Shares of paint companies were in focus with sector giant Asian Paints hitting an all-time high of Rs 2,028, up 2.5 per cent on the BSE in the intra-day trade on Thursday, on expectation of higher demand. The stock surpassed its previous high of Rs 2,016 touched on August 25, 2020.
That apart, Berger Paints India, Kansai Nerolac Paints and Shalimar Paints were up 2 per cent each, as compared to 1.4 per cent rise in the S&P BSE Sensex at 01:08 pm.
In the past one month, Asian Paints beat the market by gaining 14 per cent after it surprised the Street with better-than-expected revenue recovery in April-June quarter (Q1FY21) and clocking 14 per cent volume growth for domestic decorative portfolio in the month of June.
Analysts at JP Morgan believe strong market share focus with agile on ground execution; expanding revenue base via successful scale up of new segments like waterproofing (long growth runway given very low penetration); and expanding margins and moderating capex to drive improvement in free cash flow (FCF) and return ratios ar the three key drivers for the paint company.
Add to it, the government has been pushing affordable housing across the country. It has taken certain measures in the recent years including Pradhan Mantri Awas Yojana and Smart City Mission. These measures, analysts believe, would provide boost to demand and supply of housing, in turn aiding growth of concrete and paintable houses in India. In the next 4-5 years, these houses will enter the re-painting cycle.
"For the industry, metros and tier I areas contribute around 25 per cent in value terms with the smaller towns (tier II/III/IV cities) and rural areas contributing the balance 75 per cent. For the past few years, demand in smaller cities and towns has been growing at a faster pace than metro and tier I cities. Rise in disposable income, incremental consumption expenditure, increase in awareness, development of rural markets and various launches have fuelled the paint industry’s growth," analysts at Nirmal Bang Equities said in paint sector update.
Since in the current environment, there is a preference for businesses that are relatively more resilient, sector multiples at current levels in near term will look expensive. The brokerage firm recently initiated coverage on Asian Paints with accumulative rating with target price of Rs 2,080, as the brokerage firm believes that Indian decorative paints will continue to witness higher demand within this space, majorly led by steady shift from unorganized to organized players with bigger players gaining further share.