Asian Paints Q1 Results: Brokerages Raise Price Targets; Shares Fall
Asian Paints container sit outside a hardware shop in Mumbai (Photo: BloombergQuint)

Asian Paints Q1 Results: Brokerages Raise Price Targets; Shares Fall

Analysts raised target prices for Asian Paints Ltd. on account of improving demand and market share gains even as concerns over rising input costs remain.

India’s largest paintmaker saw its profit and revenue fall sequentially in the quarter ended June but meet the consensus estimates of analysts tracked by Bloomberg. Its margin also contracted even as the company hiked prices to offset raw material inflation.

Amit Syngle, managing director and chief executive officer at Asian Paints, however, said the company’s domestic decorative business more than doubled its volume. “The business registered strong CAGR in value and volume in comparison with Q1FY20, which was a normal quarter.” The industrial and home improvement businesses, too, doubled revenue on last year’s low base. International businesses registered strong double-digit revenue growth.

Shares of Asian Paints fell as much as 1.88%, the most in nearly a month, to Rs 3,099 apiece. Of the 42 analysts tracking the company, 19 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 4.1%.

Also read: Asian Paints Q1 Results: Profit Falls But Meets Estimates; Margin Contracts


Here's what brokerages made of Asian Paints' Q1:

Macquarie

  • Maintains ‘outperform’ rating, raises target price to Rs 3,500 from Rs 3,400.

  • Asian Paints’ sales performance re-emphasised resilient nature of decorative demand with 5% two-year CAGR despite severe second wave.

  • Less worried about near-term margin pressure (FY22 EPS cut 8%) given Asian Paints’ willingness to hike prices and moderating input costs.

  • CAGR at 5% was aided by healthy 106% decorative volume growth (sharper recovery seen in metros/Tier-1/Tier-2 cities), doubling of industrial and home improvement sales and double-digit growth in international sales. This offset weaker-than-expected gross margin (38.4%) as price hikes fell short of input cost inflation.

  • The company shared a positive outlook on demand given four straight quarters of double-digit volume CAGR on a three-year basis.

  • Asian Paints took 3% price hikes in May/June and another 1% in July to offset input pressures and is willing to take more hikes if required.

  • Further, some key input costs are showing signs of softening. Also, international margins should expand as Asian markets open up and more price hikes are taken.

  • Remains less concerned about inflation, given price hikes taken, moderation in costs of some inputs and industry history of maintaining margins through inflation cycles. This along with a bullish demand outlook enhances comfort in near-term EPS.

Ambit Capital

  • Maintains ‘sell’ rating but raises target price to Rs 2,470 from Rs 2,351.

  • Asian Paints is sustaining its healthy volume and revenue run rate, but does not translate to Ebitda or net profit owing to severe gross margin compression.

  • For FY22, increases revenue by 5%, but cuts PAT by 1%.

  • However, looking at potential scale-up of adjacencies (especially waterproofing), the brokerage increases long-term growth rates by around 100 basis points.

  • Asian Paints has over a period of time expanded its product repertoire from paints to other categories, such as home décor, waterproofing, adhesives, inorganic entry into kitchenware, bathroom fitting, wall tiles, etc. Strategy to scale up these categories will be asset light, at least initially. Thus, absolute capex increase is not likely to be beyond 20% of incremental revenue vs ~33% of incremental revenue seen over FY18-21.

Nomura

  • Maintains ‘neutral’ rating, raises target price to Rs 3,300 from Rs 2,885.

  • Strong demand was driven by economy and luxury paints (mid/premium paints seeing some down-trading); exterior paints doing better than interior (but now recovering well) due to the second wave; and tier-1,2 markets growing faster than tier-3,4 on a low base; projects business continuing to do well; and strong performance in waterproofing and ancillary businesses

  • Management maintains its positive demand outlook aided by deferred demand from Q1, good monsoons and a longer Diwali/festive season in September-October.

  • “While we expected margin pressure to be transient, margins will remain compressed in the near term as pricing trails commodity inflation, and medium-term margins will be range-bound given Grasim’s foray in paints.”

Nirmal Bang

  • Maintains ‘accumulate’ stance, raises target price to Rs 3,015 from Rs 2,580.

  • Profitability across businesses was affected due to continued inflationary pressure despite judicious price hikes.

  • Consumers may slightly downgrade from luxury to premium segment if the purchasing power is affected.

  • Even though there are near-term concerns about input cost inflation and a possibility of a third Covid wave, Asian Paints can continue to deliver strong earnings growth.

  • The current utilisation level is 70-75% and since the company does not require any major capex for the next couple of years, the return ratios will improve.

IDBI Capital

  • Maintains ‘sell’ rating with a target price of Rs 2,776, implying a potential downside of 12%.

  • Business recovery in international market continues to remain strong in Asia and Middle East, while Africa business was impacted by rising inflation.

  • Asian Paints will push waterproofing products across international market to drive top line growth.

  • Input cost inflation continues to remain benign.

  • Management doesn't expect quick relief in the short term. But strong revenue growth momentum should drive operating leverage benefits.

Motilal Oswal

  • Maintains ‘neutral’ rating, raises target price to Rs 3,070, still implying a potential downside of 3%.

  • Material costs were up 8-10% in Q4FY21 and a further 13-15% in Q1FY22. The management expects material costs to sustain at these levels.

  • As a result of sustained high material cost pressures and gradual price hikes, the management is targeting Ebitda margin in the 19-21% range.

  • Higher raw material inflation will continue to put pressure on margin, while a continued weak mix will chip away at double-digit sales forecast upgrade.

  • Asian Paints has shown remarkable resilience, with sales rebounding sharply after tough periods, a testament to the strength of the business franchise. This is even more impressive considering the discretionary nature of the business.

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