Asian Paints Ltd. share price target

APL's decorative volume growth at ~15%YoY was much higher than our expectation of ~11%. This was driven by 1) strategic dealer push, 2) low base (due to dealer de-stocking in Q1FY19 owing to GST rate cut, 3) strong demand from rural India and 4) market share gain in bottom of the pyramid products post implementation of GST. We model volume growth of ~14% for FY19-21E (lower than ~15% of Q1FY20) owing to intact demand from...

Q1FY20 revenue grew by 17% YoY (above estimate) aided by double digit volume growth (~15% YoY) in decorative paint. EBITDA margin improved by 121bps YoY to 22.5%, increase in demand for waterproofing coating & premium paints supported operating performance. While higher depreciation (42%YoY) and interest cost (28%...

While results were strong amidst a muted operating environment, the ongoing economic slowdown adds an element of uncertainty to the earnings growth prospects, particularly given APNTs massive capacity expansion (addition of 50% to Sept18 capacity up to Mar19; to be scaled up to 100% by Mar20). The deteriorating product mix and the weak progress on monsoon could further sour the case for earnings acceleration. PAT CAGR has been a meager 6% over the past three years, and given the challenges indicated above (and despite earnings upgrade post the good numbers in 1QFY20), FY20 appears poised for another year of low PAT growth. RoCE, which stood at close to 40% at the beginning of the decade, deteriorated to 28% in FY16 and further to 21.3% in FY19 (far inferior to peers). Against this backdrop, valuations of 49.7x FY21E EPS (40% premium to peer average, despite moderate earnings prospects and inferior RoCE) appear stretched.

Asian Paints delivered on an operationally weak quarter impacted by a weaker-than-expected revenue growth (in terms of volume up 10% and price/mix led growth).

Asian paints (APNT), is the market leader in the Indian paint manufacturing industry with a market share of ~53%. Q4FY19 revenue grew by 12% YoY (below estimate) aided by double digit volume growth ~10%. However, inferior product mix, trade discounts and higher...

initiatives. The capex for FY19 was Rs 10bn. Downgrade to Hold: Considering the slower revenue growth and impact of rising cost structure our earnings estimates see material downward revision of 10% each for FY20 and FY21 respectively. Considering the pressure on margins, we cut our target multiple to 42x...

Asian Paints' (APL) profitability during Q4FY19 was largely hit by a change in product mix. The company reported volume growth of ~11% (I-direct estimate: 13%) largely driven by economy product range such as Distemper and Putty. Though the company took a price hike of ~6% in FY19, the change in product mix restricted value growth. As a result, gross margin declined ~170 bps YoY. In addition to this, higher fixed cost associated with new plants weigh on EBITDA margin, which declined ~233 bps YoY at 16.4%. Flattish PAT is attributable to higher depreciation and lower EBITDA...

respectively. Gross/EBITDA margin was down 100bp/80bp YoY. Analyst meet highlights: (1) Near-term growth outlook remains uncertain. (2) Standalone business capex to be ~INR7b for FY20. (3) Faster growth in economy emulsions, distemper and putties is leading to mix corrosion. Valuation and view: We cut our FY20/21 EPS forecast sharply by 16.5%/15.3% to factor in (a) the slowdown amid a higher fixed cost environment, with APNT having just finished a massive round of capacity addition (>50% capacity added over the last six months), (b) the weakening...