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Action: Maintain Neutral as demand remains subdued
An anticipated fall in titanium dioxide (Tio2) prices will likely help margins
move higher in FY14F, but the demand environment remains subdued, in
our view, with quarterly volatility in volume growth set to continue. Tio2
accounts for 25% of overall input costs for Asian Paints and with crude oil
also dropping from recent highs, we believe the company stands to benefit
on the gross margin front in FY14F – we are now building in a ~150bp
improvement. However, we do not see a sustainable recovery in the
volume growth trajectory yet and with valuations at 26.7x FY15F P/E, we
would remain on the sidelines at current levels.
Catalyst: Correction in crude oil and titanium dioxide prices
For Asian Paints, the key catalyst will be continued softness in input
prices. Tio2 prices are down ~11% vs. the average price in FY13 and this
should help to drive margins higher in FY14F. However, INR depreciation
vs. the USD will likely offset some of the gains.
Valuation: Asian Paints trades at 26.7x FY15F P/E
Asian Paints trades at 26.7x FY15F P/E, which is slightly lower than the
sector average of ~27x. We believe that falling input prices (offset
somewhat by INR depreciation) will see margins move up higher from
FY13 levels. On our estimates, Asian Paints looks set to deliver 27% pa
earnings growth over the next couple of years, vs. a sector average of 17-
18% pa. However, valuations look full at the current level, in our view, and
we look for a better entry point.
Action: Maintain Neutral as demand remains subdued
An anticipated fall in titanium dioxide (Tio2) prices will likely help margins
move higher in FY14F, but the demand environment remains subdued, in
our view, with quarterly volatility in volume growth set to continue. Tio2
accounts for 25% of overall input costs for Asian Paints and with crude oil
also dropping from recent highs, we believe the company stands to benefit
on the gross margin front in FY14F – we are now building in a ~150bp
improvement. However, we do not see a sustainable recovery in the
volume growth trajectory yet and with valuations at 26.7x FY15F P/E, we
would remain on the sidelines at current levels.
Catalyst: Correction in crude oil and titanium dioxide prices
For Asian Paints, the key catalyst will be continued softness in input
prices. Tio2 prices are down ~11% vs. the average price in FY13 and this
should help to drive margins higher in FY14F. However, INR depreciation
vs. the USD will likely offset some of the gains.
Valuation: Asian Paints trades at 26.7x FY15F P/E
Asian Paints trades at 26.7x FY15F P/E, which is slightly lower than the
sector average of ~27x. We believe that falling input prices (offset
somewhat by INR depreciation) will see margins move up higher from
FY13 levels. On our estimates, Asian Paints looks set to deliver 27% pa
earnings growth over the next couple of years, vs. a sector average of 17-
18% pa. However, valuations look full at the current level, in our view, and
we look for a better entry point.
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