Real estate may be down and out, but the companies that decorate them are showing a lot of promise.

The home décor industry did take a hit over the past two-three years, as demonetisation, GST rollout, RERA implantation and persistent weakness in the real estate sector.

But the industry’s growth expectations and valuations have since been reset downward and growth drivers such as accelerating consumer spend on home décor, renovation and the government’s housing and infrastructure push are projected to lift demand for them in the medium term, analysts say.

This makes a case to zero in on companies from paints, plywood, sanitaryware, marble as well as tiles sectors. Barring Berger Paints (up 22 per cent) and Asian Paints (up 18 per cent), none of the companies from these sections delivered positive returns to investors in last one year.

Among the top losers, Shiva Granito Export, Asian Granito India, Nitco, ASI Industries, Restile Ceramics, Somany Ceramics, Murudeshwar Ceramics, Alfa Ica (India), HSIL and Shalimar Paints tanked between 50 per cent and 75 per cent.

Shares of Ambition Mica, Greenlam Industries and Stylam Industries are down 48 per cent, 28 per cent and 11 per cent, respectively, for last one year.

“Home décor stocks have corrected in the wake of earnings disappointments and moderating valuations. Smaller players (second- and third-tier) have been particularly hit hard as negative operating leverage dented profitability more sharply than the industry majors. Since margin expansion is likely to remain slow due to competitive intensity and weak demand outlook, earnings risks for smaller players remain high,” says Edelweiss Securities.

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However, the brokerage says despite near-term pressure, growing consumption pattern and rising aspirations of the middle class augur well for the industry.

Meanwhile, benefits from the dismantling of the unorganised sectors following GST implementation should start flowing in now.

The domestic home décor industry consists of many small players, which were earlier partially or completely exempt from tax. Under the GST regime, all these players have come under the tax umbrella and, therefore, they have to pay taxes creating big cost disadvantage for them, and forcing many such units to close down.

“Our channel checks suggest 40 plants have been shut down in the tile segment, while many small plywood players are making a beeline for outsourcing opportunities being actively explored by large organised players. The plywood industry is showing tell-tale signs of a shift from unorganised to organised players given the consistent uptick in volumes,” said Edelweiss Securities.

Edelweiss says organised plywood players would eventually gain market share from unorganised players via aggressive product launches in the mid- and low-end segments. Laminates’ margins, too, should start improving with stabilisation in input cost.

The brokerage has ‘buy’ ratings on Century Plyboards and Kajaria Ceramics at the current market prices.

Equirus Securities also has a ‘long’ outlook on Century with a March 2020 target of Rs 209.

“Century should see gradual margin improvement from the second half of FY19 with an expected drop in crude-linked phenol, formaldehyde and resin prices from Q4FY19 and possible reversals of MTM losses related to forex borrowings due to rupee appreciation. However, the MDF business would likely see increased competitive intensity at least for the next 1.5-2 years, leading to lower MDF revenue growth and below-expected segment margins. Hence, we cut our FY19/FY20 sales estimates by 2 per cent,” said Equirus Securities.

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Coming to paint industry, the sector is expected to report robust high double-digit decorative paints volume growth in Q3FY19 driven by strong festive season sales. While crude oil prices declined recently from over $85 per barrel in early October to under $60 per barrel, average price in Q3FY19 still remains higher by 20 per cent YoY. Given raw material inventory, ICICI Securities expects margins to remain weak in Q3FY19 despite price hikes.

With the price hike in December 2018, paint companies took four price hikes last year in the decorative paint segment aggregating 7-7.5 per cent to offset the increase in raw material prices.

“Despite the price hikes, we expect value growth in Q3FY19 to be marginally lower or 1-2 per cent higher than volume growth,” ICICI Securities said in a report.

The brokerage has ‘hold’ ratings on Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel and Pidilite.

Indiabulls Ventures has a ‘buy’ call on Asian Paints with a price target of Rs 1,530.

“Asian Paints’ decorative paint segment has been doing good and with lower crude prices will aid to margins expansion. Also, with the hike in MSP prices, urban development, farm loan waivers we expect rural disposable income to increase which will further aid demand,” the brokerage said in a report.





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