Asian Paints' Earnings Estimates Cut By Citi After Q3 Disappointment

After Asian Paints Ltd. posted disappointing results for third quarter, Citi Research cut its earning per share estimates by 3% and highlighted concerns regarding the near-term growth outlook. The brokerage maintained a 'sell' rating, with a target price of Rs 2,300 apiece, implying a 2.1% upside from Tuesday's closing price.

Asian Paints delivered net profit and topline below Citi Research's estimates because of weak festive demand. The demand condition is expected to remain muted, and stress in urban situation will likely continue, the brokerage said.

Asian Paints Q3 Results Highlights (Consolidated, YoY)

• Revenue fell 6.1% to Rs 8,549 crore versus Rs 9,103 crore (Bloomberg estimate: Rs 8,903 crore).

• Ebitda down 20.4% to Rs 1,637 crore versus Rs 2,056 crore (Bloomberg estimate: Rs 1,628 crore).

• Margin contracted to 19.1% from 22.6% (Bloomberg estimate: 18.3%).

• Net profit fell 23.3% to Rs 1,110 crore versus Rs 1,448 crore (Bloomberg estimate: Rs 1,144 crore).

The paint maker has not seen much impact of rising competition in the second half of the current financial year. However, a lot of movement in terms of increasing reach and advertisements has started already, Citi Research said.

Rise in competitive intensity for market share, talent, and shelf-space, and mind share will keep Asian Paints' margins under pressure. To add to that, weakness in urban demand and a rise in competition in terms of mergers and acquisitions may also hurt earnings, ultimately leading to rating downgrade.

Asian Paints has underperformed the Nifty 50 by 28% and 48% in last one and two years, respectively. Nevertheless, it's too early to bottom fish, according to Citi's estimate.

Existing players in the paint business will try to retain their market share and drive volume growth at the cost of margins. This will also hurt return on capital employed at lower levels and hurt profitability, according to the brokerage.