CLSA maintains our Outperform rating on Asian Paints and Rs 2285 target price. Management sees a Q2 demand recovery in the economy, premium and some luxury products with a strong response to its ‘safe painting’ services driven by the festive season and pent-up demand sustaining it in a normal setting. With the vision of empowering customers to create their dream homes, it is looking to address the wider in-between wall needs. At the same time, its focus is also on scaling-up its bath and kitchen offerings.

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Demand outlook remains promising and growth momentum to stand:

Asian Paints management reported that most of the growth came from tier 2-4 cities. With an increased focus on the economy segment, where margins are similar to different portfolio products, management expects rural to do some of the heavy lifting given a good monsoon and it is hopeful that the upcoming marriage season could lead to a further spurt in the demand.

Looking at wider home décor needs & also looking to scale-up kitchen and bath:

Asian Paints has gradually expanded from paint to services and now the lightning, furnishing and furniture segments. Management is looking to address the in between wall needs, while paints continues to be its core. The attempt is to provide a holistic experience to consumers addressing all their decoration needs. With AP homes, it aims to transform dealers from a product shop to a product service station. Under AP homes, Asian Paints train contractors, enables 3D previews for consumers and provides execution services. It has 14 shops in operation now. Management will look to improve its services portfolio (bath fittings, waterproofing etc.) capabilities and scale-up both the kitchen and bath segment.

Strong dealer relationships and supply chain capabilities are key strengths:

Management aims to strengthen its relationship with its 60,000+ active dealer community by continuously working on reducing dealer inventory to boost dealer ROIs by forecasting demand accurately and ensuring the fast delivery of materials leveraging data analytics. By communicating effectively, extending credit lines and sanitizing dealer shops and it has been able to assure the dealer community.

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Expecting stable gross margin profile:

Asian Paints gross margins were supported by stable input material prices and efforts to drive sourcing and formulation efficiency. Management noted part of its savings in overhead is viable, but the variable component will reverse with scale.