Asian Paints Shares Gain On Price Hike Plan; Analysts See Pressure On Margin Easing

Shares of Asian Paints Ltd. gained the most in 14 weeks after brokerages, citing dealer checks, said the nation's largest paintmaker is set to take a broad-based price hike across its portfolio to counter rising raw material costs.

Nomura

• Upgrades to 'buy' rating, raises target price from Rs 3,150 to Rs 3,550 apiece, implying a potential upside of 19.5%.

• The price increase significantly mitigates high input-cost inflation which significantly impacted second quarter margins.

• Asian Paints had a cost increase of 21% in the first half, while it took a price increase of only 7.5%. With this sharp price increase, Nomura expects Asian Paints' margin gap to be materially bridged, and will require only 5% additional price increase to fully bridge the gap.

• While smaller players had already taken double-digit price increases earlier, Nomura expects similar or higher price hikes from competitors following Asian Paints' hike. We see it maintaining its competitive lead versus smaller players with lesser financial resources to absorb inflation.

• Key risk remains low volume growth.

• Also likes Kansai Nerolac Ltd. given its relatively reasonable valuations, and expect it to benefit from this price hike.

• Sees it as a key beneficiary of any demand pickup in industrial/auto segments.

Macquarie

• Maintains 'outperform' rating and target price of Rs 3,900, implying a potential upside of 30.7%.

• Price hikes reaffirm Asian Paints' commentary to take Ebitda margin back to 18-20% level. Further, the quantum of the hikes should help offset a large portion of the input cost pressure. Also bolsters Macquarie's view that margin pressure is near term in nature.

• Sees limited merit in the argument that the entry of Grasim Industries Ltd. will weigh on near-term margins. "Our checks suggest that Grasim’s plants are in the initial stages of construction and should be ready by July or September next year making it too early for any pricing-based competition to occur."

• The bullish demand environment in decorative segment along with pricing pressures in industrial (which limit the ability of peers to move ad spend to sales back to earlier highs) should benefit Asian Paints.

• Asian Paints remains one of our top picks in the consumer space.