Anand Rathi upgrades Asian Paints to a ‘buy’ rating; here's why

Updated: 17 Mar 2023, 03:37 PM IST
TL;DR.

  • Anand Rathi anticipates demand to increase in contrast to weak Q3FY23 volumes based on industry interaction and channel checks.

Anand Rathi Share and Stock Brokers Ltd is bullish on Asian Paints Ltd

Anand Rathi Share and Stock Brokers Ltd is bullish on Asian Paints Ltd due to the demand expected to increase moving forward, the creation of value for investors, and consistent earnings growth.

The stock's rating has been raised by the brokerage firm to 'buy', with a target price of 3,260.

It anticipates demand to increase in contrast to weak Q3FY23 volumes based on industry interaction and channel checks.

The prolonged monsoon and the early festivities slowed Q3FY23 volume growth, which rebounded in December and is anticipated to be robust, according to the management. Additionally, margins from Q4FY23 would increase due to lower input costs.

"In Q3FY23, input costs fell 7% versus an 8% rise in H1 (first half) when prices were hiked 3%. Management said further softening input costs should expand the Q4FY23 gross margin. We expect gross and earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins to improve 250-300 basis points each over FY23-25. Further, our channel checks suggest some upswing in demand, post-November. But certain pockets saw keen competition from new dealers," said the brokerage in its report.

According to the brokerage report, the paint firms have consistently created value over the last three, five, ten, and twenty years. The brokerage expects this to continue, helped by consistent earnings growth that creates a chance for opportunities.

The company has lost nearly 7% of its value so far in 2023, but the brokerage thinks the decline in price provides an entry point.

Rich valuations of the company is viewed as a constraint for the brokerage, though. "We acknowledge the rich valuations, but forecast 17% earnings CAGR over FY23-25 aided by margin gain," added the brokerage.

According to the brokerage, the two main risks are a significant increase in input prices and new competitors disrupting the market and gaining a sizable market share.

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First Published: 17 Mar 2023, 03:37 PM IST