Both urban and rural markets have shown strong recovery – Asian Paints

Update on the Indian Equity Market:

On Monday, NIFTY closed at 18,125 (+0.1%). Private bank (+2.2%), Bank (+2.2%), and Financial Services (+1.3%) were the sectorial gainers, while Realty (-2.8%), Auto (-1.8%), and Consumer Durables (-1.4%) were the losers. The top gainers in NIFTY50 were ICICI Bank (+11.5%), AXIS Bank (+3.5%), and ONGC (+2.7%). The top losers were BPCL (-3.3%), Bajaj Finserv (-3.3%), and SBI Life (-2.9%).

Excerpts of an interview with Mr. Amit Syngle, MD, and CEO of Asian Paints with ET Now on 22^nd Oct 2021:

• In 2QFY22, both value and volume growth has been very strong. Unlike FY21, Metro T1 and T2 cities have performed well this year. The demand sentiment in the bigger cities have been pretty good because they are growing rapidly compared to T3 and T4 cities.
• The difference between value and volume growth is not much, and overall, both are healthy because of leeway with respect to the premium in the luxury products.
• Real estate and construction have been picking up and that has contributed to the overall growth. Institutional markets also looking strong, though it cannot be attributed to pent up demand. During the quarter they have seen very healthy volume growth.
• They feel that new demand has come in at this point of time. In Q1FY22, May was affected very badly but in June the growth was good.
• Overall, the sentiments have been much better. The markets have been great and monsoons have provided very strong sentiments which may have contributed to a very strong volume growth.
• Asian Paints has a strong presence in both rural and urban markets. They are expanding their business in rural markets aggressively in the last two years. The monsoon has been good and it is strongly reflecting on the whole agriculture income.
• The trend shows in H1 was that while T1 and T2 cities have done well. The T3 and T4 cities have performed relatively lower but the overall growth has been quite satisfactory.
• Increase in the prices of raw material is not only in India, it is happening across the world. Asian Paints took some pre-emptive actions in terms of taking price increase but they did not want to destabilise the markets.
• In 2QFY22 the inflationary trends continued and they expect this inflationary trend continue well into Q3FY22 as well. This is really unprecedented in terms of what they have seen in last 40 years, they are taking one series of price increase to address margins issues.
• They are looking at formulation efficiencies in a big way. They have done lots of work in last six months, bringing innovation in technology both in terms of formulation as well as manufacturing and that has given very good results.
• They have taken an overall price increase of about 7.5% over the last six months. Going forward, the pace of price hikes would be a little bit higher.
• Price increase is not the only strategy, the company will look at a lot of other areas so that they are able to improve the overall margin trajectory.
• The price elasticity is more towards the economy set of products not towards the premium or luxury products. Overall price elasticity exists as far as demand in concern. They definitely see what they are going to balance is in terms of saying how do they take price hikes so that market sentiments not affected.

Asset Multiplier Comments

• The paints sector is likely to deliver strong topline growth as the organized players have started gaining market share from the unorganized ones. This growth will be aided by opportunities in the rural market which offers good prospects after a good monsoon season.
• In 2QFY22, Asian Paints missed street estimates on the bottom line due to a rise in raw material prices. Steep inflation in raw material prices impacted the operating margins. The Company is confident of turning around the situation in the coming quarter due to festive demand.

Consensus Estimate (Source: market screener websites)

• The closing price of Asian Paints was ₹ 2,923/- as of 25-October-21. It traded at 89x/65x/53x the consensus EPS estimate of ₹ 32.8/45/54.6 for FY22E/ FY23E/FY24E respectively.
• The consensus target price of ₹ 3,076/- implies a PE multiple of 56x on FY24E EPS of ₹ 54.6/-.

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