The paint stocks are in focus as crude prices see some rationalisation. Nomura has a Buy rating on some of the key paint sector stocks including Berger Paints and Kansai Nerolac and sees as much as 33% upside from current levels in select plays.
The Japanese brokerage house highlighted that effective product mix coupled with strong performance of the industrial segment helped improve sentiment in the sector. It also boosts the business potential and revenue outlook of the paint companies for rest of H2 FY27.
Here is a detailed analysis of the investment rationale driving the ‘Buy’ calls.
Nomura has a Buy on Kansai Nerolac with a target price of Rs 274 per share. This implies 33% upside from current levels.
Nomura pointed out that the deco volume growth of low-single-digits “was in line with our estimate as it (Berger) is consciously moving away from low-margin products, leading to near-double-digit value growth.”
According to them, “this along with strong performance in the industrial business led by Auto drove consolidated sales growth of 18.6% YoY above the consensus estimates of12%.”
Kansai Nerolac added 1,300 dealers in Q2 (Vs 3,000 in H1FY27). Nomura believes that this is in line with its plans to expand its dealer reach by 10-15% p.a, with 70-80% have tinting machines. “However, the focus is to improve throughput/store, and hence Kansai Nerolac is pruning non-performing dealers. Project business (10%+ of sales) continued to grow indouble-digits with an increased reach across 80+ cities,” they added.
Another reason that is supporting the positive recommendation is the fact that the company has also been scaling its services business, which now contributes mid-to-high single-digit sales mix to decor sales. Nomura highlighted that “within the new business, which is 10%+ of sales, a focused markets and products approach helped deliver double-digit growth in construction chemicals and waterproofing and healthy growth in premium wood finishes,” as per Nomura.
The company had highlighted that “competitive intensity remained high.” It has launched an industry-first paint with a 20-year warranty.”
Nomura expects the strong performance in industrial business led by auto may continue in Q3, “the automotive segment had robust growth as Kansai Nerola continued to focus on innovation and new technologies to expand its addressable market into new businesses such as EVs and new segments.”
The company’s auto refinish section also witnessed growth on the back of an expanding customer base, but mix deteriorated. The management expects auto demand to be
buoyant driven by new launches and inventory build-up for the festive period.
Nomura has a Buy rating on Berger Paints India with a target price of Rs 600 per share. This implies upside of 18% from current levels.
Interestingly, Berger clocked the October saw the highest sales growth in the past 25-30 months due to the shift in festive dates. The paint company’s volume grew 3% YoY. This was below Nomura’s estimate and Asian Paints’ dealer upstocking in Q1. Additionally, Nomura pointed out that investors must remember that “price hikes impacted sales in July and festive demand was shifted to Q3.”
The paint market in eastern India was “impacted due to extended rains and sales of price-sensitive categories such as Putty, Textures and Enamel were lower. Mix improvement from degrowth along with pricing growth of 8% YoY helped lift deco sales growth to 10% YoY,” Nomura added.
Berger, overall added 2,700 tinting machines in Q2 and aims to add 10,000 machines in FY27 compared to 4,800 in H1. It expanded its store footprint and now has 2,000+ stores.
According to Nomura, “it will accelerate its urban expansion plan from Apr-27 onwards once its execution modality is finalized. Wood coatings continued to perform well and delivered double-digit value growth. Almost all subsidiaries and JV reported strong performance.”
Industrial business delivered high double-digit volume and value growth despite steep price increases. Automotive coatings comprising 5-6% of sales outperformed on the back of healthy two-wheeler demand. General Industrial segment volumes grew in double-digits, while it was stable for protective coatings.
However, even for Berger, “competition was high as while Birla Opus narrowed the price gap vs peers; it increased rebates to dealers. Berger said its share was stable at 20%,” Nomura added.
All in all, the key paint stocks, Nerolac and Berger are betting on the strong growth despite competition from peers. The strong demand in auto and industrials are the biggest growth drivers for the pain companies despite volatile crude prices and also the festive demand shifting to Q2.