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Research
Asian Paints - Weak demand affects valuations - HDFC Securities
Posted On : 2012-12-24 10:48:20( TIMEZONE : IST )
Sustained high inflation has resulted in postponement of paint demand (volume growth was -2% in 1QFY13 and ~7% in 2QFY13). We expect softness in demand to continue for the next couple of quarters. Volume growth plummeted below normalized run-rate of 1.8-2.0x GDP which gives us little comfort with the stock at 31.4x FY14E. Recommend UPF with TP of INR 4,200.
Demand slowdown to prolong?
- Real estate and automobile industries are going through difficult patch led by slowdown in economic growth and high interest rates - impacting paint companies. Sustained high inflation provided no respite as repainting demand gets postponed. This is evident from muted domestic volume growth seen in 1HFY13. With the FY13 festive season spilling into 3QFY13, we think the quarter assumes greater significance than normal (companies have pinned their hope on demand revival on 3QFY13). Any disappointment in 3QFY13 may lead to derating as consensus nos. imply volume growth of 10%, thereby yielding unfavourable risk-reward.
- Also, international operations (grew ~10% in 1QFY13; 19% in 2QFY13) face challenges (the MENA region, which contributes 50 per cent to international revenues, is in the throes of political tension).
Price led growth waning
- The last price hike that the company undertook was in May 2012. Also, muted domestic volume growth makes it difficult to effect further price increase.
- Restrain in increasing prices might not impact profitability due to softening in RM cost however revenue growth might continue to remain under pressure.
INR weakness wipes out RM benefit
- Raw material prices are seeing a downtrend but are offset by rupee depreciation. Currency is a key monitorable, since import-linked RMs are ~55% of COGS.
- TiO2 prices have declined 20% from peak in past 6 months, primarily on account of slowing demand in Europe and China.
Valuations
- At CMP, the stock is trading at 31.4x FY14E (valuations remain high at 31% premium to the 5 year-average). We derive little comfort with such valuation (given moderation in volume growth) and recommend UPF with one year TP of INR 4,200 (24x FY15E EPS in line with 5 year average multiple).
