Analysts Bullish On Asian Paints, Unfazed By Q4 Profit Drop

Most analysts retained their bullish investment recommendations for Asian Paints Ltd. even as the paintmaker’s quarterly profit dropped on poor demand amid the lockdown to contain the coronavirus pandemic.

The company’s net profit fell 2.1% year-on-year to Rs 461.9 crore in the quarter ended March, according to an exchange filing. Its sales declined 7.1% to Rs 4,636 crore.

“The loss of sales due to the lockdown in March impacted the decorative business segment in an otherwise strong quarter with double-digit volume growth in the first two months. Even with the loss of sales, the decorative business segment registered double-digit volume growth for the year,” said Amit Syngle, managing director and chief executive officer at Asian Paints. “The industrial business segment under the automotive coatings and industrial coatings continue to be impacted by the downturn in the automotive industry and the overall slowdown in the economy. The segments in the home improvement category—the Kitchen (Sleek) and Bath (Ess Ess)—are also impacted by the slowdown in the real estate space.”

A complete shutdown of business in the last few days of March, according to Syngle, added to the pressure for these businesses. But profitability was well supported by benign raw material prices and cost optimisation efforts, he said.

The company’s margin expanded 100 basis points over the year-ago period to 18.5%.

Shares of Asian Paints have fallen 5.6% so far this year compared with a 14% drop in the benchmark Nifty 50 Index during the period. Of the 40 analysts tracking the stock, 22 have a ‘buy’ rating, 11 suggest a ‘hold’ and seven recommend a ‘sell’. The average of 12-month targets implies a potential upside of 2.8%.

Here’s what brokerages made of Asian Paints’ fourth-quarter results:

CLSA

• Retains ‘outperform’ rating with a target price of Rs 1,710 apiece.
• Tepid volume growth but margin remains intact.
• Expects considerable boost in the second half of the financial year ending March 2021, driven by repainting demand and market share gains.
• Valuations at 49 times its estimated FY22 price-to-earnings leave little room for further upside.

UBS

• Maintains ‘buy’ rating with a target price of Rs 2,000 a share.
• Revenue decline 7.6% year-on-year with underlying flattish volumes.
• Asian Paints’ increased penetration to lead to market share gains; consumers will choose to direct spending towards “at-home” segments rather than “out-of-home” segments.
• Stock should trade at a premium valuation given strong volume growth outlook, distribution strength and emerging competitive advantage.

Credit Suisse

• Maintains ‘outperform’ with a target price of Rs 1,850 apiece.
• Recovery in May/June encouraging in smaller towns and rural areas, large cities lag.
• Strong gross margin tailwinds due to fall in crude prices.
• Has highest visibility of FY22 earnings within consumer discretionary stocks.

Goldman Sachs

• Maintains ‘sell’ rating with a target price of Rs 1,064 apiece.
• Sales miss driven by weaker domestic volume growth and realizations.
• Operating at 60-70% utilisation and sees near-term disruption to demand.
• Recently downgraded stock to sell as risks were not factored in consensus estimates.

Emkay Research

• Maintains ‘hold’ with a target price of Rs 1,684 apiece.
• Volume trends weaken due to lockdown.
• Margin gains driven by lower input prices.
• Valuations at 46 times its estimated FY22 EPS remain unattractive, given possible downside risks to earnings.