Large Cap : Buy Asian Paints Ltd For Target Rs.3,399 - Geojit Financial Services
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Margins improved amid competition...
• Asian Paints Ltd. (APNT), is engaged in the business of manufacturing, selling and distribution of paints and related products for home décor. APNT is the market leader in the Indian paint manufacturing industry.
• Subdued volume growth of 6% YoY in Q1FY24 due to weak consumer sentiment led the top-line to grow flat.
• Erratic monsoons and the delayed festival season impacted rural demand, while the company witnessed high single-digit growth in urban areas.
• EBITDA margin expanded by 573bps YoY to 20.2%, supported by a fall in raw material prices and efficient sourcing of raw materials.
• We expect margins to impact H2FY24 due to inflationary pressure on raw material prices and higher competition intensity.
• A longer festival and upcoming marriage season are expected to drive growth in H2FY24.
• Superior product mix, increasing distribution network, and guidance of 18 to 20% margin bode well for profitability. The longterm outlook remains intact, and we therefore maintain BUY rating with a TP of Rs. 3,399, based on a P/E of 57x on FY25E EPS.
Subdued revenue growth...
APNT reported muted revenue growth of 0.2% YoY to Rs8,479cr during the quarter. Decorative volume grew by 6% YoY, impacted by an erratic monsoon and weak consumer demand. The company witnessed high single-digit volume growth across urban markets, while rural market demand was impacted. The management pointed out that economy paints performed better during the quartet; however, luxury paint demand witnessed traction in September 2023. The sustained growth in the industrial paint business is driven by Auto OEMs and the refinish segment. However, the kitchen and bath fitting business reported de-growth of –18% YoY to Rs 97cr and –20% YoY to Rs81cr, respectively, due to weak consumer sentiment. We expect festival demand and the upcoming marriage season to drive demand for luxury paint in H2FY24.
Margins improved due to deflation in input prices...
Gross margin improved by 763bps YoY to 43.4% in Q2FY24 due to deflation in input prices by ~4% and efficient sourcing of raw materials. In Q2FY24, the average oil prices down by –12% YoY, but increased 11% on a sequential basis. The EBITDA margin expanded by 573bps YoY to 20.2% during the quarter. An increase in oil prices due to geopolitical tensions and higher competition intensity is likely to add pressure on margins. However, the management guides EBITDA margins in the range of 18% to 20% in the medium term. During the quarter, reported PAT increased by 53% YoY to Rs 1,232cr.
Key con-call highlights
• Work on capacity expansion is progressing well and the company has already infused Rs 1,500cr on brownfield expansion.
• A robust expansion of the distribution footprint, catering to almost 1.6 lakh retail touchpoints, added 2,500 retail touchpoints in Q2.
• International business witnessed a de-growth of 3.9%, while Middle East region did well with double digit growth.
Valuations
We expect a better product mix and festival-led demand to drive growth in H2FY24. The management indicated double-digit volume growth in FY24, supported by distribution expansion and innovation. The long-term outlook remains intact, and we therefore maintain BUY rating with a TP of Rs. 3,399, based on a P/E of 57x on FY25E EPS.
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