Due to a high base and rains that impacted festive demand in the first half of the quarter, paint and adhesive firms' Q3FY23 volumes are projected to remain down, according to Nuvama Wealth Management Ltd's report, which was formerly known as Edelweiss Securities Ltd.
The brokerage anticipate demand to strengthen following the dismal third quarter, despite price increases made by paints and adhesives companies over the previous few quarters to support profitability.
However, the brokerage believes the H2FY23 margins to improve for paints and adhesives space.
"Improving product mix and better margin profile would be key drivers in H2FY23," said the brokerage in its report.
As raw prices decline from their high and players experience a gradual but significant relief, the brokerage anticipates stronger profitability for the second half of FY23.
"With better product mix (in Q3/Q4) and easing raw material prices, especially crude, we expect H2FY23 margins to improve. We remain positive on growth prospects for the sector," added Nuvama Wealth.
In addition, Q3/Q4 are likely to see an increase in demand for exterior paints, which will result in greater margins.
"Asian Paints is setting up a new facility for vinyl acetate ethylene emulsion (VAE)/ vinyl acetate monomer (VAM) production, which will reduce its raw material import dependency and decrease currency exposure, thereby enhancing margins," said the brokerage.
However, rupee depreciation continues to be a key concern for the brokerage house.
In the paints and adhesives space, the brokerage prefers market leaders such as Asian Paints and Pidilite above others.
According to the brokerage, Asian Paints has outperformed its competitors in terms of volumes over the past year and the past three years. While, Pidilite has guided that it currently has 2x the outlets than the largest paint company in India.
"Paints and adhesives companies continue to expand their distribution networks with additional dealer points and tinting machines," added the brokerage house.
