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Muted QoQ performance; but long term growth prospects remains intact

Strong YoY revenue while QoQ a miss:

Asian paints posted revenue of Rs 8,457.6cr with growth of 19.2% YoY and volume growth of 10% YoY. Domestic decorative segment largest contributor to revenue drove the growth by posting 17.7% volume growth in Q2FY23. T3 & T4 cities are growing better than T1 & T2 which means rural is better placed in terms of demand as compared to urban. On the flip side, QoQ revenue de-grew by 1.7% as demand was impacted by extended monsoon.

Margins remained muted QoQ while YoY saw improvement:

Gross/EBITDA/PAT de-grew by 6.9%/21.1%/22.4% QoQ while margins declined by 197bps/356bps/253bps QoQ. The decline can be largely attributed to elevated raw material cost inflation plus low product mix in Q2. However to offset the impact the company took a series of price hikes. Comparing YoY results, Gross/EBITDA/PAT seen a growth of 22.6%/35.7%/32.8% YoY and margins improved by 98bps/177bps/98bps YoY on the back of strong top-line performance (healthy volume growth) and better realizations.

Home Décor business continued to gain traction:

Asian paints home décor business posted double digit growth wherein its bath & fitting business grew by 10.9% YoY driven by premium product range. Further, its kitchen business grew by 14.2% YoY driven by addition of kitchen solutions such as beautiful home stores and beautiful homes services. Both the businesses profits were impacted by raw material inflation.

International Business witnessed healthy growth:

Despite headwinds in international markets, Asian paints international business registered a good double digit revenue growth of 15.3% YoY. The growth was driven by price increases and currency movements across countries it is present. At PBT level, this segment posted profit as compared to loss last year on the back of cost efficiency measures.

Industrial Business picking-up pace:

Pickup in auto sales YoY as well as higher demand for Protective & Powder Coatings helped its industrial business post strong growth of 25% YoY. Further, industrial segment profit saw improvement led by cost optimization coupled with better price realizations and price increase.

Outlook & Valuation:

Asian paints will continue to maintain its leadership position driven by strong sector demand, new product launches across segments, pickup in home décor and industrial segment and growth from new tie-up’s and JV. In addition, focus on premium products and product mix along with easing raw material cost and price hikes will aid in reviving margins from Q3FY23 onwards. On a financial front, we have estimated its revenue/EBITDA/PAT to grow at 19.9%/22.9%/27.8% CAGR over FY22-24E. We remain positive on the long term growth prospects of Asian Paints and have maintained a Buy rating with a target price of Rs 3,952.

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