Paint companies face profitability challenges amidst high competition

Synopsis

Investor concerns persist for paint companies due to intense competition and weak demand, impacting profitability. Despite recent share underperformance, valuations remain high, leading to analyst caution. The entry of new players like Aditya Birla Group intensifies the fight for market share, further pressuring margins and potentially causing incumbent stock prices to struggle.

Mumbai: Investor woes in shares of paints companies may be far from over as the hyper competition in the sector and tepid demand are expected to continue squeezing profitability in the sector. With valuations remaining elevated despite the recent underperformance in the shares, money managers and analysts are less enthusiastic about their prospects in the foreseeable future.

So far in 2025, Asian Paints is down 4.2% and Kansai Nerolac has fallen 4.5%. Berger Paints bucked the trend, rising 24%. In comparison, the Nifty 50 is up 6%.

Morgan Stanley said this 'de-rating' is not yet done.

Agencies

"While there is consensus on the sell side on growth and ratings, we think the exact extent of a potential de-rating for paint stocks is not yet understood," said the brokerage in a recent note.

The apathy for paints shares among investors and analysts is a contrast to the situation three years ago when they were Dalal Street darlings for over a decade. The entry of deep-pocketed players like the Aditya Birla Group into the sector has resulted in companies focussing on fighting for market share, putting pressure on profitability. "The overall competitive intensity will remain high for the next two years," said Aniruddha Kekatpure, head of research at Edelweiss Mutual Fund. "If the new entrant executes better than expected, the stock prices of incumbents will likely continue to languish."

The recent declines in paint shares have removed some froth of their valuations, which were considered among the most expensive in the consumer-facing businesses.

"While valuations have moderated from their post-COVID highs, they continue to remain elevated amid persistent growth and margin pressures," Vaqarjaved Khan, senior fundamental analyst at Angel One. Khan said the estimated Price to Earnings (P/E) ratio - a popular valuation measure - for most paint companies still hovers around 48-55x, a rich multiple, especially when the growth outlook for FY26 appears clouded.

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