3 March 2015
Update | Sector:
Consumer
Asian Paints
BSE SENSEX
28,845
S&P CNX
8,757
CMP: INR814
TP: INR900 (+11%)
Neutral
Attractive medium term Paints outlook
Margin expansion may be offset by higher overheads
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Free float (%)
Financials & Valuation (INR b)
Y/E MAR
Sales
EBITDA
Adj. PAT
AdjEPS(INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA
( )
Div. Yld (%)
54.5
16.4
36.6
0.9
39.2
13.4
26.1
1.2
32.0
11.0
21.0
1.5
2015E 2016E 2017E
141.2
20.8
14.3
14.9
16.6
49.5
32.6
35.1
40.2
164.7
28.9
19.9
20.8
38.9
60.6
37.7
42.5
39.7
191.6
35.4
24.4
25.5
22.7
74.2
37.8
43.9
40.1
APNT IN
959.2
923/478
2/19/38
47.2
M.Cap. (INR b) / (USD b) 780.9/12.5
Avg Val (INRm)/Vol ‘000 871/1,316
Following are the key takeaways from our discussion with APNT’s management:
n
Planning for double digit volume growth in next 2-3 years:
APNT’s management
is optimistic on the medium term Decorative paints demand in India and is looking
at double digit volume growth. Weak sentiments impacted demand in 3QFY15.
While rural growth is still higher versus urban, the gap is narrowing. As per
management, expectations of a price cut would not have resulted in any
meaningful change in inventory levels in trade. We note that APNT has taken 2%
price cut effective Mar 1, 2015 in its Decorative paints portfolio. Our channel
checks suggest Decorative paint demand has improved QoQ.
n
Industrial Paints growth revival on the cards:
APNT is witnessing good demand in
both Auto and non-Auto industrial paints and is hopeful of strong performance in
FY16. The segment will also benefit from a lower growth in the base.
n
Cost savings from lower RM has kicked in, benefits to be lower than perceived:
Benefits of lower RM costs post sharp correction in crude prices have kicked in
beginning December 2014. However, the magnitude of correction in crude
derivatives prices is lower versus crude prices. Also, APNT wants to retain its
status as market setter in pricing actions; thus, we expect price cuts to continue if
RM environment remains benign. Overheads costs rose as it ventured deeper into
smaller towns where infrastructure shortfalls remain. Also, power & fuel, rental,
toll costs and transportations costs have gone up. Thus, the extent of margin
expansion at EBITDA level may be lesser than the correction in crude price would
otherwise suggest, as per management.
n
Driving International profitability is a focus; expanding operations in new
geographies:
APNT is looking to drive margin improvement in the International
segment. Profitability and RoCE will remain lower in these markets versus
domestic business. However, management sees good potential to expand its
presence in geographies like Ethiopia (recently-acquired) and Indonesia (recently
got permission to set up business) over the medium term. We note that APNT
built ~25% market share in Bangladesh from nil in a period of 10 years.
n
Ramping up Home Improvement presence:
APNT’s presence in the Home
Improvement segment, via the acquisition of Sleek and Ess Ess, is gradually
expanding. Both these brands were regional in nature, with predominant presence
in Western and Southern geographies. APNT is planning to take these brands
national and bring the service levels to its standards. Some of company’s dealers
already retail home improvement products, and management is bringing the
acquired brands into APNT’s network.
n
Valuation and view:
We estimate 31% EPS CAGR over FY15E-17E, with underlying
gross and EBITDA margin expansion of 420bp and 390bp, respectively. While
improving macros and consumer sentiment should drive volume growth going
ahead, valuations at 39.2x FY16E and 32x FY17E discount the positives, in our
view. Maintain
Neutral
with a target price of INR900 (35x FY17E, three-year
average P/E).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.