March 31, 2023

Since December, Dalal Street has been by and large seeing shades of red due to inflation and rate hike concerns, which got aggravated by the most recent global banking crisis.

At such a time, investors are focussing on domestic-oriented sectors where there is visibility in growth and valuations are attractive. And one such sector that is starting to see shades of green is paints.

The recent correction in stock prices and expectations of a recovery in earnings has turned the risk-reward favourable for the speciality chemical segment, according to analysts.

Year-to-date, shares of sector leader Asian Paints have corrected over 8%, and that of Indigo Paints by nearly 19%. Shares of Kansai Nerolac Paints are down more than 10%, while Berger Paints managed to give positive returns, albeit a marginal 2%.

In the last 2-3 quarters, most paint companies saw strong urban growth which also reflected in their revenue numbers, but the rural market, which is one of the key segments, remained subdued.

However, most companies admitted that they have started seeing some green shoots in rural demand and expect it to recover in the coming quarters.

The recovery in demand coupled with easing input cost pressures are likely to aid the current quarter earnings of the sector, and this is one good reason to add the stocks in your portfolio. “The green shoots in demand revival on account of a pick-up in real estate demand will add colours to the sector. Further, the current deflationary trend in raw material prices will be reflected in margins in the coming quarters,” said Antu Thomas, research analyst at

Geojit Financial Services.
The global banking crisis has in some way been a blessing in disguise because this pulled down commodity prices, particularly crude oil amid concerns of demand slowdown.

Being a net importer of the commodity, easing prices of crude oil favour India and also companies such as those in the paints sector who use derivatives of crude oil as inputs.

The paint industry uses titanium dioxide and monomers, which are crude oil derivatives, as raw materials. Crude oil components constitute around 30-35% of paint companies’ total raw material cost. Thus, a drop in crude price will aid the improvement in the profitability of the paint companies.

Brent Crude oil prices are currently trading at a three-month low following a 13% correction from the most recent peak.

Given that the outlook on margins is improving and similarly on rural demand, analysts believe the attractive valuations of stocks makes for a good investment bet.

“Currently, the paint stocks are trading below their long-term valuation, which provides a bargain opportunity to the investors as the story remains intact,” Thomas said.

Shilpa Rout of Prabhudas Lilladher is bullish on Asian Paints and recommends buying the stock for a target of Rs 2,940-3,000. This implies an upside potential of about 6% from the current levels.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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