Why Paint Stocks Are Rallying 

Shares of paint makers surged this month as analysts expect them to sustain a healthy volume growth this earnings season.

Kansai Nerolac Ltd. led the rally with a 11.7 percent jump in July, followed by Berger Paints Ltd. and Asian Paints Ltd.’s 9.3 percent and 7 percent rise, respectively.

Brokerages expect them to report a double-digit volume growth in the quarter ended June. A low base in the year-ago quarter when dealers pared stock ahead of the Goods and Services Tax rollout will aid growth, they said. While multiple media reports have also indicated a potential reduction in the GST rate to 18 percent from 28 percent, it hasn’t materialised yet.

Deutsche Bank isn’t banking on a tax cut anyway. It cited expected cyclical recovery in the economy, pent-up demand, initiatives taken by the government to drive housing and paint makers’ push for premiumisation for its optimism. “We do not agree with consensus’ optimism that a reduction in GST for paints will increase paint consumption/industry sales.”

• ICICI Securities estimates Asian Paints’ volumes to grow 12 percent year-on-year in the first quarter of the financial year. That will be aided by a low-base in the year-ago period.
• Edelweiss expects Berger Paints to report a 15.5 percent growth in revenue, driven by a 12 percent rise in its domestic decorative paints segment.
• IDFC Securities expects a 16 percent year-on-year growth in Kansai Nerolac’s volumes in the decorative segment and an uptick in the industrial business. Higher input costs and lack of price hikes in the industrial segment are expected to lower Ebitda and net profit growth of 10 percent and 9 percent, respectively, over the first quarter of the previous financial year.

Input Cost Worries

In May, Brent crude hit the $80 per barrel mark for the first time since November 2014. Prices of crude-related derivatives such as titanium dioxide and other monomers used in paints remain high. Titanium dioxide has become 10 percent costlier so far this year at Rs 265 a kilogram.

Costlier raw materials will put pressure on gross margins.

Steep Valuations

The surge in shares means most paint stocks trade at a premium to their two-year average price to earnings multiple. Analysts expect Asian Paints and Berger Paints to decline 2.1 and 5.6 percent, respectively, according to Bloomberg consensus estimates. Kansai Nerolac has an upside potential of 7.3 percent.

“We remain positive on the paint industry,” Vinit Bolinjkar, head of equities research at Ventura Securities, told Bloombergquint. He cited government’s affordable housing push and a pick-up in real estate demand for his bullish outlook.