Valuation hurdle may limit gains in Asian Paints despite stellar Q4

While demand stays strong, raw material movement/further price hikes could hit sales/margins

Despite price hikes, volume hit due to Omicron disruption in the early part of the quarter and a higher base, India’s largest paint company reported steady results in the March quarter. Asian Paints delivered an 8 per cent volume growth in decorative paints business ahead of consensus estimates which pegged the same at 3-5 per cent.

Vishal Gutka of PhillipCapital Research believes that volume growth was quite strong given challenges of high base (48 per cent volume growth in the base quarter) and a third covid wave during the early part of 4QFY22.

Urban markets saw higher double digit growth with demand coming from the premium segment while the economy segment did better in smaller towns and cities. However, the price hikes in the December quarter had an impact on sales in the March quarter especially in the economy segment in the tier 3 and tier 4 markets.

Value growth brought on by price hikes was partly offset by dilution in the sales mix with the company selling a larger proportion of lower margin waterproofing products and putty among others. Operating profit margins which came in 18.3 per cent saw a drop of 150 basis points y-o-y, while the street expected the margin drop to be more severe given the sharp rise in raw material inflation. The company curtailed its advertising spends; the growth in other expenses was limited to 1 per cent.

The street will keep an eye out for the trajectory of the raw material basket. There has been a 5-7 per cent sequential rise in raw material and the company is expected to take a 2 per cent price hike in May/June to offset the increase.

While there are near term headwinds, most brokerages are positive on the medium term prospects of the market leader. YES Securities expects demand for paints to be robust in the medium term led by lower penetration of paints and opportunities in new segments and services. The brokerage believes that the company is in a sweet spot to capture a major chunk of  incremental demand.

Though demand trends remain strong, what could limit upsides are valuations. At the current price the stock which is trading flat over the last six months is available at just under 54 times its FY24 earnings estimates. Investors could consider the stock on significant corrections.