Hold Asian Paints; target of Rs 1625: Emkay Global Financial

Emkay Global Financial's report on Asian Paints

Asian Paints’ Q4 performance was below expectations. Weak mix and the extended lockdown from mid-March resulted in a 7% decline in sales and 3% fall in EBITDA, both below our expectations by 4% and 7%, respectively. Lower input prices aided gross margin expansion (280bps QoQ), which should continue as input prices remain soft. However, margin gains may reduce on rising crude prices, weak mix and likely price cuts. Lower sales and additional spends on safety, sanitization and trade incentives may also restrict the operating margins gains. Management indicated a stronger recovery in smaller towns, with metros and tier 1 (40 50% of sales) seeing slower recovery. Growth for VFM products is likely to remain strong and it will continue to drive higher growth in the low-end segment.

Outlook

Valuations at 46x FY22E EPS remain unattractive, given possible downside risks to earnings. We maintain Hold/UW in EAP, with a TP of Rs1625, based on 42x Jun-22 EPS.

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