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Soft Quarter, but Green Shoots on the Horizon; Maintain HOLD

Est. Vs. Actual for Q1FY26: Revenue – BEAT; EBITDA – MISS ; PAT – BEAT Changes in Estimates post Q1FY26 FY26E/FY27E: Revenue: 2%/2%; EBITDA: 7%/8%; PAT: 4%/6%

Recommendation Rationale

• Muted Topline, but Signs of Recovery Emerge: Asian Paints reported a marginal 0.3% YoY decline in consolidated revenue for Q1FY26, largely due to early monsoons and macro headwinds. Decorative segment volumes grew 3.9%, but revenue was impacted by an adverse mix. The Industrial segment grew 8.8% YoY, driven by Auto and Protective coatings. Home décor remained weak amid subdued consumer spending, though Beautiful Homes stores performed well. White Teak was affected by BIS-related issues, while Weatherseal posted 32% growth on the back of portfolio expansion. Institutional business saw a slowdown in certain subsegments. International business delivered 11.1% like-to-like growth, with strong traction in South Asia and the Middle East. Retail presence expanded to 1.7 Lc outlets. Management maintained a cautious outlook, guiding for single-digit growth in the near term, while continuing to focus on services and differentiated offerings.

• Demand Outlook: Management indicated early signs of recovery, with urban markets improving and a good monsoon expected to support rural demand. Easing inflation and policy support provide a constructive backdrop, though competitive intensity remains high. The company aims to sustain momentum through ongoing innovation and brand-building efforts while scaling its industrial business by leveraging technical capabilities. Raw material prices are expected to soften slightly, though rupee volatility remains a key monitorable.

• Margins Pressure: The company's EBITDA margins contracted by 70 bps YoY to 18.2%, on account of higher sales and marketing investments. However, management reiterated that consolidated EBITDA margin will stabilise in the 18-20% range, aided by moderating raw material costs.

• Backward Integration: Asian Paints’ key backward integration projects—White Cement (Dubai) and VAM-VAE Emulsion (Dahej)—are progressing as planned. The White Cement plant is nearing commissioning, with benefits expected to flow in the coming quarters. The VAM-VAE facility is likely to become operational in Q1FY27, with meaningful impact seen from Q1–Q2 FY27 onwards. These strategic investments are aimed at boosting cost efficiency and enabling differentiated product offerings.

Sector Outlook: Cautious

Company Outlook & Guidance: We maintain a HOLD rating on the stock. Current Valuation: 48x Mar-27 EPS (Earlier Valuation: 45x Mar-27 EPS ). Current TP: Rs 2,420/share (Earlier TP: Rs 2,120/share).

Recommendation: With an upside of 1% from the CMP, we maintain our HOLD rating on the stock

Financial performance:

Asian Paints consolidated revenue declined by 0.3% YoY to Rs 8,939 Cr in Q1FY26, primarily impacted by early monsoons. Gross margins improved by 15 bps YoY to 42.7%, aided by a ~1% benefit from material cost deflation. However, EBITDA margins contracted by 70 bps YoY to 18.2% due to higher sales and marketing investments. Consequently, adjusted PAT declined by 6% YoY to Rs 1,100 Cr.

Outlook

We remain positive on the company’s long-term prospects, supported by the following factors: 1) Budget boost, which will lead to an increase in disposable income; 2) Decline in raw material prices; 3) The company’s announcement of setting up (a) a VAE and VAM plant and (b) a cement plant through a joint venture in Fujairah, UAE, to backward-integrate key raw materials; 4) Expansion of manufacturing footprint by more than 30–40%; and 5) Launch of differentiated nextgeneration emulsions and waterproofing products based on nanotechnology. These are steps in the right direction to achieve the next growth phase and secure the company’s market share in the long term. While near-term challenges and heightened competition may keep the stock range-bound, with early signs of recovery emerging, we have revised our FY26E/27E estimates and maintain our HOLD rating on the stock.

Other Key Highlights

• Home Décor Business: Asian Paints' Home Décor segment remained under pressure in Q1FY26 due to weak consumer discretionary spending. The Kitchen and Bath businesses saw revenue declines of ~2% and ~5%, respectively, with both segments reporting operating losses due to muted demand. White Teak posted a sharp 32% YoY drop in sales, impacted by BIS-related challenges and weak retail sentiment. However, Weatherseal delivered a robust 32% growth, supported by a broader product portfolio, improved distribution, and synergies with the Beautiful Homes network.

• Industrial Business: Asian Paints' industrial business delivered healthy top-line growth in Q1FY26. PPGAP revenue increased 11.1% YoY to Rs 575 Cr, supported by strong performance in Automotive and General Industrial coatings. However, PBT margins moderated to 16.9% (vs 19.2% YoY) due to heightened competitive intensity and higher market investments. APPPG revenue grew 4.8% YoY to Rs 307 Cr, driven by the Protective Coatings segment, though margins contracted to 8.1% (vs 10.2% YoY) owing to pricing adjustments in a competitive environment.

• International Business: Asian Paints’ international business delivered a robust performance in Q1FY26, with sales rising 8.4% YoY to Rs 736 Cr (17.5% growth in constant currency), led by strong momentum in Asian markets, the UAE, and Egypt. Profitability improved sharply, with PBT surging to Rs 38 Cr from Rs 6.5 Cr YoY, supported by operational efficiencies and benign input costs. Performance in Ethiopia remained subdued due to currency devaluation.

• Capex:- Asian Paints expects a total outflow of Rs 700-800 Cr in capex for FY26; out of this, Rs 100 Cr has already been spent.

Key Risks to Our Estimates and TP

• Increase in competitive intensity; prolonged demand recovery; RM inflation

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