Asian Paints: Rural demand revival, new capacities should drive volumes

There is little doubt that consumer firms are in a sweet spot, with improving demand. But with reviving rural demand, some companies will perform even better. Asian Paints, for instance, which has underperformed its smaller peer Berger Paints in the past due to subdued rural environment, is one of those expected to regain its charm. While Asian Paints’ stock has risen 19 per cent in the last two years, Berger Paints is up 29 per cent, narrowing the valuation gap with the paints’ leader. Berger Paints is currently trading at 44 times and Asian Paints at 48 times the FY20 estimated earnings.

There was a reason for this. "Berger Paints' volumes rose faster as compared to Asian Paints in the past few years when rural economy lagged. This also helped Berger Paints gain market share," says Sachin Bobade, analyst at Dolat Capital.

However, things are now getting better even in the hinterland, led by normal monsoon, upward revision in minimum support price for kharif crops, and improvement in rural infrastructure. Many consumer firms have said recently that rural volume growth was faster than urban.

This should play in favour of Asian Paints, as it is relatively more rural-focused (40-50 per cent of revenues), with strong distribution network in the hinterland. 

The recent 10 per cent cut in GST rate to 18 per cent should help the organised paints sector take away market share from unorganised players. Given unorganised players' higher dominance in rural areas, Asian Paints stands to benefit.

New capacities at its Mysuru and Vizag plants, to be commissioned between September and January, should aid volumes. 

“Both companies will grow in tandem. But with progress in rural economy, Asian Paints’ volume will grow faster. Thus, it will get premium over peers,” Bobade added.

Not that Berger Paints will falter. In fact, it will continue to deliver robust performance, but stock valuation could cap upsides. 

“Berger Paints is expected to deliver industry-beating volume growth, with overall consumption improvement and increasing distribution network. However, a slight fall in market share or less-than-expected volume growth will impact the stock, given current valuations,” says Dhaval Dama, analyst at Equirus.

Inflationary pressure, amid high inputs prices and weak rupee, is a concern for the paints industry. So, how companies manage their profitability will be a differentiating factor.