Asian Paints: When the going gets tough…:: Nomura

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 Action
While Q2FY11 results were below our and street estimates, this was impacted by
the longer monsoon season across the country this year. We expect demand to
pick up in Q3 and Q4 as underlying consumer demand remains robust in an
industry that continues to be attractive in the long term. We reiterate BUY as we
see continued long-term attractions.
 Catalysts
Strong revival in earnings growth over the next couple of quarters would be the key
catalysts for the stock.
Anchor themes
The domestic decorative paints industry is still in a relatively nascent stage and
should comfortably register a 10 -12% steady volume growth over the medium term
on our estimates. We remain confident of the sustainability of growth momentum.



When the going gets tough…
 Q2FY11 results impacted by monsoon season
Q2FY11 results were below our and street expectations, with sales
growth coming in 11% below our estimates, primarily due to the long
monsoon season in many parts of the country. EBITDA margins fell
40bps in Q2FY11. This was helped by lower than expected material
prices during the quarter.
 Demand under pressure but expected to pick up in H2
While demand has been sluggish in the current quarter, with festive
season timing skewed more towards Q3 this year vs. Q2 last year, we
expect a pick-up in demand and for the company to see robust
demand over H2 this year.
 Marginal reduction in our estimates
We have made some marginal adjustments to our estimates for FY11
and FY12 following the miss in Q2. We believe a pick-up in H2 should
help the company deliver another year of strong earnings growth in
FY11.
 Still an attractive long-term play, in our view
We believe Asian paints remains a strong play on urban consumption
and is still an attractive long term play. Demand weakness in the
current quarter is a one-off and is unlikely to continue, in our view.
 Re-iterating BUY with an increased PT of Rs3,050
Our target price moves up from Rs2,840 to Rs3,050 as we roll forward
our forecasts by six months. Our valuation methodology remains
unchanged at 25x FY12F P/E. With Q2FY11 as a one-off and demand
expected to pick up in H2, we see current weakness as an even better
opportunity to BUY the stock.