Backward Integration And Premium Emulsions Will Drive Long Term Market Leadership

Catalysts

About Asian Paints

Asian Paints is a leading coatings and home decor company that offers decorative, industrial and waterproofing solutions, along with integrated home improvement and service offerings.

What are the underlying business or industry changes driving this perspective?

• Scaling high differentiation backward integration projects such as the white cement and VAM VAE plants is expected to structurally lower input cost volatility while enabling Next Gen emulsions. This supports higher gross margins and more resilient earnings through cycles.
• Rapid expansion of tech enabled and AI infused service platforms like Beautiful Homes, Total Assure and Metacare is deepening customer relationships and increasing wallet share per project. This is expected to drive faster revenue growth and richer net margins as services scale.
• Sharpened regionalization, micro marketing and localized packs that tap into cultural preferences across India are strengthening brand affinity and execution efficiency. This is expected to sustain above industry volume growth and support premium pricing, lifting revenue and operating margins.
• Accelerated innovation in premium and luxury emulsions, waterproofing and designer wood finishes, with new products already exceeding 15 percent of revenue, is positioning the portfolio toward higher value categories. This can support value growth, mix led gross margins and earnings over time.
• Growing B2B and industrial coatings participation in auto, protective and infrastructure related projects, combined with a strong recovery in international markets like the Middle East and South Asia, is broadening profit pools beyond domestic decorative. This is enhancing consolidated revenue growth and PBT margins.

Assumptions

This narrative explores a more optimistic perspective on Asian Paints compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Asian Paints's revenue will grow by 11.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.3% today to 15.3% in 3 years time.
• The bullish analysts expect earnings to reach ₹73.1 billion (and earnings per share of ₹76.24) by about December 2028, up from ₹39.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹54.7 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 64.6x on those 2028 earnings, down from 68.7x today. This future PE is greater than the current PE for the IN Chemicals industry at 23.8x.
• The bullish analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Industry demand has been weak, with management indicating the paint sector grew only around the low to mid single digits recently and cautioning that external conditions remain average. If this subdued environment persists despite marriage seasons and GST tailwinds, Asian Paints may struggle to sustain double digit volume growth, putting long term revenue expansion at risk.
• The Home Decor foray, including Kitchens and Bath, continues to see declining top line and PBT losses. If these structurally remain subscale despite new ranges and higher investments, the drag from these businesses could offset gains in coatings and weigh on consolidated earnings and net margins over time.
• Management expects competitive intensity to remain high as new and existing players push promotions, rebates and free grammage. If these tactics escalate rather than fade, Asian Paints could be forced into structurally higher marketing and channel incentives, compressing gross margins and PBDIT margins even if volumes hold up.
• Backward integration projects such as the white cement plant and large VAM VAE capex are being ramped up to support Next Gen emulsions. If these assets fail to run at high utilization or do not deliver the intended differentiation, the fixed cost burden and return on this sizeable capex could disappoint, dampening future earnings growth and returns on capital.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Asian Paints is ₹3390.0, which represents up to two standard deviations above the consensus price target of ₹2803.17. This valuation is based on what can be assumed as the expectations of Asian Paints's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3390.0, and the most bearish reporting a price target of just ₹1967.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ₹478.1 billion, earnings will come to ₹73.1 billion, and it would be trading on a PE ratio of 64.6x, assuming you use a discount rate of 13.4%.
  
• Given the current share price of ₹2790.9, the analyst price target of ₹3390.0 is 17.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.