Mumbai: Paint companies Asian Paints, Berger Paints and Kansai Nerolac have outperformed the benchmark in the last one month on the back of an 11% fall in crude oil prices and strong June-quarter results. However, rich valuations could constrict the returns these three stocks could give in the near term, according to analysts.
Shares of Asian Paints have gained 16% since July 5, while those of Berger Paints and Kansai Nerolac have risen by 12% and 7.5%, respectively, compared with a 6% fall in the Sensex during this period.
With growth in the repainting segment on account of good demand in rural and small towns, and anticipated growth in construction activity over the next five years, these companies are expected to post robust growth in the coming years, but valuations are stretched at the current levels, said analyst.
“All the paint companies have posted strong revenue growth, driven by sustained strong demand in the domestic decorative paints segment, helping paint companies to post strong volume growth during June quarter,” said Kaustubh Pawaskar, research analyst at brokerage firm Sharekhan. “Further, declining crude oil prices provide some visibility of better margins in the quarters ahead.”
Both Asian Paints and Berger Paints are currently trading at 70 times their trailing 12 months earnings, while Kansai Nerolac Paints is trading at 57 times PE.
ADVERTISEMENT
Berger Paints reported 31% growth in consolidated net profit to Rs 164 crore in the June 2019 quarter on the back of high double-digit volume growth. The volume growth was higher than that of peers Asian Paints and Kansai Nerolac, implying market share gains, but the stock is currently trading expensive at 50 times its FY20 estimated earnings, said analysts.
“Strong volume growth in the decorative segment; stable volumes in the industrial segment; YoY improvement in operating margins with benign raw material situation and strong earnings growth were the highlights of the results for Berger in June quarter,” said Amit Agarwal, analyst at Kotak Securities. “However, the valuations at the current price and factoring growth prospects look stretched”.
“We see another year of consolidation in ad-spends, as auto segment weakness continues to weigh on industrial margins in the near term,” said Percy Panthaki, analyst at IIFL. “Should a back-ended auto recovery not play out, we may see sharper ad-spend cuts that could hurt Kansai’s decorative growth and, hence, drive another year of decline in return ratios.”
