Buy Asian Paints Ltd For Target Rs 3,305 by Geojit Financial Services Ltd
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Weak demand impacted Q1FY25
APNT reported a de-growth in revenue to Rs 8,970cr, -2.3% YoY in Q1FY25 due to weak demand on account of the general election and severe heat waves. Consequently, volume growth declined to 7% YoY and value growth decreased by 3% YoY, impacted by price cuts and inferior product mixes. The management stated that there are early signs of recovery in the rural market in the month of June, and it is expected to accelerate further due to the progress in the monsoon, government spending, and the upcoming festive season. The new products contribute ~12% to overall revenue, while the economy emulsion paint Neo Bharat Latex paint shows good pickup across markets. The kitchen and bath fitting business revenue saw some green shoots, which grew by ~5% and ~10%, respectively.
Price hikes and festive demand to aid margin
The recent price cut and inferior product mix had impacted the gross margin, which declined by 40bps YoY to 42.5%. The other expenses increased by 14% YoY due to higher promotional activity, and employee costs increased by 24% YoY owing to a reversal of Rs 40.7cr due to a revision in the sick leave policy of certain classes of employees, which dragged the EBITDA margin to 18.9% (a fall of 422bps YoY). In July, APNY took a 1% price hike, and we expect more price hikes in the coming quarters to mitigate the cost pressure. The management maintains EBITDA margin guidance in the range of 18% to 20% in the medium term. During the quarter, reported PAT declined by ~25% YoY to Rs 1,187cr.
Key con-call highlights
* The installed capacity at the Mysuru plant has increased from 3lakh KL PA to 6lakh KL PA.
* APNT expect double digit volume growth in Q2FY25 due to festive demand and higher spending by government .
Valuations
We expect double digit volume in Q2FY25 due to deferred demand from the previous quarter and revival in rural demand. APNT is trading at a P/E of 53x which is at a discount of 14% to its 3yr avg. Due to comfort in valuation and positive long term outlook, we revise our rating to BUY with a TP of Rs. 3,305, based on a P/E of 50x on FY26E EPS.
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SEBI Registration Number: INH200000345
