Asian Paints slips 3% as brokerage commentary sombre; Morgan Stanley, Jefferies cut rating

Shares of Asian Paints slipped as much as three percent on Friday as sombre commentary by brokerages weighed on the stock. Some foreign brokerages even downgraded their rating on the stock.

The stock had plunged on Thursday after the company reported lower-than-expected Q2 FY22 results.

Macquarie has cut EPS estimates for the company by 12 percent for FY22 to factor in Q2 miss and near-term gross margin pressure.

The brokerage has cut EPS estimates for FY23 and FY24 by two percent as it believes cost pressure is transient and has also trimmed its target price by two percent to Rs 3,900.

Further, Morgan Stanley has downgraded its rating on the stock to ‘underweight’ from ‘equal-weight’ taking into account that the unprecedented input cost inflation and slow price hikes may continue to weigh on margins and earnings in FY22.

Jefferies too downgraded its rating on the paint-maker's stock to ‘underperform’ from ‘hold’. It said lack of visibility deserves a de-rating.

Margin pressures due to steep raw material inflation and incommensurate price hikes have cornered HDFC Securities into toning down its FY23 and FY24 EPS estimates by seven percent each. The brokerage retained its ‘sell’ rating.

Asian Paints Q2 Results: Net profit falls 29% to Rs 605 crore, misses Street estimates

Motilal Oswal Financial Services also pointed out that, even as Asian Paints’ focus on topline growth and ensuing market share gains would lead to healthy earnings over the medium-to-long term, earnings for the next few quarters would be affected by intense margin pressure.

The brokerage has maintained its ‘neutral’ rating on the stock.

Meanwhile, HSBC that has a ‘buy’ call on the stock, has estimated that the current stock price of Asian Paints builds in long-term earnings growth expectations of around 15 percent which looks undemanding given its portfolio, strategy and execution.

Although Q2 results were disappointing, the management commentary has lent some comfort, as per some brokerages.

UBS noted that Asian Paints intends to take price hikes that are more aggressive, and as a market leader, the company needs to graduate price increases. This, according to UBS, is key to intermediary and consumer confidence, especially in this fragile environment.

Like UBS has a ‘buy’ call on the scrip, PhillipCapital too has maintained its ‘buy’ recommendation.

Asian Paints has solid moats like strong brand equity, an extensive distribution network, and a well-diversified product portfolio and its ability to quickly ramp up business within adjacent categories (waterproofing, construction chemicals, putty) makes it a “Must-own” company within one’s portfolio, PhillipCapital said.

“In the last three quarters, including we have seen plenty of strategic aggression from Asian Paints, which is gladdening our hearts leading us to buy even more of the stock,” said Saurabh Mukherjea, Founder, Marcellus Investment Managers.

He said, basis the results published yesterday, it is relatively clear, they are hammering the competition. The volume and value growth were both pretty similar suggesting that they haven't really taken meaningful price hikes as yet.

“This company is way more profitable than the competition, it is three times as large as its nearest competitor. So by preventing price hikes from coming through so far, Asian Paints is hammering the financial strength of its competitors. So, barring Berger Paints, one really worries about the rest of the companies and their ability to deal with this sort of pricing pressure from Asian Paints. This is a historical trait you will see this across sectors,” Mukherjea said.

In India consistent compounders --market-leading franchises suffocate the competition. When input prices go up, they deliberately hold back on price hikes, and the competition's margins get torched, he added.

Second about growth in the dealerships, already before COVID, Asian Paints had twice the dealership network that its closest rival did and as they said in their earnings that they have grown the dealership network by more than half. So at the peak they have around 80,000 dealerships and now they have through COVID added 40,000 more. So growing your dealership network by 50 percent through COVID is mind boggling, Mukherjea pointed out.

So Asian Paints is getting stronger, they are suffocating the competition, he said.