Asian Paints investors feel the blues even before competition hits full throttle

Asian Paints Ltd’s dismal March quarter (Q4FY24) results have only added to investors’ worries amid rising competition in the industry. 

Shares of the company hit a new 52-week low of 2,670.10 on Friday, after closing nearly 5% lower on Thursday, following the Q4 earnings announcement.

Investors are nervous about the emerging pain points. For instance, the year-on-year decline in revenue, albeit marginal, was particularly disappointing. 

At 8,730.8 crore consolidated revenue lagged expectations impacted by price cuts (of around 3.5%), downtrading and an unfavourable product mix (weak growth of the premium segment).

While the company delivered around 10% year-on-year volume growth in domestic decorative paints in Q4FY24, the value-volume gap widened further. 

“We believe the effects of rising competitive pressures are visible in the performance of Asian Paints,” said analysts at ICICI Securities Ltd. The brokerage house reckons (comfortable) competitive equilibrium in the paints sector is likely broken.

However, Asian Paints’ management is optimistic about double-digit volume growth in FY25. This is likely to be driven by the focus on economy paints, putty, and primer. 

The company launched Neo Bharat latex-based emulsion in January, which is focused on the entry-level segment. Further, improvement in the B2B sales post election and continued thrust on distribution expansion are seen as volume growth levers.

On the distribution front, over the past three years, Asian Paints has added 40,000-45,000 retail touchpoints. It added 10,000 retailers in FY24 and aims to take overall reach to 1,63,000.

According to the management, the new competition is not bringing any new technology and playing on a discounted pricing strategy. The management is confident of the company’s strong brand recall both at channel and consumer levels.

Still, the problem is that despite better volumes, value growth may continue to lag in the medium term. A worry here is that despite price cuts, the company is seeing a downgrading. This is even before Birla Opus by Grasim Industries is yet to roll out its products at full throttle. 

The management expects the pace of downtrading to moderate in FY25. However, analysts caution that Asian Paints may increase the quantum of rebates to protect its market share, leading to further price cuts in the decorative paints segment.

Amid this, benign raw material prices continued to drive gross margin, which hit a multi-quarter high of 43.7% in Q4. But the best on gross margin may be behind due to a changing competitive landscape and waning raw material price benefits. Elevated ad spending may impact operating performance even as the management’s guidance on Ebitda margins remains in the range of 18-20%.

Consequently, earnings estimates have been lowered by various brokerages. “Post Q4FY24 performance, we have cut our earnings per share (EPS) estimates 5%/ 2% for FY25/ FY26 accounting for higher promotions and marketing spends to fight competition. Over FY24-26, we expect Asian Paints to deliver sales CAGR of 7% with no EPS growth (due to margin contraction),” said analysts at Antique Stock Broking.

Against this backdrop, the stock’s returns are nothing to write home about, falling by a steep 18% so far in 2024 against the marginal gain seen in the Nifty 50 index. 

On the valuations front, the stock is trading at a price-to-earnings multiple of 49 times, showed Bloomberg data, which appears rich given ongoing industry trends. 

According to analysts at Prabhudas Lilladher, although valuations have moderated, it does not factor in any significant change in market dynamics.


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