Accumulate Asian Paints - Paints demand growth to sustain - Prabhudas Lilladher

We expect decorative paints demand growth to pick up in the coming quarters led by 1) higher exemption on housing loans in FY14 budget 2) higher crop prices and increased rural credit 3) rising re-painting demand in Tier2/3 cities.

Market dominance and pricing power to sustain: APNT has 52% share in decorative paints and will continue to maintain its dominance in the market place led by 1) continuous innovation and new product launches 2) strong brand equity 3) distribution strength of >32000 dealers, 2.5x the nearest competitors

MNC competition unlikely to impact APNT: Exit of Sherwin Williams from the decorative paints reaffirms the presence of entry barriers in decorative paints. APNT will have US$2bn of decorative paint sales in India as against global sales of Euro4bn by Akzo and US$500m of Kansai; thus, providing huge economies of scale. We believe that a strong consumer connect, ability to straddle across price-points and difficulty in having multiple tinting machines makes it difficult for new entrants to crack this market.

Ti02 prices down 25%; first price cut in past 4 years: Tio2 prices have declined by 25% from its peak and are expected to remain soft in the medium term. APNT has cut prices by 0.3% recently which will boost volume growth.

IBD has bottomed out; slow recovery likely: APNT's international business has been under pressure due to slowdown in demand in the Middle East led by political turmoil and Caribbean region. We expect slow but steady increase in growth rates. Margins are unlikely to reach previous levels in the near term.

Estimate 22% PAT CAGR over FY13-15; 'Accumulate': We expect volume growth to increase to 13% in FY14 and 14% in FY15. We expect 130bps expansion in gross margins and 80bps expansion in EBITDA margins in FY14. We estimate 23% PAT CAGR in standalone operations and 21.5% PAT CAGR in consolidated operations over FY13-15. The stock trades at 31.4x FY14 and 25.6x FY15 EPS. Accumulate.

Source : Equity Bulls

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