What is driving the optimism in stocks of paint companies?
Ahead of their June quarter results, shares of Asian Paints and Berger Paints have hit new 52-week highs intraday on NSE on 11 July and 12 July, respectively
Paint firms may finally manage to put the gloss back on their earnings performance. Not only is volume growth anticipated to be robust, but the margin picture is set to get pretty. Ahead of their June quarter results, shares of key paint makers Asian Paints Ltd and Berger Paints India Ltd have rallied. These stocks touched new 52-week highs intraday on the National Stock Exchange on 11 July and 12 July, respectively.
Volume growth in the decorative paints business is likely to be in double digits. The improvement would be partially aided by a lower base due to the impact of destocking during the transition to the goods and services tax.
According to ICICI Securities Ltd, Asian Paints would report its second consecutive quarter of double-digit decorative paints volume growth of 13-14%, suggesting a particularly steady recovery trend.
Its peers Berger Paints and Kansai Nerolac Paints Ltd are also seen continuing their double-digit decorative volume growth momentum with 14-15% growth. The latter’s industrial paints business is seen posting high single-digit volume growth.
As for margins, they are poised to expand, despite input cost inflation, thanks to price hikes.
All paint makers announced multiple price hikes across product categories in the last one year, aggregating around 5.5-5.8%. This includes the recent price increases of around 1.5% in March and 2% in May.
While the cost of titanium dioxide (TiO2)—a key raw material—has softened from its peak, crude oil prices have risen sharply. TiO2 prices have declined by about 5% when compared to a year ago, but remain high sequentially.
According to analysts, the Ebitda (earnings before interest, tax, depreciation and amortization) margin for Asian Paints and Berger Paints is seen expanding in the range of 80-100 basis points compared to the year-ago period. A basis point is 0.01%.
However, given a comparatively higher exposure to the industrial paints segment, Kansai Nerolac’s margins may contract. Usually, it takes a longer time to pass on cost increases here than in the decorative paints segment. A higher margin base could add to the pain, add analysts.
What investors also need to watch out for is the impact of the recent weakness in the rupee. Most Indian paint companies meet their raw material requirements, especially TiO2, through imports. This makes them vulnerable to a depreciating local currency. CLSA India Pvt. Ltd cautions about a negative impact of adverse currency movements on net importers such as Asian Paints and Kansai Nerolac Paints.
Meanwhile, on a year-to-date basis, shares of Asian Paints and Berger Paints India have posted 18.2% and 11% returns, respectively. During the same span, the Nifty 500 index has given negative returns.
As for valuations, on a one-year forward price-to-earnings basis, Asian Paints and Berger Paints trade at 52 times and 50 times, respectively. Despite their outperformance, these valuations are too expensive for comfort.
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