Analysts raised price targets on Asian Paints Ltd. after third quarter but remained cautious over its margin.
India’s largest paintmaker saw a 62% year-on-year jump in net profit at Rs 1,265.3 crore in the October-December period. Its revenue rose 25% while margin expanded to 26.3% from 21.9% a year ago. The company reported its highest-ever revenue, profit and Ebitda during the quarter.
The company’s domestic decorative business posted volume growth of more than 30%, led by premium and luxury portfolios.
“The recovery was supported by new construction and renovation as well as robust festive demand,” Amit Syngle, managing director and chief executive officer at Asian Paints, said during a conference call after the third-quarter results. “Strong growth in paints segment due to continued growth in tier 2, 3 and 4 and rebound in demand from tier 1 cities… The quarter witnessed strong growth projects and large institutional sales.”
Syngle also said raw material inflation is on an upswing with crude prices going up, but the company needs to see if costs sustain at these higher levels before deciding on any price change.
Still, analysts expect the company’s margin to face pressure amid rising crude and other input costs. Of the 39 analysts tracking the stock, 16 recommend a ‘buy’, 10 have a ‘hold’ rating and 13 suggest a ‘sell’. The stock is trading 6.2% higher than its 12-month Bloomberg consensus price target of Rs 2,507.
Shares of Asian Paints fell as much as 2.5% to Rs 2,648.
Here’s what the analysts have to say...
Morgan Stanley
- Maintains ‘overweight’ rating; raises price target to Rs 3,000 from Rs 2,300.
- New pandemic-fueled renovation cycle seems to be setting in.
- Strong trends seen in the international business.
- Strong management commentary supports overweight rating.
- Raises FY21, FY22, FY23 EPS estimates by 25%, 28% and 28%, respectively, to account for better revenue growth and margins.
HSBC
- Maintains ‘buy’ rating; hikes price target to Rs 3,150 apiece from Rs 3,000.
- Outlook for Q4 appears to be strong helped by metro and tier-1 demand.
- Execution stands out with volume-led focus and solid demand trends.
- Current price builds in long-term earnings growth of 15-16%, which is achievable given the structural growth of the category.
Motilal Oswal
- Maintains ‘neutral’ rating; raises price target to Rs 2,790 apiece from Rs 2,590.
- Outlook on demand remains healthy, but the extraordinary positive factors of strong festive season, pent-up demand, low input costs may not sustain.
- Material cost inflation has been sharp since December, meaning the current all-time high gross and Ebitda margin are unlikely to sustain beyond FY21.
- Raises FY21 and FY22 EPS estimates by 13.7% and 8.1%, respectively, owing to better commentary on top line growth.
- Remains neutral owing to rich valuations.
Emkay
- Maintains ‘hold’ rating; hikes price target to Rs 2,700 apiece from Rs 1,920.
- Domestic decorative volume growth of 33% and positive management commentary indicates strong underlying demand recovery beyond one-off growth drivers.
- Recent increase in oil prices may cap further gross margin expansion in the near term.
- Strong earnings momentum likely to sustain due to market share gains from portfolio expansion and focus on cost efficiencies.
- Raises FY21-23 EPS estimates by 14-16%.
- Re-rating is justified by improved growth outlook.
- However, valuations are no longer attractive.
Antique Stock Broking
- Maintains ‘hold’ rating; raises price target to Rs 2,606 apiece from Rs 2,175.
- Rise in key raw material prices could put pressure on margins.
- Pricing action, cost-saving initiatives and rising scale will continue to aid margins.
- Will continue its strong volume-led growth on superior execution.
- Factoring in a strong volume growth, raises sales/earnings forecast by 4-6%/9-10% for FY22-23.
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