Asian Paints Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Paints

Company

Asian Paints Ltd

Reco Price
Rs. 928.00
Price Target (1 Year)
Rs. 1115.00
Upside
20.15%

Date

May 12, 2016
Sensex
25790.22
CNX Nifty
7900.40

Exchange

Code

NSE
ASIANPAINT
BSE
500820

Strong volume growth and favourable crude prices will boost financials.

Long-term structural opportunities:
Structurally, decorative paint is a large long-term growth opportunity with a potential to double in volume terms in 6-7 years. Dominant scale and leadership makes Asian Paints a structural winner in an oligopolistic industry with high barriers to entry. Asian Paints has a smart growth strategy aimed at exploiting its vast dealer network for new revenue streams, as it recently tied up with Henkel for distribution of adhesive brand Loctite. It is further augmenting its long-term growth option in international markets (Asia and Africa). We think Asian Paints will remain a strong compounding story even for the coming decade.

Home Decor:
Asian Paints inaugurated the AP Homes store concept in Coimbatore. AP Homes would not only have the entire range of Asian Paints products, but those of other players’ too, with furnishing provided by D Decor, tiles by Somani Ceramic, furniture by Pepperfry, bath fittings by Hindware, and lights by Phillips. These stores (7,000 sq ft) would be operated through the franchisee route, where the customer can digitally select the product, customize the design and get the product installed at home. It would incur the capex for digitally enabling the store while the franchise would individually enter into agreements with other companies.

Strong volume growth momentum to continue:
Asian Paints should stand out in the consumer sector with double-digit volume growth while margin tailwinds continue, ensuring significant gross margin expansion and 20% EBITDA growth in Q4 FY16. As per our study, the outlook for FY17 remains quite strong. Volume growth can potentially accelerate on stronger rural demand and an imminent urban recovery, coupled with a strong earnings growth will continue to act as a key catalyst for the stock performance.

Margin traction continues; Hereon, volume & premiumisation are margin drivers:
Gross margins expansion continued to increase Y-o-Y from 46% to 49%, while EBITDA margin was increased Y-o-Y from 15.80% to 17.7%, partially stemmed by higher employee cost (28% Y-o-Y) and higher other expenditure (18% Y-o-Y). Employee costs included some one-offs, but was also higher due to performance incentives for higher sales and performance pay for senior managers. Other expenses shot up due to higher rebates to dealers, especially for large projects so to challenge competitor actions. As inputs like monomers, solvents and Tio2 have bottomed out, levers for gross margin expansion is largely better product mix (higher share of premium & mid-end products).

Post Festive season improved decorative volumes:
Decorative paints continued its healthy double digit volume growth (14-15%) driven by growth in the economy and sustained traction in the rural market. Tier 2-3 cities outperformed urban centers. Repainting (80% of demand) continues to drive growth, while fresh painting (20%) is witnessed muted growth owing to weak new construction demand. The company highlighted that demand trends have improved in second half led by festive demand, but would be optimistic only if this trend continues for couple of more quarters. We believe that apart from penetration, factors like implementation of 7th Pay commission, normal monsoon and sustained traction in Tier2/3 should drive volume growth. We expect 16/17% volume growth in FY17/18E led by steady traction in the economy and a likely uptick in the premium and mid end segment.

Stock Data

CMP (Rs)
928.80
Face value (Rs)
1
52 Week Range (Rs)
926.80 - 693.00
Market cap (Rs Crores)
88893.66
Price To Book Value (x)
15.86
P/E Ratio (x)
51.50
EV/EBIDTA (x)
29.61

One Year indexed Stock Performance

Asian Paints LtdSensex
Asian Paints Ltd
Return (%)
1m
6m
12m
36m
Absolute
7.09
15.82
22.24
97.05
Sensex
2.56
0.70
-4.05
30.97

Shareholders

(in %)
31-Mar
Promoter
52.79
Public
47.21
Others
0.00
Total
100

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Industry

The Indian paint industry is currently estimated at Rs. 16,000 crore and is expected to grow between 12-15% per annum over the next 5 years. The top 4 players i.e. Asian Paints, Kansai Nerolac, Berger Paints and Akzo Nobel control about 60% of the total share of the paint market with the unorganised sector controlling roughly 35% of the market. In the organised sector, Asian Paints dominates the Indian paints industry with about 33% market share.

Profile

Established in 1942, Asian Paints Limited manufactures paints in the decorative and industrial segments. APL is India’s largest and Asia’s third largest paint company and operates in the geographies of Asia, Middle East, Caribbean and South Pacific islands through its subsidiaries and joint ventures. It has presence in 17 countries with 25 paint manufacturing facilities. It operates in five regions across the world viz. South Asia, South East Asia, South Pacific, Middle East and Caribbean region through the five corporate brands viz. Asian Paints, Berger International, SCIB Paints, Apco Coatings and Taubmans.

In decorative paints, Asian Paints is present in four segments: Interior Wall Finishes, Exterior Wall Finishes, Enamels and Wood Finishes. In the beginning of FY 2013, the Company expanded the capacity of its plant at Rohtak (Haryana) from 150,000 KL to 200,000 KL per annum.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Excep Items
  • Exceptional Income / Expenses
  • Profit Before Tax
  • Provision for Tax
  • Profit After Tax
  • Minority Interest
  • Consolidated Net Profit
  • Margin (%)
  • Adjusted EPS
  • 10938.61
  • -
  • 9201.22
  • 1737.39
  • 15.88
  • 114.48
  • 1851.87
  • 42.06
  • 1809.81
  • 154.60
  • 1655.21
  • -
  • 1655.21
  • 495.69
  • 1159.52
  • -45.64
  • 1113.88
  • 10.18
  • 11.61
  • 12714.81
  • 16.24
  • 10711.15
  • 2003.66
  • 15.76
  • 134.22
  • 2137.88
  • 47.99
  • 2089.89
  • 245.66
  • 1844.23
  • -9.96
  • 1834.27
  • 571.51
  • 1262.76
  • -43.95
  • 1218.81
  • 9.59
  • 12.71
  • 14182.81
  • 11.55
  • 11939.92
  • 2242.89
  • 15.81
  • 169.71
  • 2412.60
  • 42.24
  • 2370.36
  • 265.92
  • 2104.44
  • -27.57
  • 2076.87
  • 649.54
  • 1427.33
  • -32.18
  • 1395.15
  • 9.84
  • 14.54
  • 15534.14
  • 9.53
  • 12725.52
  • 2808.62
  • 18.08
  • 200.72
  • 3009.34
  • 40.51
  • 2968.83
  • 287.97
  • 2680.86
  • -52.45
  • 2628.41
  • 849.14
  • 1779.27
  • -53.06
  • 1726.21
  • 11.11
  • 18.00
  • 17105.00
  • 10.11
  • 13895.00
  • 3210.00
  • 18.77
  • 235.50
  • 3445.50
  • 38.50
  • 3407.00
  • 308.50
  • 3098.50
  • -50.00
  • 3048.50
  • 984.86
  • 2063.64
  • -60.06
  • 2003.58
  • 11.71
  • 20.89
  • 19910.00
  • 16.40
  • 16152.00
  • 3758.00
  • 18.87
  • 265.50
  • 4023.50
  • 36.50
  • 3987.00
  • 329.50
  • 3657.50
  • -50.00
  • 3607.50
  • 1165.45
  • 2442.05
  • -70.50
  • 2371.55
  • 11.91
  • 24.73
Source: Stockaxis Research, Company Data

Valuation

At a CMP of Rs 928 stock is trading at a multiple of 37.52x FY2018E, which may appear optically expensive, as the stock is pricing in long-term earnings growth expectations of 16% in FY2018E, which is not demanding in our view. Asian Paints remains one of top long term ideas which we think can perform whether markets prefer defensive or cyclical rebounds. We have a Buy rating with target price of Rs 1115.

 

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