Paint stocks in focus: Asian Paints, Berger, and Indigo Paints gets anti-consensus ’buy’ rating from Nuvama; here’s why

Paint stocks in focus: Nuvama Institutional Equities, domestic brokerage firm, holds an anti-consensus 'BUY' stance on three major paint companies: Asian Paints, Berger, and Indigo Paints.

The brokerage notes that, not surprisingly considering the high entry hurdles, customer reaction to new paint businesses has been lackluster thus far.

Every new competitor in the industry often offers free tinting equipment and excellent dealer incentives; this doesn't upset the market, according to the brokerage.

As seen by the confidence displayed by all of the heritage firms—Asian Paints, Berger, Indigo, Kansai Paints, and Akzo—Nuvama indicated in its research that even with the substantial resources of new entrants, they do not anticipate them to disrupt the industry.

When discussing the industry as a whole, the brokerage said that the paints sector is both very large (USD8 billion+) and growing at a double-digit rate, meaning that new and established firms may coexist peacefully. Because heritage players are expected to rebound soon and there won't be any competition from new players, their valuations are reasonable.

Additionally, according to Nuvama, paint makers saw a 1% price hike in July 2024, and in FY25, they anticipate double-digit volume growth from the leaders. According to the brokerage, all businesses will profit from the rural revival, much as the whole paint industry. Since pricing growth is expected to resume shortly, operational leverage will also resume from Q3. Given the low cost of several raw materials (such as TiO2 and crude oil), gross margins should continue to be strong.

FY25 outlook

Paint manufacturers anticipate double-digit volume increase for FY25, according to a Nuvama research. A boost to volumes would come from the countryside. The paints sector is a very big one, with over USD 8 billion in sales and double-digit volume growth. Paint manufacturers anticipate a rebound in demand as rural markets continue to grow. There is considerable potential to increase and enlarge the pie with a strong concentration on the bottom of the pyramid. From Q2FY25, B2B business is anticipated to increase. The price of crude oil and other raw materials is almost at a one-year low. The sector has once again seen price increases.

Paint manufacturers are going to focus more on brand investment. Asian Paints anticipates maintaining an EBITDA margin between 18% and 20%. In a similar vein, Berger projects margins of 15–17%. For the next six months, Pidilite anticipates that they will be steady and that margins will stay in the 22–24% range.

Birlas's Remark about Competition

Asian Paints: It appears that the new launch did not meet expectations.

Berger Paints: It seems that dealers are starting to lose their early excitement for the newcomer.

Indigo Paints: No shifts in the competitive environment or pressure on prices from new competitors have been noticed by Indigo Paints. There is still considerable rivalry among the current participants. The industry is difficult for new firms to enter because of its high barriers to entry.

Kansai Nerolac: Compared to half a year ago, Kansai Nerolac Paints has stated that it is more confident in its capacity to take on new competitors.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.