Asian Paints share price jumped 7% on Wednesday morning despite a 1.8% fall in profits and a 7% on-year decline in net sales. While the share price surged to trade at Rs 1,802 per share, top brokerage firms held a contrarian view as they advised investors against buying the paint stock. Both sales and profits of Asian Paints were below estimates as lockdown initiated in the later days of March impacted the topline of the company. Paints sector, analysts say, might stay affected in the next few quarters as consumers may avoid discretionary spending.
The paint manufacturer was hit by the coronavirus pandemic, slashing the double-digit volume growth that Asian Paints saw in January and February. Volume growth in the domestic decorative paints business is likely to now stay in low single digits. Gross margins of the firm were up 410 basis points, but EBITDA margins were up merely 80 basis points, owing to higher expenses.
“Asian Paint will be impacted due to social distancing becoming a new normal, particularly due to lack of do-it-yourself culture with regards to house painting in India,” said brokerage and research firm Motilal Oswal in a recent note. The brokerage added that the impact of the severe real estate slowdown will be on-demand for paints in new construction, which accounts for 15% of decorative segment sales, will also affect growth prospects. Valuations of 59.4x FY22E EPS were termed as extremely expensive considering the 7.7% profit before tax growth that Asian paints has seen in the last 4 years. With SELL rating, a target price of Rs 1,315 has been pinned on the stock.
The management of the company is expecting rural markets to outperform urban markets while low value products like putty, primer and low end paints to grow better than premium products. Management commentary post the quarterly results claimed that while there was decline in domestic revenues, international business performed better. Asian Paints has initiated multiple schemes for the dealers such as extended credit, additional schemes/ discounts, free sanitization of their shops and insurance support for dealers, painters and contractors. Keeping in mind the supply chain disruptions, Asian Paints has also taken stock of the raw material imports from China and has now identified alternate sources to procure products.
While India has initiated its economic activities, the lockdown in metros is likely to push recovery at a slower rate for Asian Paints. Predicting a CAGR of 4% and 2.3% for sales and earnings till financial year 2022, brokerage firm ICICI Securities retains a HOLD rating on the stock with a target price of Rs 1,600 per share. Staging a smart recovery Asian Paints’ shares jumped 23% within one month of their March bottom. However, since then the stock has seen volatile movements going down 19% and also recouping the losses. Year-to-date to scrip is down 0.32%.
Holding a different view, analysts at Edelweiss are advising investors to BUY Asian Paints. “As normalcy returns, we believe APL’s operational ability and market leadership will help it regain volumes. Benign raw material prices should continue to aid margins,” Edelweiss said in a note. The brokerage firm has a target price of Rs 1,910 per share on Asian paints stocks.