As Crude Oil Falls 30%, Paint Inventories Return to Focus; brokerage sees 68% upside in these stocks

As crude oil prices fall more than 30% from 14-year highs, paint company stocks returned to center stage on Wednesday. Asian Paints, Berger Paints, Indigo Paints, Kansai Nerolac and Akzo Nobel Indian jumped around 2% each on BSE on an intraday basis.

Shares of Asian Paints and Kansai Nerolac rose more than 2% and were trading at Rs 3049.9 and Rs 465.45 respectively. Meanwhile, Indigo Paints, Berger Paints and Akzo Nobel India also gained almost 2% to trade at Rs 1657.6, Rs 707.25 and Rs 1964.95.

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Pain stocks outperformed the BSE Sensex, which was trading up 1.5% at 56629 around the same time.

The industry manufactures at least 300 items that depend on crude oil as inputs. Falling crude oil prices reduce the cost of producing items such as titanium dioxide which is a key ingredient in white paint.

The Indian paint industry has a long growth track, driven by favorable demographics and growth potential in the housing segment, shortening of the paint cycle, shift from unorganized to organized, urbanization and nuclearization and premiumization, Haitong International said in its paint industry report.

He added, “The organized paint industry in India enjoys strong competitive moats in the form of; high barriers to entry for new players (building an extensive distribution network, ability to set up tinting machines and strong brand equity), disciplined competition, no disruption to online retail or DIY.

The research report expects the industry to experience strong revenue growth over the medium term, driven by volume growth and price hikes undertaken in response to inflationary commodity prices.

Haitong International issues an outperformance rating on Asian Paints, Indigo Paints and Kansai Nerolac and target prices of Rs 4,000, Rs 2,730 and Rs 725 per share respectively, implying 31%, 68% and 56% upside. On Berger Paints, the brokerage is initiating coverage with a neutral rating and a target of Rs 840 per share, 19% upside.

Brokerage value Asian Paints, Berger Paints, Kansai Nerolac and Indigo Paints at multiple targets of 70x/62x/45x/55x on our March 2024 EPS estimates.

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