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Asian Paints
Weak quarter, growth momentum intact; upgrade to Buy
Growth momentum intact. Despite Asian Paints reporting a dismal
2QFY11, we raise our FY12e earnings 5% to factor in the improved
margin owing to recent price hikes. We see the revenue growth
momentum intact in spite of the weak quarter. We upgrade the stock
to Buy from Hold, with revised price target of `2,975 (`2,520 earlier).
Revenue growth at 5%. The company reported a mere 5% yoy
revenue growth. Prolonged monsoons and inventory build-up with
dealers in 1QFY11 resulted in lower revenue growth. In ’10, as
Diwali is almost 20 days later than in ’09, some of the revenues would
accrue in 3QFY11. Despite registering lower growth in 2QFY11, we
see the company’s long-term growth trend intact.
Margins maintained despite higher raw material cost. In the
quarter, the margin was only 40bp lower yoy. Despite rising raw
material prices, select price hikes and ‘uptrading’ helped pass on
higher costs. Net profit was up 4%, on lower income tax.
Outlook. As per-capita paint consumption in India is far lower than
in other countries, opportunities abound as also from the ‘uptrading’
expected from a rising middle class. We expect market leader Asian
Paints to register healthy growth rates in a booming segment.
Valuation. We value the stock at revised target price of `2,975,
which is at a PE of 25x FY12e earnings. Our target PE is at 50%
premium to the 12-month forward Nifty PE; average premium of the
past 10 years was 25%. With the strong earnings growth momentum
and better return ratios, we expect the premium to expand. Key risks
are higher raw material prices and competition.
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