Asian Paints - Tier 2/3 lead growth; margin expansion unlikely - Prabhudas Lilladher

APNT remains a compelling play on strong decorative paints demand from Tier 2/3 cities and rural India. Aggressive pricing and strong distribution will continue to enable APNT achieve above industry average growth in the medium term. We expect double-digit volume growth to sustain, although margin expansion looks unlikely, given lagged impact of Rupee depreciation and increase in prices of inputs and diesel. Industrial paints demand remains tepid and recovery looks unlikely in the near term. IBD is likely to report steady performance, although recovery and margin expansion in Egypt will be delayed. APNT intends to undertake more acquisitions to emerge as a one-stop shop in Home Improvement by exploring synergies in distribution and customers. We remain cautious about this move, given rising competition in segments like Flooring, Kitchens, Sanitary ware and Bathroom fitting and accessories. We believe disproportionate capital allocation can act as a drag on valuations in the long term. We remain positive on the Paints industry and relative positioning of APNT; valuations at 29.7xFY15 and 26.4xSept15 leave little room for further re-rating. We maintain 'Reduce' with an increased target price of Rs482 (26x Sept 15 EPS) by rolling forward earnings.

- Tier 2/3 drive volumes; margin expansion unlikely: Volume growth is expected to remain strong, led by Tier2/3 cities and rural India even as scenario is tepid in metros and large cities. Margins are unlikely to expand as the impact of Rupee depreciation and higher input costs of Tio2 and Diesel will be reflected in the coming quarters. APNT is not contemplating any price increase post 4% increase in H1FY14. Capacity utilisation at the Khandala unit is likely to increase to 65-70% by Q4; tax benefits are yet to be quantified. Industrial and automotive paints remain under pressure; near-term recovery looks unlikely.

- Focus on Home improvement space: APNT is integrating 51% acquisition of Sleek and plans to move into new segments in Home Improvement. We note that APNT might be looking at segments like wall and floor tiles, sanitary ware, bathroom fittings and accessories etc, post its entry into the kitchen space. We remain cautious on diversification into unrelated segments.

Source : Equity Bulls

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