Fall in crude oil prices may add shine to paint firms; here's what brokerages have to say

Shares of paint companies have been buzzing on Dalal Street amid the ongoing fall in crude oil prices and better-than-expected financial results in the June quarter. Of late, the price of brent crude oil fell by 14 per cent in the past one month. In general, higher crude oil prices increase input costs for paint companies, which use crude derivatives.

With a rally of 27 per cent, Kansai Nerolac Paints emerged as the top gainer in the sector in the past one month. On the hand, the benchmark BSE Sensex gained 8 per cent during the same period. Other paint majors Asian Paints and Berger Paints jumped 20 per cent and 15 per cent, respectively.

Indigo Paints and Akzo Nobel also advanced 7 per cent and 1 per cent, respectively. Shalimar Paints (down 1.90 per cent) stood as the only loser among paint companies in the past one month. However, shares of the company have gained 42 per cent on a year-to-date (YTD) basis.

Commenting on the sector, Vinod Nair, Head of Research, Geojit Financial Services said, “A fall in oil prices is a boost for the paint industry. Profit from the deflationary raw material prices will be reflected in the expansionary margins during H2FY23.”

Paint majors, including Asian Paints, Berger Paints and Indigo Paints, reported over 70 per cent year-on-year (YoY) growth in net profit for the quarter ended June 2022. Kansai Nerolac Paints and Akzo Nobel reported a growth of 36.51 per cent and 1.32 per cent YoY, respectively, in net profit in Q1FY23.

Sharing its view on Asian Paints, Motilal Oswal Financial Services said, “The momentum witnessed in February-March’22 sustained in Q1FY23, leading to a 10-12 per cent beat in sales, EBITDA and PAT as compared with our expectations.” Asian Paints is the leader in India’s paint industry with a market share of over 50 per cent. It is the third-largest player in Asia and the ninth-largest globally.

While retaining its bullish view on Kansai Nerolac with a target price of Rs 500, Nomura said, “Kansai Nerolac’s standalone Q1 revenues were much above our and Bloomberg consensus estimates.”

Julius Baer Equity Research is also positive on Kansai Nerolac with a target price of Rs 575. “We remain positive on long-term growth prospects of the domestic paint industry, given India’s low per capita consumption, rising income, lower repainting cycle, and government’s focus on housing and infrastructure. However, inflationary pressures, demand environment and increasing competition remain key monitorables,” the brokerage house said.

Sharekhan is bullish on Indigo Paints with a target price of Rs 2,250, indicating an upside of over 40 per cent from the current market price. “Indigo Paints posted sturdy numbers in a tough environment of raw material inflation and slowdown in consumer demand,” the brokerage said, adding that the prices of some of the key inputs, such as emulsion monomers, titanium dioxide and packaging material, have corrected from their high in last six months.

“If prices continued to decline or remain stable in the coming months, the company will see YoY substantial improvement in the margins from Q3FY2023,” Sharekhan said.