What is Core & Satellite strategy?

Paints shares are up today as crude oil prices are down. The relation between them is that crude oil is an important raw material for the paint industry. Now that crude oil has fallen this means that companies will have better margins. However, we have to see how much raw material companies already have. If crude oil prices are falling then the ones that have not stockpiled them will gain more.

At the same time demand outlook is also good. If the real estate sector and hospitality sector will rise then new buildings will be created and that will lead to demand for paints. Not just houses, as companies would create new plants that would also lead to paint demand. At the same time, paints are also used for industrial use. With manufacturing PMI above 50, and prospects of growth demand from that sector can remain strong. So all this combined gives good growth prospects for companies. Even the revival of the auto sector is positive for the paint industry.

So let’s look at major shares of this industry.

If we look at Berger Paints. It is a dominant player and ICICI direct reported that 80-85% of its revenue comes from the decorative paint segment. Its balance sheet is strong and has good ROCE figures as per ICICI direct. However, it’s valuations are very expensive P/E of Asian paints is 75.23. So either the targets of brokerages have been met or are very close to it.

For Asian Paints, ICICI Direct stated that focusing on new product launches and backward integration will help EBITDA margins. Management gave double-digit volume growth guidance for FY24. However, even for this stock, P/E is very high at 75.88. That’s why some brokerages have even given a sell rating.

Nerolac Paints still have some upside potential. Major triggers for them is the premiumization of products and focus growth in the auto sector. The auto sector is a huge segment for the company so revival in them is great for Nerolac Paints. It’s P/E ratio is comparatively lower at 50.15. Hence there is some upside potential even by looking at brokerage targets.