Asian Paints’ Dec quarter is pale; competition worries lurk

The paints maker missed expectations on most of the key parameters. Consolidated net revenue at nearly ₹8,637 crore lagged analysts’ expectations. Domestic decorative paints business was flat in Q3 in terms of both volume and value. This is on a very high price increase base in the previous year. Also, extended monsoon in some parts of the country weighed on festive demand for paints in October, but demand picked up in November and December.

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The sales mix in Q3 was led by economy and waterproofing products, with downtrading seen in the premium range, the management said in an earnings call. Remember, Asian Paints has taken steep price hikes over the past one year to combat raw material inflation and contain margin erosion. This has started to yield results. Consolidated operating margin at 18.7%, rose sequentially and a year-on-year basis in Q3, but improvement was lower than expectations.

Going ahead, the management expects raw material costs to soften further, which is a bright spot. According to the management, demand outlook is looking better in Q4FY23 and that should lead to an improved sales mix. Also, good monsoon coupled with expected increases in the minimum support price augurs well for the rural sector, it said. Even so, the spectre of rising competition in the sector has kept investors edgy. In the last one year, the Asian Paints stock has fallen by 13%, while the Nifty 50 index has risen marginally. From its 52-week high of ₹3,582.90 in September 2022, the stock is down 20%.

“Margin recovery is a positive which we believe can continue into Q4 as well. However, Asian Paints might settle for margins lower than historical given the expected entry of Grasim in paints,” said Amnish Aggarwal, head of research, Prabhudas Lilladher in a note.

Despite unimpressive stock returns, at FY24 price-to-earnings the Asian Paints stock is trading at a multiple of 52.73x, Bloomberg data showed. Expensive valuations along with worries of disruption due to the entry of newer companies with deep pockets, dims the stock’s re-rating prospects, for now. Further, the company’s FY23 and FY24 earnings per share estimates could see marginal cuts of 4-5%, added analysts.

Meanwhile on international front, the management said forex pressures are persisting in many African and Asian markets. Here, one needs to be watchful of global recessionary fears.