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Motilal Oswal Report
Asian Paints Ltd. posted 2%/3% YoY decline in consolidated/standalone revenue in Q1 FY25. Decorative volume grew 7% YoY (estimate 12%). The value versus volume gap was in the range of 5-6% versus ~12% in Q4.
Revenue growth was affected by price cuts in the last quarter (~3.5% in Q4), an unfavorable product mix, general elections and heat waves.
Raw material prices rose 1.8% in Q1 and are expected to rise ~1.5% in Q2. To offset these costs, Asian Paints implemented a ~1% price hike in July 2024 and may hike again in the upcoming quarter. Gross margin contracted by 40 bp to 42.5% in Q1. Monitoring gross margin in FY25/FY26 will be crucial due to the changing competitive landscape, rising raw material prices and ongoing supply chain challenges.
Employee and other overhead costs hurt Ebitda margin, which contracted by 420 bp YoY and 50bp QoQ to 18.9%. Asian Paints added new employees to expand its distribution and retail touchpoints. Ebitda declined by 20% YoY (est. -6%).
Given the changing competitive landscape, a high mix of economy/mid-segment, and the company's focus on volume traction, we estimate Ebitda margins of 20.7%/21.0% in FY25/FY26.
Despite Asian Paints’s various initiatives to boost volume growth, revenue growth excitement does not look like in FY25 due to price cuts, downtrading and competitive pressure. Besides, sustaining the current high-level Ebitda margin is also a challenge for Asian Paints in the near term.
We reiterate our Neutral rating with a target price of Rs 3,150 (based on 45 times FY26E EPS).
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