Paint companies' stocks struggle to hold their colour amid growth fade

GLOSS OVER: No fresh coat of optimism from brokerages as demand stays patchy

A sharp correction in stock prices, signs of rural recovery, and lower raw material costs have not been enough to change brokerages’ cautious stance on the top-listed paint companies. Concerns over rising competition and weak demand continue to weigh on sentiment. While valuations are no longer steep, most brokerages believe the risk/reward balance remains unfavourable.

 

The primary concern is sluggish demand, as reflected in the October-December 2024-25 (FY25) results, though some signs of recovery are emerging in the current quarter (Q4). Sector-wide revenue declined 3 per cent year-on-year (Y-o-Y), weighed down by a 6 per cent drop in sales at market leader Asian Paints.

 

Asian Paints recorded the lowest volume growth among the top three players at 1.6 per cent, while revenue contracted 7.5 per cent due to pricing pressure. The company attributed its weak performance to subdued demand, downtrading, and a lacklustre festival season.

 

Indigo Paints also struggled, with revenue down 4 per cent. Kansai Nerolac posted flat revenue growth, with an estimated 2 per cent increase in volumes. Excluding Asian Paints, sector revenue remained unchanged from the previous year. Analysts at IIFL Research, led by Percy Panthaki, cite weak pricing, subdued demand, and an unfavourable sales mix as the key reasons for the sector’s uninspiring performance.

 

Some brokerages, however, see early signs of recovery in the January-March quarter (Q4FY25). Analysts Abhishek Mathur and Rajat Parab of Systematix Research note, “Q4 is likely seeing the first signs of a demand revival off a weak base, with deferred purchases from earlier quarters, the phase-out of base price cuts improving realisations, distribution/salesforce ramp-ups, and rural revival momentum.”

 

While raw material costs have eased, price cuts and an adverse product mix put pressure on margins. The impact would have been more severe if not for a 5-9 per cent decline (Y-o-Y and quarter-on-quarter) in crude oil prices and a stable to marginal drop in titanium dioxide costs. 

 

According to IIFL Research, operating profit margins fell Y-o-Y for the fourth consecutive quarter. The sector’s average contraction of 240 basis points (bps) was driven by a 90-bp drop in gross margin, an 80-bp rise in other expenses, and a 60-bp increase in staff costs. However, cost savings on inputs have not been enough to counteract the broader headwinds plaguing the sector.

 

Analyst Ajay Thakur of Anand Rathi Research says, “While lower input costs provide some margin respite, slow demand recovery and rising competition continue to weigh on earnings.” The brokerage projects 6 per cent revenue growth and 3 per cent net profit growth for the sector from 2023-24 through 2026-27.

 

This strain is reflected in stock performance. Over the past year, Indigo Paints has declined 28 per cent, while Asian Paints and Kansai Nerolac have fallen 21-25 per cent. Forward valuations for the top three paint companies are trading at a 31-36 per cent discount to their five-year averages. Despite this, brokerages remain cautious. IIFL Research maintains a ‘reduce’ rating on the sector, observing, “While valuations have become reasonable, confidence in an upside remains low given the challenging demand environment and intensifying competition.”

 

Anand Rathi Research echoes this view. “Despite the recent share price declines and lower valuations, we remain cautious and recommend profit booking in the sector,” it notes.

 

Systematix Research takes a more optimistic stance for the medium term. It points out that one-year forward price-to-earnings valuations for top players are at a steep discount to historical averages, reflecting low growth, margin pressure, and a competitive landscape. “These factors warrant near-term caution, but we expect a medium-term rerating as demand gradually recovers and the new entrant’s market expansion progresses at a slower pace than initially projected,” it adds.