No Diwali cheer for Asian Paints' investors

Prolonged monsoons impacted demand for paints and inflation prompted customers to switch to economy products. Also, price hikes taken by the company were not sufficient to offset the cost pressure. So, an unfavourable combination of sharp gross margin erosion, inferior product mix and elevated operating expenses played a spoilsport.

Consequently, the company missed consensus estimates on profit and operating performance. Shares of the company fell 1.14% on the NSE in Friday’s trading session.

The near-term outlook offers limited comfort.

“Margin pangs remain as price hikes (+27%) continue to lag RM inflation (+38%) since Q1FY22. Consequently, EBITDAM (up 177bps YoY at 14.5%) missed expectations (16%). Future price hikes are likely to be measured as demand elasticity may get tested,” said analysts at HDFC Securities Ltd.

Meanwhile, the company announced that it plans to invest ₹6,750 crore over the next three years in expanding production capacity to 2.27 million kilolitres. It also plans backward integration of white cement, VAM and VAE and acquisitions like Weatherseal, White Teak and Harind, a nanotechnology company which operates in surface coatings.

“While improving margins would lead to better returns on capital employed, the new capex plan might dilute the same,” said analysts at Motilal Oswal Financial Services. It further added that with the entry of new players with deep pockets and massive commitments to investments, the overall industry may see a shift in demand and margin structure due to heightened competition. “We remain cautious as the sector may not enjoy the higher multiples of the past,” the domestic brokerage house said in a report.

Shares of the company trade at an FY24 PE of around 55 times, which in the current backdrop are expensive.