Colouring growth
Quality exposure to domestic consumption; raise earnings and price target
We expect Asian Paints (APL)’s dominant paints portfolio across multiple price
points to grow +18% YoY (from 14%) in volumes for FY11E due to housing
construction, repainting demand, automobile sales, and industrial activity. We
forecast 22% revenue and 37% EPS CAGR for FY10-13E, while trading at 23.4x
FY12E PE. We believe APL should trade at a premium due to: 1) higher growth in
the paints industry; and 2) low risk of profit erosion compared with the home and
personal care (HPC) space.
Asian Paints manages cost pressures by taking price increases
Asian Paints is a market leader in decorative paints and enjoys pricing power,
managing to grow volumes despite price increases. We believe the company will
continue to use a selective price strategy to manage its costs and maintain margins.
Capacity expansions reflect industry potential, management outlook
APL commissioned its sixth plant in Rohtak, with capacity of 150,000kltrs
(expandable up to 400,000kltrs). Management is setting up its seventh plant
commissioned in 2013 at Kesurdi, Maharashtra with the same capacity metrics.
From the base of an estimated 1.5-2mnltrs paint industry size in India, APL sees
the potential for capacity and volume growth into the next four to five years,
reflected in capital allocation.
Valuation: maintain Buy; raise price target from Rs2450 to Rs3,500
We are biased towards APL’s volume growth story and maintain a Buy. We raise
our earnings estimates by 18%-36% from Rs81.61/88.65/96.48 to
Rs96.0/117.14/131.36 for FY11/12/13E. We derive our price target from a DCFbased
methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. We assume a WACC of 9.8% and interim growth of 13.5%.
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