Asian Paints - Healthy volume growth; Buy - Anand Rathi

Asian Paints reported 16.2% revenue growth yoy; volumes contributed 9-10 percentage points of that. Despite Diwali coming three weeks later this year, the company reported healthy volume growth. Higher other expenditure pulled EBITDA margin down 50bps, and net profit was up 14.6% yoy. As we expect the company to report 27% earnings CAGR over FY12-14, we retain our Buy, with a price target of Rs.4,441.

- Healthy revenue growth. The company reported revenue growth of 16.2% yoy. We believe price hikes contributed 6-7 percentage points of that; the rest came from volumes. Prices had been hiked 1% in Jul'11, 2% in Dec'11, 2% in Apr'12 and 3.2% in May'12. Considering the 200-bp drop in realizations and the rise in excise duty (Feb'12 Budget), we expect price hikes of ~6-7%. Despite Diwali falling in the second week of Nov this year (last year: Oct third week), the company reported strong growth.

- Net profit grew 19%. Higher expenditure pulled the EBITDA margin down 50bps. Raw material and staff cost inched up a shade yoy. Despite the higher raw material prices (and rupee depreciation), the company was able to pass on the additional costs. The effective income-tax rate was down 120bps yoy. Net profit was up 14.6% yoy.

- Outlook. We expect a healthy 3QFY13 as Diwali would see higher offtake. The fall in crude oil prices and the rupee appreciation are expected to drive margins up. Any upswing in the economy is expected to drive volume growth in paints to low single digits over the next 2-3 years.

- Valuation. We value the stock at Rs.4,441, at a target PE of 26x FY14e earnings. It trades at the mean plus one standard deviation. We expect it to trade at a PE of 26x. Sharp volume growth and higher profit margins are expected to sustain premium valuations. Risk. Steep increase in crude oil prices.

Source : Equity Bulls

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