Asian Paints Ltd reported high double digit growth in Q1FY23

Asian Paints Ltd is an Indian multinational paint company, headquartered in Mumbai, Maharashtra, India. The company is involved in the production, marketing, and distribution of paints, coatings, home décor goods, bathroom fixtures, and related services. Asian Paints is India’s largest and Asia’s third largest paints corporation. It commands a 42% market share of paints in India. It has manufacturing activities in 15 different nations, including India, with a major presence in the Middle East and the Indian subcontinent. Asian Paints is the holding company of Berger International.

Asian Paints on 26^th July 2022 announce their Q1FY23 results, where they reported high double digit YoY growth in both top as well as bottom line, partly due to low base effect as figures of Q1FY23 were affected due to Covid-19 and partly due to growing volumes in both domestic and foreign markets. But margins remains under pressure due to increasing inflationary trends.

On the stock exchanges, share price of Asian Paints has delivered a return of 7% in the last one week & started moving upwards prior to announcement of Q1FY23 results. Let’s now analyse their Q1FY23 results in deeper details and understand what future holds for the Paints giant.

Key Highlights of Asian Paints results

• Consolidated revenue in Q1FY23 came in at Rs 8,607 crore, a 54% YoY growth
• EBITDA for Q1FY23 increased to Rs 1,556 crore 8% YoY growth
• Tier-1 and -2 cities growth was driven by luxury & premium products mainly emulsion, waterproofing & adhesives while tier 3 and 4 cities witnessed strong growth in economy
• Asian Paints Ltd reported an 80.4 % YoY growth in consolidated profit at Rs 1,017 crore in Q1FY23
• Steep inflation in raw material prices in the Q4FY22 and again in this quarter saw gross margins impacted across all businesses despite the price increases taken to mitigate this pressure to an extent
• The competition in the paints segment is set to intensify with Aditya Birla Group’s flagship company Grasim Industries announced plans, while Sajjan Jindal-led JSW Group forayed into the sector

Asian Paints results: Revenue grew 54% YoY, while EBITDA for the Q1FY23 increased by 70.8% YoY

Consolidated revenue for the Q1FY23 period came in at Rs 8,607 crore, a 54% growth over Rs 5,585.36 crore reported in the Q1FY22. The international business, which had seen some continuity in the Q1FY22, registered strong double digit revenue growth.

On the operating front, its EBITDA for the Q1FY23 increased by 70.8% YoY from Rs 911 crore in Q1FY23 to Rs 1,556 crores in Q1FY23, and the margin expanded by 194 basis points (bps) at 10.61 % compared to the Q1FY22 (One basis point is one-hundredth of a %age point).

Gross margin, however, contracted sharply to 40.26 % in Q1FY23, compared to 54.67 % in Q1FY22 despite price hikes taken by the company due to higher input cost. Further Tier 1/2 growth was driven by luxury & premium products mainly emulsion, waterproofing & adhesives while Tier 3/4 cities witnessed strong growth in economy range.

“The domestic decorative business more than doubled its volume and delivered stellar revenues over the lower base of last year, which had suffered from the first nationwide lockdown. The industrial business and the home improvement business also doubled its revenue on last year’s low base,” Amit Syngle, Managing Director & CEO of the paint company said.

Moreover, the company derives 98% revenue from the paints business while 2% business comes from the home improvement business (kitchen and bathroom fittings). Both Kitchen and Bath business continues to grow at high double digit. However, loss in kitchen business rose due to higher inflation while Bath continues to be profitable (4% PBT margin).

Further, Kitchen & Bath business momentum will continue with the opening up of new plant in Pune in Q2FY23. This Plant in Pune (for kitchen and bath business) is likely to be operational in Q4FY23.

Asian Paints results: PAT grew 80% YoY in Q1FY23 on low base

Asian Paints reported an 80.4 % YoY growth in consolidated profit at Rs 1,017 crore for the Q1FY23, partly due to a low base. The Q1FY22, when the company reported a profit of Rs 568 crore, was affected by the second Covid wave.

Rupee depreciation, on the back of global policy tightening, further aggravating inflationary pressures. Persistent inflation could, however, dampen consumer sentiments

“Steep inflation in raw material prices in the last quarter of previous financial year and again in this quarter saw gross margins impacted across all businesses despite the price increases taken to mitigate this pressure to an extent,” Syngle said.

Moreover, the company has strong distribution network of 1,50,000 dealers, 2x more than the No. 2 player. The company added 5000 new retailing points in Q1FY23 and aims to add 5000-8000 touch points every year.

You may also like: ICICI Bank Q1FY23 results

Growing Competition in the Paints Sector

“With the entry of new players with deep pockets and massive commitments on investments, the overall industry may see a shift in demand and margin structure due to the heightened competition. We remain cautious as the sector may not enjoy the higher multiples of the past,” Motilal Oswal said in a report. The company is likely to raise prices by 0.5% in the first week of August, while the gross margin is likely to remain in the 38-40.5% band for some time, it added.

As Sajjan Jindal-led JSW Group enters the paints market and Grasim Industries, the flagship firm of the Aditya Birla Group, announces plans, the competition in this market is expected to heat up. At present, Asian Paints – with a production capacity of 1,700 million litres per annum (MLPA) – is India’s largest and Asia’s third-largest paints company.

Thus, management remains focused on double digit volume growth with gross margins at 38-40.5% for FY23. For which Innovations continue to drive growth with the launch of 10 new products like anti-insect enamel, PU enamel, high-quality high-end glitz matte, luxe collection leading to 40 unique APNT products in the market. Lastly, FY23 capex is estimated at Rs 8bn.

Asian Paints, recently declared that it was buying the majority of two businesses, White Teak and Weatherseal Fenestration. It made the acquisition in an effort to strengthen its position in the home improvement and decorating categories. The two purchases will be made over the course of the following three years in a phased manner.

White Teak is, in the business of decorative lighting products and fans, etc. While Weatherseal Fenestration, which was founded in March 2022, engages in the manufacture of uPVC windows and door systems in addition to other interior décor and furnishing activities.

Technical Analysis of Asian Paints share price

After a significant 20% share price correction over the past month, Asian Paints’ stock is currently in an uptrend. The 50 EMA has been trading below the 100 & 200 EMAs for the previous few months as it faces strong immediate resistance at 3268. After the announcement of Q1FY23 results, Asian Paints stock has seen consecutive green candles for last few trading sessions. Analysts believe, the stock is moving towards its resistance and have a potential to deliver a 10-15% return in medium to long term.

According to Edelweiss, which has a “buy” rating, the management expects margin pressure in the second quarter and will take calibrated price hikes.

“Strong brand, market leadership position and a robust balance sheet condition justify APL’s premium valuation. APL has been a consistent compounder with stock price appreciating at 22% CAGR over the last five years. We maintain our BUY rating on the stock with target Price to Rs 3700/share” said ICICI Direct in an equity research report.

The company’s margin pressure is abating “faster-than-expected” with the softening of key input costs. The company would comfortability maintain a gross processing margin (GPM) band of 38-40.5% in the near term (versus 37.7% now), Nomura, which upgraded its rating to ‘buy’ said.

Our view:

The introduction of new entrants is expected to increase competition, which is likely alter the sector’s dynamics. Asian Paints would therefore need to make significant investments in sales and marketing in order to keep up their leadership position in the fiercely competitive business.

Additionally, paint firms increased their prices during the past year, resulting in an extraordinary 22% increase during that time. Even overall, material inflation expected to ease gradually from second half of current financial year.

Asian Paints is the leader in the paints industry in India. Even on stock returns, the stock has delivered higher returns to investors than competitors over the last one year. If one considers returns from the beginning of this year, Asian Paints is the only company in this sector to deliver positive return from January 1, 2022. Other factors that work for Asian Paints are the cooling of crude oil prices (crude oils is a major raw material for paints), rising construction activity and addition of new business segments in lighting and UPVC windows. For the paints sector, Asian Paints continues to lead in market share as well as investor returns.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

You may also like: Cost Involved in Stock Market Investing