Asian Paints Q3 Results Review - Peak Margins, Valuations; Downgrade To 'Hold': Prabhudas Lilladher

Prabhudas Lilladher Report

We cut FY25/26 earnings per share estimates by 1.2%/1.4% given little scope to improve margins (all time high levels ex of Covid year) on expected increase in competitive activity (Grasim’s entry) despite sustained double digit volume growth expectations.

Q3 volumes are up 12% owing to improved sentiments in festive and wedding season along with significant traction in luxury/economic range.

Domestic outlook remains positive across decorative, auto and industrial segments while International business has uncertainty due to Geopolitical issues. Home décor is showing noticeable signs of improvement segments while 'Beautiful Homes' stores and network continues to scale up.

Asian Paints’ structural moat driven by-

1. market share gains in decorative paints,

2. sustained increase in distribution (addition of 2000 retail touch points in Q3 FY24 to 160,000),

3. high growth in waterproofing/wood finishes/ projects business and

4. scalability plans in home décor from 4-5% to 8-10% of sales by FY26 remains intact.

We expect stunted growth in medium term given that-

1. near peak Ebitda margins,

2. likelihood of price cuts (1.3% in Q3 FY24),

3. Q4 FY24 entry of Grasim in decorative paints.

We believe valuations at 52.5 times FY26 earnings per share don’t factor in slowdown in profit growth and increase in competitive intensity fully.

We cut discounted cash flow based target price to Rs 3159 (Rs 3466 earlier) and rating to 'Hold' (Accumulate earlier) and would avoid fresh entry at current prices.

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