Target: ₹3,363

CMP: ₹3,179.50

Asian Paints reported marginal quarter-on-quarter decline in margins despite calibrated pricing action and superior mix as 6 per cent quarter-on-quarter inflation impacted profitability despite strong broad-based volume growth. It expects commodity prices to remain volatile in the near term although strong demand is likely to sustain.

We believe long-term structural levers remain intact, led by market share gains in decorative paints in an industry growing at double digits; increased distribution (addition of 5,000 retail touch points in Q1-FY23); innovations and focus on high-growth waterproofing/wood finishes segment; scalability plans in home décor from 4 per cent to 10 per cent by FY26 by both organic and inorganic means. We expect Asian Paints to sustain premium valuations given strong growth visibility.

Consolidated revenues grew by 54.1 per cent year-on-year. Gross margins contracted by 73 basis points year-on-year to 37.7 per cent. EBITDA grew by 70.3 per cent year-on-year. Margins expanded by 172 bps year-on-year to 18.1 per cent.

Tier 1/2 growth was driven by luxury and premium products mainly emulsion, waterproofing and adhesives, while tier 3/4 cities witnessed strong growth in economy range; 6 per cent inflation witnessed across RM basket in Q1-23 against 0.5 per cent price increase in July 2022 and August 2022; the management remains focused on double-digit volume growth with gross margins at 38-40.5 per cent for FY23; demand sentiments in T3/4 cities likely to improve with good monsoon and increase in dealer penetration; B2B sales will likely remain strong driven by strong real estate sector, uptick in housing and increase in government spending on infrastructure; FY23 capex is estimated at ₹800 crore. 

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