Asian Paints, Berger Paints Q2 numbers seen weak but will continue to dominate 5 years down the road: Abneesh Roy

Abneesh Roy, Executive Director, Nuvama Institutional Equities, says he is seeing consolidation in the paints sector. In Q2, he expects weak numbers for Asian Paints, Berger Paints, etc, because there is a postponement of exterior paints because of very high rains but these companies will continue to dominate even five years down the line. There are elements of downtrading and price cuts are still there. So, Q2 results will be weak. At mid-single digit market share in consumption or paints, the ability to influence the market or gain market share is very tough. Consolidation will be the game. It could be JSW Paints, Birla Opus, or any other player, and only time will tell.

Kalyan and Titan have come out with their Q2 updates. The numbers seem to be strong, but they seem to have been boosted by this one-time sales because of the cut in the customs duty and the market is not taking that quite positively. How are you reading into Q2 numbers? Do you expect the margins to be on the weaker side given that the studded sales were quite weaker for both the companies?
Abneesh Roy: The stocks have corrected because generally in markets sell-on-news happens. Now the updates are out. So, no more positive surprise in terms of sales is there. But on the margins front, there will be pressure because studded has grown much slower than gold and that always happens when gold has seen so much inflation in terms of pricing and diamond, on the other hand, has seen disruption from lab-grown diamond.

Second, post the duty cut by the government, we have seen that in the first 45 days after that, a huge pent-up demand came back. The issue is now the gold price is back and in fact above where it was before the rate cut had happened. So, if before the duty cut, the volumes were slow, the footfalls were slow, I think now we are back to normal. But yes, going ahead in H2, the number of marriage days is very strong, so that should help.


In terms of consumption, what we are picking up is that pockets of urban consumption are still doing well, but generally urban consumption is lagging rural consumption. In the five-six updates which have come, both in the FMCG and the retail, rural-focused companies, the rural-based companies or value part of the consumption have grown faster.

In urban consumption, there is the impact of the slight issue of food inflation, telecom hikes, etc. But in rural areas, definitely because of the freebies and because for rural areas, food inflation is not much of a concern. It is localised and we are seeing rural growth being faster for most of the companies.

Coming to the paints industry, on one hand, volatility of crude has happened and on the other hand, there could be some consolidation on the cards with this latest commentary coming in from the AkzoNobel parent. Whom do you see as the likely suitor back home? Do you think Grasim could be looking to add more capacity?
Abneesh Roy: This is in line with our expectations. We were expecting consolidation in the paints sector, maybe after one or two years. But we are seeing it much earlier. So, firstly, in the near term, in Q2, we expect weak numbers for Asian Paints, Berger Paints, etc, because there is a postponement of exterior paints because of very high rains.

Second, there is a level of downtrading still being there and at the base, price cut is still there. So, Q2 results will be weak. That is why we had pointed out in the preview last week itself. Now, coming to the specific question on Akzo, clearly in the paints, we expect Asian and Berger will continue to dominate even 5 years, 10 years, 15 years down the line. But for the rest of the players, it will be more of consolidation.

Now, who will be the suitor? That only time will tell, because Akzo has said that everything is open. They are not necessarily selling out or partially exiting. They have also said that they are open to partnerships, JVs. But Akzo is a small player. It is the fourth largest player. But market share wise, it is in the mid-single digit.

So, at mid-single digit market share in consumption or paints, the ability to influence the market or gain market share is very tough. That is why we see that consolidation will be the game. It could be JSW Paints, Birla Opus, or any other player, and only time will tell. It could be anyone because it is a good brand. Dulux is a great brand. It has decades of presence, distribution access, and very good presence in the premium and mid market. It will be an attractive opportunity for anyone to collaborate either through a merger, either through a JV or through partnership also.

Has the competitive intensity gone down significantly in this sector and given that crude prices have also come off from their peaks, not that they are at their lowest point currently, but still just off than what they were at the Q1 level, can we see some margin benefits for the second half of the financial year?
Abneesh Roy: Yes, we do see better margins for the sector in H2. Coming to competitive intensity, it is not at all a surprise. All the new players also have a very rational strategy. No one is playing big disruption. Now, free tinting machines, extra grammage, more distributor margin, those are things which every new player does.

I do not think that disrupts the market because in paints the two big things are access to the paint shops and second is, of course, the brand. Now, these things take decades to build in. It cannot be built in five-six months. So, Birla Opus, JSW are all focusing on a gradual strategy and we are not seeing any big impact of any of the new players who have come and the latest initiative of AkzoNobel, I think that further shows that yes, consolidation will happen and ultimately, in our view, Asian and Berger will continue to dominate even five years down the line.

In the rest of the players, they will have to work out what is the right strategy. But Birla Opus has built up a huge capacity. So, what do they get by buying AkzoNobel because they do not need the manufacturing. But in terms of brand and distribution, I think AkzoNobel can be a great fit for any of the new players.

What do you make of this war which is underway when it comes to quick commerce and the impact clearly was seen in DMart numbers as well last week the provisional update that we saw. What is your expectation? Will the rest of the players feel the brunt too?
Abneesh Roy: So, yes, quick commerce, e-commerce, clearly disruption continues and we are seeing now Zepto is also well funded and Swiggy is planning the IPO. So, all the e-commerce, quick commerce players are well funded. The good part is they are also looking at a rational strategy, not too many freebies, charging now for the delivery in many cases.

It is a path towards more convenience rather than just disruptive pricing, that is the first point.

It is positive for FMCG companies because for them, the reliance on kirana shops goes down further. That is why if you see Dabur, we did see an inventory correction because a lot of pipeline had built up in the kirana, but in Q2, many FMCG companies will report a decent volume growth of 5% to 6% also. So, Dabur's result should not be seen as the parameter.

Any initial thoughts on the Swiggy IPO?
Abneesh Roy: No, I do not cover that space. But we expect two to three players to survive and it is good for the consumer companies that clearly the last mile will become much better. But in terms of pricing, we will wait for the details, but I will not be able to comment on that.