Asian Paints, Berger shares get an upgrade after ICICI Securities turns positive after four years

Shares of India's paint companies will be in focus on Tuesday, July 1, after brokerage firm ICICI Securities upgraded Asian Paints and Berger Paints, reversing its negative stance on the sector after nearly four years.

The brokerage has raised its rating on both stocks from 'Reduce' to 'Add', citing improved industry dynamics and attractive valuations.

ICICI Securities has also increased its target price for Asian Paints to ₹2,700 from ₹2,000 earlier, and for Berger Paints to ₹650 from ₹515.

The upgrade comes as industry data points to a pickup in demand after two weak years.

The brokerage mentioned that Birla Opus, a recent aggressive entrant, has already exhausted 95% of its allocated budget for its paints venture, indicating heavy upfront spending.

Additionally, operating margins for leading players are currently near the lower end of their guided range, suggesting limited downside risk from here.

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The brokerage also said that valuation multiples for both Asian Paints and Berger Paints are currently trading at one standard deviation below their historical averages, making the risk-reward more favourable.

Meanwhile, the race for the number three position in the industry is heating up, with Birla Opus and the AkzoNobel-JSW Paints combine stepping up efforts to gain market share.

In a recent interaction with CNBC-TV18, Berger Paints MD and CEO Abhijit Roy confirmed that Berger was indeed in the fray for Akzo Nobel India, but let go of the deal due to valuation concerns.

Paint stocks and other crude sensitives had taken a hit earlier with the escalation in tensions between Iran, Israel and the US getting involved in the conflict. This resulted in a surge in crude oil prices, which is a negative for paint stocks, as more then 50% of their input is linked to crude.

However, with a de-escalation in tensions, oil prices have taken a knock and are back below the $70 per barrel mark. A benign raw material environment is beneficial for the margins of such companies.

These paint stocks mostly have corrected anywhere between 10% to 35% in the last one year, which has resulted in a correction in their valuations from peak levels.