Asian Paints overcomes margin pressure, but niggling concerns persist

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rural growth which was nearly on par with the urban market growth in Q1, the management added. On the other hand, the luxury paints category was laggard and is facing challenges. To remedy this, the company could consider taking price cuts if necessary.

But a niggling worry for investors in paints stocks remains the likely increase in competitive intensity and its impact on incumbents. That is likely to play a spoilsport for Asian Paint investors even as margins are set to improve. A concern here is that recovery in margins could drive better return on capital employed, new capital expenditure plans might dilute it.

“The worst of margin pangs seem behind. We’ve accounted for higher gross margin gains (versus earlier) and increased our FY25/26 EPS estimates (+3/+2%). Asian Paints, however, will jostle with hard revenue growth comps in FY24.

This, coupled with rising competitive intensity, could mean that the pricing lever may remain out of play," said analysts at HDFC Securities Ltd. EPS is earnings per share. Not only earnings outlook, the spectre of rising competition could also weigh on valuations.

"With the entry of new players with deep pockets and massive commitments to investments, the overall industry may see a shift in demand and margin structure due to heightened competition. We remain cautious as the paints segment may not enjoy higher multiples of the past," said analysts at Motilal Oswal Financial Services Ltd in a report. Shares of Asian Paints are trading at FY25 price-to-earnings multiples of around 55 times.