Analysts sour on Asian Paints as competition, demand fears paint gloomy picture

As competition intensifies with Grasim’s entry into the market, InCred equities sees limited room for near-term margin expansion for Asian Paints

India’s largest paint manufacturer, Asian Paints, is among the stocks with maximum pessimism in the month of May as analysts remain concerned following weak earnings for the quarter ended March 2024 and subdued outlook on account of weak demand conditions, rise in crude oil prices and rising competition.

A Moneycontrol analysis shows that out of the 38 analysts that have coverage on Asian Paints stock, 16 have a 'sell' call, 11 have a 'hold' call and 11 analysts are bullish with 'buy' calls. The pessimism stems from the fact that the company's revenue and profit for the fourth quarter of FY24 missed estimates.

Moreover, its EBITA saw a decline as a result of the higher investment in the brand, along with advertisement and promotional (A&P) spends, per brokerages.

Although volumes saw a growth of 10 percent for the quarter as the paints manufacturer undertook price cuts to boost demand,  it failed to spur revenue. Instead, consumers were downtrading: using cheaper offerings from competitors to fulfill their needs. Analysts at CLSA believe that the value growth will likely lag volume growth as a result of the price cuts taken.

Also Read | Morgan Stanley downgrades chemical stocks, expects pain to linger

According to Nuvama Institutional Equities, the anticipated growth in construction activity over the next five years creates opportunity for fresh painting. Asian Paints is anticipated to grow ahead of the market because of its pricing strategy at the lower end, higher growth in premium products, brand equity and distribution strength.

"However, moderation in real estate and auto segments can act as barrier," the brokerage said. A slowdown in the economy is the biggest risk for the paints industry, as about 75 percent of demand for decorative paints arises from repainting, which, in turn, depends heavily on the country’s economic condition.

Additionally, a rise in crude oil price and rupee depreciation could hurt Asian Paints's margin as crude derivatives account for a  major part of the input costs.

Rural markets seem to be picking up, and Asian Paints' management expects first quarter FY25 demand to be supported by that sentiment. With a favourable monsoon forecast, wages in the rural segment will see an uptick, leading to increased discretionary spendings.

However, with the entry of Grasim Industries into the paints business, the outlook on Asian Paints’ near-term prospects remains subdued, said Prabhudas Lilladher.

As competition intensifies with Grasim’s entry into the market, InCred equities also sees limited room for near-term margin expansion for Asian Paints. The brokerage retained a 'reduce' call on the stock with a target price of Rs 2,620.

Axis Securities expects Asian Paints stock to move sideways in the near term, owing to increased competition from the new entrants (JSW and Grasim) "which will keep the profitability under check in the near term."

On the contrary, Motilal Oswal believes that the new competition is not bringing any new technology; it is more of a "me-too product, playing on discounted pricing." Customers’ loyalty plays a big role in the paints category and Asian Paints has a strong brand recall both at channel and consumer levels, the brokerage said.

"We remain cautious on both value growth and margin in FY25/FY26. Despite a correction in the stock, the risk of competitive pressure still hovers around its earnings, said Motilal Oswal as it reiterated its neutral call, with a target price of Rs 3,000 per share.

Also Read | Brokerages remain bearish on Wipro despite its $500 mn contract from US client

International brokerage Citi retained its sell rating on the paints major, with a target price of Rs 2,600 per share. CLSA also maintained its sell call on the stock and cut target price to Rs 2,337 per share.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.