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Muted revenue growth with volume in single digit: Asian Paints Q2FY24 revenue was flat YoY but sequentially it saw decline of 7.7% to Rs 8,478.6cr because of the weak consumer sentiments, erratic monsoon as well as festive sales shifting to the next quarter (Q3FY24). Thus, its domestic decorative sales (contributes ~82% of sales) posted flat value growth and single digit volume growth 6% YoY. Also its international business (~9.1% of sales) growth remained muted due to macro-economic challenges. On the flip side, its Automotive & industrial coating segments (~8.8% of sales) witnessed decent growth.

Healthy margin improvement continues as compared to YoY: Asian paints profits and margin as compared sequentially remained muted however strong performance was seen as compared to last year. Its gross profit increased by 21.7% YoY to Rs 3,677.1cr with margin improvement of 764bps at 43.4% Additionally, its EBITDA grew healthy by 39.8% YoY to Rs 1,716.2cr with margins at 20.2% an improvement of 573bps YoY. Furthermore, its PAT reported was Rs 1,232.4cr, up by 53.3% YoY with increase in margin by 503bps YoY to 14.5%. Overall strong improvement on profit & margin as compared to last year was due to moderation in raw material cost by 11.7% YoY, better sourcing capabilities as well as operating efficiency managed by the company.

Mixed performance of Home Décor: The company’s Home décor segment performance was mixed with White Teak and Weatherseal gaining strength and good traction however muted performance from bath & kitchen segment. White Teak saw healthy growth of 8.5% YoY to Rs 26.1cr and Weatherseal sales doubled to Rs 12.6cr because of high demand, increase in store network and synergies with the company. Further, these acquisitions are gaining synergies with the company. Besides, its Bath and kitchen segment de-grew by 20%/17.8% YoY to Rs 81.4cr/96.8cr due to weak consumer sentiments.

Decent performance of Industrial segment: The company’s PPGAP/APPPG business grew by 5.6% YoY/11.4% YoY to Rs 495.3cr/250.6cr led by improving demand from Auto OEM as well as strong growth in Protective & Powder coating segments. Further, both the segment PBT margin improved by 347bps/524bps YoY to 15.6%/11.3% in Q2FY24 led by easing of raw material prices, customer and sales mix.

Growth in International market remains impacted: Asian Paints international business witnessed a decline of 3.9% YoY in INR terms to Rs 775cr and in constant currency it grew by 1.9%. The decline can be attributed to subdued performance of Asian markets with Bangladesh (macro uncertainties), Egypt (currency devaluation) and Nepal (Liquidity crunch) continuing to remain impacted. The Middle East witnessed double digit growth of 12% YoY while Sri-lanka business is seeing recovery.

Outlook & Valuation: We believe industry tailwinds such as festive demand, marriage season and government spending towards infrastructure & housing and demand from real-estate will aid growth for the paints sector and Asian paints being a leader will benefit from it. Additionally, the company’s plan of innovating products along with focusing on expanding in the decorative segment by growing its home décor bodes well. Along with it, focus is on growing industrial, Automotive and coating businesses. Further, easing raw material prices as well as efficiency measures taken by the company aids in margin improvement. On a financial front, we estimate its revenue/EBITDA to grow at 18%/27.8% CAGR over FY23-25E and maintain a Buy rating with a target price of Rs 3,939.

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