Asian Paints (APNT) saw strong growth despite high base, price hikes in Q3FY22. It delivered volume/value growth of +18%/+26% y-o-y (2-year CAGRs of +25%), which was above our forecasts and Bloomberg consensus estimates. The strong growth was on a high-base (pent-up demand) quarter, and on the back of unprecedented price increases taken during the quarter. As the price hikes take full effect in Q4FY22, management does not expect any meaningful impact on volume growth, given the price-inelastic characteristic of the industry.
Growth was driven by higher demand in Metros, Tier-1 and 2 markets, in premium/luxury products and in projects. Management highlighted share gains from organised and unorganised players. Industrial non-auto demand was also robust (+33%y-o-y), while the auto segment (+5% y-o-y) was impacted by chip shortages at OEM customers. Demand slowed in the second half of December and early January due to the third pandemic wave; APNT expects demand deferment to Feb-Mar of Q4FY22 (in line with past trends).

Margins to improve sequentially
Gross margins remained under pressure y-o-y in Q3 (-830bp y-o-y to 36.8%) while improving sequentially (+210bp q-o-q). Despite sharp price increases effected in November/December (15%/5% m-o-m), we note a significant share of sales happened at old prices in Q3; hence the benefit of price hikes was not fully realised. While input-cost inflation can remain elevated in the short-term, as the hikes take full effect in Q4, we expect GPM pressure to abate, leading to q-o-q margin improvement.
Our view
We expect strong sales growth to continue, aided by share gains in new/ niche categories with specialised higher margin products, as APNT: (i) aggressively expands its reach to new markets; and (ii) takes price increases to mitigate sharp input-cost inflation. We expect margin pressure to abate on the back of price increases (supported by inelastic volume growth), giving way to robust margin expansion. We lower FY22F EPS by 3% to factor in the Q3 margin miss and raise FY23F/24F EPS by 4%/4% to factor in strong volume /value growth and margin improvement.
Maintain Buy and raise TP to Rs 3,875; APNT trades at 67x Mar-23F EPS
We forecast FY22-24F EPS CAGR of c.33%. We roll forward our valuation to Mar-24F EPS (from Dec-23F) and value APNT at a P/E of 65x (unchanged), at a c.5% premium to its past three-year average multiple, as we expect continued share gains and strong volume growth. We arrive at a TP of Rs 3,875 (vs Rs 3,550 previously). We maintain our Buy rating. Key risk: slower volume growth.