Jefferies sees 10% downside for Asian Paints. Here’s why

The company will see better margin trends in Q4 as high-cost inventory gets exhausted. Jefferies estimates gross margins to inch up to >40 percent in the next quarter

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New entrant Grasim could give India’s paint giant Asian Paints the blues. Competition from Grasim is set to emerge in just 12 months, which clouds the medium-term growth outlook for Asian Paints, financial services firm Jefferies has said. It has an “underperform” rating on the stock with the target set at Rs 2,500 a share.

At 2 pm, Asian Paints was quoting at Rs 2,792.55 on the National Stock Exchange, down 1.6 percent from the previous close. It was among the top losers on the Nifty and the Sensex.

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“Any potential tailwind from input price deflation is an opportunity to sell,” said Jefferies in its report.

The company will see better margin trends in Q4 as high-cost inventory gets exhausted. Jefferies estimates gross margins to inch up to >40 percent in the next quarter.

In Q3 FY23, the company reported a 6.37 percent growth in consolidated net profit at Rs 1,097.06 crore. Consolidated revenue from operations came in at Rs 8,636.74 crore, up only 1.28 percent from Rs 8,527.24 crore in the year-ago quarter.

On Moneycontrol’s Analyst Call Tracker, the stock has consistently featured in the Maximum Pessimism list. It has 15 “buy” calls, 11 “hold and 12 “sell” calls. In March 2019, before the Covid outbreak, it had 25 “buy” calls, eight “hold” and only one “sell” call.

Grasim has announced Rs 10,000 crore capex for its paints business with 1,332 MLPA (million litres per annum) total capacity. Asian Paints’ capacity is 1,700 MLPA.