A tug-of-war between bulls and bears: Analysts divided on Asian Paints

But given an optimistic market and a good monsoon, an upside is more likely

Asian Paints is a premium blue-chip company with its performance depending largely on household consumption, as well as the industrial and corporate segment to a lesser extent. The Q2, 2021-22, results will be released on October 21. Leading brokerages have released conflicting advisories after its Q1 results, and it is interesting to review those expectations.

In its own presentations after it declared the Q1 results, the company warned against steep material inflation, which had affected the margin and would remain a concern. Petrochemicals are a vital input, so that’s no surprise. Costs would have stayed elevated in Q2. Asian Paints also announced small price increases (about 1 per cent averaged across portfolio) in July to pass on costs.

On the positive side, the company expected the demand outlook to stay positive and it was optimistic about the long Diwali season. It hoped a good monsoon would help with rural demand. It considered that avoiding a third Covid wave would be critical to regaining normalcy. There has indeed been a good monsoon, and so far, no third wave.

In a recent consumption report, Motilal Oswal Securities expects Asian Paints to report Q2 net profit at Rs 973.1 crore, up 14 per cent YoY and up 69.4 per cent quarter-on-quarter (QoQ). Net Sales are expected to increase by 42 per cent YoY (up 36 per cent QoQ) to Rs 7,597.3 crore. The operating profit (Ebitda) is likely to rise 14.5 per cent YoY and 58.6 per cent QoQ to Rs 1,448.9 crore. The rating has been “neutral”.

After Q1, when the market price was around Rs 3,145, the following recommendations started to come in from brokerages and analysts. HSBC had a “buy”, which it still maintains, with a target of Rs 3,500. CLSA also had a buy/outperform rating — the target of Rs 3,275 has been hit. It noted that the company’s focus on sustaining market share gains had eroded gross margin.

Macquarie had an “outperform” rating with a target of Rs 3,500, which it has since moved up to Rs 4,000. It noted that the company’s Q1 performance emphasised demand was resilient and it was less worried about near-term margin pressure. JPMorgan has a target of Rs 3,575.

Morgan Stanley was less optimistic with an “equal-weight” rating and a target of Rs 3,143 (the price when it released its recommendation). It noted that revenue growth beat estimates but the margin disappointed. Goldman Sachs, however, was outright bearish and still maintains a “sell” recommendation with a target of Rs 1,667. It noted the margin contraction raised questions about pricing power. While Morgan Stanley believed Q2 was likely to benefit from pent-up demand, it implied the stock could decline 60 per cent.

The stock has moved between a high of Rs 3,445 and a low of Rs 2,951 in the past three months. It is currently at Rs 3,306, a loss of 1 per cent in the past month but it has gained from a recent low of Rs 3,177 in early October. In the past 10 sessions, it has registered 30 per cent higher trading volumes than its 3-month median. Technically speaking, the stock has just crossed above its own 11-day moving average, which is a bullish signal. The lack of analyst consensus could mean a tug-of-war between bulls and bears. Given an optimistic market and a good monsoon, the upside seems more likely than the downside.