Despite oil prices slipping to yearly lows, international brokerage Morgan Stanley retained its 'underweight' call for the paint players under its coverage, Asian Paints and Berger Paints.
The brokerage raised its FY25 EBITDA margin assumption for Asian Paints to 19 percent, up from 18.4 percent earlier. As a result of lower commodity and oil prices, FY25 earnings are likely to be up around four percent.
Morgan Stanley has a target price of Rs 2,522 per share for Asian Paints, implying a downside of 24 percent from the previous session's closing price.
For Berger Paints, Morgan Stanley reiterated its price target of Rs 497, indicating an 20 percent downside.
However, the brokerage still raised its EBITDA margin assumption to 16.2 percent from 15.5 percent earlier. Overall, earnings for the current fiscal year are likely to be seven percent higher on benign commodity prices.
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Crude oil prices affect the decorative paint business more than any other because it is a raw material-intensive industry. The manufacture of paint requires more than 300 items, most being petroleum-based. Raw material accounts for 55-60 percent of input costs and directly impacts gross margins.
Falling crude oil rates also decrease the cost of producing items such as titanium dioxide, a key ingredient for white paint. A decline in crude prices benefits paint manufacturers as that reduces their input costs and gives them more leeway to generate higher margins. Falling oil prices would mean that these companies can also restock at cheaper rates, boosting profit margins.
Last week, Brent fell around 3 percent, while WTI fell by around 5 percent as demand worries increased after fiscal stimulus from China, the world’s second-biggest economy and the top oil importer, failed to reassure market confidence.
Over the past year, Asian Paints shares have traded flat, gaining around 4.5 percent. Berger Paints have performed slightly better, rising 10 percent during the same time. However, both the counters underperformed the frontline index Nifty 50, which has surged 34 percent during the same time.
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