Paint stocks may be due for re-rating soon

Mumbai: Stocks of Indian paints manufacturers are likely to outperform on expectations of strong revenue growth over the medium term, led by volume growth and price hikes in response to inflationary raw material prices, said analysts.

The growth will mainly be led by the shortening of the repainting cycle, housing demand, conversion from ‘kutcha’ to ‘pucca’ houses, and increased investment in infrastructure, they said.

“We expect demand momentum to remain robust over the medium term with organised players with strong brand equity gaining share,” said Gaurang Kakkad, analyst at Haitong International. “FY23 will see a strong recovery in gross Ebitda margins on account of price hikes in December quarter and will aid Ebitda and profits growth, as margins come back largely to FY21 levels.”

Despite the Covid-induced lockdown, the paints sector rebounded strongly, reporting sequential recovery since June 2020. However, most paint companies underperformed the benchmark in the last three months. Stocks such as Asian Paints, Berger Paints, Kansai Nerolec, and Indigo Paints are likely to see re-rating in coming weeks, said analysts.

India is largely a decorative paints-dominated industry, accounting for 74% in value terms and 89% in volume terms. The organised sector has around 75% market share, and the unorganised sector holds the remaining 25%. The share of unorganised players has been on a downtrend due to challenges faced by smaller players in the form of demonetisation, implementation of the Goods and Services Tax, and Covid-led disruptions.

Paint companies hiked prices by about 20% last year due to inflationary pressure on raw material cost and support margins.

“We expect a strong demand trend to continue in the December 2021 quarter supported by festival season and pre-buying activity by dealers in expectation of further price hikes,” said Vinod Nair, head of research, Geojit Financial Services. “Similarly, the second half of FY22, the demand from tier 1 and 2 cities are likely to remain healthy compared to tier 3 and 4 cities, which will contribute to improvement in product mix.”

Over FY14-19, India’s GDP grew at a compounded annual rate of 7.1%, while the paint industry grew 1.5 times faster at 11% CAGR over the same period. Historically, the Indian paint industry volume growth is usually 1.5-2 times India’s GDP growth rate. The positive correlation between volume growth and GDP is largely due to similar macro factors like increasing income levels, an uptick in economic activity, rise in infrastructure spending, said analysts.

According to Vishal Gutka, an analyst at PhillipCapital, Asian Paints will report bumper volume growth of 25%-plus in the December quarter aided by market share gains, premiumisation trends, dealer up-stocking due to massive price hikes that took place in the middle of the quarter, and ancillary segments such as putty and waterproofing showing solid traction.

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