Neutral Asian Paints; target of Rs 2650: Motilal Oswal

Motilal Oswal's research report on Asian Paints

Asian Paints (APNT) registered weak 2Q performance with a 5%/7% YoY decline in consolidated/standalone revenue. Decorative volumes dipped 0.5% YoY, a sharp deceleration after clocking 7% growth in 1QFY25. Weak industry demand, extended monsoon, price cuts, and competition led to weak growth. Decorative industry saw a 3%-4% decline in 2Q. Gross margin contracted 260bp/180bp YoY/QoQ to 40.8%. The company has implemented ~1% price hike, the benefits of which will be fully visible from 3Q. EBITDA margin saw a 480bp/340bp YoY/QoQ contraction to 15.4%. EBITDA dipped 28% YoY. The near-term demand outlook looks bleak given the weak demand and curtailed festive period due to extended monsoon and early Diwali. The rising competition also partially impacted the performance. Further, the operating margin is expected to witness weakness in the near term, as the company needs to reinvest in the business to counter competition.

Outlook

The stock has massively underperformed (18% fall in the last three years) and is not likely to offer respite in the near term. Industry volume recovery and competitive strategy on pricing/incentives will be key monitorables to relook the stock. In the uncertainty, we maintain our Neutral rating with a TP of INR2,650 (based on 45x Sep26E EPS).