Asian Paints- Upgrade to OW: Phasing issues: HSBC research

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Asian Paints (APNT IN)
Upgrade to OW: Phasing issues, stock price correction
provides buying opportunity
 Q2 FY11e results below our and consensus numbers, but
due to postponement of sales (phasing issues)
 No change to our estimates; stock has corrected 13% since
its peak in mid-September (3.5% today), providing a buying
opportunity
 Maintain PE-based TP of INR2,954, but upgrade to
Overweight from Neutral with 19.3% potential return





Q2 FY11e results were below expectations, but due to phasing issues: Asian Paints
missed our and consensus estimates on the top and bottom lines. Sales came in 9% below our
expectations and net profit was 14% below our expectations. Sales were low because (1) due
to a prolonged monsoon this quarter, paint demand was impacted, (2) Diwali is in early
November this year compared to mid October last year, hence some of the festive season
demand will come in the next quarter. While gross margins improved by c50bp, net profit
missed our estimate mainly due to negative impact of operating leverage due to lower sales.

Will meet full-year estimates, correction overdone: We are not changing our estimates,
as we believe the Q2 miss will be made up for in the coming quarters. We estimate EPS
growth of 16% in FY11e and 23% in FY12e. Cost inflation is the only concern and there
is a risk of margin squeeze for 1-2 quarters, but over the long run Asian Paints margin
trajectory has been upwards, giving us confidence that margins will be recovered soon.
The stock has corrected 13% since its peak in mid September (including 3.5% today),
which we believe prices in all potential negatives.

Upgrade to OW: We maintain our TP at INR2,954 but upgrade to OW from N given that
the recent fall in the stock price now affords 19.3% potential return to our target price.
Our target price is based on a 24x PE multiple on Sep’12 EPS. Our target multiple is at a
10% premium to historical forward multiples and is in line with the current 12m forward
multiple of 23.9x. Higher than expected cost inflation is the key risk to our Overweight
call. Good sales growth in the coming festive season is likely to be a catalyst.