Asian Paints Q3 Result Review - Multiple Triggers For Structural Correction In P/E Multiples: ICICI Securities

ICICI Securities Report

Asian Paints Ltd.'s double digit volume growth in Dec-22 is just optically higher considering there was high inventory in trade in Dec-21 and primary sales were weak in Dec-22, in our view. While there was a lot of noise in Q3 FY23 due to prolonged monsoon, early Diwali, correction in raw material prices and strong base quarter, we note three structural factors which indicate the price/earnings multiples are likely to decline as-

1. the portfolio mix continues to deteriorate with weaker consumer sentiment, higher sales of putty, primer as well as institutional/ projects sales. If we assume a P/E of ~20 times for institutional and putty/primer business, paints segment is d at P/E more than 70 times for FY24E,

2. the Ebitda margin range is targeted at 17-20%, much lower than historical 21-22%. Structural reduction of 250 bps in Ebitda margin is likely to hurt discounted cash flow valuation by 8-10% and

3. with Asian Paints reaching 150,000 outlets, there is limited scope to expand distribution. Average annual revenue/outlet is now lower than Rs 1.4 million. It is tough to run a store profitably with such small turnover which indicates Asian Paints has hit the ceiling to add new stores (in near term in our view).

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