Paint stocks: paint stocks could be reassessed soon

Mumbai: Stocks of Indian paintmakers are expected to outperform amid expectations of strong medium-term revenue growth, driven by volume growth and price increases in response to commodity price inflation, have analysts said.

Growth will be mainly driven by the shortening of the repainting cycle, the demand for housing, the conversion of “kutcha” houses to “pucca” and increased investment in infrastructure, they said.

“We expect demand dynamics to remain robust over the medium term with organized players with strong brand value gaining market share,” said Gaurang Kakkad, analyst at Haitong International. “Fiscal 23 will see a strong recovery in EBITDA gross margins due to price increases in the December quarter and will contribute to EBITDA and profit growth with margins largely returning to year-level levels. 21. ”

Despite the Covid-induced lockdown, the paints industry has rebounded strongly, showing a sequential recovery since June 2020. However, most paint companies have underperformed the benchmark in the past three months. Stocks such as Asian Paints, Berger Paints, Kansai Nerolec and Indigo Paints are expected to revalue in the coming weeks, analysts said.

India is an industry largely dominated by decorative paints, accounting for 74% by value and 89% by volume. The organized sector holds around 75% of the market share and the unorganized sector holds the remaining 25%. The share of unorganized actors has seen a downward trend due to challenges facing smaller players in the form of demonetization, implementation of the Goods and Services Tax and disruption caused by Covid.

Paint companies increased their prices by about 20% last year due to inflationary pressure on the cost of raw materials and support margins.

“We expect that a strong demand trend will continue into the December 2021 quarter, supported by the festival season and pre-purchase activity by dealers pending further price increases,” Vinod said. Nair, Research Manager at Geojit Financial Services. “Likewise, in the second half of FY 22, demand from Tier 1 and 2 cities is expected to remain healthy relative to Tier 3 and 4 cities, which will help improve the product mix.”

In fiscal year 14-19 India’s GDP grew at a compound annual rate of 7.1%, while the paint industry grew 1.5 times faster at a CAGR of 11 % during the same period. Historically, the volume growth of the Indian paint industry is generally 1.5 to 2 times the growth rate of India’s GDP. The positive correlation between volume growth and GDP is largely due to similar macroeconomic factors such as rising income levels, a slight increase in economic activity, an increase in infrastructure spending, said analysts.

According to Vishal Gutka, analyst at PhillipCapital, Asian Paints will report exceptional volume growth of over 25% in the December quarter, driven by market share gains, premiumization trends, increased inventory from dealers due to the massive price hikes that have taken place in the middle of the neighborhood, and ancillary segments such as putty and waterproofing showing solid traction.

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