Asian Paints Shares Rally Most In A Decade After Q4 Results
Here’s what brokerages had to say about Asian Paints’ Q4 performance...
Shares of Asian Paints Ltd. gained the most in a decade as analysts lauded the company’s volume growth in the fourth quarter, market share gain from unorganised peers and improved performance of its international business, among others. But the near-term demand outlook amid the severe second Covid-19 wave remains uncertain.
The nation’s largest paintmaker reported a 48% year-on-year jump in domestic decorative business volumes in the quarter ended March, according to an exchange filing. It didn’t disclose the growth over the preceding three months. Net profit and revenue, however, fell sequentially and margin contracted.
The domestic decorative business performance was led by a “robust growth in the premium and luxury product range”, Amit Syngle, managing director and chief executive officer at Asian Paints, said. “The home improvement business also registered record sales for the quarter aided by the foray into the home décor business. The industrial coatings business delivered a robust performance, particularly in protective coatings and refinish segments supported by the uptick in the industrial activity.”
The huge inflationary trend in raw material prices, according to Syngle, however, has been worrying. “But its impact on profitability has been negated with some path-breaking work on sourcing and cost optimization.”
Shares of Asian Paints rallied as much as 11% during the day — the most since Oct. 6, 2010. The stock, however, ended Friday’s session up 8.44% at Rs 2,772 apiece. Of the 41 analysts tracking the stock, 18 have a ‘buy’ rating, 10 suggest a ‘hold’ and 13 recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 4.2%.
Here’s what brokerages had to say about Asian Paints’ Q4 performance...
Jefferies
Maintains ‘hold’ rating but cuts target price to Rs 2,400 from Rs 2,500 apiece earlier.
Asian Paints’ Q4 volume growth at 48% with two-year compounded annual growth rate at 21% was extremely strong.
Company managed to gain market share from organised as well as unorganised players. Gross margin and Ebitda contraction, however, has been worse resulting in a slight miss.
Not taking away any credit for growth so far, the outlook is uncertain now in the wake of the second Covid wave and its impact on near-term demand.
International business did well with double-digit volume growth for all units in Q4 and robust performance in Asia, Middle East and Africa.
ICICI Securities
Maintains ‘add’ rating with a target price of Rs 2,800 apiece.
“Never ever, we had witnessed the confidence which we felt in Asian Paints’ presentation.”
It indicated that it’s a likely industry outperformer.
In FY21, it continued to gain market share. “Input cost pressures exist, however, it has raised prices by 2.8% in Q1FY22 and we believe that price-led growth is feasible in FY22.”
“Consensus appears concerned about short-term input inflation issues – we are not.”
While the input prices have increased in past two quarters, the company is focusing on driving raw material sourcing efficiencies, value engineering to reduce the costs and efficiency in distribution and trade servicing.
Motilal Oswal
Maintains ‘neutral’ rating, with a reduced target price at Rs 2,620 apiece.
Asian Paints declared a stellar top line growth in Q4, with 48% volume growth, led by pent-up demand, especially as demand in tier I cities recovered sequentially.
Near-term demand uncertainty is again on the rise as the second wave is far more widespread than the first, with Covid-19 cases spreading to the hinterland this time.
“While sales growth has been strong and we expect the company to bounce back after the impact of the ongoing second Covid wave recedes.”
IDBI Capital
Revises rating from ‘reduce’ to ‘hold’ with a target price of Rs 2,444 apiece.
Asian Paints reported above expected revenue, while higher-than-expected input cost inflation lead to in-line profit.
Strict control over cost and operating leverage benefits contributed towards Ebitda margin expansion.
Due to inflationary raw material trend, company took price hike of 2.8% in May 2021.
Management believes pricing cannot be the only route for any new player to disrupt paint market. Competition will need other levers like distribution, supply chain efficiency, product range, strong brand equity etc. to sustain.
Morgan Stanley
Maintains ‘overweight’ rating with a price target of Rs 3,000 apiece.
Q4 performance did not merely reflect pent-up demand; it also included new demand from projects, businesses, innovation and market share gains.
Home improvement revenues were up 21% QoQ aided by the foray into the home decor business.
While focus on market share gains continues, management emphasized the need to protect margins.
Asian Paints aims to achieve equitable gross margins even from low-end products. The company is also working on sourcing efficiencies, technology adoption, formulation efficiencies, overhead cost control etc.
UBS
Maintains ‘buy’ rating with a target price of Rs 3,350 apiece.
Asian Paints’ industrial business performed better than expected aided by sequential recovery in auto sector and industrial demand.
“We continue to maintain a positive outlook for the home improvement segment and believe that the overall volume growth visibility remains robust for Asian Paints.”
Nomura
Maintains ‘neutral’ rating, cuts target price to Rs 2,885 from Rs 3,000 apiece.
Asian Paints delivered robust FY21 decorative volume growth driven by strong growth in tier-2, 3, 4 towns that had relatively lower case loads and where it gained share by upgrading consumers from distemper to economy emulsions.
Asian Paints also increased focus on ancillary products and gave moratorium on loan repayments that provided liquidity to the trade and consumers.
“We expect strong volume growth to sustain, aided by increase in vaccinations and metros/tier-1 cities returning to growth.”
Given strong FY21 results, most of the delayed/ pent-up demand became exhausted, with limited pent-up demand to be carried forward to FY22.
Increasing Covid-19 cases in tier-2, 3, 4 towns could impact/postpone demand there.
HSBC Global Research
Maintains ‘buy’ rating with a target price of Rs 3,150 apiece.
Exceptional performance continues even in Q4, strong demand rebound was witnessed in metro and tier-1, 2 cities, leading to superior mix with growth across premium and luxury categories.
Industrial and home improvement segment reported robust growth, while international business, too, registered strong double-digit growth.
Overall, this performance in a disrupted year, highlights how formidable its business model and execution is within the paints industry, where demand can continue to surprise.
Asian Paints is the dominant leader in the lucrative decorative paints industry, a structural winner with superior cost economics.
Covid-19-led crisis has further consolidated its competitive position helped by market share gain from both organised and unorganised players.
CLSA
Maintains ‘outperform’ rating with a target price of Rs 2,950 apiece.
Remains impressed with Asian Paints’ transformation into a full service interior decor brand.
Asian Paints remains preferred consumer pick.
Slowly but steadily building home decor capabilities and investing in enhanced consumer service.
“We see significant value creation optionality emerging, with the group targeting a much larger addressable market beyond paints.”