Rerating of paint stocks on still some time away, say analysts | News on Markets

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Top Paint stocks to buy, paint stocks outlook: The performance of paint stocks has not been colourful at the bourses thus far in calendar year 2024 (CY24). ACE Equity data shows that Kansai Nerolac share price has tumbled 19.76 per cent year to date (YTD) in CY24, followed by Berger Paints share price (14.97 per cent), and Asian Paints share price (13.57 per cent).

By comparison, the Nifty50 has surged 11.92 per cent YTD, while the broader Nifty500 has soared 18.26 per cent.

This subdued CYTD performance of paint stocks at the bourses, analysts said, has been on account of subpar March 2024 (Q4-FY24) numbers. Expected entry of new players later in the year (Birla Opus) amid weak demand in Q4-FY24 also dulled sentiment.

Going forward, analysts do not expect an immediate trend reversal as overhangs of rising competitive intensity, coupled with weak discretionary spending, are likely to keep stock prices under pressure. The rerating of paint stocks, if any, will be gradual as investors remain watchful of how the dust would settle in the oligopolist market.

“Our channel check suggests the competitive scenario in the paint sector will only increase in the near to medium term, especially with the entry of Grasim Industries-owned Birla Opus Paints,” says Amit Purohit, vice president for research at Elara Capital.

With this, profit margins of paint companies, he added, are at risk even if the demand picks up during the festive season.

“We believe all the players would focus on improving sales volume, which may restrict earnings upgrades. Paint stocks will likely underperform over the next one year,” Purohit said.

New entrant

To add to the worries of the paint companies, Birla Opus launched its products across several Indian states in June 2024.

While Opus’ off take has been slow due to initial supply hiccups, and brand unawareness, analysts expect Opus’ products will be available in most Indian states by July. This, they believe, will intensify competition further.

As a result, despite steady input prices, such as crude oil, margin expansion of incumbent paint companies may be constrained by discounts and higher spend on advertising and promotional activities, analysts pointed out.

In Q4FY24, India’s largest paint company – Asian Paints – for instance, reported a 170-basis points (bps) year-on-year contraction in Ebitda margin, and Berger Paints saw 100 bps contraction.

Price war in paints sector

On the pricing front, Opus Paints is available at a 5–6 per cent discount compared to Asian Paints. Asian Paints, meanwhile, took a 3.7 per cent price cut in Q4FY24, while Berger Paints slashed prices by 4.5 per cent.

“We believe these strategic moves will help the incumbent players protect their volume growth. However, this may affect their realisations in the medium-term,” said Antu Thomas, research analyst at Geojit Financial Services.

Valuations of paint stocks

Asian Paints is trading at a price-to-earnings (P/E) of 51x, which is a discount of 17 per cent to its 5-year average. Berger Paints, too, is trading at 50.5x P/E – a discount of 23 per cent to its 5-year average.

“Thus, though the stocks are available at comfortable levels, we expect rerating to get delayed,” said Thomas of Geojit Financial Services with ‘Hold’ ratings on Asian Paints, Berger Paints, and Kansai Nerolac.

Amit Purohit of Elara Capital, on the contrary, opines valuations are high given the risk of possible earnings downgrades, and sees no rerating in the near to medium term. He has a ‘sell’ call on Asian Paints.

Systematix Institutional Equities, meanwhile, has ‘Buy’ call on Asian Paints, Berger Paints, and Kansai Nerolac, seeking comfort from their discounted valuations, but expects significant pressure on operating margins (OPMs) over FY25-FY26 due to elevated advertising, R&D and distribution costs, idle capacity overheads, and price cuts.

First Published: Jul 08 2024 | 8:20 AM IST

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