Asian Paints - Sep Q disappointment to be ignored; Maintain Buy:: BoA ML

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Asian Paints - Sep Q disappointment to be ignored; Maintain Buy

􀂄 Delayed festive season, prolonged monsoons hit Sep Q
A Paints reported Sep Q profit of Rs2.1bn, up 5% yoy but 22% below our est.
Both sales and margins disappointed as prolonged monsoon and delay in festive
season hit domestic volumes which appear to have declined. We believe the
sales are only pushed back and strong recovery in next qtr should largely make
up for the weak Sep Q. We are tweaking our est by 5-6% over FY11-12E to factor
in some weakness of Sep Q and lower growth in International and Industrials. We
maintain Buy as in our view overall business fundamentals remain strong.

Historical evidence supports our Dec Q bounce back thesis
Sep Q sales growth of 6% yoy was 20% below our estimates. Historically (FY02,
FY05, FY08) there is evidence that delayed Diwali has led to weaker Sep Q
(average 6% yoy growth) and a strong rebound in Dec Q (average 27% yoy
growth). Added to the festive season effect is the exceptionally long monsoon
season this year which should further accentuate the variation in performance.
We forecast a 35% yoy growth in Dec Q sales to make up for weak Sep Q.

Margins fears unfounded as gross margin continues to rise
Margin declined 40bp in this qtr. However, we are not worried yet about margins
as contrary to management guidance, gross margins expanded and were higher
than our estimate. Key reason for decline in margins was lack of scale in domestic
biz – a situation we expect to correct going forward. However, further crude price
hikes (especially in view of QE2) could be a risk we need to watch out for.

Valuation – it’s the cheapest one; PO maintained at Rs2700
Asian Paints at 21xFY12E is trading at ~10% discount to FMCG sector and is one
of the cheapest stocks under over coverage. This we believe is unjustified given
stronger earnings growth, lower competition & possible surprise from volume
growth and margins. We maintain Buy with PO of Rs2700 on expected re-rating to
22xFY12E, in line with target sector average.