Asian Paints – Magnificent Impressions

Asian Paints company’s volumes and earnings are powerful, but a spurt of competitors is a risk to the fortunes of the company.

Quarterly Earnings Results Walkthrough

Market leader Asian Paints has reported a healthy set of numbers for the second quarter of the current financial year though sustained inflationary pressure has impacted margins sequentially.

The company continues their dominance and prowess on the paints market by expanding its manufacturing footprint. The company is going to invest about Rs 6750 crore over the next 3 years, and majority of it will be spent on paint capacity expansion and setting up of new manufacturing units for white cement and intermediary chemicals that are used in a variety of coating and painting applications.

The consolidated revenues for the quarter grew by 19 percent year on year (YoY) to Rs 8458 crore led by a double-digit volume growth in the decorative paints business. The overall demand conditions were impacted by a prolonged monsoon, especially in the west and the south. The consolidated net profit for Q2FY23 has risen to Rs 804 crore which is a 33 percent growth from Rs 605 in the same quarter of the last year.

There was a consistent momentum in demand across Tier 3/4 cities, which have recorded double-digit growth in the economy emulsions and the undercoats segments. For Tier 1/2 cities, the market turned weak due to the extended monsoon.

Segment-wise performance

The industrial business of Asian Paints has shown performance, led by demand recovery across the automotive segment. The Industrial Coatings JV (AP-PPG) also fared well on the back of growth in the Protective Coatings segment.

Regarding the home improvement business, both the kitchen business and the bath business brought revenues of over Rs 100 crore each. The growth in the kitchen business was supported by the current integration of the business operations with the Beautiful Homes Stores network. For the bath business, project collaboration and premium business are gaining traction.

Asian Paints has forayed into premium lighting and UPVC doors and windows with the acquisition of White Teak which has generated revenue of Rs 24 crore and Weatherseal which has generated revenue of Rs 7 crore.

The International business has shown a double-digit revenue growth in Q2FY23. The highest growth came from Asia followed by Middle East, Africa, and the South Pacific region. Regarding profitability, commodity inflation and currency devaluation took a toll on the margins across Sri Lanka, Ethiopia, and Egypt.

Since a possibility of persistent inflation is hurting consumer sentiments, festive demand was dented by extended monsoon. But the company still sees an upside in demand on the back of a pick-up during the marriage season and a surge in the Project/Institutional business.

Business Expansions

Asian Paints to about to set up a manufacturing facility for vinyl acetate ethylene emulsion, vinyl acetate monomer in India. A royalty of about Rs 2100 crore will be invested by the company over a period of 3 years, including the cost of land to be acquired.

The company has also entered into an agreement with Riddhi Siddhi Group (and others) to set up a joint venture in Fujairah, UAE, at an investment of about Rs 550 crore over the next 2 years. The proposed joint venture will be set up with a 60:40 partnership to manufacture white cement with a capacity of 2.65 lakh tonnes.

Technical Analysis

Asian Paints Weekly Candlestick Chart on Sharekhan’s TradeTiger

The stock has made a triple top and has a clear distribution zone around its lifetime high of Rs 3590. The stock is trading above the 100-day exponential moving average which tells us that the stock is expensive.
The stock had taken heavy support at its 50% retracement level at Rs 2510 which is a good level for fresh investments. The stock currently is taking support on the 23.6% retracement level of Rs 3080.
MFI is at 40 which is not in the oversold zone. A good investment could be when MFI falls below 30.
Accumulation of this stock on every correction is a good opportunity as Asians Paints is a market leader with a bright performance and new operations for expansions of the business.

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