Reliance Securities
Asian Paints (Buy)
CMP: ₹1,412.65
Target: ₹1,550
We re-initiate coverage on Asian Paints with a ‘Buy’ recommendation.
It reported a stellar performance in the third quarter of FY19 driven by nearly 20 per cent volume growth, which is the highest since FY11. Notably, the management continues to see strong volume traction in decorative paints segment across categories.
Though near-term headwind in the form of General Elections could pose some challenges, Asian Paint’s long-term themes of un-organised to organised conversion and premiumisation continue to remain intact.
Asian Paint’s capacity addition in FY19 is 0.6 million KL/year, which translates into a capacity enhancement of 53 per cent, which is quite significant. Further, its operating cost and depreciation expenses significantly increased in the third quarter with operation of the Mysuru plant, which added 3,00,000 KL/year capacity in September 2018. We value the stock at 45x FY21-E earnings, which implies 11 per cent upside from the current levels.
Asian Paint’s international segment delivered a sluggish performance in FY19 owing to challenges in countries such as Sri Lanka, Egypt & Bangladesh, as it does not enjoy market leadership to exercise pricing power. Ethiopia is witnessing raw material challenges because of lack of forex availability. Though its domestic automotive segment is seeing sluggish growth, industrial segment is seeing good traction.