Asian Paints declines for 11th straight day on uncertain demand outlook

The slight improvement in paint demand during January-February was offset by poor sales in March.
Shares of Asian Paints hit a seven-week low of Rs 1,512, down 4 per cent on the BSE on Tuesday on concerns of demand destruction in the near term due to the outbreak of coronavirus. The stock was quoting lower for the 11th straight trading day and was at its lowest level since March 25, 2020.

Since April 27, in the past 11 trading days, the stock of Asian Paints has underperformed the market by falling 18 per cent, as compared to a 1.8 per cent decline in the S&P BSE Sensex.

The slight improvement in paint demand during January-February was offset by poor sales in March. Also, April-June quarter (Q1FY21) & July-September quarter (Q2FY21) demand will be impacted by lockdown and monsoon.

Analysts at Goldman Sachs see significant risks to sales growth as they expect consumers to down-trade and extend the re-painting cycle given the macroeconomic slowdown. The brokerage firm forecast FY22E and FY23 volume growth to be 1.5x real GDP growth (lower than the long-term average of 1.7x) as consumers are likely to push back re-painting given the slowdown and Covid-19 concerns.

“We expect volume growth to slow to an average of 6 per cent over the next three years. We expect price/mix growth to be challenged (-4 per cent in FY21E) due to price cuts and consumers down trading to the economy segment,” the brokerage firm said in the stock update.

“The companies have increased cash discounts to dealers by 3.5 per cent from the start of April 2020. Companies are providing extra discounts to dealers (depending on the size of dealers) to realise the cash as early as possible (to avoid the fear of any default),” analysts at ICICI Securities said in the paints sector update.

The dealers are expecting companies to pass on the benefit of lower input cost with a lag of 45 days. Hence, the brokerage firm believes the major impact of benign raw material prices would come from October-December quarter (Q3FY21) onwards.

At 09:44 am, Asian Paints was trading 3 per cent lower at Rs 1,521 on the BSE, as compared to a 1.4 per cent decline in the S&P BSE Sensex. A combined 1.2 million equity shares changed hands on the counter on the NSE and BSE so far.

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