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Asian Paints Q4FY22 Review: Strong volume growth, pressure on margin continues…

ICICI Securities 13 May 2022

What’s Buzzing

Asian Paints reported strong revenue growth of ~19% YoY in Q4FY22, with surprise in volume growth. Margins as expected stayed under pressure on higher RM cost & adverse product mix.

Context

Asian Paint’s topline growth of 19% YoY Rs 7893 crore in Q4FY22 was supported by 8% volume growth and ~10% of realisation growth. The volume growth was much ahead of Street expectation as it came on the base 48% growth. Continued demand from tier III & tier IV cities, market share gains and aggressive product launches drove the overall volume growth. On the margin front, despite a steep price hike (of 21% in FY22) gross margin contracted ~448 bps, suggesting continued input cost pressure and deteriorating product mix. However, improved operating leverage limited EBITDA margin fall at 153 bps YoY to 18.3%. Accounting for one-time exceptional loss (forex loss/impairment in Sri Lanka) of Rs 115 crore PAT came in at Rs 874 crore, flat YoY.

Our Perspective

Despite a sharp price hike and a strong base, Asian Paints reported strong volume growth in Q4FY22. This reconfirms our belief that the structural demand drivers such as ‘shortening of repainting cycle’ and ‘revival in housing sector’ are in place. However, we build in a moderate volume CAGR at 11% in FY22-24E (vs. 15% in FY17-22) considering sharp price hike will hurt rural demand. We also believe further price hike (company plans to take further price hike of 5-7% in Q1FY23 addition to 21% price hike in FY22) can lead to a risk of downtrading, which can slow-down gross margin recovery. We believe gross margin expansion is a key trigger for a further re-rating of the stock.

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