Asian Paints gains 3%, hits 8-month high on hopes of margin improvement

Shares of Asian Paints hit an eight-month high of Rs 3,559, gaining 3 per cent on the BSE in Wednesday's intra-day trade, outperforming the market. The stock price rose, even in a weak market, as falling raw material costs are expected to aid margin expansion for the paint maker.

A fall in raw material prices from their recent peak, and improved product mix will help drive EBITDA margin for Asian Paints in the coming quarters, analysts said. The stock of the paint company also traded higher on hopes of higher demand ahead of the festive season.

The stock was trading at its highest level since January 2022. It had hit a record high of Rs 3,588 on January 10. In the past three months, Asian Paints has soared 30 per cent after it reported a strong 80.39 per cent year-on-year (YoY) increase in its consolidated net profit to Rs 1,036 crore for the first quarter ended on June 30, 2022, as the business grew both in volume and value terms. Its revenue from operations was up 55 per cent YoY to Rs 8,579 crore during the quarter.

The domestic decorative business of Asian Paints experienced good consumer demand, and recorded stellar revenue growth for the quarter. The volume growth registered in the quarter was one of the highest in the last six quarters. The business also registered robust 4-year compounded growth in volume and value terms.

During the Q1FY23 investor presentation, Asian Paints had said that the demand conditions looked stable so far across rural and urban markets; while organization continued to focus on strong growth for the coming quarter. "Overall, material inflation expected to ease gradually from second half of current financial year. Q2 inflation estimated to be in low single digits. The company would continue to take calibrated prices increases to offset impact of inflation," it had said.

Analysts at ICICI Securities believe strong volume growth is attributable to market share gains, dealer additions, and strong demand traction in tier II and tier III cities. In addition, pent up demand from B2B segment (20 per cent of sales) also helped drive overall volume growth. Going forward, the brokerage firm believes the company’s aggressive product launches and continuous expansion of its retail touch points (plans to add 5000 retail touch points every year) will drive the company’s decorative paint volume at CAGR of 14 per cent over FY22-24E.

"We believe strong supply chain network and robust balance sheet of Asian Paints provide enough cushion to safeguard its margins, going forward. We maintain our BUY rating on the stock factoring in Asian Paints’ dominant position in the paint industry and limited damage to its margins from increasing competition," ICICI Securities said in a consumer discretionary sector update.

The brokerage firm has a 'buy' rating on the stock with a target price of Rs 4,045 per share.