Q1FY24 Review: Asian Paints: In line with estimates

26 Jul 2023 , 01:18 PM

Asian Paints (APNT) reported a broadly in-line performance at Ebitda level, with sales/Ebitda up 7%/36%. Management reiterated its medium-term Ebitda margin guidance of 18-20%, despite clocking 20%+ Ebitda margin in recent quarters. Analysts of IIFL Capital Services forecast 17% EPS Cagr over FY23-26. The stock is trading at 55x FY25 EPS and does not adequately factor in the upcoming risk of Grasim launch in their view. Maintain REDUCE rating with a TP of Rs3,200.

Broadly in line with estimates: 

APNT reported a broadly in-line performance at Ebitda level – sales up 7%, Ebitda up 36% (Ebitda margin at 22.7% excluding one-offs), driven by a 10% decorative volume growth and deflation in raw material prices (gross margin expansion of 523bpsYoY). Project business grew faster than Retail, Economy and premium end grew faster than luxury; rural growth was at par with urban. Lower depreciation costs resulted in an 8% beat at PAT level (growth of 49%).

Guidance of margin band retained at 18-20%: 

With raw material prices softening for 3 consecutive quarters (translating into ~11% YoY deflation), Ebitda margin improved to 22.7% (ex one-off) – up 458bps YoY and 150bps QoQ. With recent firming up in crude prices, management would refrain from taking price hikes in the immediate term and wait for clear trends to emerge before taking any pricing actions. It retained guidance of 18-20% Ebitda margin for the medium term, even though the Ebitda margin in the past 2 quarters has been comfortably above 20%.

Reiterate cautious view: 

With Diwali being in mid-November, there is a longer retail season (typically post monsoon and till Diwali) in FY24, which should drive an acceleration in growth in H2.  Analysts of IIFL Capital Services factor in a 10%/13% sales growth and 22%/21% Ebitda margin in FY24/25. Analysts of IIFL Capital Services increase FY24/25 EPS by 8%/2%, on account of 167bps/57bps Ebitda margin upgrade. Valuation is rich (the stock is trading at 55x FY25 EPS) and does not adequately factor in the risk of impending rise in competitive intensity (Grasim launch expected towards the end of FY24). Maintain REDUCE with a target price of Rs3,200.