Asian Paints - Margin expansion priced in - Antique

Government housing development schemes to drive paint sales in the future

Asian Paints would be a key beneficiary from the improvement in rural housing led by government initiatives during the last five years. Further the consistent growth in urbanisation would facilitate decorative paints volume growth in the coming years.

Strong supply chain driving Asian Paints success

Asian Paints has exhaled and gained market share due to its strong supply chain across India supported by its broad-based manufacturing set up in the country. The key success factor for the company has been servicing of its wide spread distribution reach. Dealers in paints are multi paint dealers, and therefore, servicing of this distribution makes a difference. Asian Paints has been able to improve its leadership position due to its ability to replenish the smallest of the SKU in the widest colors in an average of 24 hours in majority of its key geographies.

Working capital management displays domination

From our analysis of balance sheets across all the paint players, we understand that Asian Paints has one of the most effective management of working capital with relatively lower debtors days and higher creditor days as against its competitors. This shows the strength arising from its leadership in the decorative paint industry and consequently its dominance on the distribution network and its raw material vendors. Asian Paints and Akzo Nobel stand out in working capital management as compared to the peers.

Correction in titanium-dioxide prices to aid margins

Prices of key raw material, Titanium-dioxide have witnessed a sequential drop of about 14% during the last five months. Particularly during October 2012, prices have declined by 9% on a sequential basis. Titaniumdioxide accoridng to our understanding forms about 30% of the total raw material cost and has higher significance in a portfolio, which is dominated by water based paints. In water based paints, titaniumdioxide is the key raw material. Therefore correction in the commodity coupled with the current appreciation in INR is expected to lead to an EBITDA margin expansion during 2HFY13. Consequently we are increasing our EPS estimates for FY13 and FY14 by 2% and 3% to INR123 and INR152.

Valuation

We remain positive on the company's strength in decorative paints and pricing power, particularly in the domestic market. However we believe that the stock factors in these positives at the current levels. The stock is trading at a PE of 31.7x FY13e and at 25.6x FY14. With the upgrade in earnings we increase our target price to INR 3,799(implying 25x FY14e). We therefore maintain a HOLD recommendation on the stock at the current levels.

Source : Equity Bulls

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