Asian Paints Share Price Target: Why Did Asian Paints Stock Fall 9%?

Asian Paints, a leader in the Indian paints industry, faced a significant dip in its stock price recently. On Monday, the company’s share price tumbled 9.3%, reaching a low of Rs 2,511.65 on the Bombay Stock Exchange (BSE).

Asian Paints, an Indian paints market leader has witnessed a deep plunge in its stock price lately. On Monday, the share price of the company fell 9.3 percent to a low of Rs 2,511.65 on the Bombay Stock Exchange (BSE). The plunge has been triggered by Q2 results, which turned out to be slightly weak, a downward revision in earnings estimates and a series of downgrades by major brokerage firms.

What Triggered the Fall in Asian Paints Share Price?

The greatest reason for the share price decline at Asian Paints was its Q2 financial performance that was lagging behind the expectations in the market and the competition as well. Analysts said Asian Paints reported a year-over-year decline of 0.5% in volumes, while the rest of the players in the sector witnessed around a 3-4% growth. The sales and EBITDA of the company plummeted sharply, and it seemed to be a challenging quarter for the company.

Nomura India cut earnings-per-share estimates for Asian Paints by 13% each for FY25-FY27, citing weak results. The firm downgraded its target price for Asian Paints to Rs 2,500 from Rs 2,850 and has an EPS CAGR estimate of 12% during FY25-FY27. Asian Paints retains a neutral rating at Nomura, cautioning that it continues to face challenges.

The Asian Paints has coming out in Q2, and varied brokerage houses have revised their view on the same.

Nomura has cut its target price to Rs 2,500, expecting an earnings-per-share growth rate of 12% for the following years along with the point where a gross profit margin contraction begins. Gross profit margin contracted 260 bps YoY to 40.8% in Q2 compared to 42% expected by the firm.

JPMorgan has downgraded Asian Paints to “underweight” from an existing “neutral” level with a target price of Rs2,400. The intrinsic call remains cautious in the backdrop of the company’s ability to absorb rising input costs as well as its cost/margin management. Jefferies targets Asian Paints at a relatively modest Rs2,100, while Morgan Stanley is one notch higher at Rs2,522. Asian Paints has mixed views coming in. Factors affecting Asian Paints’ margins and market position are:
The fall in Asian Paints’ stock price was more vitally driven by operational issues cutting into profitability:

Gross Margin Pressure: Gross profit margin for Asian Paints declined on the back of several factors such as lower sell of exterior high-margin paints, increased cost due to cost of inventory and increased dealer rebate. These changes consequently saw gross margin contracting to 260 basis points at 40.8%.

Operating Profit Margin (OPM) Squeeze: Asian Paints’ OPM declined by 480 bps to 15.4% for Q2 compared with an estimate of 18.4% from analysts. This was mainly because staff cost jumped by 13% and others in the industry were also on the same lines.

Price Rise and Asian Paint's Outlook

Asian Paints had, with this 2.5% price hike in Q2, pushed back the pressures on its margins. Nomura believes that this should keep pricing steady in Q3 and maybe a modest 2-2.5% price increase in Q4. Analysts expect Asian Paints and its peers to see margin expansion begin in Q3, driven by lower input costs, better product mix, and benefiting fully from the price hikes announced in Q2.

Nomura also estimates potential EBITDA recovery, as it expects all industry relief in the margins front owing to stabilization in raw material prices.

Asian Paint is undergoing a tough phase, facing high costs, competitive pressures and operational setbacks. Though this stock has dropped sharply by quite a percentage recently, the analysts are still hopeful concerning recovery, as it reveals the improvement in pricing strategy and cost management. The investors will closely monitor the quarters going ahead and understand if the company can stabilize and achieve the EPS growth estimates. Since all the major brokerage houses have maintained a neutral to a cautious view, share price performance going ahead shall be influenced by Asian Paint’s ability to garner momentum and operational efficiency about the current challenges.

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