Paint stocks tumble after ICICI Securities downgrades

Stocks of major Indian paint manufacturers fell after ICICI Securities downgraded them all a notch.

“As we remain positive about their business model due to strong competitive advantages and long-term growth opportunities, rising input prices and high competitive pressures will impact their short-term profits.” , the brokerage said in its Oct. 24 report.

In addition, “two divergent strategic approaches are at play in the paints industry”, ahead of the imminent entry of Grasim Industries Ltd. next year, he said. They are:

  1. Market leader Asian Paints Ltd. strives to speed up the formalization of the industry by abandoning the profit pool, so that Grasim cannot reach the easy 5% share by winning informal players.

  2. Indigo Paints Ltd. and Nobel India Ltd., among others, are likely protecting their profitability to have enough ammunition for the inevitable increased competition in calendar year 2022 and beyond.

“We remain true to Akzo’s turnaround story, however, we believe the near term remains cloudy, can be a bit disappointing,” said ICICI Securities.

The brokerage downgraded Asian Paints, India’s largest paint maker, after an “unprecedented” drop in gross margin of 1,000 basis points in the second quarter. “It will improve sequentially in the third quarter, which could allay consensus concerns. Any excitement, however, will be short lived as the industry enters a phase of increased competition. “

Compared to the hyper inflationary era of FY08-10, ICICI Securities said lost margins could be recouped over a period of time through price increases and some stability in input prices. “But players will have to choose between market share and margin over the next two years, which will slow down value creation and serve as a catalyst for the devaluation of valuation multiples.”

While large companies like Asian Paints and Berger Paints Ltd. may choose to focus on volumes and market share, smaller competitors like Indigo Paints and Akzo would like to protect their profitability, which will empower them to compete with new entrants. “There will also be an increase in net working capital days. With a lower margin and higher capital, value creation will decrease for smaller and unorganized players. We also expect lower valuation multiples for most listed players. “

  • Key upside risk: better than expected gross margins due to the correction in input prices.

  • Main downside risks: unexpected irrational competition due to the deceleration in general consumer demand.

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