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Weak operating print; margin concern persists in near term

* Asian Paints (APNT) reported 17% YoY consolidated revenue growth in 2QFY27 (est. 14%), while standalone revenue grew 15% YoY. Domestic decorative volumes increased 6% YoY (est. 6%), impacted by channel inventory build-up ahead of price hikes and a shift in festive demand to 3QFY27. Management indicated that the inventory-related impact was fully absorbed during the quarter. Management expects domestic volume growth of 8-9% in 3QFY27, slightly below its guidance, given the extended festive season and higher number of weddings in 2HFY27.

* Gross margin contracted 350bp YoY to 39.7% (vs. est. 42%), impacted by high-cost inventory carried forward from 1QFY27. RM costs increased 28% YoY (25% in 1QFY27 and a further 3% in 2QFY27). The company has implemented calibrated price hikes of 12% so far (7% in 1QFY27 and 5% in 2QFY27), followed by a further 3.5% increase in Nov’26. It would partly offset the impact of anti-dumping duty on TiO? (effective 24th Oct’26).

* EBITDA margin contracted 200bp YoY to 15.6% (est. 17.3%). EBITDA grew by just 4% YoY to INR15.6b (est. INR17.3b). Management maintained its FY27 EBITDA margin guidance of 18-20%, supported by premiumization, cost savings, and backward integration benefits. We model 19.7%/20.2% standalone and 18.5%/18.9% consolidated EBITDA margins for FY27/FY28.

* An extended festive period and higher number of weddings are expected to drive healthy secondary demand. However, persistent cost inflation is likely to keep margins under pressure in the near term. We reiterate our Neutral rating with a TP of INR2,600

High-cost inflation dents margin; volume up 6%*

* Domestic volume up 6%: APNT reported consolidated net sales growth of 17% YoY to INR99.8b. (est. INR97b). Decorative business (India) clocked value growth of 14.5% and volume growth of 6.4% (est. 6%, 9% in 1QFY27). Industrial segment clocked growth in thirties (+31% YoY). The bath business revenue rose 19% and the kitchen business revenue grew 13%. White Teak business revenue declined 12% and Weather Seal revenue declined 2%.

* International saw strong momentum: International business registered a value growth of 30% (24% growth in CC terms), backed by steady performance in Egypt, UAE, and Bangladesh.

* Dents in margins: Gross margin contracted 350bp YoY to 39.7% (est. 42%). GP grew 8% YoY to INR39.6b (est. INR40.7b). Employee expenses rose 13% YoY, while other expenses rose 9% YoY. EBITDA margin contracted 200bp YoY to 15.6% (est. 17.3%).

* Miss in profitability: EBITDA grew 4% YoY to INR15.6b (est. INR16.8b). PBT grew 6% YoY to INR14.4b (est. INR15.0b). Adj. PAT grew of 8% YoY to INR10.7b (est. INR11.3b).

* In 1HFY27, net sales/EBITDA/APAT delivered 17%, 19%, 25%, respectively.

Key highlights from the management commentary

* Rural demand remains a monitorable as the deficient monsoon could weigh on rural consumption and partly offset the expected demand recovery.

* VAM-VAE project commissioned the first phase in 2QFY27. It has annual production capacity of 100,000MT (VAM) and 150,000MT (VAE). VAE’s production has already started, while VAM’s production will begin in phase 2.

* Management highlighted that the VAM-VAE project should continue to deliver 300–500bp of gross margin benefit for the products, utilizing the in-house emulsion, although the exact benefit will depend on sourcing economics and product formulations.

* Gross margins are expected to remain in the 41-43% range in 2HFY27, depending on the extent of further raw material inflation and the impact of calibrated pricing actions.

Valuation and view

* We largely maintain our EPS estimates for FY27 and FY28.

* Given the volatile geopolitical backdrop, inflationary pressures are likely to remain elevated. Price hikes are changing the P&L structure, with revenue growth expected to remain strong, supported by double-digit price hikes. However, given input cost inflation and stiff competition, margins are expected to be under pressure in near term. The company is focusing on product innovation, brand salience, regionalization, and execution excellence to negate competitive pressure.

* We model 8% volume and 17% standalone revenue growth for FY27. Management maintains EBITDA margin guidance of 18-20%, supported by premiumization, cost efficiencies, and backward integration benefits. We model 19.7%/20.2% standalone and 18.5%/18.9% consolidated EBITDA margins for FY27/FY28.

* We value the company at 40x Sep’28E EPS to derive a TP of INR2,600. We reiterate our Neutral rating.

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