 "Asian Paints: Volumes driven by strong distribution; low-end products")
Falling crude oil prices have come as a boon for paint companies such as Asian Paints, Berger Paints (Berger) and Kansai Nerolac (Kansai). Titanium Oxide (a key input for paint companies) is a derivative of crude oil and its prices move in tandem. Thanks to weak input costs and healthy gross margin expansion, all three companies have witnessed a healthy expansion of 230-240 basis points in their Ebitda (earnings before interest, taxes, depreciation and amortisation) margin in FY16 over FY15. These gains could have been higher but for the price cuts this year. These companies are seeing good traction in demand for decorative paints in the domestic market. This is reflected in the double-digit volume growth posted by them for the past couple of quarters.
This strong performance has been well rewarded by the Street as well. These scrips have outperformed the benchmark BSE Sensex over the past year, with gains of 37 per cent for Asian Paints, 44 per cent for Berger and 38 per cent for Kansai. The Sensex, on the other hand, has risen only one per cent in this period. In fact, Asian Paints scrip hit a new 52-week high of Rs 1,031.85 on Monday, while Berger and Kansai made new highs in May and April, respectively.
However, with crude oil prices inching up in recent times, analysts believe the bulk of the margin gains are behind these companies. The Ebitda margins are expected to grow 0-50 basis points in FY17. This, along with rich valuations, could cap meaningful upsides, believe analysts. At current levels, Asian Paints trades at 47 times the FY17 estimated earnings, while Berger and Kansai trade at 44 times and 37 times, respectively.This strong performance has been well rewarded by the Street as well. These scrips have outperformed the benchmark BSE Sensex over the past year, with gains of 37 per cent for Asian Paints, 44 per cent for Berger and 38 per cent for Kansai. The Sensex, on the other hand, has risen only one per cent in this period. In fact, Asian Paints scrip hit a new 52-week high of Rs 1,031.85 on Monday, while Berger and Kansai made new highs in May and April, respectively.
While the upsides appear capped, these valuations are also unlikely to head southwards. This is because the double-digit volume growth in domestic decorative paints segment is expected to continue as well. The rising frequency of repainting and a government push to affordable housing are some catalysts for growth. Good monsoons, higher payouts to government employees after Pay Commission hike and One Rank, One Pension implementation are others. In this backdrop, most analysts are positive on Asian Paints, Berger and Kansai. The latter, though, stands to benefit more from a recovery in demand for industrial paints as this segment contributes relatively higher to Kansai’s revenues. Asian Paints enjoys strong leadership position in decorative segment and hence is well poised to benefit from improving demand.
