On industry interaction and channel checks, we expect Asian Paints' demand to rise, vs. weak Q3 volumes. Lower input prices would help margins expand from Q4. While we lower our FY23e/24e/FY25e 8%/6%/6% to factor in weak Q3 volumes and higher capex, we are optimistic of its earnings (~17% CAGR) over FY23-25. The recent stock-price fall provides an entry, driving our upgrade to a Buy at TP of Rs3,260 (55xFY25e EPS) vs. Rs3,570 (60x Sep'24e EPS) earlier.
Pricing discipline unlikely to be broken with new entrant. Despite new entries (JSW Paints), no price wars have been seen, a concern among the investor community. With the Grasim entry, we don't expect this to change as demand is expected to be steady and industry distribution is unlikely to accept price cut, which could curb all-round profitability.
Demand to improve post Q3 blip; channel check suggest upswing. The prolonged monsoon and early festivities curtailed Q3 volume growth, which rebounded in Dec and is expected to be healthy, per management. Our channel checks suggest some upswing in demand, post-Nov. But certain pockets saw keen competition from new dealers.
Margins could surprise. Past management guidance had been conservative. It suggested a lower 17-18% optimal EBITDA margin over FY16-FY17 but delivered ~20%. Thus, the current 17-20% margin guidance could be overshot, given lower input prices and cost-efficiencies.
Rich valuations a constraint; stock-price drop offers entry. We acknowledge the rich valuations (53x FY24e EPS), but forecast 17% earnings CAGR over FY23-25 aided by margin gain. Paints companies have been the most consistent value creators over the last 3/5/10 years. This would continue, aided by steady earnings growth. Risks: Sharp rise in input costs; entrants disrupting the industry, capturing considerable market share.
Link to the report
Shares of Asian Paints Limited was last trading in BSE at Rs. 2829.40 as compared to the previous close of Rs. 2746.25. The total number of shares traded during the day was 109818 in over 15337 trades.
The stock hit an intraday high of Rs. 2865.00 and intraday low of 2768.60. The net turnover during the day was Rs. 311036242.00. |
