Hold Asian Paints - BP Wealth

Asian Paints India Ltd (APNT) is India's largest paint manufacturer with a 52% overall market share covering both the industrial as well as the decorative segment. The company has a dominant position in the decorative paints industry with a market share of 60%, 2.5x that of its nearest competitor making it an undisputed leader. Overall APNT is the 10th largest paint producer in the world with aspirations to become the 5th largest.

Investment rationale

Favorable position in the decorative paints segment

APNT is able to leverage its dominant position with in the decorative paints segment (currently 5th largest in the world) to drive its future growth. The decorative paints division has shown promising growth in the past, along with comfortable margin performance. In India currently the decorative paints segment is considerably bigger than the industrial paints division. The decorative paints division is primarily driven by growth in the real estate sector, rising purchasing power and rapid urbanization. These factors will continue to contribute to the revenues in the coming years as a part of India's growth story.

Industrial Paints to drive next phase of growth

Asian Paints is currently the market leader in the Indian paint industry. Even though its product portfolio is biased more towards the decorative paints segment, it is about to change that. The next phase of growth will be embarked by the industrial paints segment. The firm has been heavily investing to develop a strong industrial paint product portfolio to bet on India's rampant industrialization. Recent changes in the government policy to revive the infrastructure sector will also greatly benefit this segment. However within the industrial paints segment, APNT has a strong foothold in the automotive coatings segment where it operates through a joint venture with PPG, a worldwide leader in the coating industry.

Structural changes with the industry

Since the past few years there has been a severe consolidation in the industry causing a major shift towards the organized sector. Even though this move is beneficial to the organized players in the industry as a whole, APNT is to gain the most from this move. Many reasons can be attributed to this phenomenon.

- Firstly-Asian paints has the strongest distribution network spanning across the nation, amongst the paint companies. It also has a strong brand equity and diverse product portfolio relative to its peers.

- Secondly-The decorative paints segment has been traditionally dominated by the unorganized players. APNT is the leader in this segment having the highest market share, hence it is to benefit even further.

Revamping the entire product portfolio

APNT is planning to revamp its entire product portfolio to include a larger proportion of enamels and emulsions. It will achieve this by reducing the production of distempers and focus on these two core products to drive future growth. Enamels and emulsions command a higher value, as a result better margins.

Outlook & Valuation

Asian Paints is an industry leader and dominant player, we have assigned a target P/E multiple of 30x to our FY15 EPS of Rs178.1 to arrive at a target price of Rs 5,343. We have a hold rating on the stock as already high price appreciations have led us to believe that the stock's upside potential is capped at 12%.

Source : Equity Bulls

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