Asian Paints Rating: Buy | Margin paints a dull shade | The Financial Express

Asian Paints Rating: Buy | Margin paints a dull shade

Extended monsoon impacted demand for exterior paints in India

Asian Paints Rating: Buy | Margin paints a dull shade
It undertook 3% price hikes in Q2FY23 to tackle inflationary pressures.

By Nuvama Research

Asian Paints (APL) reported weak Q2FY23 margins, missing consensus/our Ebitda estimates by 23%. Revenue was in line with our estimate, but missed consensus by 5%. Demand challenges from extended monsoon deferred exterior paints demand. This was partially offset by an early festive season, propelling the decorative segment to record double-digit volume growth. Home décor growth was slower as bath-fittings grew 10.9%/14.2% y-o-y. High priced inventory and product mix were instrumental in delivering disappointing margins, but H2 will likely be better. Thus, we cut our FY23e/FY24e EPS estimates by 6.8%/4.1%, rolling forward to Q3FY24e with a revised target price of Rs 3,795. Maintain ‘BUY’.

Growth drivers intact, margin pain continues
What went well: APL saw strong growth across segments with the domestic decorative segment growing double-digit in both volume and value terms despite subdued demand due to extended monsoon in July-August. APL witnessed double digit CAGR for the sixth consecutive quarter. It undertook 3% price hikes in Q2FY23 to tackle inflationary pressures.

Also Read: Axis Bank Rating: Buy | Retail engine needs to be accelerated

International business grew 15.3% y-o-y to Rs 8.1 bn despite headwinds across key markets. Similarly, Ebitda margins grew 177bp y-o-y. APL announced elaborate capex plans – setting up of VAE/VAM capacity with capex of `21 bn and entering a JV to manufacture White Cement with a capex of Rs 5.5 bn over the next three years.

What we did not like: Gross margins slipped 200bp q-o-q with continued stress from elevated raw material prices. Similarly, Ebitda margins contracted by 356bp q-o-q led by low gross margins, increase in staff costs and other expenses over this period.

Outlook and valuation
Demand growth drivers remain intact, but need to factor in the early festive season, which could affect Q3FY23 growth. We factor in the Q2FY23 miss and weaker INR to cut our FY23e/FY24e EPS estimates by 6.8%/4.1% and roll forward to arrive at a revised TP of Rs 3,795.

Q2FY23 conference call highlights:
Remains confident of gross margins returning to normal levels gradually
Domestic decorative business saw volume growth of 10% y-o-y with 3-year CAGR coming in at 17.7% in Q2FY23
Rural demand outpaced metro cities demand. Extended monsoon impacted demand for exterior paints, especially in South and West regions
Setting up a new facility for VAE and VAM production, which will reduce import dependency, enhance margins, get aggressive in adhesives.
Set up a joint venture in UAE for sourcing White Cement, with capex of Rs 5.5 b
n

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First published on: 24-10-2022 at 03:15 IST