Asian Paints share price: Sharekhan maintains Buy on Asian Paints with an unchanged price target of Rs 3000

Asian Paints has underperformed the broader indices with 15% correction in its stock price since its high in January 2021 compared to a 2% decline in the Nifty Consumption index and a 3% increase in the NSE Nifty. The stock is currently trading at 53x its FY2023E earnings. The correction provides a good entry opportunity in the quality consumption stock as it has a strong balance sheet and long-term growth prospects are intact. Sharekhan maintains Buy on Asian Paints with an unchanged price target of Rs 3000. Asian Paints share price today is Rs 2444, trading flat.

Asian Paints' focus on transforming itself from surface improvement to home improvement player improves its revenue streams in the long run. Paint consumption would also rise, as villages transform into tier 3/4 towns (50% of the paint market in India). The company has recently forayed into designer tiles after entering into home lighting and furniture space in Q2. These launches are currently in the test marketing phase and will be scaled up after the analysis performance in various markets. This along with a reducing painting cycle, upgradation to premium paints (especially in urban markets) and a shift from unorganised to organised paints would help the company to achieve double-digit revenue growth in the medium term.

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After lull Q1 FY21 (affected by lockdown), Asian Paints posted sustained double-digit volume growth (Q2FY21 - 11%; Q3FY21 - 33%) in its decorative paints business led by a strong recovery in the rural demand giving boost to sales of products at the bottom of the pyramid. Q3 also saw a recovery in urban markets with painting/home improvement gained momentum post reduction in the cases coupled with surge in the real estate and construction activities (25% of the overall decorative paints sales in India).

Asian Paints management has indicated that demand in the rural markets and tier III towns have remained buoyant in January and February. Sharekhan's interaction with engineering / construction companies suggest that the water-proofing/re-painting projects, which were stalled have gained momentum since December as the same has to be completed before the next monsoon. This along with resurgence in real estate demand would help Asian Paints post yet another quarter of strong double digit volume growth in Q4FY2021 (also supported by a low base of Q4FY2020; volume growth stood at low single digit). The crude prices have seen a significant surge and touched $70 per barrel before falling to $60 per barrel in the last few days. The sharp rise in crude oil prices would result in consequential increase in the crude derivatives prices (forms 30% of paints input prices).

Thus, Sharekhan expects gross margins to come under pressure in Q4 as the company is yet to take any price hike in the portfolio. Asian Paints management will mitigate input cost pressures through improving mix and efficiencies in the near term. Further, high volume growth would result in better operating leverage which will help in further mitigating input cost pressures. However any further correction in the crude prices from the recent fall augurs well for paint companies as it will ease out pressure on the gross margins in the coming quarters.

Asian Paints Key Risks:

Any slowdown in the demand environment or significant spike in key input prices would act as a key risk to Asian Paints earnings estimates