Brokerages cut target price of Asian Paints; stock under pressure after whistle-blower flags related party transactions

Brokerages cut target price of Asian Paints; stock under pressure after whistle-blower flags related party transactions
October 25
14:04 2021

The whistle-blower has alleged that money to buy Paladin Paints and Chemicals went from Asian Paints but its promoters Ashwin Dani and son Malav were controlling the company in their personal capacity

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Asian Paints share price was under pressure on October 25 after reports said a whistleblower had flagged related-party transactions done by the paintmaker’s promoters that allegedly benefited them at the cost of shareholders.

The stock has shed over 9 percent in the last five days and was trading at Rs 2,941.55, down Rs 43.10, or 1.44 percent at 11.27 am. It touched an intraday high of Rs 2,949.45 and an intraday low of Rs 2,855.60.

The whistleblower told the market regulator Securities and Exchange Board of India (SEBI) that money to buy Paladin Paints and Chemicals went from Asian Paints but its promoters Ashwin Dani and son Malav now controlled the company in their personal capacity, a CNBC-TV18 report said.

SEBI has reportedly sought details from the whistleblower.

“The said complaint was investigated in accordance with the Company’s Whistle Blower Policy, and after undertaking a detailed review of the transactions which were mentioned therein, the said complaint was closed as the enquiry concluded that the transactions were undertaken in compliance with the law, and there was no basis for the allegations made,” Asian Paints told In a the exchanges.

The company said it had entered into a technical consultancy agreement with Jayram Nadkarni, a former employee of Asian Paints, and Paladin Paints and Chemicals during the financial year 2005–2006.

The paints company, despite an impressive growth in revenue, has seen a sharp drop in profits because of higher raw material costs, leaving investors worried.

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The company on October 21 reported a 29 percent year-on-year decline in consolidated profit at Rs 605.2 crore for the quarter ended September 2021 as higher input prices dented operating income, missing analysts’ expectation.

Consolidated revenue during the quarter grew 32.6 percent year-on-year to Rs 7,096 crore, which came in higher than analysts’ expectations due to higher sales volumes.

Yes Securities | Q3 outlook looks positive

According to a report by Yes Securities, the third quarter outlook looks positive in the festival period with consumer confidence strong. Good monsoon augurs well for rural demand, uptick in housing construction and industrial demand.

A third wave looks remote. With persisting raw material inflation, a further price hike was imminent, target to cover large part of inflation over the next three months through a combination of aggressive price hikes, formulation efficiencies and cost controls. There were some concerns in international markets, especially Africa.

Elara Capital | Rating: Accumulate | Target: Rs 3,250

The research firm has an “accumulate” rating on the stock, with a price target of Rs 3,250 a share. It is of the view that Asian Paints is assertively driving growth, gaining market share from unorganised players and expanding offerings to emerge as a complete home décor company.

“We recommend accumulate as we assign 64x P/E (1STD above its five-year average P/E) to arrive at a target of Rs 3,250 on September 2023E EPS of Rs 50.8. Key upside risk is higher-than estimated revenue growth and downside risk is lower-than-estimated EBITDA margin,” it added.

Motilal Oswal | Rating: Neutral | Target: Rs 2,930

Research and broking firm Motilal Oswal has a neutral call on the stock with target of Rs 2,930 a share. According to its report, the big miss on the results has led to a 22.7 percent/7 percent cut in our FY22E/FY23E EPS.

While sales growth has been impressive, the challenging base ahead for 2HFY22 and persistent material cost pressures would significantly impact earnings growth over the next few quarters.

“Valuations are expensive at 69x FY23E EPS. We maintain our neutral rating, with target of Rs 2,930 on 60x Dec’23 EPS,” it said.

Axis Securities | Rating: Buy | Target: Cut to Rs 3,300

Axis Securities has maintained a “buy” call on the stock, with the target at Rs 3,300 a share.

Asian Paints remains upbeat on the sustenance of demand on the back of a recovery in Tier 1 and 2, urban centres, expanding distribution footprint (added 40k retail points in the last 18 months), good monsoon, upgrade to emulsion at the bottom of the pyramid and healthy festival season-led demand, a report said.

Market share gains from both organised as well unorganised players continued to be reported by ANPT. Beautiful Home Services gained improved traction with the kitchen and bath business achieving break-even at the EBTIDA level.

The international business reported healthy performance and is expected to continue. However, to bake in the high inflationary environment, our FY22E see a sharp downgrade, while FY23E/24E estimates for EBITDA/PAT are lower by 8.9 percent/9.6 and 6.7 percent/7.1 percent, respectively.

“The long-term structural story remains intact, with drivers such as clear focus on driving volumes and profitability, improved traction in other adjacent business segments, market share gains, and huge growth opportunities in the rural and small towns. Even as we continue to value the stock at 57x FY24E EPS our target undergoes a downward revision to Rs 3,300 per share from Rs 3,510 earlier,” it added.

Emkay Global | Rating: Hold | Target: Cut to Rs 2,800

Emkay Global Financial Services has a “hold” rating on the stock with the target at Rs 2,800 a share.

“With input inflation getting back to the peak, FY21 margins appear challenging. We raise sales estimates by 6 percent, factoring in the strong growth momentum, but reduce margin assumptions.

“As a result, we cut earnings estimates by 23 percent/13 percent/7 percent for FY22/23/24 and retain hold with a revised target of Rs 2,800 (Rs 2,960) based on 55x Dec’23E EPS,” it said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.