With paint stocks witnessing some correction in recent times, domestic brokerage house Nuvama has retained its ‘buy’ call on 2 paint stocks - Asian Paints and Indigo Paints.
As per the brokerage, the demand for the paints industry has improved in the March quarter for FY23, and it does not expect any major price correction for these stocks in the near term.
"In Q3FY23, the paint industry remained muted since a high base and an extended monsoon dampened demand in October/November, although there has been some recovery in December. Meanwhile, January and February have been good for paint players, and March is expected to hold up well. In all, volume growth in Q4FY23E is likely to be good, not to mention that deflation in raw materials shall aid margin improvement," said Nuvama.
The recent stock price correction and expectations of earnings recovery have turned the risk-reward favourable for these stocks.
Let's see what Nuvama has to say about these 2 paint stocks:
After an 8 percent fall in the last 1 year and around 10 percent decline in 2023 YTD, the brokerage has a target price of ₹3,615 for the stock, indicating a potential upside of 30 percent.
Nuvama believes Asian Paints (APL) shall post a good volume recovery in Q4FY23—versus flat volumes in Q3FY23. Furthermore, the recent sharp correction in key raw materials bodes well for EBITDA as well as gross margins, it said. APL delivered a double-digit volume CAGR (three-year) for a seventh consecutive quarter in Q3FY23, and 29 new products were developed for architectural paints, construction chemicals and adhesives in FY22; innovation has continued in FY23, informed the brokerage.
It further added that APL's long-term EBITDA margin target is 18–20 percent and in order to sustain this band while growing revenues, APL has taken several initiatives including backward integration and improvements in manufacturing processes.
"APL has announced capex plans to augment capacity and back-end, which also shows its confidence against new players. Strong entry barriers (distribution, high ad spends), robust repainting demand and a sharp focus on adjacencies bolster our confidence for APL. In fact, we believe APL is likely to turn in a top-tier Q4 results performance across the entire consumer pack despite an overall tough demand environment," forecasted the brokerage.
On the entry of Grasim in the Paint sector, the brokerage observed that APL has maintained its dominance in the industry, and it does not anticipate any threat to it in the face of impending entry by Grasim.
With raw materials deflating, it anticipates margin improvement in Q4FY23E and FY24E. However, rupee depreciation, monsoon (watch out for likely El Nino impact) and Grasim’s entry into paints (launch still a year away) remain the key risks, it added.
After a 35 percent fall in the stock in the last 1 year, Nuvama sees a massive 77 percent potential upside in Indigo Paints. It has a target price of ₹1,745 for the stock. Its CMP is ₹984.45, as on March 28, 2023.
While the stock has added 1 percent in March, it has fallen consecutively for the past 6 months from September to Feb, down 41 percent in this period. Just in 2023 YTD, the stock has lost nearly 25 percent.
The brokerage is bullish on Indigo on the back of i) Plans to increase its sales force by 40 percent in a few months. ii) A key strategy to continue to expand in larger towns. iii) Plans afoot to enter the construction chemicals and waterproofing segment. iv) Differentiated products to slightly outgrow the rest of the portfolio; this shall enable Indigo to garner higher gross margins and expand distribution. v) No major apprehensions about the entry of new players.
The brokerage highlighted that Indigo plans to enter the construction chemicals and waterproofing segment (in retail/B2C in Q1FY24), which would be launched under the Indigo brand and would ensure it is able to match the offerings of other B2C players in the space. Currently, larger paint players generate 10 percent of top-line from the construction chemicals and waterproofing segment and Nuvama believes Indigo has the capability to turn in a similar performance over a longer term.
It expects Q4FY23E to be strong in terms of demand and margins. That said, the brokerage has cut the FY25E target to 42x (from 46x) to incorporate the relatively high-risk Indigo faces from Grasim vis-à-vis other players.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.