High optimism in the sector drives up valuations
Ahead of their June quarter results, shares of key paint makers Asian Paints Ltd and Berger Paints India Ltd have rallied. These stocks touched new 52-week high intraday on the BSE, today.
High optimism in these stocks is driven by:
- Continuing double digit volume growth in decorative paints business
- Improvement in operating margins owing to price hikes
- Softening of price of key raw material titanium dioxide (TiO2)
Analysts and investors see a recovery in volume growth thereby driving up the valuations.
- Analysts expect volume growth in the decorative paints business to be in double digits, partially aided by a lower base due to the impact of destocking during the transition to the goods and services tax.
Besides, margins are poised to expand, despite input cost inflation, thanks to price hikes.
- All paint makers announced multiple price hikes across product categories in the last one year, aggregating around 5.5-5.8%. Hence, margins are expected to expand in the range of 80-100 basis points compared to the year-ago period. However, margins of Kansai Nerolac’s (industrial paints segment player) may contract as it takes a longer time to pass on cost increases here than in the decorative paints segment.
However, investors should remain watchful as depreciating rupees could be a concern as most of the paint makers import their raw materials.
Strategy going forward
On a year-to-date basis, shares of Asian Paints and Berger Paints India have posted ~18.2% and ~11% returns, respectively. During the same span, the Nifty 500 index has given negative returns.
As for valuations, on a one-year forward price-to-earnings basis, Asian Paints and Berger Paints currently trade at 52 times and 50 times, respectively. Despite their outperformance, these valuations are too expensive for comfort. Besides, investors also need to watch out for is the impact of the recent weakness in the rupee.
Asian Paints ( CMP: 1,390 , Mcap 1,33,305 crores, FY19E P/E 57.4x )
Berger Paints ( CMP: 315, Mcap 30,588 crores, FY19E P/E 56x)