macro headwinds and structural positives priced in. Asian Paints and Berger are well poised to gain market share from the unorganised sector and other smaller players over the next three-four years. But our channel checks suggest that given the weak overall festive demand, discretionary consumer categories have not seen any signs of revival in Q3. Declining crude prices will boost the sector’s gross margins in Q4 and in Q1FY16.
Light electricals: The euphoria of recovery settling down. Contrary to earlier expectations of a demand recovery from October 2014, demand has slowed down due to liquidity challenges impacting B2B (project) demand and slow recovery in B2C (consumer-led) demand. But the fall in metal and crude prices could lead to margin improvement for companies.
Tiles: Transient slowdown; secular growth story intact. Slowdown in real estate construction in tier-II/III cities led to volume growth deceleration in FY15. Channel inventory remains high, which could lead to poor volume growth for two-three quarters. Kajaria and Somany, the two strongest tile franchises, have been raising scale (via JVs with unorganised players) alongside investments in brand building, which has enabled market share gains and higher-than-industry volume growth in recent years.
Pipes: Lower prices of PVC pipes structurally positive for the sector. PVC pipe sales would likely be weak in Q3, as distributors have delayed purchases in anticipation of lower PVC resin prices. It would be difficult for Supreme Industries to meet its FY15 revenue growth guidance of 18-20% y-o-y. We estimate revenue growth of 16% y-o-y-in FY15, with downward risks.
Plywood: Receding competition from unorganised segment. Whilst volume growth has moderated this year, the export ban of timber from Myanmar led to waning competitiveness of unorganised players and hence better pricing power of organised players (price hikes of 10% YTD). Century has outpaced competition (16% volume growth in H1 vs 3-4% growth of the industry and Greenply) with its enhanced capacities and brand-building.