At first glance, it appears that the September quarter earnings of Asian Paints failed to meet the expectations of analysts and the market.
The stock opened lower at ₹3,136.30 against the previous close of ₹3,141.55 and fell more than 2% to ₹3,073.55 in intraday trade. The stock closed 1.58% lower at ₹3,091.90 on BSE.
Asian Paints on October 20 reported a lower-than-expected consolidated net profit of ₹783 crore, up about 31% as compared to ₹596 crore in the same quarter last year.
Its revenue from operations rose over 19% year-on-year (YoY) to ₹8,457.6 crore from ₹7,096 crore.
The numbers failed to cheer the market and the road ahead also looks bumpy due to heightened competition and elevated raw material prices.
The stock is 8.6% down this calendar year till October 21 against a nearly 2% gain in equity benchmark Sensex.
Brokerages look unimpressed
CNBC-TV18 reported that Morgan Stanely has maintained an 'underweight' call on Asian Paints with a target price of ₹2,674.
Morgan Stanely, as per CNBC-TV18, said that the Q2FY23 numbers of Asian Paints missed its estimates on topline and margin. Changing industry dynamics and rising aggression on investments will drive de-rating.
Among the domestic brokerages, Motilal Oswal Financial Services has maintained a 'neutral' call on Asian Paints with a target price of ₹3,150 after the company's Q2 results came below its estimates.
"Results were well below estimates as realizations and gross margins were severely impacted, primarily led by product mix deterioration caused by (a) slower growth in high-margin urban sales unlike a preceding couple of quarters and (b) the adverse impact of downtrading," Motilal Oswal pointed out.
The brokerage firm said the stock is expensive and the current valuations of the stock at nearly 53.6 times FY24E P/E fully capture the upside over the next one year.
The brokerage firm also highlighted the intense competition in the sector due to the entry of new players.
"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," said Motilal Oswal.
"Asian Paints has delivered 11.6% earnings CAGR over the past five years (FY17-22), while the stock price has delivered 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. While improving margins would lead to better ROCEs, the new capex plan might dilute the same," said Motilal Oswal.
Brokerage firm Kotak Securities is also pessimistic about the stock as it has a 'reduce' call on the stock with a target price of ₹2,950.
The brokerage firm highlighted that Grasim’s entry into the paints segment has triggered an increase in capital intensity and dilution in return ratios.
Media reports had earlier suggested that Grasim Industries Ltd. now plans to invest ₹10,000 crore in the paints industry by FY25.
"It looks like Asian Paints and Grasim are eyeing to become lowest-cost producers. Competitive pricing would be the next step. Asian Paints' aggression and strategy ahead of Grasim’s entry indicates that it is not prepared to cede market share and Grasim’s growth will likely be at the cost of others," said Kotak.
Brokerage firm ICICI Securities has maintained a 'hold' call on Asian Paints stock with a target price of ₹3,200, modelling sales and earnings CAGR of 20.1% and 25.7% respectively, for FY22-FY24E.
ICICI Securities highlighted that Asian Paints also revealed its plans to invest in the backward integration of white cement, Vinyl Acetate Monomer (VAM) and Vinyl Acetate Ethylene Emulsion (VAE), which is likely to improve gross margins by nearly 400bps as per the company.
VAE is the key component to manufacturing environment-friendly paints and VAM is a key constituent to manufacturing VAE.
Brokerage firm Nuvama Wealth Management Limited (formerly Edelweiss Securities Limited) has maintained a buy call on the stock. It, however, cut its FY23E and FY24E EPS estimates by 6.8% and 4.1%, respectively, and cut the target price also to ₹3,795 from ₹3,815 earlier.
"Demand growth drivers remain intact, but need to factor in the early festive season, which could affect Q3FY23 growth. We factor in the Q2FY23 miss and weaker rupee to cut our FY23E and FY24E EPS estimates by 6.8% and 4.1%, respectively, and roll forward to arrive at a revised target price of ₹3,795, valued at 75 times P/E," said Nuvama Wealth.
According to a MintGenie poll, an average of 38 analysts have a ‘hold’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of broking firms. These do not represent the views of MintGenie.