Target: ₹3,120

CMP: ₹3,054.1

Demand has been fairly resilient, with 8 per cent volume growth in Q4-FY22, despite a cumulative price increase of about 20 per cent in FY22. In tier I and II cities, the price rise has been absorbed, but there has been some impact on demand in smaller cities.

The impact of raw material inflation in Q4-FY22 was lower than our estimate. However, the management said Asian Paints is witnessing a 5-7 per cent sequential increase in its raw material basket against which it is taking a 2 per cent price increase in May’22 and Jun’22.

A better-than-expected near-term margin outlook has led to a 14 per cent/6 per cent increase in our FY23/FY24 EPS estimate. We have assumed FY24 margin at the top end of the management’s stated gross/EBITDA margin threshold of 41-42 per cent/18-20 per cent.

Gross margin, even after the recovery, may only return to 41-42 per cent levels as against the 43-44 per cent achieved in the deflationary raw material cycle. The management doesn’t want to raise prices by too much as it does not want to give opportunity to competition

While Asian Paint’s demand outlook is better than its FMCG peers, despite the high price increases, valuations at 54.4x FY24 PE are expensive and fully capture the upside over the next one-year.

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