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Strong demand momentum despite price hikes, margins getting back on track; reiterate BUY

Result Synopsis

Asian Paints (APNT) once again delivered a strong performance in a challenging environment with 8% volume growth on base of 48% volume growth despite a soft performance in January. Value growth stood at 21%; higher value growth was on account of price increases partially offset by deterioration in product mix. Growth was uniform for the company with strongest growth in West and East markets. The company is witnessing strong double‐digit growth in Tier 1 and 2 cities led by luxury and premium range, while tier 3 and 4 markets delivering growth in economy range. APNT has been aggressive in launching new products which now contribute 14% to the revenue. It is also aggressively expanding its home décor foray with extended offering across the product categories like kitchen, bath, sanitary ware, lighting, tiles, flooring, furniture, furnishings, doors and windows. APNT is targeting to nearly double its Beautiful Home stores to 70 in FY23. On international front, company saw growth from Asia followed by Middle east while Africa, Ethiopia and Srilanka are seeing impact of currency devaluation. Company is also aggressively expanding its distribution touch points and has added 15,000 retail points in FY22

Considering strong demand momentum despite sharp price hikes, under penetration of paints and opportunities in new segments and services, we feel demand for paints is expected to remain robust in medium term and APNT is in a sweet spot to capture a major chunk of incremental demand.Also, its foray into home décorto broaden its product and service offerings to a large consumer base is expected to make Asian a go to brand in the broader home improvement space. Its pricing power, distribution prowess and balance sheet strength should enable it to ward of any competition that comes in it way. Considering the above, we continue to remain upbeat on the stock and feel premium valuations are justified. We expect FY22‐24E Revenue/EBITDA/PAT CAGR of 18%/34%/39% respectively and maintain our BUY rating with TP of Rs3,708 valuing it at 60x FY24 EPS.

Result Highlights

* Quarter summary – Paints business saw 8% volume growth despite high base of 48% and value growth of 21% on back of price increase and change in business mix. Its home improvement business grew at 25% yoy.  

* Margin – Gross margin at 38.7% contracted 450bps yoy; however, it showed improvement of 190bps on sequential basis. Price increases of about 24‐25% on account of higher commodity prices have resulted in sequential improvement in gross margins.

* Distribution expansion – Company is aggressively expanding its distribution in suburbs of big cities and tier 3 and 4 markets and have added 15,000 retail points to expand reach to 145,000 retail touch points. It is also targeting to double its Beautiful Home stores to 70 in FY23.

* International business – International business has remained mixed during the quarter with growth coming from Asia and Middle east; while Africa continues to remain subdued. Sri‐Lanka, Ethiopia and Egypt market saw impact of currency devaluation resulting in PBT decline for international business.

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