Synopsis
Paint shares surged due to price hikes, led by Indigo Paints at 10.7%. Analysts foresee short-lived gains and pressure from Birla Opus. Nuvama views price hikes favorably. Despite underperformance in 2024, Q1 earnings may be muted, keeping stocks range-bound. Anand Rathi sees opportunities. Elara Capital cites margin pressure and muted FY25 earnings, advising strategic investment.
Shares of paint manufacturers gained Wednesday on news reports that some companies have raised product prices, but analysts warn these upsides will be short-lived as the sector faces pressure on profitability.
Indigo Paints soared 10.7%, Asian Paints gained 3.3%, Kansai Nerolac rose 3.4% and Berger Paints moved up 2.5%.
“The uptick in the paint stocks was due to news that Asian Paints and Berger Paints are expected to hike prices by 0.7 to 1%,” said Amit Purohit, VPresearch, Elara Capital. “The gains in the stocks today are likely a one-off up-move and is not sustainable.”
Post trading hours on Wednesday, Asian Paints told stock exchanges, “The Company has taken price increase of 1% at portfolio level, with effect from 22 July 2024.”
Brokerage Nuvama said that the price hike is a positive move to fight Birla Opus, a new entrant, and keep margins in a healthy range. The move shows that the pricing power remains intact despite Birla Opus’ entry, it said.
“Our detailed channel checks confirm that Asian Paints (APL) and Berger Paints have taken price hikes of 0.7% to 1% effective from 22 July across most of their portfolio. We expect other players also to follow suit,” said analysts at Nuvama in a note. “We believe Birla Opus can successfully coexist with established players like Asian Paints and Berger.”
Investors have cut exposure to paint companies of late as the entry of Birla into the sector is feared to put pressure on profitability. So far in 2024, Asian Paints is down 11.7%, Kansai Nerolac is down 15% and Berger Paints is down 12.8%. Indigo Paints is up 2.7%. The NSE 500 index has gained 18% and the Nifty has advanced 11.8% in this period.
Analysts said the earnings growth of paint companies in the first quarter results could be muted, weighing down their stock prices.
“The volume growth is expected to be strong, but some margin pressure is likely since margins are already at peaks and competition from Birla Opus remains,” said Ajay Thakur, research analyst at Anand Rathi Institutional Equities. “Paint stocks are expected to remain range bound in the near term.”
Thakur said that the earnings for paint companies in FY25 are likely to be muted compared to last year.
“Valuations have come off now but are likely to remain at the same levels in the absence of a major trigger,” he said. “There could be better buying opportunities for investors to buy paint stocks in the near term, in case of any dips from the current levels.” Purohit said that investors can wait for either a correction in paint stocks or wait for an earnings upgrade to enter these stocks.
