Top 5 Paint Stocks to Add to Your Watchlist

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Top 5 Paint Stocks to Add to Your Watchlist

Mar 17, 2022

Top 5 Paint Stocks to Add to Your Watchlist

The Indian paint industry has been around for almost a century.

It all started with the establishment of a plant by Shalimar Paints in Calcutta (now Kolkata) in 1902. Until World War II, the industry was made up of small manufacturers and two foreign firms.

Over the years, with increased urbanisation and the easy availability of home mortgages, there has been amazing expansion in the housing market. It has emerged as the primary driver of the decorative paint market.

The domestic paint industry is estimated to be a Rs 500 bn industry with the decorative paint category constituting almost 75% of the market. It covers exterior and interior wall paints, wood finishes, enamel, and ancillary products.

The industrial segment covers the remaining 25% and includes automotive, powder, and protective coatings.

For the last two weeks, paint stocks have been facing a correction amid rising crude oil prices.

Crude oil is a critical component in the production of paints. However, rising crude oil prices have raised the cost of producing products such as titanium dioxide, a key element in the production of white paint.

Increased input costs have a direct influence on firm's gross margins.

The ongoing war between Russia-Ukraine can create more shortages of oil supplies which will directly impact the paint industry. Therefore, investors should be careful before taking any position in the stocks of this sector.

With the help of Equitymaster's powerful stock screener, we have shortlisted the top paint stocks to look out for in the future.

These are the stocks which came up when we ran the screener for best paint stocks in India.

1. Asian Paints

Asian Paints is one of the most popular and best paint brands in India.

Set up in 1942, the Asian Paints group is the largest paint manufacturer in India also engaged in the business of manufacturing of varnishes, enamels, or lacquers, surfacing preparation, organic composite solvents, and thinners.

The company operates in 15 countries and has 26 paint manufacturing facilities in the world, servicing consumers in over 60 countries. It offers products through its various brands like Apcolite, SCIB, Causeway Paints, etc.

The company is also known for its supply chain strategy. Its supply chain is crucial in keeping the company competitive via delivering impeccable product quality and excellent service while maintaining costs.

Asian Paints brokered its first dealership at Sangli, Maharashtra. Since then, the number of dealers affiliated with Asian Paints has increased multifold. Today it has over 70,000 dealers.

For the October-December 2021 quarter, the steep and unprecedented inflationary trend in raw material prices impacted gross margins, which shrank to 36.8%.

Its revenue grew 25.6% YoY, while EBITDA and profit after tax (PAT) declined 13.7% and 18%, respectively, driven by 18% YoY volume growth in the domestic decorative segment.

Asian Paints' revenue has grown at a CAGR of 9.5% over the last five years.

With a substantial correction in the market, several bluechips have captured investors' interest including Asian Paints.

On year to date (YTD) basis, the stock has fallen over 12%. In the past one month alone, the stock is down about 8.6%.

So, should you buy the dip in Asian Paints?

To answer this question, Rahul Shah, Co-Head of Research at Equitymaster recently recorded a video.

According to Rahul, the challenges facing the company are only temporary in nature. The company's long-term fundamentals are pretty much intact.

So, is this a great opportunity to buy the stock or is there more pain in the offing?

Tune in to the video below to find out more:

For a more detailed analysis, check out Asian Paints financial factsheet and its quarterly results.

2. Berger Paints

After Asian Paints, Berger Paints is the second largest paint company in India with a presence in decorative and industrial segments. The company is listed in Forbes India Super 50 Companies.

Berger Paints is also the dominant player in the two-wheeler automotive coating segment and is the major supplier of Hero Motors, Yamaha, Eicher Motors.

Apart from that, in the commercial vehicle segment, it includes customers like Tata Motors, Ashok Leyland, Mahindra & Mahindra, Force Motors, Honda etc.

Like Asian Paints, Berger Paints too, very judiciously has built its rapport with the dealers under its network. Berger Paints has over 25,000 under its distribution network.

Overall, the decorative paint segment contributes 80% to revenue while balance 20% is contributed by industrial paints.

Berger's net profits have grown at a compounded annual growth rate (CAGR) of 9.4% in the last five years, while it has delivered a sales growth of 10.1% in the same period.

It has also been maintaining a healthy dividend payout of 48% on an average for the last five years.

However, the gross margins in the coming quarter could contract on the back of rising oil prices.

Recently in an interview with a leading financial daily, Abhijit Roy, Managing Director and CEO, Berger Paints India said,

  • Continued geo-political tensions, especially the Russian invasion of Ukraine, and expected hit in crude prices, will impact crude-linked raw material costs and may force the company to increase prices.

Crude linked commodities account for 35-40% of Berger's expenses.

Shares of Berger Paints have witnessed heavy selling in the last two months. On 7 March 2022, the stock of the India's second largest paint company quoted at its lowest level since March 2021.

The stock hit its 52-week low of Rs 620.6 on 7 March, down 29% from its 52-week high of Rs 872.

chart

For more details, check out the Berger Paints company fact sheet and quarterly results.

3. Kansai Nerolac

Kansai Nerolac Paints (formerly known as Goodlass Nerolac Paints) is the largest industrial paint and third largest decorative paint company in India. It's based in Mumbai.

It's a subsidiary of Kansai Paint of Japan. It's engaged in the industrial, automotive and powder coating business. It develops and supplies paint systems used on the finishing lines of electrical components, cycle, material handling equipment, bus bodies, containers, and furniture industries.

In financial year 2019-2020, Kansai entered into a new venture and signed an agreement with Italian major Icro Coatings to enable them to offer high end Italian wood finish to its premium customers.

During same year, it set up a new company Neroflix a strategic joint venture with Polygel Industries for tapping adhesive market.

The company also made its debut in international markets through acquisitions in Bangladesh, Nepal, and establishment of greenfield joint venture (JV) project in Sri Lanka. Nerolac sees huge growth potential in international markets and is ready to make more investments.

For the December 2022 quarter, Nerolac reported a 38.7% decline in its consolidated net profit to Rs 1.3 bn compared to Rs 2 bn in the same period last year.

The company's poor performance was triggered by increase in cost of raw materials, inflationary pressures along with volatility in crude & exchange rates and supply chain constraints. It has delivered a poor sales growth of 6.1% over past five years.

On YTD basis, the share has declined 23% on the BSE, while in the past one year, it has delivered a poor return of 17% to its shareholders.

chart

For more details, check out the Kansai Nerolac company fact sheet and quarterly results.

4. Indigo Paints

Indigo Paints is engaged in manufacturing and sale of decorative paints and operates its manufacturing facilities in Jodhpur, Kochi, and Pudukkottai. It's the fourth largest decorative paint company in India.

The company's product portfolio includes decorative paints including emulsions, enamels, wood coatings, distemper, primers, putties, and cement paints.

The firm's distribution network includes 15,242 active dealers and 5,500 tinting machines for mixing of paint. It has a total of 44 depots across India.

Indigo Paints is the first company to launch differentiated paint products and has enjoyed the first mover advantage in various products in the industry.

Indigo posted good performance in an inflationary environment with revenue growing by 27%, while operating profit margin (OPM) declined marginally to 14.6%, aided by relatively flat ad spends. The gross margin decreased by 6.7% YoY.

The company is targeting active dealer reach to expand to 17,000, up from 15,242 dealers. Increased distribution reach would help in consistent growth in sales in the coming years.

In the past two months, the stock has underperformed the market by falling 23%. Meanwhile, Indigo Paints share price is down 35% over the period of last one year.

chart

For more details, check out the Indigo Paints company fact sheet and quarterly results.

5. Akzo Nobel

Akzo Nobel India has been present in India for over 60 years and currently operates in Coatings segment. In 2008, the company became a part of the AkzoNobel Group.

Since then, it has been at the forefront of cutting edge innovation. It sells trusted and well-known brands like Dulux, Sikkens, International, and Interpon.

With an employee strength of around 1,500, Akzo Nobel India has manufacturing sites, offices and a distribution network spread across the country. The company is backed by a pioneering heritage, innovative products, and sustainable technologies.

The parent of Dulux reported a 4.1% decline in its consolidated net profit to Rs 838.2 m for the third quarter ended December 2021, dragged by inflationary headwinds in raw material inputs.

During the quarter, Akzo Nobel India had a price increase of 17% versus the same quarter last year and registered highest quarterly revenue from operations.

Akzo Nobel also recommended an interim dividend of Rs 40 per equity share for the financial year 2021-22.

chart

For more details, check out the Akzo Nobel company fact sheet and quarterly results.

Snapshot of top paint companies in India from Equitymaster's stock screener

Here's a quick view at the above mentioned companies based on some crucial financials.

Source: Equitymaster's Stock Screener

Please note these parameters can be changed according to your selection criteria.

This will help you in identifying and eliminating stocks that are not meeting your requirements and give emphasis on those stocks that are well inside the metrics.

The bottom line

The past few weeks have been very brutal.

Against the backdrop of a European war, surging inflation, rising crude prices, and slowing growth, paint stocks are in a downtrend. In the last two months, most paint firms have underperformed the market.

The paints industry is heavily reliant on raw resources, with over 300 raw ingredients (50% of which are petroleum-based derivatives) used in the manufacturing process. The majority of the raw materials are petroleum-based.

Thus, the sector benefits from lower crude prices. Once the crude oil prices go down, paint companies in India will benefit as input costs will also go down and the margins will improve.

It seems the paint stocks have already started recovering as international oil prices fell below US$ 100 to US$ 99.84 per barrel on 15 March 2022, easing margin pressure and a spike in the cost of raw materials.

The paint business is heavily dependent on other factors as well. The growth will be driven by disposable personal income, the shortening of the repainting cycle, growth of the auto industry, housing demand, conversion from 'kutcha' to 'pucca' houses, and investments in infrastructure.

With the government focused on industrial growth, construction is likely to increase over the coming years, providing greater opportunities for the paint sector.

Therefore, investors must consider several points before investing in the any company.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Equitymaster requests your view! Post a comment on "Top 5 Paint Stocks to Add to Your Watchlist". Click here!

1 Responses to "Top 5 Paint Stocks to Add to Your Watchlist"

Ramesh B

Mar 18, 2022

excellent !

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Equitymaster requests your view! Post a comment on "Top 5 Paint Stocks to Add to Your Watchlist". Click here!

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