Asian Paints Q4 Results Review - Focus On Volume Growth; Margin Risk Still Persists: Motilal Oswal

Motilal Oswal Report

Asian Paints Ltd. posted 1%/2% YoY decline in consolidated/standalone revenue in Q4 FY24, with decorative volume growth at 10% YoY (versus estimate 9%). The value-to-volume gap expanded to ~12% in Q4 from ~7% in q3 FY24. Revenue growth was hit by price cuts (~3.5% in Q4), and an unfavorable product mix (subdued growth of the premium segment).

Benign raw material prices continue to drive gross margin, which stood at 43.7% in Q4, the best in the last 12 quarters. Asian Paints’ gross margin will be the key monitorable in FY25/FY26, considering the changing competitive landscape and dwindling raw material price benefits.

Employee and other overheads (higher marketing and distribution spending) hurt Ebitda margin, which contracted 180 basis points YoY and 325 bp QoQ to 19.4%. The marketing spending also accelerated due to the recently launched Neo Bharat Latex Paint (in the economy segment). Ebitda declined 9% YoY (estiamte +6%). Asian Paints achieved a 21% Ebitda margin in FY24. Management reiterated its Ebitda margin guidance of 18-20% in the medium term. Due to a changing competitive landscape, a higher mix of the economy/mid segments, and the company’s increased focus on volume traction, we model an Ebitda margin of 20.5% for FY25/FY26 (each).

Despite Asian Paints' various initiatives to drive volume growth, the revenue growth trend for FY25 is still weak due to price cuts, downtrading, and competitive pressure. Besides, the elevated Ebitda margin may not sustain in the near term. Consequently, we reiterate our Neutral rating with a target price of Rs 3,000 (based on 45 times FY26E earnings per share).

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