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Margins drive 3Q beat; raise estimates marginally

* Asian Paints (APNT) reported a volume growth of 12% YoY in 3QFY24 (est. 13%), characterized by double-digit expansion in both rural and urban markets. The revenue growth is supported by an extended festive season. However, it has been sluggish due to price reductions and unfavorable mix (low mix of luxury segment).

* Benign raw material prices continue to drive gross margin. APNT clocked a gross margin of 43.6%, the best in the last 11 quarters. The gross margin in FY25/FY26 will be the key monitorable, considering the changing competitive landscape and dwindling raw material price benefits.

* EBITDA reported a beat led by a higher-than-expected gross margin improvement. EBITDA surged 28% YoY during the quarter. APNT achieved a 22% EBITDA margin in 9MFY24. However, management reiterated its EBITDA margin guidance of 18-20% in the medium term. We model a 21.5% margin for FY25/FY26.

* We believe valuations are expensive at ~53xFY25E EPS and 48xFY26E EPS, especially considering the uncertain competitive pressure. We reiterate our Neutral rating with a TP of INR3,340 (based on 50x Dec’25E EPS).

Beat on gross margin; EBITDA surges 28% YoY

* APNT reported consol net sales of INR91.0b, a growth of 5.4% YoY (est. INR94.8b). The revenue growth for 2Q and 3Q combined stood at 3% YoY (est. 5% YoY).

* Volumes grew in double digits at 12% YoY (est. +13%) in the Domestic Decorative paints business.

* Gross margins expanded 500bp/~20bp YoY/QoQ to 43.6%.

Employee and other expenses were up 13%/11% YoY and were up 40/70bp YoY as % of sales.

* EBITDA margin expanded ~390bp YoY/230bp QoQ to 22.6% (est. 19.4%). ? EBITDA grew 27.6% YoY to INR20.6b (est. INR18.4b).

PBT also grew 33.1% YoY to INR19.2b (est. INR16.8b).

* Adj. PAT grew 34.5% YoY to INR14.8b (est. INR12.3b).

* In 9MFY24, Net sales/EBITDA/adj. PAT growth stood at 4%/34%/46% YoY.

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