Buy This Large-Cap Paints Stocks For Potential Upside, Target Price Rs 3,689: Sharekhan

Asian Paints is India's largest decorative paint company with market leadership of over 50 years and stands among the top 10 paint companies in the world. The company has 26 paint manufacturing plants in 15 countries, serving customers in over 60 countries globally. The company offers paints - decorative and industrial, wall coverings, and waterproofing along with kitchen and bath fittings, adhesives, and services. Following the Q4FY22 result of the company, the brokerage firm Sharekhan has given a buy call for a target price of Rs 3,689 per share. The current market price (CMP) of Rs 3,031.35 per share, trading after falling 0.76% on 12 May 2022, IST 15.03.

Q4FY22 Results

The brokerage in its recent report on Asian Paints stated, "In Q4FY2022, Asian Paints Ltd's (APL's) consolidated revenues grew by 19% to Rs. 7,892.7 crore driven by an 8% rise in volumes (two-year CAGR of 26%) in the domestic decorative paints business while realisation growth stood at 12% during the quarter. Raw material inflation on y-o-y basis stood at 26%, reducing the gross margins by 448 bps y-o-y to 38.7% (same improved by 195 bps q-o-q as inflation remained stable) and OPM decreased by 153 bps y-o-y to 18.3% (remained stable compared to 18.1% in Q3). PAT grew by 10.3% y-o-y to Rs. 959.7 crore. The third wave of COVID-19 led to a short blip in January sales while February, March and April saw strong double-digit volume growth. In FY2022 consolidated revenues grew by 34% y-o-y (with decorative volume growth at 31%), while adjusted PAT grew by 11% (led by a 586 bps decline in the OPM)."

Key positives and negatives

Commenting on the positives of the stock, the brokerage has said, "February-March 2022 saw strong double-digit volume growth resulting 8% volume growth in Q4FY022 (on a high base of 48% volume growth). Kitchen business saw a third consecutive quarter of Rs. 100+ crore revenues while Bath business delivered second consecutive quarter of Rs. 100+ crore revenues; losses of kitchen business reduced significant on y-o-y basis. Industrial business PPG-AP and AP-PPG registered double-digit revenue growth of 16% and 28% respectively on back of good recovery in the auto sector and industrial coatings segment."

Whereas, commenting on negatives, the brokerage said, "International business' operating margins was profitability significantly impacted by the steep material inflation & currency devaluations in Sri Lanka, Ethiopia and Egypt resulting in 56% decline in IB PBT."

Buy for a target price of Rs 3689 per share

The brokerage has said in the report, "Asian Paints's dominant positioning in the domestic decorative paints business and focus on becoming complete home décor play in the long run gives us a visibility of better earnings growth in the medium term. Market share gains, distribution expansion and sustained new product additions will help the company achieve volume growth better than peers in the medium term. With the company focusing on becoming a complete home décor play (contributing 10% of revenues by FY2026), its valuation will continue to remain premium in the consumer space. The stock trades at 71.8x and 54.9x its FY2023E and FY2024E EPS. We maintain our Buy rating on the stock with an unchanged price target of Rs. 3,689. Key Risks Sustained high inflationary pressure putting pressure on sales volume in Tier2/4 market and volatile input prices would act as a key risk to our earnings estimates."

The brokerage further stated and said about the key risks, "Sustained high inflationary pressure putting pressure on sales volume in Tier2/4 market and volatile input prices would act as a key risk to our earnings estimates."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.