Asian Paints down even after a robust Q4. Here’s what brokerages have to say

Brokerages have taken a mixed view of Asian Paints’ Q4 numbers. Macquarie has an ‘outperform’ call, while Morgan Stanley has an ‘underweight’ rating on the stock

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Asian Paints was down almost a percent in the morning trade on May 12, a day after putting out a better-than-expected set of numbers for the March quarter, which, however, got a mixed reaction from brokerages who are concerned about growing competition in the sector.

The paint maker’s year-on-year (YoY) net profit was 44 percent higher at Rs 1,258 crore against an estimate of Rs 1,160 crore.

Revenue came in at Rs 8,787 crore, also higher than expectations of Rs 8,600 crore, the company said on May 11. Asian Paints‘ operating margin at 21.2 percent was 180 basis points higher than the forecast, thanks to easing raw material prices.

The biggest beat was on the volume growth front. Volume growth at 16 percent was the highest in three quarters, while analysts were expecting the number at 7-10 percent.

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Despite these numbers, brokerages have a mixed outlook on the stock.

Macquarie has given an “outperform” call with a target price of Rs 3,700 a share, citing the company’s sector-leading sales performance and healthy demand supporting the company’s confidence on FY24 sales.

In contrast, Jefferies has “underperform” call with a target price of Rs 2,500, expressing concerns about looming competition risk despite the impressive double-digit volume growth.

Competition heating up

With a capex of Rs 10,000 crore and a capacity of 1.3 billion litres, Grasim plans to launch its products in 2024. That’s when analysts expect market share competition to play out aggressively.

Asian Paints is also not taking things lightly. It has already announced over Rs 8,700 crore of capex to pump up its manufacturing capacity to almost 2.3 billion litres.

While the management is aggressive, analysts believe this can affect return ratios and free cash flows in the near term.

“While improving margins would lead to better ROCE, new capex plans might dilute it. The stock remains expensive at ~57.8x FY24E earnings per share,” Motilal Oswal Financial Services’ analysts have said.

Morgan Stanley also has an “underweight” call on the stock with a target price of Rs 2,546 a share. The management’s aggressive pursuit of growth is viewed as a positive factor, but the retention of the 18-20 percent operating margin guidance is seen as a limitation, its analysts said.

At 9.21 am the stock was down 0.92 percent at Rs 3,111 on the National Stock Exchange.

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