Volume growth remains intact… • Asian Paints:: ICICI Securities PDF link

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Volume growth remains intact…
• Asian Paints reported a topline growth of ~16% YoY on the back of
~12% YoY growth in volume and ~4% YoY hike in price in Q2FY15.
Volume growth in the decorative segment was largely driven by
intact demand in tier-II and tier-III cities in the festive season.
• EBITDA margins declined 164 bps YoY led by ~25% YoY increase in
both employee cost and other cost. The spike in employee cost is
attributable to higher gratuity provisioning while the sharp growth in
other expenses was driven by a spurt in advertisement cost
• PAT increased 6% YoY supported by ~6% YoY rise in other income
and 41% decline in interest outgo
Leader in paint segment, economic recovery to drive volume growth
APL is the industry leader in the decorative paint segment with ~57%
market share and a dealer network of over 35,000 across India. It derives
~85% of its topline from the decorative segment while the rest comes
from the industrial segment. With limited competition in the market, APL
recorded revenue CAGR of 18% in FY09-14 driven by volume CAGR of
~11% (amid economic slowdown) during the same period. In spite of
inflationary pressure during FY09-14, gross margins expanded 340 bps
clearly indicates APL’s pricing power. Slowing Indian GDP growth (paints
volume growth is 1.5-1.7x of real GDP growth) and a slowdown in
discretionary expenditure (slight shift in repainting demand) took a toll on
overall volume growth of the paint industry. We believe an economic
recovery (albeit at a slow pace) and repainting demand coupled with the
new government’s focus on increasing spending in infrastructure projects
would lead to ~15% volume growth (intact demand from tier II, tier III
cities) and moderate revenue CAGR of 18.6% between FY14 and FY17E.
Moderate raw material price, favourable rupee movement to aid margin
In order to avoid inflationary pressure, the company has successfully
passed on the price hike (~6-7%) to its customers. However, the EBITDA
margin tapered off during FY12-13 as raw material prices moved up
sharply (~40% of raw material are imported) hit by elevated dollar value
against the rupee (up 19% between FY11 and FY13) and bottoming out
titanium di-oxide (TiO2) prices. We have modelled a margin improvement
of ~60 bps in FY14-17E supported by benign raw material prices and
launch of premium products.
Strong fundamentals, revival in economy to drive valuation
APL has recorded revenue, PAT CAGR of 19.6%, 33%, respectively,
supported by volume CAGR of ~16% during FY05-08. Better operating
leverage led to an EBITDA margin expansion of 200 bps during the same
period. We expect revenues and PAT to grow at a CAGR of 18.6% each
for FY14-17E. We expect operating margins to inch up 60 bps by FY17E
driven by high operating leverage due to sustained volume growth in
decorative paints and a recovery in industrial paints demand. APL
witnessed sustained revenue growth of 15-18% over the last five years.
We believe the robust pace of growth in revenues and earnings would
continue for a prolonged period with the economic recovery and GDP
growth coming back on track. Also, high cash on the books could lead to
an increase in dividend payout and improvement in RoEs. We roll over
our valuation on FY17E considering the revival in the Indian economy and
value the stock at 33x its FY17E earnings with a revised target price of
| 733 per share and BUY recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_AsianPaints_Q2FY15.pdf