Asian Paints, On May 12, 2023,shared rose by 0.6%, trading at Rs 3,158.05 each on the BSE, following the company’s strong march results. Both top and bottom lines experienced double-digit year-on-year growth, with net profit increasing by 44% YoY to Rs 1,258 crore and revenue from operations rising over 11% to Rs 8,783 crore compared to Rs 7,892 crore from its previous quarter.
Undoubtedly, the Q4 performance exceeded expectations. On Tuesday the company documented a 52% increase in the quarter profit because strong demand for decorative paints and reduced raw material expenses have been beneficial.
For the quarter ended June 30, the company stated a consolidated profit of over 15.5 billion rupees, surpassing analysts expectation of 13,81 billion rupees according to the refinitiv data.
The company experienced a nearly 12% decline in material costs, primarily due to the easing of the prices of the crude oil. Crude prices constitute approximately 30% of the raw material expenses for paint companies.
The robust performance, along with a substantial 7 percent increase in revenue driven by strong decorative paints demand , resulted in asian paints core profit margin surging to 23.4% from 18.2% compared to the same period last year. Reportedly, the decorative paint segment which accounts for a near 80% of the company revenue obtained double digit growth.
The consolidated revenue from operations rose by almost 7 percent YoY to reach Rs 9,182 crore but it fell short of the estimated Rs 9,358 crore. The paint maker witnessed a remarkable 36.3% YoY growth in operating profit, reaching Rs 2,121 crore. This growth was supported by a substantial expansion of gross margins by 530 basis points(bps) during the quarter.
As a consequence, the operating margin improved to 23.2 percent from 18.1 percent compared to the same period last year, and it also increased from 21.3 percent in the previous quarter.
Despite experiencing growth in the Indian market the company reported that its international segment remained subdued, it decreased by 1.4% to Rs 695 crore . For which, the performance can be attributed to the adverse forex situations and macro-economic challenges and liquidity issues posed in the asian and african markets.
Though asian paints hold nearly 50% of the market share in the current market, it is expected to face intense competition in the near future as companies like JK cement and Pidilite industries are getting ready to enter the space.
Moreover, as noted, by analysts the stock’s upside seems limited at its current valuations. Highlightingly, imminent competition from JSW paints and others leave minimum room for any significant re-rating change of the stock.
ICICI securities forecast a compound annual growth rate(CAGR) of 13.6 percent and 13.8 percent in revenue and earnings, respectively, over the period from FY23 to FY25E. The brokerage maintains a positive outlook on asian paints; however, it believes that the stock potential for growth is limited at its current valuation due to the restricted expansion in the EBITDA margin resulting from increased competition.
The brokerage has raised its profit after tax(PAT) estimates by approximately 5 percent for FY24E and 6% for FY25E. Valuing the stock 60 times FY25E earnings per share, it has revised the target price to Rs 3,425 per share. The recommendation for the stock is “Hold”.