Pricing, unfavourable product mix likely to hit Asian Paints stocks

Some brokerages have reduced target prices after muted Q1 showing

Brokerages view on Asian Paints: Paint industry behemoth Asian Paints reported a weak set of numbers in the June quarter of financial year 2024-25 (Q1 FY25). The muted performance was on account of the heatwave, elections and an unfavourable product mix.

The market leader in paints reported a 2.3 per cent year-on-year (Y-o-Y) decline in revenue and a considerable 20.2 per cent drop in earnings before interest, taxes, depreciation and amortisation (Ebitda), falling short of consensus estimates.

However, the company's domestic decorative business saw a 7 per cent increase in volumes, but a 3 per cent decline in value due to price reductions and unfavourable product mix.

 

Meanwhile, the industrial segment recorded a 5.8 per cent growth Y-o-Y.

The company's gross margin contracted slightly to 42.5 per cent, while operating profit margin dipped to 18.9 per cent primarily due to a high base effect and lack of operating leverage.

Operating costs such as staff and other expenses rose notably compared to the previous year.

Given the disappointing show, the stock fell by as much as 4.2 per cent intraday to Rs 2,848. It, however, recovered a bit to end the day at Rs 2,930, a loss of 1.5 per cent.

Some international brokerages have slashed their target prices of the stock following weak performance in Q1 FY25.

Nomura Research lowered its earnings per share forecasts for FY25, FY26, and FY27 by 7.8 per cent, 6.4 per cent, and 5.7 per cent, respectively.

Given the sluggish earnings growth and increased competition from new entrants like Birla Opus, analysts have cut the target price to Rs 2,850 (from Rs 2,925). The rating, however, remains 'neutral'.

Mihir P Shah of the brokerage expects double-digit volume growth (11 per cent Y-o-Y) in FY25 despite competition, supported by the new launch of economy latex paint NeoBharat — at a price of a distemper and better rural demand on good monsoon. 

However, he believes that sales growth in FY25 will be lower at 4 per cent Y-o-Y due to price cuts (-2 to -3 per cent) and lower mix (-6 per cent).

Also, benefits of soft material prices are now behind, which coupled with lower sales mix, will weigh on gross margins in FY25.

This, along with increased advertising and promotional spends, would lead to contraction of operating profit margins by 165 basis points (bps) Y-o-Y, says the brokerage.

While reiterating its 'buy' rating, global brokerage UBS has adjusted its target price downwards to Rs 3,650 per share. Goldman Sachs has maintained its 'neutral' stance, but slashed its target price to Rs 2,750 per share.

Domestic brokerage ICICI Securities has maintained its 'reduce' rating.

Analysts, led by Manoj Menon of the brokerage, believe Asian Paints is facing multiple headwinds. These are an increase in competitive pressure, higher commodity prices and slowdown in industry growth rates.

It has maintained a 'reduce' rating and a target price of Rs 2,550 (earlier Rs 2,600) as it believes the stock's valuations (P/E of 58.5 times FY26 earnings estimates) are stretched.

With limited scope for margin expansion and likely market share decline, it believes there are multiple triggers for contraction of valuation multiples.

Long-term investors, however, may use the dip in Asia Paints stock as a buying opportunity, believes Nuvama Institutional Equities.

Their confidence comes from potential recovery in rural consumption and anticipated price hikes ahead. 

The brokerage, which has retained a buy rating with a target price for Rs 3,450, is watching out for rural consumption recovery and further price hikes. It expects double-digit volume growth for the remainder of FY25.

Asian Paints expects to achieve double-digit volume growth for Q2 FY25 amid favourable demand dynamics.

However, the company acknowledged the challenges ahead, particularly concerning inflationary pressures, which may range between 1 per cent and 1.5 per cent in Q2 FY25.

To address these challenges, Asian Paints plans to implement additional price hikes during the same period.

In terms of performance, the economy segment, particularly highlighted by NeoBharat, exhibited strong traction.