Buy Asian Paints - Strong and sustainable - IIFL

The Asian Paints management highlighted that demand conditions remain healthy during the quarter albeit lower than the historical level of 20%+ growth. Titanium dioxide prices (25% of raw material costs), which had run up sharply (up 50% over the past six quarters), have fallen c7% YoY in 3QFY13. This should offset the impact of rising monomer/ other raw material costs and sustain gross margins at 40%.

Furthermore, history suggests that the paint industry reduces production during demand slowdown, despite making sharp capacity additions. Hence, concerns that the 30-150% capacity addition across the industry would result in product flooding are misplaced. The company is still evaluating the categories for its home décor foray.

Following our interaction with management, we believe investments in home décor would not be material and would be at a conservative pace. Maintain BUY with a target price of Rs5,200.

Source : Equity Bulls

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