Asian Paints Q3 Review: Shares Fall As Analysts Peg Competition, Capex As Headwinds
Looming competition risk and huge capex plans keeps analysts worried about Asian Paints with many brokerages cutting estimates.
Shares of Asian Paints Ltd. declined for the second day in a row on Friday as weaker-than-expected Q3 earnings dampened sentiment.
Analysts also cut the paintmaker's target price and earnings outlook for FY23-25, citing rising competition, lower volume growth expectations and higher capex outlay.
Asian Paints' third-quarter profit missed estimates as the extended monsoon dented demand in the peak festive season, even as input prices aided margin.
"Asian Paints is a strong player, but the looming competition risk continues to worry us," Jefferies said in its Jan. 19 note.
"We cut our FY24-25 EPS estimates by 7–10% to account for huge capex plans and sub-par 3Q performance," said Phillip Capital.
Asian Paints Q3 FY23 (Consolidated figures, YoY)
Revenue up 1% at Rs 8,636.7 crore.
Ebitda up 4% to Rs 1,611.4 crore.
Margins at 18.7% versus 18.1%.
Net profit up 6% to Rs 1,072.6 crore.
Shares of the company ended 2.73% lower at Rs 2,787.8 apiece, compared with a 0.44% decline in benchmark Nifty 50. The total traded volume was 3.3 times its 30-day average volume. The relative strength index stood at 21, indicating that the stock might be oversold.
Of the 39 analysts tracking the stock, 17 maintained a 'buy', 11 analysts recommended a 'hold', while the remaining 11 suggested 'sell', according to Bloomberg data. The average of 12-month price consensus price target implies an upside of 12.6%.
Here's what analysts make of the quarterly results:
Jefferies
Retained 'underperform' call on the stock, with price target Rs 2,570 implying a downside of 13%.
Cuts FY23-25 revenues estimates by 4-5% to factor in the weakness in volumes.
Flat volumes due to extended monsoon, shorter Diwali season, and pre-stocking in the base resulted in a sharp revenue and Ebitda miss in Q3.
Raise margin estimates on account of lower input price, while earnings estimates remain largely unchanged.
Grasim's foray into paints segment remains a key monitorable.
Steps like channel push, higher discounts and promotions for dealers and painters could impact industry's profitability, at least in the medium term.
Morgan Stanley
Maintained 'underweight' and lowers price target to Rs 2,516 from Rs 2,674.
Expects changing industry dynamics and rising aggression on investments to drive de-rating.
Believes threat from new competitors is higher than in the past.
Seen increased focus on growth and higher investments from new and existing players.
Believes that with new domestic entrants, existing players are more likely to focus on the top line, not margins.
New competition should hurt the smaller players more than the larger ones.
Remains less constructive on paints.
Expects some cut in consensus estimates after weak Q3 earnings.
Domestic decorative volume growth was flat on year, as against a growth of 6% expected by the brokerage.
Says management is optimistic about double digit volume growth and demand pickup in tier 3 and 4 markets in Q4 and Q1.
Product mix should improve and volume value growth gaps should narrow to 4-6%.
Gross margin expected to improve sequentially in Q4 as material deflation continues and full benefit of price correction in Q3 flows through.
JP Morgan
Keeps 'neutral' rating and cuts target price to Rs 2,800 from Rs 3,365.
Asian Paints' nearly flat volume and value revenue growth in Q3 was below brokerage's and street expectations.
Overall normalisation of volume growth, fading of pent-up demand and slowing discretionary spends, is under way.
This drives down house's revenue forecasts for FY23/24 by 3%/5%.
Expect sequential gross margin to improve further as commodity moderation gains flow through entirely.
Investments in adjacencies, increasing competitive spends may cap decorative margins in 18-20% range.
Lowers FY24/25 earnings per share by 4%/6% factoring normalisation of volume growth with fading pent up demand and slowing discretionary spending.
Goldman Sachs
Keeps 'neutral' rating and cuts target price to Rs 2,800 from Rs 3,200, implying a downside of 2%.
Cuts FY23-25 earnings per share estimates by about 2-8% largely due to lower volume growth expectations and higher capex outlay.
Asian Paints consolidated PAT in 3Q grew 6.4% YoY, below brokerage's estimates of 10%.
Volume growth was flat on year, continuing the slowdown since last quarter
Volumes in December have picked up, but unlikely to indicate a strong fourth quarter.
Kitchen and bath businesses also declined on year, indicating weak broad trends in home decor.
Margins recovered in-line with expectations.
Rising competitive intensity and sharp jump in capex remains headwinds for the next two years.
Phillip Capital
Keeps 'buy' with target price Rs 3,200, implying 12% upside.
Cuts FY24-25 EPS estimates by 7-10% to account for huge capex plans and sub-par Q3 performance.
Cuts target multiple from 60x to 55x to account for low teen volume growth over the next two years vs 18% volume growth CAGR seen over FY20-22.
Irrational competitive intensity might keep margin under check .
But new players are most likely to takeaway market share from challengers rather than taking it away from market leader.
Exit volume growth towards end of December, 2022 suggest healthy recovery.
Management expects this recovery to continue going towards 4QFY23.
Management expects double digit volume growth to continue even in FY24 despite high base.
Watch | Asian Paints' Amit Syngle discuss the road ahead for the paint maker