Asian Paints Ltd is feeling the heat as brokerages continue to slash earnings estimates following weak December quarter (Q3FY25) earnings. Not only that, the outlook for the next two quarters remains challenging due to persisting stress in urban demand. The company’s management expects a gradual recovery only in H2FY26.
In the meantime, the company aims to drive single-digit volume growth in decorative paints while improving its product mix. However, consumer downtrading has led to faster growth in lower-margin mass and economy segments, keeping the product mix inferior and impacting profitability.
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Asian Paints’ domestic decorative paint volume grew just 1.6% year-on-year in Q3FY25, hurt by a weak festival season and muted urban demand. Standalone revenue, primarily from its domestic decorative paints business, declined 7.5%, a sharper drop than anticipated. Consolidated revenue fell for the fourth straight quarter.
Gross margin contracted year-on-year to 42.4%, pressured by an inferior product mix and higher rebates. However, a sequential improvement was seen due to lower material costs and price hikes taken in the past two quarters. While Asian Paints expects raw material prices to soften, a weakening rupee is a concern, as it could drive up costs for imported inputs. Ebitda margin dropped to 19.1%, staying within the management’s guidance range of 18-20%.
The competitive landscape, meanwhile, is shifting. As Birla Opus commences operations at all its plants, likely in FY26, and expands distribution, Asian Paints may have to incur higher marketing spends and offer deeper discounts, which could strain profitability. If consumer sentiment remains weak, the company could face the dual risk of market share erosion and Ebitda margin contraction, said ICICI Securities Ltd.
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“Considering recent actions of price cuts in putty and entry-level emulsion paints, we model Asian Paints to sacrifice margins in order to protect the market shares,” it added.
So far, management has not observed a significant shift in market share due to new competition but acknowledges it may be too soon to gauge the full impact. The company compared the current slowdown to the 1990s, the last time the decorative paints industry faced a prolonged downturn.
“Asian Paints’s acute underperformance versus the industry in Q2/Q3 and caution on the Q4/Q1 outlook (revenue decline likely to continue) is worrying. Ebitda margin has slipped to the lower end of the guidance (18- 20%), even as Grasim has just started and gained limited traction (3-4% market share),” said a Kotak Institutional Equities report dated 5 February. Further, a potential revival of the ‘Dulux’ brand under a new owner following Akzo Nobel’s exit could hurt Asian Paints’ dominance in the premium segment, it added.
Kotak Institutional has cut FY25-27 earnings per share estimate by 3-5%.
To beat slowdown blues, Asian Paints is focusing on rural distribution expansion and strengthening its B2B and industrial businesses. It has launched NeoBharat Latex paint and sees meaningful potential in the latex paint market, and is working on faster painting solutions to increase painting frequency. In the home decor business, the management is confident of a pick-up in White Teak/Weatherseal going forward.
However, according to analysts at Prabhudas Lilladher Ltd, the diversification into other segments in home improvement, like bath, kitchen, and home decor, has been slow to scale up and cannot compensate for the sluggish growth in its core decorative paints business. The home decor segment currently contributes 4.5% to the decorative paints business’s revenue.
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Meanwhile, the Asian Paints stock has massively underperformed the Nifty50 in the last year, falling 22% as ongoing earnings cuts have marred sentiment. Bloomberg data shows that at FY26 price-to-earnings, the stock trades at an unattractive multiple of 47x.
