What's Ailing The Paints Sector? Neelkanth Mishra Explains Macro Pressures
Some of the major paint companies, including Asian Paints, reported muted growth in the second quarter in the backdrop of soft urban demand.
The slump in Asian Paints Ltd.'s quarterly earnings has drawn focus on the state of India's paints sector, which is reeling due to macro-economic pressures.
Some of the top macro-economic trends presently do not augur well for a number of sectors, including consumer discretionary, according to Neelkanth Mishra, chief economist at Axis Bank Ltd.
"One of the important trends that has emerged is that our current account deficit is at around 1% (of the gross domestic product). This is when the general government deficit is 7.5–8%. And household savings are still continuing, but on a net basis, they are slightly lower," he told NDTV Profit.
At present, households are not saving that much and only the corporates are saving significantly, he said. "That you can see in data of BSE 200... The operating cash flow (of companies) have grown by 22% CAGR between FY19 and FY24. Investing cash flows are also growing."
The investing cash flow as percentage of operating cash flow, which was 140% in 2012 and 2014, has now fallen to 70. Now, all of these groups need to figure out where to invest — some diversifying into jewellery, some into paints, some are buying stake in auto companies, he explained. "You will see this phase of diversification and, therefore, competitive intensity in some of these sectors is going to change."
This phase of diversification will lead to new companies coming into a particular sector, and new competitive realignment happening. And that uncertainty means lower price-to-earnings.Neelkanth Mishra
Recovery Ahead?
Despite the muted performance of several sectors due to slowdown in urban demand, Mishra feels that the momentum could shift early next year with an increase in government spending.
"It is reasonable to expect that once the fiscal monetary tightening ends, and relaxation starts, then demand will go up. That demand could be seen in (the) real estate sector, it could show up in demand for cars, consumption items, consumer discretionary items," he said.
The Reserve Bank of India has kept the benchmark lending rates unchanged since July last year. There is an expectation of the rate-cut cycle to be initiated soon as the central bank changed its outlook from 'withdrawal of accommodation' to 'neutral' in October.
According to Mishra, the slowdown is not worsening incrementally. "From May, it was clear that things were slowing down and momentum was negative. Now, it appears that things are bottoming out. But, still, it's too early to say that as only a few indicators suggest so."
Mishra's comments come in the backdrop of Asian Paints missing analysts' estimates on all fronts in its financial results released for the July–September period. Its net profit slipped 44% year-on-year to Rs 694 crore, as compared to the consensus estimate of Rs 1,079 crore of analysts tracked by Bloomberg.
Revenue from operations dropped 5.3% to Rs 8,028 crore, as against the consensus estimate of Rs 8,581 crore. This was followed by the company's stock slipping to its lowest in three years on Monday, as brokerages flagged growth concern in the near term.
Nomura expects that Asian Paints' top line and earnings before interest, taxes, depreciation and amortisation will likely remain flattish in the second half of this fiscal. However, volume may improve in the second half due to postponement of demand in rural areas, the brokerage said in a note on Sunday.
Morgan Stanley, in a note on Asian Paints, said product mix, rising rebates, employee costs, and high selling expenses are the "key monitorables".