In­vestors’ coloured view of paint stock val­u­a­tions

Mint Asia ST - - Otherviews - HAR­SHA JETHMALANI


of paint firms have risen as much as 33% from their lows in De­cem­ber quar­ter. With crude oil prices eas­ing and ru­pee sta­bi­liz­ing, a key head­wind for paint mak­ers is be­hind them. This should have caused a re­lief rally; but it has ex­tended into ex­u­ber­ance.

While an­a­lysts are up­beat on the sec­tor’s vol­ume growth prospects, as well as the re­lief on the mar­gin front, some of them have re­vised their ratings on these stocks be­cause of high val­u­a­tions. “Given the steady up­trend in stock prices, we re­vise our ratings on Asian Paints and Kan­sai Nero­lac from buy to hold and on Berger Paints and Pidilite In­dus­tries from add to hold,” ICICI Se­cu­ri­ties Ltd said in a re­port on 31 De­cem­ber.

Stan­dard Char­tered Bank has re­moved Asian Paints from its list of top stock picks. “The cur­rent stock price fac­tors all pos­i­tives re­lated to soften­ing of raw ma­te­rial cost pres­sures faster than our ex­pec­ta­tions. Hence, we would like to book prof­its,” it said in a note to clients on 20 De­cem­ber.

From its peak in early Oc­to­ber, Brent crude prices cor­rected by 35%. Sim­i­larly, the ru­pee has re­cov­ered by around 7% from the low of 74.39/US dol­lar it touched on 9 Oc­to­ber.

Monomers and ti­ta­nium diox­ide are deriva­tives of crude oil and used in pro­duc­ing paints. So, eas­ing crude oil prices have re­sulted in mod­er­a­tion of their cost as well. They ac­count for about 30-35% of the to­tal raw ma­te­rial cost of the sec­tor. Sim­i­larly, vinyl ac­etate monomer is a crude oil-based chem­i­cal and a key raw ma­te­rial for mak­ing ad­he­sives. It ac­counts for 60% of Fe­vi­col maker Pidilite In­dus­tries Ltd’s to­tal raw ma­te­rial cost.

Usu­ally, the ben­e­fits of favourable moves in crude and/or forex mar­kets re­flect with a lag, es­pe­cially on gross mar­gins front. This is be­cause of hedges and ad­vance pur­chase of ma­te­ri­als. Mar­gin gains can’t be ig­nored. But with val­u­a­tions of about 40-50 times one-year for­ward earn­ings, the mar­kets are pric­ing in gains and much more.

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