Brokerages expect revenues to remain under pressure for Asian Paints

The outlook remains muted for Asian Paints as brokerages expect increased competitive pressures to weigh on its revenues.

In the July-September quarter of 2023-24 (Q2FY24), the paints major saw its revenue remain flat at Rs 8,452 crore, which was attributed to an erratic monsoon.

It impacted market sentiment, potentially leading to the deferment of sales to October given the late Diwali this year. 

Motilal Oswal Research said in its report, “with input costs on the rise, the margin gains in the second half of FY24 are not expected to mirror those seen in the first half of FY24.”

It noted that the overall industry may see a shift in demand and margin structure due to heightened competition. 

“We remain cautious as the paints segment may not enjoy higher multiples of the past,” it added.

Domestic brokerage firm JM Financial Research also pointed out that the input-cost scenario would not work in the paint maker’s favour due to the recent move in crude oil and its derivative prices. 

“We believe a more important watch out would be the developments on the competitive environment, with Grasim’s paints launch scheduled for 4Q – actions on this front would be a key guiding force for the sector’s near- term trading multiple,” it said. 

Prabhudas Lilladher Research also pointed out that the company gave an optimistic outlook for the second half of the financial year as it expects a revival in demand in the festival season. 

“We expect double digit volume growth in the second half (2H), while most gains from RM deflation have been mostly realised,” it said. 

Nuvama Institutional Equities 

In our view, the gap between sales and volume growth at 6% is higher than the usual 4-5 per cent, which may be due to the higher discounting given higher margins and faster growth of putty/construction chemicals.

Prabhudas Lilladher Research

We cut FY24/25 EPS estimates by 3.1/4 per cent following lower than expected volume growth and profitability in second quarter FY24. Asian Paints growth levers are intact due to market share gains in decorative paints, sustained increase in distribution, high growth in waterproofing/wood finishes/ projects business and scalability plans in home décor from 4-5 per cent to 8-10 per cent of sales by FY26 (both organic and inorganic).

JM Financial Research

Management’s prognosis of the demand environment was tad-bit confusing this time round.

The 2Q weakness didn’t sound like a one-quarter phenomenon (lower-tiered centres not doing as well anymore) but there was also some attribution to erratic rains that impacted July, and delayed festival dates, which led to much stronger sales in September and October. The management sounded sure that 3Q volumes would grow in double-digits again, with help from a good wedding season.

Motilal Oswal Research 

The management highlighted the adverse impact of erratic rainfall on demand. Additionally, with input costs on the rise, the margin gains in 2HFY24 are not expected to mirror those seen in 1HFY24.

HDFC Securities 

Asian Paints remains an industry bellwether, it is likely to jostle with tougher revenue growth comparables in FY24. This, coupled with the rising competitive intensity, could mean the pricing lever may remain out of play for some time.