Asian Paints, Berger Paints hit new highs, gain 15% in a month

Shares of Asian Paints and Berger Paints India hit their respective record highs on the BSE in intra-day trade on Tuesday on expectation of strong volume growth to sustain, riding the potential demand shift from unorganised segment.

Asian Paints (up 3.5 per cent to Rs 2,917.10) and Berger Paints India (up 2.5 per cent at Rs 827.30) up over 2 per cent on the BSE, surpassed their respective previous highs of Rs 2,871.40 and Rs 824.80, respectively, touched on January 11, 2021. In the past one month, these stocks have outperformed the market by surging 15 per cent each, as compared to 6 per cent gain in the S&P BSE Sensex.

The domestic paints industry commands strong pricing power, which is evident from frequent price hikes amid inflationary raw material prices; moreover, price cuts happen with a lag in a deflationary environment. Industry volume growth has a strong correlation with GDP growth (1.5–2x). Recovery in GDP in FY22 should give volumes a boost. Furthermore, innovation and strong repainting demand (90 per cent of total) are big drivers of growth. Besides, considering the industry’s low penetration, growth potential remains huge.

For the January-March quarter (Q4FY21), Asian Paint’s decorative business had clocked multi-quarter high volume growth (48 per cent year on year) led by a strong performance in the premium and luxury portfolios. The home improvement business also clocked record sales aided by the home décor business. The Industrial coatings business delivered a solid performance in protective coatings and re-finish segments supported by the uptick in industrial activity.

“The company has taken a price hike of 2.8 per cent effective May 1st. Tier 1 and 2 cities saw a pick-up in demand from Q3-end onwards. Tier 3 and other areas continued their strong momentum. The company is focusing on improving volumes and developing the kitchen and bath business to complement its home décor business in the short run and to gradually improve profitability over medium term,” analysts at Edelweiss Securities said in result update.

With raw materials being crude-linked and crude being inflationary, the brokerage firm believes, even if the inflationary pressure returns, Asian Paints has pricing power to deal with it. Analysts expect double-digit growth in decorative volumes to sustain, riding the potential demand shift from unorganised segment. This coupled with Asian Paint’s capability to hike prices should help maintain margin.

Asian Paints faces near-term challenge given input cost inflation and second wave of Covid-19, however poor base in 1H21 and 2.8 per cent price increase from May will provide cushion to profitable growth. Although, Home improvement business is still small but a strong growth led turnaround in 2H21 and entry into furnishings and emerging segments bodes well in long term, said analysts at Prabhudas Lilladher in result update.