Asian Paints Expresses Concern Over Outlook After Steady Quarter

Asian Paints Ltd. expressed concern over its outlook for the next few quarters, stemming from a weak macro environment, monsoon trends and a possibly poor festive season even as its quarterly results boosted investor confidence.

Demand will be driven by overall economic growth and normalisation of monsoon—whose progress has been average so far—in the future, the company told analysts in a post-earnings interaction. The economy, it said, seems to be in the middle of a slowdown as shown by gross domestic product numbers.

The paint maker’s profit and revenue for the quarter ended June rose and beat estimates, while margin expanded 130 basis points over last year. It said high-volume growth was led by an aggressive channel push at the dealer level, a favourable base quarter and market share gains as implementation of goods and services tax starts affecting the unorganised sector. The company also said demand growth in smaller towns and rural markets was higher than in metro cities in the three-month period.

That boosted investor confidence in the stock, with most brokerages raising their target prices citing strong volume growth in the paint maker’s decorative business. Four out of six analysts tracking the company hiked their target prices, while all of them maintained their ratings on its stock.

The “painting window”—or the period after monsoons and prior to the onset of festive season when the activity is taken up in full swing—is relatively shorter this fiscal compared with last year, which can affect domestic decorative demand, the company said.

KBS Anand, the paint maker’s managing director and chief executive officer, was quoted as saying in the post-earnings statement that the automotive coatings and industrial coatings businesses were affected by the severe slowdown in the automobile industry. He said a slowdown in new construction activity has some impact on its home improvement business—one of the company’s better-performing verticals. Anand also highlighted caution in businesses in Sri Lanka and Egypt.

Here’s what brokerages made of Asian Paints’ Q1 results 2019-20:

CLSA

• Maintain ‘Sell’, but hikes target price to Rs 1,300 from Rs 1,285.
• Outstanding Q1 results, 15 percent volume growth comes as big positive surprise.
• Management commentary cautious due to weak macro and deficient rainfall.
• Concerned by demand environment and believe paint category is vulnerable.

UBS

• Maintains ‘Buy’ with a target price of Rs 1,750.
• Execution and consumer centricity delivers the goods.
• Volume growth at 16-17 percent was much higher than estimates.
• Deepening distribution, new facilities and expansion in East India have contributed.

Macquarie Group

• Maintains ‘Outperform’, hikes target price to Rs 1,530 from Rs 1,470.
• Volume growth strong at 15 percent in a challenging environment.
• Margins aided by Indian Accounting Standards-116 and lower other expenses.
• Expect firm to remain aggressive in channel push in the near future.

BofA Securities

• Maintains ‘Buy’ and hikes target price to Rs 1,650 from Rs 1,550.
• June quarter volume growth is much ahead of the estimates.
• Strong earnings growth to sustain led by demand growth and benign input costs.
• Strong growth to support premium valuations.

Morgan Stanley

• Maintains ‘Overweight’ with target point of Rs 1,600.
• Q1 results beat estimates, expect 16 percent domestic volume growth.
• Strong volume growth reflects market share gains from unorganised sector.

Credit Suisse

• Maintains ‘Neutral’, but hikes target price to Rs 1,550 from Rs 1,425.
• Big beat on growth and margins partially aided by channel push.
• Strong volume growth is despite the macro slowdown.
• Expect volume growth to be around 11 percent for FY20.