Inflationary headwinds reducing, topline growth outperforms – Asian Paints

Inflationary headwinds reducing, topline growth outperforms – Asian Paints

Update on the Indian Equity Market:

On Monday, NIFTY closed in the red at 17,149 (-2.7%). Among the sectoral indices REALTY (-5.9%), METAL (-5.2%), and MEDIA (-4.6%) were top losers, and there were no sectoral gainers. CIPLA (+2.9%), and ONGC (+0.9%) were the only gainers. BAJFINANCE (-6.4%), JSWSTEEL (-6.9%), and TATASTEEL (-5.9%) were among the top losers.

Excerpts from an interview of Mr. Amit Syngle, MD & CEO, Asian Paints with Economic Times dated 21st January 2022:

  • In 1HFY22 the company had taken a 7% hike and in Q3FY22, they had already taken two hikes in November and in December totaling about 15%. Quarter on quarter, the company had a very strong volume growth at 18% and value growth of 26%.
  • With a healthy topline growth quarter on quarter, the margins have gone up because of the price hike which has been taken and so has the EBITDA margins being impacted in a very strong way.
  • The company is on a very good footing now because they have taken the pressure of inflation head-on and raised prices to the tune of about 22% for the year so far. The next quarter looks good from the point of view of addressing the inflation by the company.
  • The price increases have been unprecedented. Notwithstanding that, the company has seen quite a strong volume growth as well as value growth because October and November were very good for the company given the festive period.
  • The COVID-19 pressure was off to that extent, the consumer sentiment was quite good even in December. The company got a little bit hit in the second fortnight of December because of the third wave emerging but overall the company saw very healthy volumes, very good value growth. The company has gained a good quantum of market share in the third quarter as seen forward.
  • People have been experiencing COVID for the last year and nine months and the experience has been that there is an impact on consumer sentiment, which happens immediately when such a wave starts. But overall, there is only a little bit of a deferment of sales because people do not put off their painting or the renovation cycles.
  • The company’s outlook is that while in January there might see some impact of price hike and COVID-19, going forward, in February and March, it expects to see recovery with sales coming back strongly.
  • Going forward, it sees the environment as still inflationary. Despite taking price hikes or the crude hitting high prices and as prices of some of the crude derivatives go higher, some prices of select raw materials might come down. So overall, it expects the impact of Q4 over Q3 to be mild but the environment would remain inflationary.

Asset Multiplier comments:

  • Asian Paints has been an undisputed market leader in the paints category, despite inflationary near-term headwinds. We believe the company is likely to outperform based on its strong brand image and execution capabilities.
  • The expected boom in real estate augurs well for the company as we are entering a multi-year cycle of developmental activity that’ll help the top line of the company.

Consensus Estimate: (Source: Market screener website)

  • The closing price of Asian Paints was ₹ 3,155/- as of 24-January-2022.  It traded at 93x/67x/55x the consensus Earnings per share estimate of ₹ 34/47/57/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 3,380/- which implies a PE multiple of 59x on FY24E EPS of ₹ 57/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


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