Asian paints share price: Sharekhan maintains Buy rating with price target of Rs 3000

Sharekhan says that Asian Paints registered strong volume led performance in Q4FY2021 with revenues growing by 44% to Rs 6651 cr and PAT growing by 81% to Rs 870 cr. Strong volume growth momentum was sustained in the decorative paints business for the third consecutive quarter. It stood at 48% in Q4 as against street expectations of 30-35%. Further, on a normalised basis it stood at 30%. This was mainly led by strong demand that sustained in tier 2/3/4 towns while strong resurgence was seen in the metros and tier-1 markets. Also the recovery in the real estate cycle helped in good recovery in the tier1/ metros during the quarter.

Sharekhan explains that Revenue growth in the decorative paints business stood at 46% and the gap between volume and value reduced to 2% from 5-6% in earlier quarters mainly on account improvement in mix due to recovery in urban markets, which saw good demand for premium products. International business registered 24% growth in Q4 with double digit growth in most of the key geographies. Home improvement business revenues grew by 2x in Q4 to Rs 227 cr, driven by an 84% growth in the kitchen business to Rs 95 cr and 84% growth in the bath business to Rs 93 cr largely led by uptick in the project business and offering high value services under one roof.

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Sharekhan added that overall, despite a loss in April 2020 due to the nationwide lockdown, Asian Paints registered a high single revenue growth of 8% (with volume growth of 13% in decorative paints) on the back of strong sequential recovery. April 2021 started on good note with momentum sustained both in rural and urban markets. However localised lockdowns in key states due to spread of virus will put a halt to strong growth momentum in the coming months. In addition, the spread of virus has deepened in rural markets, which might result in underperformance in the short term.

Asian Paints management is confident of seeing a strong recovery once the second wave minimises in most of the markets. Third consecutive year of expected better monsoon and government focus on improving rural prospects will lead to a strong recovery in rural markets. On the other hand, occasion-led/pent-up demand would aid a recovery in urban markets (likely in Q3FY2022 prior to festive season), highlights Sharekhan.

Further, a steady volume growth momentum may be maintained for the medium term, which will be driven by:

1) strong growth in Tier-3 & -4 markets (as consumer’s shifting to branded products and upgrading to emulsions from distempers
2) expansion in product portfolio that create more options for urban consumers to improve their homes
3) waterproofing and undercoats is gaining strong traction due to lower quality of construction

Asian Paints Key positives:

Volume growth of the decorative paints business stood at 48% (on normal base was 30%)
Home improvement business grew by 2x in Q4; auto business continues to see sequential improvement
Losses in the kitchen business and Bath business reduced substantially yoy due to an increase in the scale of business in FY2021
The company paid a dividend of Rs. 17.5 per share for FY2021 (dividend payout of 53%)

Asian Paints Key negatives:

Significant increase in raw material prices (including crude derivatives) led to 266 bps YoY and 190 bps qoq