Q2FY24 Review: Asian Paints: A disappointing quarter

27 Oct 2023 , 12:05 PM

Asian Paints (APNT) reported a disappointing quarter, in terms of the top line seeing a flat YoY value growth. This was mainly due to a festive mismatch vs Q2FY23 and sporadic rainfall witnessed during the quarter, which affected the demand sentiment. Management reiterated its medium-term Ebitda margin guidance of 18-20%, despite clocking a 20%+ Ebitda margin in the recent quarters. The stock trades at an expensive valuation of 51x FY25 EPS. The company is faced with the risk of increased competition, with the launch of “Birla Opus” by Grasim scheduled for Q4FY24. Analysts of IIFL Capital Services cut their FY24/25 EPS estimates by ~6%. Maintain REDUCE, TP of Rs3,000. 

Below estimates: 

In Q2FY24, APNT reported a flat YoY sales growth as against our estimate of 6.5%, whereas the volume growth reported was around 6%. Gross margin (GM) expanded by 764bps YoY on account of a 2% QoQ deflation in the RM prices and operational efficiencies. As a result, the Ebitda margin expanded by 573bps YoY and stood at 20.2% (IIFLe 21.9%). PAT increased by 54% as against our estimate of 76.3%. 

Return to normalcy:

Analysts of IIFL Capital Services expect the revenue growth to recover and return to the normal levels of a low mid-double digit, largely driven by volume growth. As the coming quarter marks a long festive and a wedding season, we expect the Q3/Q4FY24 sales growth to be 12%/10% respectively with the Ebitda margin at ~21.1%/21.4%. Some of the factors that will drive recovery in volume growth in the medium term are moderating inflation, increased government spending on infrastructure (especially in rural areas) and improved demand sentiment, as the fears of poor monsoon abated with a pickup in Sept.

FY24/25 EPS downgrade by ~6%: 

Analysts of IIFL Capital Services downgrade comes on the back of a poor result for Q2FY24 with sales growth remaining flat. They expect a sales cut of ~3% for FY24/25 and Ebitda margins to stand at 21.5%/20.5%.