Asian Paints (APNT) continued to see sturdy double-digit development in February-March (January muted as a consequence of Omicron wave) extending into April, regardless of sharp worth hikes of c.17-18% in H2FY22. It expects sturdy demand to proceed in FY23 pushed by deferred demand regardless of a excessive base (FY22 quantity +31% y-o-y).
But downturn might begin with smaller markets: However, we word demand in Tier-3,4 markets has began moderating with down-trading seen on the again of sharp worth hikes. We consider given the stress on client wallets as a consequence of excessive inflation, demand for discretionary classes like paints will be impacted particularly in Tier-3,4 markets.
Margin stress to return with managed pricing: While APNT has managed to develop GPMs sequentially
(-450bp y-o-y, +190bp q-o-q to 38.7%) with sharp worth hikes, it’s as soon as once more witnessing excessive input-cost inflation (Q1FY23 +5-7%). We additionally word APNT is decreasing the depth from aggressive worth hikes in H2FY22 to small hikes in Q1FY23 (+2%) regardless of rising inflation, as it’s now turning into delicate to demand worth elasticity. We consider near-term margin stress might construct up as soon as once more.
Long-term intact: APNT is ramping up superior technology-led world-class improvements (fireplace retardant paint, waterproofing), just a few of that are first-of-their-kind and/or patented, and therefore tough for smaller friends to copy, and gaining an edge over its competitors, in our view. It is dialing up investments in dwelling decor/companies, and targets 8-10% of gross sales from these new companies over three years (vs 4% now). It additionally expects each its kitchen and tub companies to be worthwhile in FY23.
Downgrade to Neutral on unfavourable risk-reward: While deferred demand might assist short-term volumes, we anticipate demand moderation to set in on the again of weak client discretionary spending amid elevated inflation stress. We anticipate margin stress to persist on the again of elevated input-cost inflation. We decrease FY23F/FY24F EPS by 18%/15% to think about margin stress as a consequence of rising prices and sure slower quantity development. We forecast a FY22-24F EPS CAGR of c.25%.
We worth APNT at a P/E of 58x Mar-24F EPS (vs 65x earlier, decrease by 11%) to think about our rising rates of interest outlook. We arrive at a TP of two,950(vs 3,875 earlier). APNT trades at 61x Mar-24F EPS. Key dangers: increased/slower quantity development.
Source: www.financialexpress.com”