'Brighten portfolio with paint stocks; Asian Paints, Berger are good bets'

Paint companies outperformed consumer staples and discretionary subcategories in terms of volume growth in the June quarter.

Shares of Asian Paints and Berger Paints India have witnessed healthy gains, in calendar 2019, thanks to upbeat quarterly results and prolonged weakness in some raw materials, including crude oil.

Analysts think the paint companies may remain on an upward trajectory for a medium as well as a long-term horizon.

"The sector is showing a lot of traction. The numbers and the margins for Asian Paints and Berger Paints India have been among the best during the last many quarters and the management have given a positive outlook for the future as well," said Sanjiv Bhasin, EVP-Markets & Corporate Affairs at IIFL.

On the consumption side, non-institutional demand was keeping the paint companies buoyant, said Nav Bhardwaj, Research Analyst- Institutional Equities at Anand Rathi. “Also, the fall in raw material prices has also supported them," he said.

In Calendar 2019 till September 3, shares of Asian Paints jumped nearly 15 percent, while those of Berger Paints gained 10 percent, against a 1.37 percent gain for the Sensex during this period.

In June quarter, Asian Paints reported an 18 percent year-on-year (YoY) growth in consolidated net profit, while total income rose 16.67 percent YoY.

Berger Paints' Q1 profit jumped 32 percent to Rs 176.8 crore versus Rs 133.9 crore, while revenue rose 15.7 percent to Rs 1,716.5 crore versus Rs 1,483 crore YoY.

Paint companies outperformed consumer staples and discretionary subcategories in terms of volume growth in the June quarter, which was in the range of 8-16 percent.

"The overall volume growth for paint companies largely remained strong in Q1—Asian Paints (16 percent), Berger Paints (13 percent), Kansai Nerolac (13 percent) and Akzo Nobel (8 percent). This was well ahead of the staples peers with only two companies reporting double-digit volume growth—Dabur (10 percent) and Nestle (11 percent)," said brokerage ICICI Securities.

"We estimate industry volume to grow at 11-12 percent in FY20, as GST-led price-cut benefits come in the base. This still translates into 1.6 times GDP multiplier, which is higher than the 14-year average rate of 1.5 times."

"We estimate industry volume to grow at 11-12 percent in FY20 as GST-led price cut benefits come in the base. This still translates into 1.6 times GDP multiplier, which is higher than the 14-year average rate of 1.5 times," said the brokerage.

Piling up of inventories and high valuation are among the concerns that can act as speed-breakers. But Bhasin doesn't think so.

Inventory pile-up worries were overblown, said Bhasin. "Paint companies will continue to see demand. The slowdown in the auto sector did weigh on them to some extent but the situation will improve in the coming months. A GST rate cut on auto, if occurs, will be the icing on the cake for the paint companies. Lower crude prices will see the expansion in their margin," he said.

Bhasin was bullish on Asian Paints and Berger Paints, saying both were big brands and enjoyed lion's share in the paints sector.

Bhardwaj had a similar view.

"The penetration of these companies in the market is still lower. So, there is a lot of latent demand for these companies," he said.

About the valuation, Bhardwaj said valuation typically was in tandem with prospective growth. Current valuations would prevail as long as the growth was good.

While the prospects of growth for paint companies look decent, competition and a fall in consumption demand remain key risks.

"Key downside risk is unexpected irrational competition due to deceleration in general consumption demand," ICICI Securities said.

Source: https://www.moneycontrol. com/news/business/markets/brighten-portfolio-with-paint-stocks-asian-paints-berger-are-good-bets-4400591.html

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