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Bright spots emerge; valuation comfort in leading players

We initiate coverage on the Indian paints industry. The sector has seen strong growth at 1.5-2x of GDP historically. It has gone through a tough couple of years due to RM cost volatility, price cuts impacting revenue growth, impact on discretionary demand in the country and concerns related to a slew of new entrants in the market. This has led to a contraction in valuation multiples compared to historical averages for most players. We believe the risk-reward has now started looking favourable for some players, based on:

1. Expected demand improvement due to declining inflation levels and improving outlook for rural demand;

2. Anniversarisation of price cuts, leading to stronger revenue growth expectations from H2FY25E;

3. Increased confidence of existing players that competition may not be disruptive for the industry;

4. Long-term growth drivers are intact in terms of strong GDP growth, improving per capita income and discretionary spending, and government spending on infra growth schemes such as ‘Housing for all’.

We believe there is unlikely to be a large impact of competition on the larger players and companies with a diversified business. While there may be some impact in terms of pricing and ad spending, larger companies have growth levers of their own to withstand the competition. We initiate coverage on the top 5 listed paint companies with investment rationale as below:

Asian Paints - We like its strong distribution prowess that continues to grow, new product launch to target the unorganised market, the home décor foray and backward integration projects. It is currently trading at 53.5/46.8/42.5x its FY25/26/27E EPS, respectively.

Berger Paints - Berger Paints has consistently gained market share due to distribution expansion, which is expected to continue. It benefits from large size as well as diversification from industrial business. It is currently trading at 53.4/47.5/43.3x its FY25/26/27E EPS.

Kansai Nerolac Paints - We like Kansai Nerolac due to its portfolio diversification between decorative and industrial, focus on premiumisation and new segments and expanding presence in T1 towns and West and South India. It is currently trading at 30.1/25.8/22.9x its FY25/26/27E EPS, respectively.

Akzo Nobel India - While the company benefits from a superior product mix, it will see an increasing share of mass products, leading to margin pressure. There is also uncertainty due to the parent company’s ongoing portfolio review for South Asia decorative businesses. It is currently trading at 40.2/37.6/35.7x based on FY25/26/27E EPS, respectively.

Indigo Paints - While Indigo Paints has been growing stronger than the industry and margin improvement due to scale-up, we think there are long-term concerns due to increased competition from larger players as the company has just a low single-digit market share. It is currently trading at 50.5/41.7/32.1x based on FY25/26/27E EPS, respectively.

Relative Share Performance of Coverage Companies

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