Reduce Asian Paints; target of Rs 2680: HDFC Securities

HDFC Securities' research report on Asian Paints

Asian Paints’ top line grew 1.3% YoY (three-year CAGR: 16.8%); fell short of expectations (var: -3%). The decorative business was largely flat (0/1% volume/value growth YoY in Q3FY23 due to (1) an extended monsoon and shortened Diwali season and (2) a high volume base impacting growth. The worst of the margin pressure seems to be over as Q3 marked the end of a six-quarter upward RM spiral. Consequently, GM/EBITDAM expanded ~180/60bps YoY. RM moderation is likely to continue in Q4. Note: price hikes (+24%) are yet to catch up with RM inflation (+29%) since Q1FY22. APNT is embarking on a significant investment phase (INR87.5bn over three years) towards (1) capacity enhancement, (2) backward integration, and (3) acquisitions. While beneficial in the long run, it will certainly be a drain on FCFF and returns profile in the short to medium term.

Outlook

We largely maintain our FY24/25 EPS estimates (-1/-2%) and our REDUCE rating with a DCFbased TP of INR 2,680/sh (earlier: INR2,700/sh), implying 50x Dec-24 P/E.

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