Reduce Asian Paints Ltd For Target Rs. 2,142 - PL Capital
Growth outlook remains hazy
Quick Pointers:
* 4Q decorative volumes up 1.8%, outlook cautious for next couple of quarters, more so in urban India. Projects and Govt business have a positive outlook.
* APNT aims for single digit value growth, with 18-20% EBITDA margins in FY26
APNT has given a cautious outlook for FY26 with single digit topline growth and EBIDTA margins in the band of 18-20%. Demand scenario has been tepid and organized decorative demand has seen a decline in FY25. Rural and tier3/4 demand is better than urban India, however normal monsoons benefit of tax cuts and benign inflation. The competitive intensity remains high in decorative paints; however current discounts and the pricing environment are unsustainable for new entrants. We believe the acquisition of decorative business of AKZO Nobel by a strong player will further add to competition.
Given that realization is negative and demand recovery is gradually given competitive scenario, sales growth is likely to remain in low to mid-single digits. Bath, Kitchen and Home décor have been slow to scale up given slow demand and competitive environment. We estimate a CAGR of 4.9% in revenue and 6.4% in PAT over FY25-27. APNT trades at 48.4xFY27 EPS, which looks expensive given the tepid growth scenario. Retain reduce rating with target price of Rs2142 (45xFY27 EPS, 2094 based on DCF earlier).
Decorative volume grew by 1.8% amid muted demand conditions and downtrading. Revenues declined by 4.3% YoY to Rs83.6bn (PLe: Rs82.3bn). Gross margins expanded by 23bps YoY to 43.9%. EBITDA declined by 15.1% YoY to Rs14.4bn (PLe:Rs14.8bn) Margins contracted 219bps YoY to 17.2% (PLe:18%). Adj. PAT declined by 30.7% YoY to Rs8.8bn (PLe:Rs10.1bn). Standalone Revenues declined by 3.9% YoY to Rs71.9bn; Gross margins expanded by 53bps YoY to 45.2%; EBITDA margins contracted by 229bps YoY to 18.4%; Adj. PAT declined by 27.7% YoY to Rs8.7bn . Sub Sales declined 6.7% YoY; EBITDA declined 21.5% YoY.
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