Subdued volume growth… • Asian Paints :: ICICI Securities

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Subdued volume growth… • Asian Paints (APL) reported a disappointing 5.6% topline growth on the back of muted 2% volume growth mainly due to early festive season this year and slower-than-expected revival in consumer demand. The growth in home improvement segment, which includes ‘Sleek’, was subdued due to weak urban consumer demand • Operating margins improved 33 bps with 277 bps saving in RM cost set off by higher advertisement cost. Net profit witnessed 11.2% growth mainly on account of higher operative profits • With capacity utilisation reaching ~80%, the company is expanding its Rohtak plant capacity from 2 lakh tonnes to 4 lakh tonnes. It is also planning to set up a plant in South India 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 in FY09-14, gross margins expanded 340 bps clearly indicating APL’s pricing power. Slowing Indian GDP growth (paints volume growth is 1.5-1.7x 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 ~11% volume growth (demand staying intact in tier II, tier III cities) and moderate revenue CAGR of 17% 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 ~300 bps in FY14-17E supported by a sharp fall in crude prices in the last six months resulting in a concomitant dip in crude derivatives. Strong fundamentals, revival in economy to drive valuation APL recorded revenue, PAT CAGR of 19.6%, 33%, respectively, supported by volume CAGR of ~16% in 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 ~17% and 23%, respectively, in FY14-17E. We expect operating margins to inch up ~300 bps by FY17E driven by a steep fall in crude prices and its derivatives. 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 with 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 35x its FY17E earnings with a revised target price of | 825/share and HOLD recommendation

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