Paint stocks: Inflation will weigh on paint companies: Morgan Stanley

Mumbai: Paint companies are facing more headwinds than tailwinds due to inflation concerns and intensifying competition, Morgan Stanley said.

Throwing a hedge on Berger Paints India and Kansai Nerolac Paints with “underweight” ratings, the brokerage said it was less constructive on the paints segment compared to other consumer discretionary segments in the medium term.

Morgan Stanley has a target price of ₹546 on Berger Paints and ₹394 on Kansai Nerolac. The brokerage also has an underweight rating on Asian Paints but has revised the target price up to ₹2,620 from ₹2,548.

Shares of Asian Paints ended down 1.2% at ₹3,016.15 on Wednesday, while Berger Paints ended down 2.1% at ₹683.10. Kansai Nerolac finished at ₹458.60.

According to Morgan Stanley, the current inflationary cycle could last longer than the previous two cycles and the sharp price increases could hurt the volume growth mix. Soaring crude oil prices to multi-year highs further adds to the pain, he said.

The brokerage said expansion into smaller cities will help paint business volume grow, but could weigh on margins. “Stock prices may underperform as margins remain tight,” the company said.

Asian Paints has the market leadership advantage and is best positioned to weather competitive pressures, but its multiples could see some depreciation due to changing category dynamics and risk to margins.

With Asian Paints’ aggressive management mindset, it will be difficult for Berger Paints to significantly outperform, Morgan Stanley said.

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