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JMFL
Asian Paints (Hold)
CMP: ₹1,263.75
Target: ₹1,310
FY18 was no doubt a challenging year for Asian Paints as it had to contend with high input costs inflation and tax rates (unlike consumer staples, GST did not result in any saving for the Paints industry).
On BS side, the company incurred huge capex on greenfield factories and acquisitions. The combination of above resulted in a 620 bps compression in ROIC (30.1 per cent versus 36.2 per cent in FY17) of which 290 bps was on account of gestating assets. Interestingly, the efficiencies that Asian Paints consistently displayed in managing its overheads until FY12 returned to help constrict operating margin decline to mere 67 bps in FY18 versus 220 bps decline in gross margin. Net cash position was down ₹830 crore on account of the huge capex spends that will up capacity by over 50 per cent by end-FY19E, and cost of acquisition of Sri Lanka’s Causeway Paints.
Operating CF generation growth has, however been strong (+38.4 per cent) due to a negligible increase in working capital; FCFF, though, was down 18 per cent due to capex spends mentioned earlier. The company’s ability to sustain the recent recovery in volume growth to double-digit level would be key for the stock to sustain its premium valuation (51x NTM EPS) — we expect earnings to accelerate to c.20 per cent CAGR over FY18-20E versus 11.7 per cent over FY15-18.
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