The share price of Asian Paints fell nearly 1 percent in opening trade on Thursday after the company reported its Q1 earnings with the net profit coming in below market expectations.
The profit doubled to Rs 219.6 crore, as compared to a year ago. However, it was below the CNBC-TV18 poll estimate of Rs 721 crore. The profit saw a steep jump YoY owing to the low base of last year.
The company's revenue jumped 91.1 percent YoY to Rs 5,585.4 crore in the first quarter of FY22. The revenue was slightly above the CNBC-TV18 poll estimate of Rs 5,550 crore.
Asian Paints recorded a volume growth of 106 percent with 95 percent value growth during the Q1 FY22. The growth was majorly on the backs of lower base in the previous year and increased demand.
The company witnessed a steep inflation to the extent of 13-15 percent during the quarter and it hiked the prices by 3 percent. More price hikes are expected.
Here's what brokerages have to say on Asian Paints' stock and Q1 earnings:
Asian Paints' business momentum revived in June '21 after the second wave of COVID-19 infections hit the country in May '21, the brokerage said.
"In an inflationary setting, its focus on sustaining share gains eroded gross margin," the brokerage said. However, on a low base, EBITDA margin contraction was limited to 20 basis points YoY to 16.4 percent, it added
Asian Paints is optimistic on demand in FY22 with better monsoon, long Diwali, and pent-up demand. It looks to maintain an EBIT margin at 19-21 percent, noted the brokerage.
"Better top-line delivery and expected easing in margin pressure in FY23 make us raise earnings by 11 percent," CLSA said in the note.
It retained its 'outperform' rating on the stock and upgraded the target price to Rs 3,275 from Rs 2,950.
The brokerage firm said the revenue growth of 91 percent, led by a volume growth of 106 percent was ahead of its expectations.
"The company is aggressively pursuing volume growth and network expansion, out-investing rivals in customer centricity and branding, raising an already high bar," it said.
Therefore, the company has a 'buy' rating on the stock with a target price of Rs 3,500.
The brokerage firm said the contraction in gross margin raises questions about its pricing power. While the second quarter is likely to benefit from the pent-up demand, Goldman Sachs remains cautious.
The brokerage has a 'sell' rating on the stock with a target price of Rs 1,679.
Asian Paints has reported a commendable bounce back in FY21, ending up with positive sales growth of 7 percent for the full year as well as in Q1FY22, despite the significant impact of lockdown, said the brokerage.
However, it says the stock is trading at rich valuations of 69.5 times the forward estimate of its earning, which "prevents us from taking a more constructive call on the stock". The brokerage maintains a 'neutral' rating.
The first quarter performance re-emphasised on the resilient nature of decorative demand, the brokerage said. It added that it is less worried about the near-term margin pressure and maintained its 'outperform' rating with a target price of Rs 3,500.
Morgan Stanley downgraded the stock as the company's margins disappointed the firm, despite the topline beating its estimates.
The management is confident in the growth outlook, it said, "but the uncertain direction of margin leads us to move to sidelines." The brokerage firm will wait for a better entry point. For now, the stock is rated 'equal-weight' with a target price of Rs 3,143.
Yes Securities said, "The stock has seen a strong outperformance and is now tracking at an all-time high valuation multiple of 68 and 59 times the forward estimate of its FY23 and FY24 consensus earnings, respectively."
While the strong near term outlook in demand and pricing actions driving margin recovery can help sustain these valuations, there is limited room for positive surprises, according to the brokerage.
"Further, a rise in material inflation and margin/ROCE 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.
Nomura noted the company had strong demand despite the second wave of COVID-19 infections, aided by share gains from unorganised and organised players. It said the margins will remain compressed in the near term as pricing trails commodity inflation.
It maintained a 'neutral' rating on the stock with a target price of Rs 3,300 and said the medium-term margin will remain range-bound given Grasim's foray into the paints industry.
UBS maintained 'buy' rating on the stock with a target price of Rs 3,550 as it noted that even though the quarter was tough for the company, its outlook has improved.
At 13:05, the stock was trading 1.49 percent lower at Rs 3,111.90 on NSE.