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Business News/ Markets / Stock Markets/  Buy or sell: Paints sector in consolidation mode. Add Kansai Nerolac, reduce Asian Paints, Berger
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Buy or sell: Paints sector in consolidation mode. Add Kansai Nerolac, reduce Asian Paints, Berger

ICICI Securities advises investors to stay underweight in paint stocks as the likely increase in competitive intensity may hurt industry profitability and cap valuation multiples. The brokerage has a ‘Reduce’ rating on Asian Paints, Berger, Akzo and Indigo Paints, and ‘Add’ rating on Kansai Nerolac.

There will be around 10 sizeable players in the paints sector with market shares of more than 2% each in the next three years, as per ICICI Securities. (Photo: iStock)Premium
There will be around 10 sizeable players in the paints sector with market shares of more than 2% each in the next three years, as per ICICI Securities. (Photo: iStock)

The Indian paint industry is evolving from a ‘somewhat rational competition’ to a ‘perfect competition’ market and analysts expect an accelerated industry consolidation over FY23-FY30.

With multiple players such as Grasim, JSW, JK, Astral, Pidilite, etc. entering the paint business, analysts at ICICI Securities believe the (somewhat) oligopolistic structure of the paint industry will likely change to a perfect competition structure. It could eventually hurt the industry profit pool.

“With multiple players entering the market, there will be margin pressure across players and the industry profit pool is likely to shrink in coming years. It had already been corrected in FY22. While the industry profit pool did recover in FY23 and is likely to move upwards in FY24E due to commodity deflation, we model the industry profit pool to remain under pressure in the medium term," ICICI Securities said in a report.

Incumbents will be forced to choose between market share versus margin and it expects the industry players to focus on retaining their respective market shares.

The brokerage believes there will be around 10 sizeable players with market shares of more than 2% each in the next three years. 

Hence, we will likely see consolidation for gaining market share via new geographies or differentiated products, and expanding margins via higher scale of operations, stronger brand equity or premiumisation.

Also Read: Stocks to Buy: Tata Steel, JSW Steel, Jindal Steel & Power among top bets in metal sector

It believes M&As could help new players to secure competitive advantages such as brands, distribution and stronger connect with painters.

ICICI Securities advises investors to stay underweight in paint stocks. It believes the likely increase in competitive intensity may hurt industry profitability and cap valuation multiples. 

The brokerage has a ‘Reduce’ rating on Asian Paints, Berger, Akzo and Indigo Paints, and ‘Add’ rating on Kansai Nerolac.

Kansai Nerolac | Add | TP: 360

ICICI Securities has an ‘Add’ rating on Kansai Nerolac with a target price of 360 per share. It expects EV/EBITDA of 24x and 21x over FY24 and FY25, respectively. 

The brokerage expects the company’s revenue, EBITDA and PAT to grow at a CAGR of 11%, 20% and 27% over FY23-FY25.

Akzo Nobel | Reduce | TP: 2,650

The brokerage estimates Akzo Nobel’s revenue, EBITDA and PAT to grow at a CAGR of 11%, 16% and 19% over FY23-FY25.

It has a ‘Reduce’ call on the stock with a target price of 2,650 per share.

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Asian Paints | Reduce | TP: 3,000

Asian Paints share price has gained just over 6% this year so far, while the stock is down a little over 3% in the last one year.

ICICI Securities has a ‘Reduce’ rating on Asian Paints with a target price of 3,000, implying a downside of around 8.6% as compared to Tuesday’s closing price.

Asian Paints, market leader, has cut its EBITDA margin target range from 23% earlier to 18-20% now.

The brokerage firm expects the company to deliver Revenue, EBITDA and PAT growth at a CAGR of 10%, 15% and 14% over FY23-FY25. EV/EBITDA is expected to be at 40x in FY24 and 38x in FY25.

Berger Paints India | Reduce | TP: 655

Berger Paints share price has rallied more than 23% this year so far. The stock is up 6.7% in the last one year and over 27% in the last three years.

ICICI Securities believes the acquisition of larger players in industrial paints could allow Berger Paints to strengthen its position in Industrial paints. The company has indicated maintaining its EBITDA margin in the range of 16-18%. 

The brokerage had a ‘Reduce’ rating on the stock with a target price of 655 per share, which is a downside over 10% from Tuesday’s closing price. It estimates EV/EBITDA of 36x in FY24 and 33x in FY25.

The company is estimated to deliver Revenue, EBITDA and PAT growth at a CAGR of 12%, 18% and 22% over FY23-FY25.

Indigo Paints | Reduce | TP: 1,500

ICICI Securities has a ‘Reduce’ call on Indigo Paints with a target price of 1,500 per share. It expects the company’s Revenue, EBITDA and PAT to grow at a CAGR of 19%, 23% and 27% over FY23-FY25.

Indigo Paints plans to focus on 750 tier 1 and 2 cities (ex-metros) and wants to focus on influencers to improve store productivity. Kerala and Chhattisgarh are its key regions and now intends to expand to 750 cities.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 30 Aug 2023, 01:31 PM IST
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