Should you buy Asian Paints post-Q1 results?

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Brokerages retained their mixed view on Asian Paints after the paints major on Tuesday posted an over two-fold growth in its consolidated profit to Rs 574.30 crore for the first quarter ended June 30, 2021, on account of higher revenue from operations. It had reported a profit of Rs 219.61 crore in the same quarter last year.

Consolidated net sales of the company increased by 91.11% to Rs 5,585.36 crore in Q1FY22 compared to Q1FY20. Sales of the paints segment have gone up 90.37% to Rs 5,464.66 crore (accounting for 97.82% of total sales). On the other hand, sales of the home improvement segment increased by 133.25% to Rs 121.50 crore.

On a year-to-date basis, shares of the company have gained over 14% till date, while the benchmark BSE Sensex has advanced 9% during the same period.

What’s next?

Sharekhan holds a ‘Buy’ call on Asian Paints with a target price of Rs 3,550. “Gradual softening of input prices, price increase of 3-4%, better product mix and supply efficiencies would help ease out gross margin pressure. Overall, we expect Asian Paints’ revenue to grow in strong double digits in the near to medium term, while the consolidated operating profit margin is expected to stand at 21% in FY2022.”

Further, management of the company expects double-digit volume growth momentum in decorative paints to sustain for the medium term, driven by 1) strong growth in Tier-3 and Tier-4 markets (as consumers are shifting to branded products and upgrading to emulsions from distempers), 2) expansion in a product portfolio that creates more options for urban consumers to improve their homes and 3) waterproofing and undercoats gaining strong traction due to lower quality of construction. This will be well supported by the home improvement business, which is focusing largely on complete home décor play. Moreover, industrial and automotive paints are expected to see a strong recovery in demand in the coming quarters.

On the other hand, YES Securities added that the stock has seen a strong outperformance and is now trading at an all-time high valuation multiple of 68 times FY23 and 59 times FY24 consensus earnings. While the strong demand outlook in the near term and pricing actions driving margin recovery can help sustain premium valuations, there is limited room for positive surprises from here.

“Further rise in material inflation and margin dilution due to diversification could be risks to an otherwise flawless execution story. Given limited absolute upside, we don’t recommend aggressive buying at current levels,” the brokerage said.