Asian Paints (APNT) February-March (January muted due to Omicron waves) continues to see strong double-digit growth extending to April, despite a sharp c.17-18% sharp rise in H2FY22. It expects strong demand to continue in FY23 driven by deferred demand despite the high base (FY22 volume + 31% yoy).
But the recession may start with smaller markets: however, we notice that demand in the Tier-3,4 market has begun to moderate with down-trading, seen behind the sharp rise in prices. We believe that due to the pressure on the consumer wallet due to high inflation, the demand of the discretionary section like paint may be affected especially in Tier-3,4 market.
Margin pressure to return with controlled price: When APNT has been able to expand GPM sequentially
(-450bp yoy, + 190bp qoq to 38.7%) With sharp rise, it is again witnessing high input-cost inflation (Q1FY23 + 5-7%). We further note that APNT is reducing the intensity of the small increase in Q1FY23 (+ 2%) from the aggressive rise in H2FY22 despite rising inflation, as it is now becoming more sensitive to the demand for price elasticity. We believe that near-term margin pressures may increase again.
Long-term intact: APNT is developing world-class innovations (fire retardant paints, waterproofing) led by advanced technology, some of which are first-of-its-kind and / or patented, and therefore difficult to replicate to younger peers, and in our view an edge over its competition. Acquisition. It is dialing in investments in home decor / services, and is targeting 8-10% of sales from this new business in three years (vs. 4% now). It also hopes that both its kitchen and bathing business will be profitable in FY23.
Downgrade Neutral to Adverse Risk-Rewards: While delayed demand may support short-term volumes, we expect weak consumer discretionary spending to moderate demand amid high inflationary pressures. We expect to maintain margin pressure behind higher input-cost inflation. We have reduced FY23F / FY24F EPS by 18% / 15% due to rising costs and possibly slower volume growth due to margin pressure. We forecast a FY22-24F EPS CAGR c.25%.
We rate APNT at a P / E of 58x Mar-24F EPS (vs. 65x earlier, 11% lower) as the reason for our rising interest rate outlook. We reached a TP of 2,950 (vs. 3,875 ago). APNT trades at 61x Mar-24F EPS. Key Risk: High / Slow Volume Growth.