/Has Berger Paint Ripe for Shorting

Has Berger Paint Ripe for Shorting

After a phenomenal dream run from 9th July, Stock of berger Paint has already risen from levels of Rs.300 to Rs. 500. that is a whooping 66% return in period of 3 months. This has happened at a time when Indian Economy and 95% of listed stocks in the stock market were struggling due to downturn in GDP, cracking consumption, global trade wars etc. But now has Berger paint ripe for shorting to make good money, let us try and understand few technical parameters.

Before we understand the possible downside in future, let us try and understand its reason for this strong up move.

  1. Whenever market sees headwinds due to bad economic conditions, smart investors finds comfort in FMCG, Consumer Discretionary, IT and Pharma kind of stocks. Berger Paint belong to the category and lot of institutional players started adding it, in last qtr.
  2. Berger Paint gives the comfort of having highest promoter interest, with no pledge from promoters. Adding to that is huge cash pile of Rs.2400 Crore in books. It has always commanded superior P/E multiple of around 49, prior to last 3 months. Which now has came to levels of 102, where as industry average is 78.
  3. Post monsoons, India generates huge renewed demand every year for paints before Diwali. Unlike this time, where consumer sentiment is seen dented on occasion of Navratri, Dushehra. There has been poor sales recorded for 2 wheelers, 4 wheelers and new house purchases. But upward movement in stock of Berger paint must be on the anticipation of good season for the company.

How Competition has done

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While Berger paint was going up, It was not alone, lets have a look at how other major paint companies have performed during the same time frame.

  1. Asian Paint – +37%
  2. Akzo Nobel – +16%
  3. Kansai Nerolac – +26%

So it is quite evident that Berger Paint has gone much beyond industry averages. Oil prices were low for all of them and on fundamentals Asian paint ideally should command superior valuations as compare to Berger paints.

Let us check the stock on certain technical parameters like bollinger bands, RSI, MACD to understand possible future movement in the berger paint stock price.

You can clearly see extreme overbought levels are shown by all indicators, Oil being at low, and internationally expectation of resolution in US sino trade war can bring some heat in Oil prices on hope of growth coming back to economy. Moreover, winters are on corner that too will have increased usage of energy products leading to increase in oil prices, why Oil is key as it is a raw material for paint companies.

Berger Paint can be shorted keeping above technical parameters for a initial price target of Rs. 465 and then Rs. 440 per share. Less risky would have been selling call option keeping in view limited up side and buying a put option of the stock. But due to low volumes in the options of the stock the spreads are huge and dosent leave much to make money. In a view this data is also giving an indication of limited upside in the stock price.

Disclosure: I have not participated in this trade yet but looking forward for opportunity to get in.

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Anvesh is committed to make life simpler for investors being SEBI registered IA(Investment Advisor), CIEL(Centre for Investment Education & Learning) Certified Level 1, AMFI Certifed, Capital Market & Derivatives Market Certifed from NISM & pursuing Ph.D. in Cloud Funding. He has a stint of more then 11 years in banking and investment industry at key leadership positions and professionally engaged at Investocafe.com