ICICI Securities
Asian Paints (Add)
Target: ₹3,400
CMP: ₹3,104.45
First quarter of FY22 financial performance of two-year CAGR revenue growth of 4 per cent surprised consensus positively. While Asian Paint's gross margins declined a steep 630 bps, it’s focus on market shares gains appears to be successful – it says it has gained from organised players also (vs. consensus view of accelerating industry formalisation). It is outperforming in ancillary segments too (waterproofing and adhesives).
We believe Asian Paint's (higher-than-normal) price aggression in the market is a strategic choice which it is exercising prior to the (likely) increase in competitive activity when Grasim enters the market. While management expects some softening of input prices going forward, PPG US expects that aggregate input and logistics costs will be sequentially higher.
While consensus appears concerned about input inflation, market share gains (vs. maintaining margins) is DCF-accretive, in our view. It plans to focus on newer formulations (selectively), efficiency in sourcing, distribution and value engineering to mitigate inflationary pressures instead of raising product prices.
We model sales and earnings CAGR of 17.1 per cent and 17.3 per cent respectively, for FY21-FY23.
Lower-than-expected urban recovery and potential execution challenges in new categories are key risks.