In the past one month, the stock price of Asian Paints has declined 15 per cent after Grasim Industries announced doubling of capital expenditure (capex) to Rs 10,000 crore for its foray into the paints business. The Aditya Birla Group firm expects to start production from the fourth quarter of 2023-24 (Q4FY24). In comparison, the S&P BSE Sensex was down marginally by 0.02 per cent during the same period.
"For the immediate future, the environment has turned uncertain with the economic recovery under challenge from multiple fronts. Inflation is at a multi-decade high across geographies, partly induced by the global supply chain disruptions and partly by the ultra-accommodative policies pursued by governments and monetary authorities to pump-prime the pandemic affected economies," Asian Paints said in FY22 annual report.
The company added: The geopolitical situation is threatening to further worsen inflation across key commodities. As a result, monetary authorities are tightening the money supply, hoping to squeeze out the inflationary pressures. This could hurt the demand conditions across industries
Meanwhile, for January-March quarter (Q4FY22), the company reported a flattish profit after tax (PAT) of Rs 874 crore due to lower margin and one-time exceptional loss of Rs 116 crore. Despite a sharp price hike, gross margin declined 448 bps year-on-year (YoY) suggesting a delay in price hikes and adverse product mix (higher sales of low end of products).
However, savings in other expenses restricted the overall fall in EBITDA margin by 153 bps YoY to 18.3 per cent. That apart, it reported revenue growth of 19 per cent YoY to Rs 7,893 crore, which was supported by price hikes and decorative volume growth of 8 per cent.
"The repainting represents around 80 per cent of total decorative paint demand. Gradual reduction in repainting cycle would drive future paint demand. The increased focus on the ‘water proofing & building chemical’ category will continue to drive revenue growth for Asian Paints," analysts at ICICI Securities had said in Q4 result update.
The management continued to see robust demand traction in decorative paints and expects double digit volume growth in FY23 as well despite a strong base of FY22. Shortening re-painting cycle, shift from low end to premium segment and continued demand of water proofing and wood finishes products will help drive volume growth for the company, the brokerage firm said.
On the flipside, analysts at HDFC Securities said that the gross margin recoup was well underway but fell short of expectations.
"Future price hikes are on the anvil but are likely to lag raw material inflation, as demand elasticity from hereon may get tested," the brokerage said.
It has marginally toned down its FY23/24 EPS estimates by 3.6/2 per cent to account for lower gross margin and maintains a 'SELL' rating on Asian Paints with a price target of Rs 2,550 per share.
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