Shares of paint companies were in the limelight on Thursday with sector giants Asian Paints and Berger Paints surging 3 per cent each to hit their respective fresh highs of Rs 2,232 and Rs 625 at the bourses in an otherwise weak market on expectation of higher volume growth. In comparison, the S&P BSE Sensex was down 0.29 per cent at 39,787 points at 01:38 pm.
In the past three months, Asian Paints and Berger Paints have rallied 28 per cent and 19 per cent, respectively, as compared to 4.6 per cent rise in the benchmark Sensex.
Brokerages believe that the volume growth in the decorative segment should remain high, especially in rural areas, given better crop production this season. Further, on-going government investments in rural infrastructure, and house construction in rural areas should partially mitigate overall slowdown. In the long term, they remain optimistic about the unorganised to organised shift in the paint industry.
Asian Paints reported continuous improvement in demand from May to September and October continues to maintain the trend. The demand in Tier 2,3 and 4 cities are back to pre-Covid levels while urban centers are witnessing continuous improvement.
Going ahead, analysts at Dolat Capital believe that Asian Paints would benefit from higher rural contribution (around 50 per cent) which is likely to grow faster as against urban contribution due to favorable base, relatively lesser Covid impact and increased government spends. However, margin expansion would remain a challenge given peaking of GM and lower operating leverage hereon, it said.
"Delivering growth along with improving profitability and untouched free cash generation during a pandemic, especially when top cities are yet to fire (70-80 per cent of base quarter sales) is a testimony to Asian Paints' distribution and product portfolio heft. That said, the recovery is more than priced in at 54x Sept-22 P/E," analysts at HDFC Securities said in result update.
Meanwhile, the board of directors of Berger Paints is scheduled to meet on November 5, 2020 to consider and approve the financial results of the company for the quarter and half year ended September 30, 2020.