Paint Stocks Bullish Week: Asian Paints, Kansai, Berger, 4 Others Rise Up 7%; What's Driving Them?

Markets broadly saw bearish sentiment on Friday due to sharp selling in banking and financial stocks, however, amidst the panic, bulls seem to have taken a liking to paint stocks as they rallied up to 5%. Paint stocks have broadly logged a bullish week with seven major stocks rising in the range of 1% to nearly 7.2%. The reason behind the robust rally in paint stocks is a steep decline in crude oil prices.

On Friday, Asian Paints, the largest paint stock in terms of market share, rallied by 1.20% to end at Rs 3167.50 apiece on BSE with a market cap of nearly Rs 3.04 lakh crore. Also, Kansai Nerolac zoomed 2.14% to settle at Rs 324.65 apiece, and Berger Paints jumped by 1.63% to end at Rs 587.80 apiece. Other stocks like Akzo Nobel India, Shalimar Paints, and Indigo Paints were also in green. However, after rallying during the trading hours, Sirca Paints reversed the trend and ended lower by 1.80%.

But in the entire trading week from November 13th to November 17th, all of these paint stocks have risen.

This week, Asian Paints jumped by 3.44%, while Berger Paints zoomed by 2.4%, and Kansai Nerolac made the highest jump of 7.2% in percentage terms. Akzo Nobel is up by 1.3%, Shalimar Paints gained 4.03%, Indigo Paints surged 3.3%, and Sirca Paints soared by 2.53% on BSE.

Crude oil prices are moving towards fourth-weekly losses owing to a slump in US retail sales and a decline in monthly producer prices. Also, mixed economic data of the world's second-largest economy, China. Currently, Brent Crude is around $79.5 per barrel, and US WTI is near $74.6 per barrel.

The reason why paint stocks are excited with the decline in crude oil prices is that it brings down the operational cost of many companies that use crude or crude derivatives (titanium dioxide and monomers) as raw materials. Hence, with a decline in crude prices, there is a significant drop in input costs of paint stocks which increases profitability.

Yesterday, crude oil prices dropped by 5% and reached near four-month low.

Rahul Kalantri, VP of Commodities, Mehta Equities said, that in the past month, WTI crude oil has witnessed a decrease exceeding 14%. The descent in crude oil persisted, reaching four-month lows, influenced by lacklustre U.S. industrial production data and a surge in jobless claims. Pessimistic economic indicators in the U.S. and recession apprehensions within the European Union contributed to the downward pressure on oil prices. Nevertheless, a positive adjustment in global oil demand forecasts by OPEC+ and the IEA may provide some support to prices at these reduced levels.

Coming to paint stocks, some analysts have recommended buying in couple of them.

For Kansai Nerolac, Prabhudas Lilladher said, "2H outlook on both sales and profits looks positive, although volatility in crude and inputs is a key determinant. With Grasim expected to enter decorative paints in 4Q24, the change in the competitive landscape and industry pricing would be a key factor to watch out for. We estimate 422bps EBITDA margin expansion over FY23-26 and 28bps over FY24-26. While we estimate 57% PAT growth in FY24, FY24-26 CAGR is expected to be 13.3%. retain accumulate with a target price of Rs351. Increasing competition from Grasim/JSW and JK Cement remains a key risk to our call."

Meanwhile, on Berger Paints, Religare Broking in its latest note said, "Berger Paints reported decent numbers for Q2FY24 with double-digit volume growth and strong improvement in margin while its revenue in value
was in single digit. Going ahead, we remain optimistic as well as management outlook for Q3FY24 and thereon is positive as it expects top-line and margin growth to be driven by healthy festive demand, improved rural demand and higher spending by the government on infra & housing. Additionally, margins to improve led by easing raw material prices and a healthy product mix. On the financial front, we estimate its revenue/EBITDA to grow at 21%/41% CAGR over FY23-25E and maintain a Buy rating with a price target of Rs 693."

On the giant in this sector, Asian Paints, KR Choksey's note said, "With the entry of a large player in the paints industry nearing in Q4FY24E, the competitive intensity is likely to ramp up. We reduce our FY24E/ FY25E EPS by 1.9%/ 4.8% respectively, as we factor in some normalization in topline growth while our margin assumption largely remains the same. We expect Revenue/ EBITDA/ Adj. PAT to grow at 10.7%/ 16.9%/ 18.8% CAGR, respectively, between FY23-25E. The share currently trades at 52.1x/ 49.0x FY24E/ FY25E Adj. EPS, respectively. Since our last report, the share price has declined by 11.3%. We apply a P/E multiple of 55x (earlier 56.5x) on FY25E EPS of INR 61.2 to arrive at a target price of INR 3,365 (INR 3,629 earlier); an upside potential of 12.3%. Accordingly, we maintain our "ACCUMULATE" rating on the shares of Asian Paints Ltd."

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.