Asian Paints Shares Gain On Price Hike Plan; Analysts See Pressure On Margin Easing

Shares of Asian Paints Ltd. gained the most in 14 weeks after brokerages, citing dealer checks, said the nation's largest paintmaker is set to take a broad-based price hike across its portfolio to counter rising raw material costs.

The hike is expected to be in the range of 7-9% and will be effective across Asian Paints' portfolio from Nov. 12, according to the brokerages.

Shares of Asian Paints gained as much as 5.9% to Rs 3,145 apiece in morning trading on Wednesday. The scrip's trading volume was five times the average for this time of the day, and it was the best performer among peers in early trade.

According to Macquarie, the company is expected to increase prices by:

• Rs 3 a litre across entry-level distempers.

• Rs 12 per litre across enamels.

• Rs 35-45 per litre across the premium Royale and Ultima brands.

• Rs 15–25 per litre price in the waterproofing segment.

• Rs 25–50 per litre for wood coatings.

Analysts expect the price hike to significantly mitigate high input-cost inflation which impacted second quarter margins.

Asian Paints didn't immediately respond BloombergQuint's emailed queries.

The planned price increase is higher than its cumulative hike of around 7.5% over the past six months.

The company's management attributed its below-expectation margins in the second quarter to "steep inflation seen in raw material prices". After the earnings, Amit Syngle, managing director and chief executive officer at Asian Paints, in an interview with BloombergQuint, had indicated further price hikes to mitigate the impact of "persistently high inflation".

Of the 41 analysts tracking the company, 18 recommend 'buy', eight suggest 'hold' and 14 have a 'sell' call. The average of 12-month price targets compiled by Bloomberg implies a downside of 1.5%.

Here's what brokerages made of Asian Paints' price hike:

Nomura

• Upgrades to 'buy' rating, raises target price from Rs 3,150 to Rs 3,550 apiece, implying a potential upside of 19.5%.

• The price increase significantly mitigates high input-cost inflation which significantly impacted second quarter margins.

• Asian Paints had a cost increase of 21% in the first half, while it took a price increase of only 7.5%. With this sharp price increase, Nomura expects Asian Paints' margin gap to be materially bridged, and will require only 5% additional price increase to fully bridge the gap.

• While smaller players had already taken double-digit price increases earlier, Nomura expects similar or higher price hikes from competitors following Asian Paints' hike. We see it maintaining its competitive lead versus smaller players with lesser financial resources to absorb inflation.

• Key risk remains low volume growth.

• Also likes Kansai Nerolac Ltd. given its relatively reasonable valuations, and expect it to benefit from this price hike.

• Sees it as a key beneficiary of any demand pickup in industrial/auto segments.

Macquarie

• Maintains 'outperform' rating and target price of Rs 3,900, implying a potential upside of 30.7%.

• Price hikes reaffirm Asian Paints' commentary to take Ebitda margin back to 18-20% level. Further, the quantum of the hikes should help offset a large portion of the input cost pressure. Also bolsters Macquarie's view that margin pressure is near term in nature.

• Sees limited merit in the argument that the entry of Grasim Industries Ltd. will weigh on near-term margins. "Our checks suggest that Grasim’s plants are in the initial stages of construction and should be ready by July or September next year making it too early for any pricing-based competition to occur."

• The bullish demand environment in decorative segment along with pricing pressures in industrial (which limit the ability of peers to move ad spend to sales back to earlier highs) should benefit Asian Paints.

• Asian Paints remains one of our top picks in the consumer space.