Shares of Asian Paints slumped over 4 per cent in early trading on Thursday to ₹2,848.15 on the BSE, after the company reported about 25 per cent decline in consolidated net profit in the June quarter. However, a late-hour recovery in broader market helped Asian Paints to end slightly higher at ₹2,930.45, down by 1.48 per cent from the previous day’s close.
Near-term prospects for Asian Paints look faded as the company’s Q1FY25 numbers fell short of Street expectations. The management attributed this fall to tough demand conditions caused by severe heatwave and General Elections.
Analysts feel that a 20 per cent year-on-year (y-o-y) decline in EBITDA indicates increasing headwinds and a sharp growth slowdown. Additionally, there is growing pressure from competition and rising raw material costs.
Antu Thomas, Senior Research Analyst, Geojit Financial Services, told businessline that a price war is currently underway, with Opus Paints, from the Aditya Birla Group, available at a 5-6 per cent discount compared to the market leader. This “ could affect the realisation and volume growth of existing market players. Meanwhile, with the benefit of deflation in input prices, organised players are passing the benefit to end-consumers by implementing price cuts.” He pointed out that Asian Paints took a 3.7 per cent price cut in Q4FY24, while Berger Paints slashed about 4.5 per cent.
“Going forward, the impact of increased competitive intensity is likely to create further pressure,” said global investment advisor Goldman Sachs in its commentary, giving a Neutral call on the stock with a target price of ₹2,750.
Brokerages such as JP Morgan and Nomura, too, have come out with ‘Neutral’ calls. While JP Morgan has set a target price of ₹2,800, the latter has set it a tad higher at ₹2,850.
Incred Capital, too, has given a word of caution: “As Birla Opus steps up its presence in the market, we see limited room for near-term margin expansion,” adding that it was retaining its ‘Reduce’ stand with a target price of ₹2,620.
However, Jefferies said in its report that the Asian Paints management has clarified that the quarterly performance has “nothing to do with the rise in competition”. It said that the multi-quarter low EBITDA margin translated into a 20 per cent decline in EBITDA, while initiating an ‘Underperform’ call on the stock and cutting the target price to ₹2,100.
Meanwhile, Citi in its report said that Asian Paints’ Q1FY25 Revenue/EBITDA/PAT declined 2 per cent/20 per cent/25 per cent respectively, missing estimates, recommending ‘Sell’ call on the stock, with a downward revision of the target price to ₹2,400 (₹2,600 earlier).
Future-perfect
Though the stock of Asian Paints is “likely to see sideways movement owing to increased competition from the new entrants which will keep the profitability under check in the near term,” Axis Securities said in its report that it remains positive on the company’s long-term prospects, owing to: double-digit volume growth guidance in FY25, buoyed by the long festive season and rural recovery; decline in raw material prices; recent announcement of a vinyl acetate ethylene emulsion and vinyl acetate monomer plant, plans of a white cement plant through a joint venture in UAE to backward-integrate key raw materials, expansion of manufacturing footprint by more than 30-40 per cent, and launch of emulsions and waterproofing products based on nanotechnology.
Terming these “steps in the right direction”, the brokerage has recommended ‘Hold’ on the stock with an upward revision of target price to ₹2,930 (₹2,800).
