REDUCE on Asian Paints - De-facto king - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research & Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

(TP Rs 1,800, CMP Rs 1,956, MCap Rs 1,876bn)

Asian Paints (52/64% revenue/PAT share) with 2.5-7x active dealers than the next three paint companies remains de-facto king in distribution/supply chain of paints in India. Coupled with better price laddering of products across categories/price points, this has ensured its unhindered dominance over decades. Promising optionality in waterproofing/other adjacent categories (we build in 40-50bp incremental growth from waterproofing) could surprise on the upside. We build in Sales/EBITDA/PAT CAGR of 8/9/10% over FY20-23E. Alas! all pluses seem priced-in at 55x Sept-22 P/E. We initiate coverage with a Reduce Reco and DCF-based TP of Rs. 1,800/sh (implying 50x Sep-22 P/E).

Volume Now, Value Later: GST rate cuts and recent capacity bump-ups (50%+) are known catalysts for APNT's aggressive pivot to low-end paints market (low-end emulsions, distempers, and putty). More importantly, our channel checks/product pricing analysis suggest that APNT has bettered its price laddering across categories/price points (Price Ladder). The pandemic-induced plausible down-trading theme in FY21/22 could also be serviced aggressively, given APNT's capacity arbitrage (1.73mn KL/pa). We believe APNT's 'Volume Now' focus could pay future dividends as newly recruited low-end consumers eventually ladder up in paint choices (Value Later).

Distribution arbitrage steady as a rock: APNT has consistently been able to better its distribution lead even within the Top-3, in terms of exclusive network. Of note: despite Colors World growing at 11% CAGR over FY15-20, the throughput/active dealer remains consistent (Rs. 2.9mn per Color World outlet), validating APNT's strong salience across paint segments.

Waterproofing-promising optionality: Commonality in application time and sales channel makes waterproofing products a 'must-have' for paint companies for incremental growth (Waterproofing Market sizing). We expect APNT's waterproofing portfolio to outpace category growth, given its distribution arbitrage, and bake in 22% CAGR over FY20-25E (to add ~40-50bp incremental growth to standalone operations).

Margin gains likely to be modest over FY21-23: While demand shock-led benign RM costs are likely to keep GMs elevated in FY21 at 45.1% (up 150bp YoY), the latter is likely to mean revert over FY20-23, given (1) demand recovery and (2) focus on low-end products. Despite this, we build in almost no EBITDAM contraction as (1) capacity utilisation improves, underpinned by volume-led growth, and (2) freight costs reduce in the South.

Valuation and outlook: APNT's dominance remains untouched given its strong distribution/supply chain moat and better-aligned product portfolio. However, at 55x Sept-22 P/E, pluses seem more than priced in, ergo our Reduce Reco. We assign a DCF-based TP of Rs. 1,800/sh (implying 50x Sep-22 P/E). Implied assumptions: (1) 10-year APNT revenue CAGR: 12%, (2) FY20-41 FCFF CAGR: 12.7%, (3) WACC: 10.5%, (4) Terminal growth: 6%.

Shares of ASIAN PAINTS LTD. was last trading in BSE at Rs.1981.95 as compared to the previous close of Rs. 1956. The total number of shares traded during the day was 59448 in over 3733 trades.

The stock hit an intraday high of Rs. 2003.8 and intraday low of 1948.15. The net turnover during the day was Rs. 117835054.

Source : Equity Bulls

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