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IDBI Capital Equity Research has recommended buying on APNT (revised TP Rs 3,756, valued at 70x FY24E EPS) and BRGR (TP Rs 870, 65x FY24E EPS) while maintain Hold on KNPL (TP Rs 621, 35x FY24E EPS).
"We are bullish on paint sector despite (i) worst inflation that the industry faced since last 4 decades (ii) new players announcing aggressive capex (iii) valuation concerns due to rally in stock price," the broking firm said.
"Broadly, we expect paint sector to drive outperformance in revenue growth led by penetration, market share gains and new categories (waterproofing, adhesives etc).""We expect gross margin and valuation multiples to sustain driven by pricing-power and fast growth opportunities," it added.
Key highlights and investment rationale
Inflation has minimal impact on wealth creation in paint sector, topline has maximum: Over last 25 years (FY1997-2022) there is nil correlation between change in gross margin and market cap whereas revenue growth explains +30% of the market cap’s variations. Hence, we expect paint companies to drive aggressive revenue growth by remaining competitive on price to protect/gain market share.
Business economics to remain healthy despite stiff competition: New entrants in paint industry are aiming to occupy no.2 (Grasim) and no. 3 (JSW Paint) spots. However, we do not expect any significant disruption in market share and price power of existing paint companies. There is no scope of competition on quality and price parameters. Also, strategies focused on love-making (incentives) with dealers failed historically. Indigo Paints took 20+ years to occupy no. 5 spot!
Waterproofing; emerging growth engine for paint companies: Paint companies are aiming to make waterproofing as default product with paints. APNT enjoys 5-6 years lead in category creation compared to competition. We expect all paint companies to enjoy high double-digit penetration led revenue growth in this category.
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