Asian Paints delivers solid Q4 but the road ahead is tough

Asian Paints shares were trading 0.6 per cent higher at Rs 3,158.05 apiece on the BSE in morning trade on May 12, 2023, a day after the paints company reported its March quarter numbers. The company's both top and bottom lines grew in double-digit year-on-year (YoY) during the period. The net profit grew 44 per cent YoY to Rs 1,258.4 crore while the company’s revenue from operations jumped more than 11 per cent to Rs 8,787.3 crore against Rs 7,892.7 crore logged in the year-ago quarter. Zee Business Research desk had estimated the paint company to report Rs 1,153 crore profit and Rs 8,810 crore revenue during the March quarter. 

The Q4 performance was, indeed, better than expected; however, the upside on the stock looks capped at the current valuations, note analysts. The imminent competition from Grasim and JSW Paints leaves little scope for further re-rating of the stock, they note.

ICICI Securities says, "We model revenue, earning compound annual growth rate (CAGR) of 13.6 per cent, 13.8 per cent, respectively, over FY23-25E. While we maintain our positive stance on Asian Paints, we believe the upside on the stock is capped at the current valuation given the limited expansion in EBITDA margin due to increasing competition. We increase our PAT estimate upwards by nearly 5 per cent and 6 per cent for FY24E and FY25E." The brokerage values the stock at 60xFY25E EPS with a revised target price of Rs 3,425/share. It has a "Hold" rating on the stock. 

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Echoing similar views, analysts at Prabhudas Lilladher say they see little scope for further re-rating given likely aggression from Grasim & JSW in Paints and impending capex plans. "We value stock on discounted cash flow (DCF) and assign a target price of Rs 3,360 (Rs 3,160 earlier). We expect back-ended returns given the emerging competition and valuations of 51.1xFY25.  Accumulate for long-term gains only," the brokerage said in its earnings review report. Discounted cash flow (DCF) refers to a valuation method that estimates the value of an investment using its expected future cash flows, as per Investopedia.

Meanwhile, Preeyam Tolia, Senior Research Analyst at Axis Securities, says, "Asian Paints' result was strong, led by double-digit volume growth. However, the EBITDA margins saw a significant beat, primarily led by better-than-expected gross margin expansion due to lower raw material prices. Going forward, we could see margin recovery due to lower raw material prices and cost-efficiency measures. However, competition in the paint sector will be key to watch out for, as earnings will likely remain volatile."

Among global brokerages, both CLSA and Citi have maintained "Sell" on the stock while JP Morgan and Goldman Sachs are "Neutral".