The June quarter results of Asian Paints came on a stronger note with net profit jumping as much as 80% year-on-year (YoY).
The company on July 26 reported its consolidated net profit came at ₹1,036 crore in Q1FY23 against ₹574 crore in the same quarter last year. Its revenue surged more than 54% to ₹8,607 crore as against ₹5,585 crore year-on-year (YoY).
"The domestic decorative business experienced good consumer demand and recorded stellar revenue growth for the quarter. The volume growth registered in the quarter is one of the highest in the last six quarters. The business also registered robust four-year compounded growth in volume and value terms," said Amit Syngle, Managing Director & CEO of Asian Paints.
Shares of Asian Paints traded with gains but the gains were capped as concerns over inflation and valuation made investors cautious. The stock traded over a percent higher in the afternoon session of trade.
The stock ended 2.31% higher at ₹3,179.50 on July 27.
Brokerage firms remained divided on the prospects of the stock after the Q1 show as some of them have faith in the company's market leader position while some think inflation, rich valuation of the stock, weak demand scenario, and weakness in the rupee are the key concerns for the company.
Those who are positive
Brokerage firm Centrum Broking maintained a 'buy' call on the stock with a target price of ₹3,707, implying 69.7 times FY24E earnings per share (EPS).
"We expect Asian Paints to emerge as a strong player, moving from the share of surface to share of space inside the home in line with its core strategy: (1) upgrade volumes through innovations in economy/luxury emulsions, (2) develop project business, (3) expand waterproofing business, (4) grow rural reach, and (5) gain volume market share, yet maintain margins," Centrum said.
"We believe it is a structural growth story, capturing demand across segments and town class. Considering the improved margin trajectory, we have increased earnings for FY23E and FY24E by 7.5% and 4.6%, respectively," the brokerage firm added.
Brokerage Prabhudas Lilladher maintained a 'buy' call on the stock while raising the target price of ₹3,363 from ₹3,018.
"We believe long-term structural levers remain intact led by (1) market share gains in decorative paints in an industry growing at double digits (2) increased distribution (addition of 5,000 retail touch points in Q1FY23) (3) innovations and focus on high growth waterproofing/wood finishes segment (4) scalability plans in home décor from 4% to 10% by FY26 by both organic and inorganic means," said Prabhudas Lilladher.
The brokerage firm believes valuations at 53.8 times FY24/51.7 times June 2024 EPS will remain a little overhang given Grasim’s aggressive entry plans in Decorative paints in FY24. But it expects Asian Paints to sustain premium valuations given the strong growth visibility.
Those who remain cautious
Brokerage firm Motilal Oswal Financial Services maintained a 'neutral' call on the stock with a target price of ₹3,170.
The brokerage firm highlighted that better-than-expected sales momentum has led to a 3% and 8% increase in its FY23 and FY24 EPS estimates.
Motilal believes with the entry of new players with deep pockets and massive commitments on investments, the overall industry may see a shift in demand and margin structure due to the heightened competition.
"We remain cautious as the sector may not enjoy the higher multiples of the past. Asian Paints has delivered an 11.6% earnings CAGR over the past five years (FY17-22), while the stock price has delivered a 24.1% CAGR, implying a significant re-rating. We have assumed an FY24 gross/EBITDA margin at the top end of the management’s guidance," Motilal said.
"While we expect RoCE to improve, it will still be lower than the 30-40% recorded in the first half of the decade gone by. The stock remains expensive at nearly 50.9 times FY24E P/E," the brokerage firm added.
Elara Capital has a 'sell' call on the stock but raised the target price to ₹2,600 from ₹2,420 on FY24E EPS of ₹52. The brokerage firm has raised FY23E/24E earnings by 7% each to factor in better revenue growth.
"Current valuations do not factor in the entry of a large new player. We assign 50 times P/E (unchanged) to arrive at a higher target price of ₹2,600 from ₹2,420," said the brokerage firm.
According to a MintGenie poll, an average of 37 analysts have a ‘hold’ call on the stock.
Disclaimer: The views and recommendations made above are those of broking firms and not of MintGenie.