Result Update: Asian Paints Ltd - SELL - TP Rs.1420 - Kotak

Strong double digit volume growth in the decorative segment, good demand in the industrial coating and automotive coating and raw material price inflation and volatile INR were the highlights of the results for APNT during the quarter.

Key Highlights

- As per management commentary, APNT experienced healthy double digit YoY volume growth in the decorative segment. Healthy automotive demand and improved demand in the industrial segment lead to strong performance of the entire industrial segment.

- International operations faced challenging conditions with issues like forex unavailability, difficult weather conditions impacting overall business performance.

- Both the businesses in the home improvement category viz. the Kitchen (Sleek) and Bath (Ess Ess) business registered strong growth in the quarter

- Management also indicated that the raw material prices remained at higher levels for the company during the quarter at +10% YoY which impacted operational performance. APNT has taken a price hike of 3.3% in May to counter the increase in raw material prices. Post that the company has faced further increase in raw material prices. However, the company doesn't not intend to further increase product prices post reduction in GST rates from July 2018.

- Revenue was reported at Rs 43.9 bn (+15.1% YoY) with EBIDTA margin of 19.9% and PAT of Rs 5.71 bn vs. our expectation of Rs 5.05 bn. We interpret the results as healthy.

Valuation and Outlook

- We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of APNT also indicated that the volume trends remain strong for the company and expect the trend to continue in medium term. We believe that the favorable GST changes should help paint companies and APNT. In light of this positive GST development, we have increased our earnings estimate by 3% each for FY19 and FY20. For APNT, we estimate 11% volume CAGR over FY18 - FY20E with stable margins and ROE of ~24% and ROCE of ~32.9% for FY20E.

- The stock has run-up by more than 25% since our last update in May 2018 and is trading at a very stretched valuation of 48.6x FY20 earnings, which we believe is not commensurate to its performance and involves risk like raw material price inflation, demand slowdown and competition. Recommend SELL with an increased TP of Rs 1420 (from Rs 1320) at 46x FY20E earnings which is at a small premium for the market leader to valuation commanded by peers.

Shares of ASIAN PAINTS LTD. was last trading in BSE at Rs.1433.25 as compared to the previous close of Rs. 1432.5. The total number of shares traded during the day was 81574 in over 2317 trades.

The stock hit an intraday high of Rs. 1452.3 and intraday low of 1427.3. The net turnover during the day was Rs. 117351599.

Source : Equity Bulls

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