Synopsis: Asian Paints Ltd witnessed a sharp decline in its stock price, dropping 9.3% on the BSE, reaching a low of Rs. 2,511.65. The drop followed the release of weaker-than-expected financial results for the September quarter, which lagged behind industry peers.
Shares of Asian Paints Ltd took a steep hit, falling over 9% during Monday’s trading session to reach Rs. 2,511.65 on the BSE, as the company’s financial performance for the September quarter disappointed investors and analysts alike.
With sales volumes dipping 0.5% year-on-year (YoY) – starkly contrasting with competitors' volume growth of 3-4% – the results underscore challenges in a competitive paints market.
Declining Sales Volumes and Contracting Margins:
Nomura India highlighted the subdued sales figures as a primary factor contributing to the stock's decline.
The firm also pointed to a year-on-year contraction in Asian Paints’ gross profit margin by 260 basis points (bps) to 40.8%, versus its forecasted 42%.
This decline has been attributed to a less favourable sales mix, characterized by reduced sales of high-margin exterior paints, along with heightened raw material costs and competitive pressures.
To address these headwinds, Asian Paints implemented a 2.5% price hike during Q2, with anticipated price stability in Q3 and a projected 2-2.5% pricing increase in Q4.
Revised Forecasts and Price Targets:
Reacting to the weak performance, Nomura India adjusted its earnings-per-share (EPS) estimates for FY25 to FY27 downward by 13% across each year.
Valuing Asian Paints at a price-to-earnings (P/E) ratio of 45 times – about 20% below the company's 10-year average – Nomura set a revised target price of Rs. 2,500, down from its previous target of Rs. 2,850, while maintaining a 'Neutral' rating.
Other major brokerages also downgraded their outlooks for Asian Paints. JPMorgan reportedly shifted its rating to "underweight," setting a target price of Rs. 2,400, while Jefferies suggested a more conservative target of Rs. 2,100. Morgan Stanley placed a slightly higher target at Rs. 2,522.
Operating Profit Margin Pressures:
In Q2, Asian Paints saw its operating profit margin (OPM) contract by 480 bps YoY to 15.4%, below Nomura’s projected 18.4%.
The margin decline was attributed to increased staff costs, which rose 13% YoY, affecting profitability.
Comparatively, other industry players experienced mixed results in OPM: Berger Paints recorded a margin of 15.6% (down 150 bps YoY), Kansai Nerolac at 10.9% (down 310 bps YoY), Akzo Nobel at 14.9% (up 10 bps YoY), and Indigo Paints at 13.9% (down 125 bps YoY).
Nomura anticipates improvement in Asian Paints’ margins from Q3 onward, expecting softer input costs, an enhanced sales mix, and the full impact of recent price adjustments to drive recovery.
EBITDA dropped by a steep 28%, significantly missing consensus expectations of an 8-9% decline.
In conclusion, Asian Paints’ September quarter results reveal the challenges the company faces amid heightened competition, elevated raw material costs, and rising operating expenses.
Although Q3 could see improvement as input costs ease and recent price hikes take effect, analysts remain cautious, with leading brokerages revising EPS projections and setting lower price targets.
Investors will be closely watching for signs of margin recovery in the coming quarters.
Disclaimer: This article is for informational purposes only and should not be interpreted as financial advice. Investors should consult a qualified financial advisor before making any investment decisions.
