What investors should do after Asian Paints misses Q2 estimates — buy, sell or hold?

After India's largest paint manufacturing company, Asian Paints' September quarter earnings missed street expectations on topline and margins, a clutch of top brokerages came out with their views on the paint stock.

Among them were global brokerage Morgan Stanley which has an 'Underweight' rating on the counter with a target price of ₹2,702 per share. While, Jefferies has a ‘Underperform’ rating on the Asian Paints stock with a target of ₹2,500.

Jefferies said that the second quarter results were a miss due to weak consumer sentiment, along with delayed festive season and an erratic monsoon. According to the brokerage, the management commentary was positive on Q3 as a shift in season will likely show up in volume growth.

HSBC, meanwhile, has a target of ₹4,000 on Asian Paints with a 'Buy' rating. The global brokerage expects volume growth to rebound in the December quarter. HSBC also said that the outlook for the second half of this fiscal (H2FY24) remains strong and valuation looks appealing.

Asian Paints reported volume growth of 6% in the second quarter as against an estimated 8%. The management highlighted a top-line moderation, citing weakened consumer sentiment and emphasising the sensitivity of demand growth to unpredictable rainfall patterns. Additionally, a decline in demand was observed in rural markets, with urban centers showing better performance than their rural counterparts.

Gross margins currently reside at the highest levels observed in the last 10 quarters. However, looking ahead, Motilal Oswal said there is an anticipation of potential upward movement in input costs. "This is influenced by larger geopolitical factors and currency fluctuations, particularly expecting an upswing in material prices, especially those derived from crude."

The management has given guidance for the EBITDA margin to be in the range of 18-20%. As per Motilal, the management expresses optimism for an extended festival season, foreseeing a rise in rural growth in H2FY24, buoyed by expectations of a bountiful harvest and an improving economy, supported by effective government spending

"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," Motilal said.

The brokerage pointed out that re-rating was a bigger driver of stock price appreciation for Asian Paints over the past five to six years, as the earnings compounded annually has been in the 10-12% range.

Nuvama, meanwhile, slashed its FY25 and FY26 earnings per share (EPS) by 5.5% and 5.6%, respectively, and multiple from 60 times to 55 times, factoring in a recent spike in RM costs, rural slowdown and kitchen or bath business remaining muted.

This, as per the brokerage, yielded a revised target price of ₹3,505 from Rs 4,045 earlier. Key risks, as per Nuvama, include spike in RM prices, Grasim entry.

What Nuvama liked: Asian Paint's decorative business logged double-digit volume growth of 14.7% on a four-year CAGR. Its plans on capacity expansion, backward integration are progressing well. "In our view, the gap between sales and volume growth at 6% is slightly higher than usual 4-5%, which may be due to higher discounting given higher margins and faster growth of putty or construction chemicals."

What Nuvama didn't like: The revenue remained flat year-on-year on account of the impact in global and kitchen business. The Kitchen and Bath businesses disappointed with revenues down 18% and 20% respectively YoY, on the back of weak consumer sentiments and high base for Kitchen business due to price increase. The revenue for the international business saw a mere 1.9% YoY growth in constant currency terms but declined 3.9% YoY in rupee terms, led by a subdued performance in key markets, especially South Asia and Egypt.

Shares of Asian Paints were trading almost flat at ₹2,951.25 apiece on the NSE today. The scrip has gained nearly 2% in the last six month. On a year-to-date basis, the stock has tumbled over 3%.