Nuvama Recommends 'Buy' On Paint Incumbents Despite Rising Competition

Nuvama, taking an anti-consensus stance, recommends 'buy' on all three leading paint makers—Asian Paints Ltd., Berger Paints India Ltd., and Indigo Paints Ltd.—citing a revival in the rural economy even as lower raw material costs improve margins.

This posture by the brokerage is against the consensus stance taken by other brokerages like Citi's 'sell' call on Asian Paint and Morgan Stanley's 'underweight' call on Berger Paint, among others.

The optimism is, however, tempered by concerns about new entrants in the paint industry like Grasim's Birla Opus and changing industry dynamics. 

The paint industry, valued at over $8 billion, has seen minimal disruption from new competitors. Nuvama’s analysis indicates that despite the aggressive entry of Grasim’s Birla Opus, legacy players are well-positioned to coexist and even thrive. The Aditya Biral Group company has committed nearly Rs 7,000 crore to its paints business, signalling its serious intent to capture market share.

Having said that, Asian Paints' recent product launches underperformed expectations, while Berger Paints expressed confidence in its ability to compete effectively. Indigo Paints, too, reported no significant changes in competition or pricing pressure from the new entrant.

Adding to this, the gradual signs of a rural market revival bodes well for the paint industry, according to Nuvama. The worst of negative pricing is likely behind the sector, with price growth expected to return soon, the borkerage said. Despite the introduction of new players with significant resources, their impact on the market has been muted so far, it said. This has allowed established players to maintain healthy gross margins, supported by benign raw material costs.

Legacy paint companies are forecasting double-digit volume growth in fiscal 2025, with rural demand expected to pick up. The B2B segment, in particular, is anticipated to see a significant uptick in the second quarter of fiscal 2025. Raw material costs, including crude oil, remain near one-year lows, providing further margin support. Asian Paints, Berger Paints, and Pidilite Industries Ltd. have issued margin guidance of 18–20%, 15–17%, and 22–24%, respectively.

The first quarter of fiscal 2025 saw firm volume growth across the paint industry, although margins disappointed due to factors like prior price cuts and a lack of operating leverage. Asian Paints reported a soft quarter, while Berger Paints outpaced the industry in the decorative segment but faced challenges in its industrial business. Pidilite, on the other hand, showed strong growth, with a significant YoY gross margin expansion of 479 basis points.

The paint industry reported robust volume growth in the first quarter ended June 2024, with companies like Berger Paints leading the charge with a 10% year-on-year increase, followed closely by Pidilite at 9.6% and Asian Paints at 7%. Despite this positive volume performance, the industry's margins were under pressure. Companies had previously reduced prices in fiscal 2024 to reflect lower raw material costs, impacting their profitability in the recent quarter. However, Pidilite managed to stand out by expanding its gross margins by 479 basis points year over year, demonstrating strong cost management.

On the revenue front, Indigo Paints outperformed its peers, registering 7.8% year-on-year growth, despite the overall industry's challenges. Asian Paints, in contrast, saw a 2% decline in top-line growth, while Berger and Pidilite posted modest revenue increases in the low single digits. Adverse factors like price cuts, an unfavourable product mix, and external challenges such as weather conditions and manpower shortages during election periods contributed to this mixed revenue performance.

Gross and Ebitda margins reflected the industry's struggles, with most paint companies experiencing either flat or slightly reduced margins compared to the previous year. Pidilite once again emerged as a leader, with a significant 235 basis point expansion in Ebitda margins, while Asian Paints faced the steepest decline, attributed to higher operational costs. The divergence in international business performance also highlighted the varying impacts of global economic conditions on these companies.