Asian paints share price: Sharekhan revises price target to Rs 3000 after Q3 results

Asian Paints registered healthy all-round performance in Q3 FY21. Revenue grew by 25.2%, operating profit margin (OPM) expanded by 439 bps to 26.3% (led by higher gross margin and lower fixed cost), and PAT grew by 62%. Asian Paints domestic decorative paints business registered robust volume growth of 33% compared to 11% volume growth in Q2 FY21. This was aided by strong pent-up demand, led by deferment of re-panting activities coupled with strong festive and occasional demand.

Asian Paints Growth momentum in tier 3 and 4 towns continued due to sustained upgrade from unorganised to organised players. Asian Paints stock is currently trading at 59x its FY2023E EPS. Sharekhan maintains Buy recommendation on the stock with a revised price target of Rs 3000 (valuing the stock at 65x its FY2023E EPS).

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The highlight of the quarter for Asian Paints was strong recovery in tier 1 and metro towns, which registered robust double-digit volume growth. Recovery in re-painting activities and increase in institutional due to revival in the real estate and construction sectors led to strong growth in tier 1 cities/metros. Strong uptick in passenger vehicles (PV) led to the original equipment manufacturer (OEM) business reporting good growth in Q3 and the industrial paints business witnessed recovery in Q3. Asian Paints Home improvement business posted 23% growth during the quarter.

Asian Paints International business grew by 20%+. Benign input prices and cost-saving initiatives aided strong 439 bps improvement in OPM to 26.3%. Sustained upgrades to better brands in tier 3/4 towns (50% of overall paints market), upgrades to premium/luxury paints in metros, and revival in the real estate market will be key growth levers in the near to medium term. The company is focusing on becoming a complete home decor play and launched 16 stores providing end-to-end home decor solutions to customers.

Asian Paints is planning to double its store count over the next two years. Though raw-material prices have gone up, stringent cost measures, better mix, and improved operating leverage would help OPM to sustain on a y-o-y basis in FY2022 and would improve in FY2023. Capacity utilisation currently stands at 60%; and hence, there are no major capital expenditure plans in the coming years.

Asian Paints - Key positives:

Volume growth of the decorative paints business stood at more than 30%+ Š
Auto paints business continues to see an uptick; industrial paints sales recovering Š
Paints business margins expanded by 508 bps; home improvement business almost witnessed breakeven at EBITDA level

Asian Paints - Key negatives: 

Raw materials started moving up with increase in crude oil prices, which will put some pressure on gross margins

Asian Paints - Key Risks:

Increased competitive pressures from large players, slowdown in the demand environment, or spike in key input prices would act as a key risk to our earnings estimates