Market Reaction and Analysis
Asian Paints' shares fell by 6% on January 28th due to mixed brokerage reviews of its December quarter financial results. CLSA maintained an 'Underperform'
rating with a price target of ₹1,875, implying a potential further 29% decline. This was influenced by the observation that consolidated revenue growth of 3.7% underperformed expectations by roughly 2%. The firm also highlighted the gap between revenue and volume growth as a significant concern, despite high single-digit volume growth. HSBC downgraded the stock to 'Hold' and reduced its price target to ₹2,900, expressing worries over disappointing volume and revenue expansion in the third quarter. It also cautioned about potential sustained weak retail demand, even though the company's margins were strong. Goldman Sachs rated the stock 'Sell' and set a price target of ₹2,500, indicating that the company's performance was below expectations. The brokerage pointed out weak decorative growth in India, despite favorable conditions, and cited muted demand expectations. Citi maintained a 'Sell' rating, reducing its revenue estimates for fiscal years 2026-2028 by 3% due to slower-than-anticipated growth. Conversely, Jefferies retained a 'Buy' rating with a price target of ₹3,300, noting that domestic volume growth remained strong at around 8% year-on-year, despite seasonal challenges. The report highlighted the disparity between revenue and volume growth as a key issue.
Brokerage Insights and Ratings
The varying perspectives from brokerages reveal nuanced views on Asian Paints' performance. CLSA's concerns extend to the difference between revenue and volume expansion, leading to a downgrade. The company's guidance points toward mid-single-digit value growth and high single-digit volume growth, which CLSA views with skepticism. HSBC's downgrade to 'Hold' reflects worries about Q3's weaker performance, coupled with retail demand concerns. The strong margins were not enough to offset the predicted future risks. Goldman Sachs emphasized disappointing decorative growth in India, even with favorable conditions, coupled with moderate demand commentary. Citi cut revenue estimates for the next few years because of a slower growth momentum. Jefferies' positive outlook was supported by respectable domestic volume growth, although it also raised the issue of a large gap between volume and revenue growth. Nomura reiterated its 'Buy' rating, with a price target of ₹3,250, mentioning how fewer painting days impacted volumes and acknowledging that margins were high, though the street may not be excited by the guidance.
Factors Impacting Performance
Several factors were at play during Asian Paints' December quarter performance. Unseasonal rains and a shorter festive season weighed on the company's performance during the quarter. The company's consolidated revenue growth of 3.7% came in roughly 2% below CLSA’s expectations. Standalone volume growth was at 7.9% year-on-year. The company's gross margin was much better than expected, thanks to lower commodity expenses and some operational leverage. HSBC warned that weaker retail demand trends could continue. Goldman Sachs noticed that the margins were currently at the higher end of the guidance range, with any future improvements likely to be reinvested. Nomura stated that fewer painting days during the quarter negatively impacted volumes, despite improvements in January. Management’s growth outlook remained optimistic, focusing on expanding market share and highlighted the company's ability to maintain high margins of around 20% despite continuing competition.
Financial Outlook and Targets
Brokerages have provided various price targets for Asian Paints, reflecting their expectations of future value. CLSA has set a price target of ₹1,875, suggesting a potential 29% downside. HSBC reduced its price target to ₹2,900. Goldman Sachs set its target at ₹2,500. Citi's price target is ₹2,300. Jefferies set a high target of ₹3,300, maintaining a 'Buy' rating. Nomura's reiterated 'Buy' rating comes with a price target of ₹3,250. These targets highlight the divergent views on the company’s near-term prospects. For fiscal years 2026-2028, CLSA cut its earnings estimates by 0-7%. Citi cut revenue estimates by 3%. The trading price of Asian Paints is about 47 times its March 2028 forward earnings. On Tuesday, after the earnings announcement, shares ended 2.8% lower, at ₹2,628, indicating an immediate market reaction.
