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Tepid quarter: Input prices to soften further...

Asian Paints (APNT), is engaged in the business of manufacturing, selling and distribution of paints and related products for home décor. APNT is the market leader in the Indian paint manufacturing industry.

* APNT’s Q3FY23 performance was impacted with flat volume/revenue growth due to extended monsoon and shorter Diwali season.

* However, volume recorded double digit in December, the management expects the trend to sustain in Q4.

* Gross margin improved by 181bps YoY to 38.6% in Q3FY23 supported by deflation in raw material prices. EBITDA margin improved by 57bps YoY to 18.7%.

* Input prices expected to soften further in Q4, will further improve margin.

* The stock has corrected 22% from the recent high, we expect most of the headwinds have factored in the price. We,therefore, reiterate Buy rating on the stock with a TP to Rs. 3,115, based on a P/E of 50x on FY25E EPS

Muted volume growth

APNT’s Q3FY23 performance was below expectation due to muted volume/ revenue growth on account of extended monsoon, shorter Diwali season and a high base of last year. The top-line grew by 1.3% YoY to Rs8,637cr in Q3FY23. Good monsoon coupled with expected increase in MSP augurs well for Tier 3 & 4 cities. Industrial paint grew by 24% YoY led by strong growth in auto and general industrial segments. Home décor business witnessed slowdown with bath and kitchen business declining by 11% and 7% respectively. The management expects demand condition to improve further with high single digit and low double-digit growth in volumes and recent down trend in inflation

Margins to normalize

During the quarter, gross margin improved by 181bps YoY to 38.6%, supported by 7% YoY fall in input prices. The EBITDA margin expanded by 57bps YoY to 18.7 % during the quarter. We expect raw material prices to soften further, and margin is expected to normalize going ahead. The management expects EBITDA margin to be in the range of 17% to 20%.

Key Con call highlights 

* The current capacity utilization stands at ~75% and the company is expanding its capacity from 17 lac KL to 26.7 lac KL per annum with an investment of Rs5,400 cr.

* The company added 10,000 retail points in 9MFY23. The company’s total retail touch points now stand at 1,55,000.

Valuations

We reduce FY23/FY24 earnings estimate by 12%/3% respectively due to near term slowdown in demand and inferior product mix. The stock has corrected by 22% from the recent high, we expect most of the headwinds have factored in the price. We, therefore, reiterate Buy rating on the stock with a TP of Rs 3,115, based on a P/E of 50x on FY25E EPS.

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