Battered shares of paints makers Asian Paints Ltd, Berger Paints Ltd and Kansai Nerolac offer up to 49 per cent upside potential, as their valuations drop below historical averages, amid concerns over low growth, margin pressure and new competition in the form of Birla Opus.
Systematix Institutional Equities said the March quarter is likely seeing a small start to demand revival off a weak base, with deferred demand from earlier quarters; phase-out of base price cuts leading to better realisations; distribution ramp ups; and rural revival momentum. It said volume or value growth should improve every quarter from here on.
In the case of Birla Opus, while the momentum is building up, the FY25 revenue ramp-up has largely followed initial network buildout and primary sell-in. Systematix feels the pace of FY26 network expansion might not be similar.
"The real test comes in FY26 when (1) repeat/ secondary sales need to be driven on the 4QFY25 base, and (2) industry likely recovers with incumbents coming back. BO’s target of high-single digit market share at end-FY25 looks challenging (currently at c.3.5 per cent)," it said.
The brokerage has maintained 'Buy' ratings on Asian Paints, Berger Paints and Kansai Nerolac Paints with target prices of Rs 2,870, Rs 625 and Rs 340, respectively. It continued to prefer Berger Paints in the space.
The current one-year forward PE valuations for the three stocks are at steep discount to historical averages, Systematix Institutional Equities said.
"We expect medium-term re-rating as (1) demand gradually picks up, and (2) revenue ramp-up of the new entrant is more gradual vs guidance.
In terms of regions, Systematix Institutional Equities said demand is seeing a slim pickup mainly in the North market, West seeing very slight improvement while East and Central markets are trending flattish.
"Sales in South remain depressed, with a sluggish real estate market impacting the builder segment. Mass-market/ economy emulsions are doing relatively better in North, South and to an extent West markets," it said. Systematix said Asian Paints likely saw some meaningful volume growth in the first three months, moving better in North market. The inventory at dealers has reduced a bit across most top players from 3-4 days for running and 15 days for other products to 2-3 days.
Besides, pricing is stable with no hikes or cuts since August 2024. The discounting by incumbents remained stable. Birla Opus' sales momentum is better in West and to an extent North markets, less so in South and East. Mass or economy products are selling better for Birla Opus in all markets.