Strong revenue visibility has buoyed stocks of paint companies to new highs, but valuations look stretched.
Companies in the paints sector are bracing for the increased demand due to robust economic growth and rising incomes. Berger Paints, the third-largest player, plans to increase its capacity from 250,000 tonnes to 450,000 tonnes in the next two years, while the second-largest Kansai Nerolac will enhance its capacity by 50 per cent to 300,000 tonnes over the next three years. Market leader Asian Paints plans to triple its current capacity of about 600,000 tonnes in the next few years.
The Rs 13,000-crore paints industry is growing at over 15 per cent due to high demand from decorative (led by housing and real estate construction), automotive (strong auto sales) and industry paints (industrial capex and infrastructure spending). In the trailing four quarters ended June, aggregate sales of top-three companies rose 20 per cent to Rs 10,700 crore. This year, too, the growth rate is likely to be similar, driven mostly by robust volumes and price hikes.
In the last four quarters ending June, operating profit margin of these companies jumped nearly 390 basis points to 16.6 per cent, while net profit margin increased 330 basis points, as companies passed on the rising input costs to consumers. However, as raw material prices continue to rise and stiff competition pushes ad spends, analysts reckon that the industry has seen the peak of margins.
Prices of titanium dioxide, the key raw material, have risen eight per cent since January and are expected to increase another five per cent in the next few months. Prices of other raw materials are also on an uptrend. Paint companies have raised product prices by seven per cent over the last year.
Due to strong revenue visibility, stocks of paints companies have touched new highs. However, after their phenomenal rise, the average valuation of 25 times price to estimated earnings multiple for FY12 looks stiff.