Festivals tend to usher in good times for most consumer segments in India – both essentials and discretionary. Within the discretionary segment, paint stocks have usually seen a seasonal runup every festival season. While Covid-19 has badly destroyed the demand environment across segments, investors are still seem to be betting on the paint makers to do an encore.
Stocks of Asian Paints and Berger Paints haven’t logged big gains on a year-to-date basis; they have simply gyrated back to their pre-Covid levels, and continued to be consistent performers and wealth creators.
Sectoral leader Asian Paints remains analysts’ favourite stock in the pack, but they are divided on the near-term prospects of its peers. Asian Paints hit a new all-time high of Rs 2,015 on August 25, rising 9.5 per cent year to date and 38 per cent from its March lows. The stock traded at Rs 1,954 on Tuesday.
The closest peer Berger Paints trades at Rs 542, but is 6 per cent away from its record high hit in February. The stock is up 9.2 per cent so far this year. Asian Paints has rallied 621 per cent over last one decade, and Berger Paints 1,663 per cent.
For the relatively smaller players, the story is a bit different though. Kansai Nerolac and Shalimar Paints are down 8 per cent and 10 per cent respectively, for the year to date, while Akzo Nobel is up 8.5 per cent. These stocks need to gain 15 – 67 per cent to reach their all-time highs.
The Asian Paints stock had 3 ‘strong buy’, 17 ‘buy’, 7 ‘hold’, 6 ‘sell’ and 2 ‘strong sell’ ratings on the publicly available Reuters Eikon database on Monday, while Berger Paints had 2 ‘buy’, 4 ‘hold’, 3 ‘sell’ and 12 ‘strong sell’ ratings. Akzo Nobel had 1 ‘strong buy’, 1 ‘buy’ and 2 ‘hold’ ratings, while Kansai Nerolac had 3 ‘strong buy’, 7 ‘buy’, 6 ‘hold’, 1 ‘sell’ and 1 ‘strong sell’ ratings.
Gaurav Dua, senior vice-president and head of capital market strategy & investments at Sharekhan by BNP Paribas, believes Asian Paints and Berger Paints may recover faster due to their higher exposure to the decorative paints segment. They are already outperforming some of their peers such as Kansai Nerolac, which has substantial exposure to the automotive and industrial paints segment, he said.
“Asian Paints is seen as a bellwether, and has a good RoC (return on capital). It is part of that pack – which are ‘buy’ and ‘hold’ stocks for long-term investors. We believe Asian Paints could be part of any investor’s core long-term portfolio,” Dua said.
The paint industry consists of a mix of organised and unorganised players, but the first group holds the biggest market share.
Till fiscal year 2017, the organised players had a market share of about 65 per cent, which rose to 80 per cent post GST implementation. The top players in the organized sector are Asian Paints, Berger Paints, Kansai Nerolac and Akzo Nobel, which together account for about 68 per cent of the market share.
Abhimanyu Sofat, Head of Research at IIFL Securities, said he is bullish on Asian Paints and Kansai Nerolac in the pack. “If you look at the valuations from FY23 earnings perspective, Asian Paints trades at 43 times P/E, Berger Paints at 65 times and Kansai Nerolac at 37 times.”
He said Akzo Nobel has been impacted heavily due to high industrial exposure amid the Covid-led industrial lockdown. Companies with urban exposure were beaten down more than those which had a high market share in the hinterlands. “Going ahead, growth will be led by water proofing, emulsion and primer segments,” said Sofat.
The path ahead for these companies is dependent on how activity picks up in user industries. “Fortunes of these stocks are tied to how the user industries fare. As the auto sector went through a gut-wrenching slowdown starting from IL&FS bust in 2018, it savagely impacted companies such as Kansai Nerolac which had large exposures to the auto sector,” said Ajay Bodke, CEO of PMS at Prabhudas Lilladher.
“What is important is that many of these stocks have gone up as a part of ‘unlock’ trade. Within the decorative segment, risk aversion has come down among the customers, and they are now comfortable allowing a team of painters to come and paint the house,” he said, pointing out that Asian Paints was the market leader in the decorative segment.
Bodke, however, said sustenance of these valuations would depends on how soon demand returns to pre-Covid levels. He said that festivals of Navratri and Diwali are falling a little later than usual this year, and it remains to be seen how demand picks up.