Thursday, January 28, 2010


The Indian paint industry is out of blues faced in FY09 and is back on track delivering double digit growth in sales with improved profitability. H1FY10 has seen major paint companies witnessing revival in demand for both decorative and industrial paints, thanks to pick up in economic activity boosting demand for construction and infrastructure development. While price corrections in realty, easing of credit availability, abating concerns on sustain ability of income have revived consumer sentiment and inturn demand for housing and consumer durables; enhanced government spending on infrastructure development and resurgence in investment by private sector have led to increased industrial activity boosting demand for industrial paints. With user industries gaining vigour, paint industry has also seen revival in demand.

Decorative paints are witnessing strong demand traction from both housing and commercial construction. Factors like low per capita consumption of decorative paints, existence of large unorganized market, improving financial status, growing nuclear family culture, increasing urbanization are driving demand for residential housing; where as strong growth in IT&ITES and Organized Retail sectors and the general economic development are drivingdemandfor commercial construction.

Demand for industrial paints is increasing because of increasing demand for automobiles (automotive paints), consumer durables (powder coatings), enhanced road development activity (road markings) and general infrastructure development (high performance coatings for power and other plants).

We are initiating coverage on Indian paint sector recommending two companies Kansai Nerolac Paints Limited (KNPL) and Berger Paints India Limited (BPIL) which are a pure play on India growth story with low country risk (minimal exposure to international markets) and currency risk (only to the extent of imported raw materials). These companies with pan-India presence, strong brands and products covering all price points are set to benefit from uptrading from lime-wash kind of low end products to paints as well as from growing number of high income class consumers driving demand for premium emulsions.

While revenue growth in H1FY10 was subdued despite strong volume off take due to price corrections; profitability has improved from Q1FY10 onwards due to year-on-year (YoY) lower raw and packing material cost. This revival in volume growth and improved profitability as also positive outlook for future has led to a re-rating of these companies post Q1 results. However, we believe there is room for further upside from current levels. We hence recommend a BUY on KNPL and BPIL with one year target price of Rs.1476 and Rs.70 respectively giving a potential upside of 39% and 20%respectively.

To read the full report: PAINT SECTOR