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Miss on all fronts; industry challenges persist

* Asian Paints (APNT) registered weak 2Q performance with a 5%/7% YoY decline in consolidated/standalone revenue. Decorative volumes dipped 0.5% YoY, a sharp deceleration after clocking 7% growth in 1QFY25. Weak industry demand, extended monsoon, price cuts, and competition led to weak growth. Decorative industry saw a 3%-4% decline in 2Q.

* Gross margin contracted 260bp/180bp YoY/QoQ to 40.8%. The company has implemented ~1% price hike, the benefits of which will be fully visible from 3Q. EBITDA margin saw a 480bp/340bp YoY/QoQ contraction to 15.4%. EBITDA dipped 28% YoY.

* The near-term demand outlook looks bleak given the weak demand and curtailed festive period due to extended monsoon and early Diwali. The rising competition also partially impacted the performance. Further, the operating margin is expected to witness weakness in the near term, as the company needs to reinvest in the business to counter competition.

* The stock has massively underperformed (18% fall in the last three years) and is not likely to offer respite in the near term. Industry volume recovery and competitive strategy on pricing/incentives will be key monitorables to relook the stock. In the uncertainty, we maintain our Neutral rating with a TP of INR2,650 (based on 45x Sep26E EPS). Disappointing performance on all fronts

* Decline in volume: Consol net sales declined 5% YoY to INR80.3b (est. INR85.2b), impacted by weak demand conditions, price cuts implemented last year, a shift in the mix, and increased rebates. Volume declined 0.5% (est. +5.5%, 1QFY25 7%) in the domestic decorative paints business.

* Miss on margin: Gross margins contracted 260bp YoY to 40.8% (est. 43%). Employee expenses were up 14% YoY and other expenses were flat YoY. EBITDA margin contracted 480bp YoY and 340bp QoQ to 15.4% (est. 17.6%). EBITDA declined 28% YoY to INR12.4b (est. INR15.0b). PBT dipped 32% YoY to INR11.1b (est. INR14.0b). Adj. PAT declined 29% YoY to INR8.7b (est. INR10.8b).

* Relatively better performance in emerging businesses: The kitchen business revenue grew 9% while the bath business grew only 2%. White Teak and Weather Seal delivered double-digit revenue growth of 14%. Industrial business delivered 6% revenue growth, supported by growth in the General Industrial, Protective Coatings, and Refinish segments.

* Currency devaluation continues to affect growth: The International Business portfolio registered a marginal decline in revenues in 2QFY25 (8.7% growth in CC terms) due to a weak macroeconomic condition and currency devaluation in Ethiopia, Egypt, and Bangladesh.

* In 1HFY25, net sales, EBITDA, and APAT experienced a decline of 4%/ 24%/27%, respectively. In 2HFY25, we model 1% growth in net sales, while EBITDA and APAT decline to 6% and 9%.

Key highlights from the management commentary

* Demand was impacted by the seasonal market, extended monsoons, and flooding in some parts of the country during August and September.

* Management indicated that October was a bit challenging in terms of demand conditions, given the fact that last year there was a late Diwali and October was a full month in terms of sales.

* The decorative paint industry saw a decline of 3%-4% in 2Q.

* The company has implemented ~1% price hike in the quarter, but full realization benefits will be visible in Q3.

* The company has guided for FY25 EBITDA margin of ~18.5%.

* The distribution footprint continues to expand, with ~1.67 lakh retail touchpoints.

* Forex losses due to currency devaluation (INR560m in Ethiopia), along with subdued performance in Asia, negatively impacted overall profitability. Valuation and view

* We cut our EPS by 14% and 11% for FY25 and FY26 to reflect weak volume growth and pressure on margin.

* APNT launched ‘Neo Bharat Latex’ paint in Jan’24 to compete with the unorganized segment, with a branded solution that is affordable and accessible to consumers. It will address the market size of INR50-55b (targets to achieve a 30% share in the medium term).

* With the entry of new players with deep pockets and massive commitments to investments, the overall industry may see a shift in market share and cost structures. These factors will be the key monitorables in FY25-FY26.

* We remain cautious about both value growth and margin for FY25/FY26. Despite a correction in the stock, demand and competitive pressure still hovers around earnings. We reiterate our Neutral rating with a TP of INR2,650 (based on 45x Sep’26E EPS).

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