Asian Paints too succumbed to the pressures of slowing consumption which has been affecting its peers for some time now when it posted weak set of numbers for the third quarter. Varun Lohchab, Regional Head of Consumer, CIMB Equities was already negative on the stock and continues to maintain reduce rating. It has cut back earnings estimate by 6-7 percent with target price of Rs 475. He says Asian Paints valuations were very stretched compared to the rest of the sector.
Also Read: Asian Paints Q3 net falls 1.76% on high raw material cost
He expects to see downside risk from these levels on an ex-12 month basis in terms of volume growth. He expects volume growth to stay at 5-6 percent level and topline growth of close to 10 percent in the next few quarters.
Below is the verbatim transcript of Varun Lohchab's interview on CNBC-TV18
Q: How would you approach Asian Paints now after the weak set of numbers? Have you downgraded or scaled down your estimates on the stock?
A: We have maintained our reduce rating. We were already negative on the stock for sometime and we have cut back our earning estimate by around 6-7 percent and we have maintained our reduce rating with a target price of Rs 475. Asian Paints valuations are anyway very stretched relative to rest of the sector. The stock is trading at 2 standard deviations above its historical average valuations and though rest of the sector has been weak in the last 6-7 months on back of slowing consumption, Asian Paints was quite resilient given that they were reporting better numbers, but we believe that the pressure points are now visible for them as well both in terms of top-line and margin, so we maintain our reduce call on the stock.
Q: What is your forecast of Asian Paints? When do you see a recovery in their sales at all?
A: Their sales so far have actually been quite resilient. If you see on a 9 month basis they would have done volume growth of around 8 to 9 percent. It has been all over the place. first quarter was around 7 percent, second quarter was 13 percent, third quarter is more like 6-7 percent, but if you look at on a 9 month trend basis it is still very resilient compared to other FMCG categories and we believe there is a downside risk even from these levels on an ex-12 month basis in terms of volume growth, so I will not be surprised if volume growth stays at these 5-6 percent levels and you have a top-line growth of close to 10 percent in next few quarters.
Q: I just wanted to understand a breakup. The decorative segment has done pretty well in the last couple of quarters. It is the industrial segment where we have seen a slowdown. Do you think trend will continue?
A: Industrial has been slow for quite sometime now. Last three or four quarters industrial has been slow. Decorative has been the strongest point in their business along with international which is also doing well now in rupee terms. We believe decorative would slowdown a bit like we have seen in this quarter, even going forward decorative could slowdown and at the same time for industrials we are still not seeing any signs of material pick up. So you could have both decorative and industrial slowing down and international the big tailwind of currency depreciation led top-line growth might be behind us, so you could have slightly muted international growth as well going forward.
Q: What are the price targets for Emami?
A: Our existing price target is Rs 510. We will review it post the conference call today evening. We have a hold rating for the time being on Emami. Top-line growth was obviously quite weak. We were anywhere anticipating a weak quarter with around 4-5 percent volume growth, but it turned out to be even weaker with around 1 percent volume growth for domestic business. Emami given the nature of the portfolio which is very seasonal in nature, you have these aberrations from time to time where you have volatility in top-line growth. So this time winter centric portfolio did not do well. It was flat in value terms, whereas the non-winter centric portfolio still grew at 10 percent in value terms. So we need to see it. I do not think Emami will probably report as bad a top-line as they did in this quarter, things should be slightly better, but having said that even Emami is facing the slowdown impact as well. So it is difficult for volume growth for the company to go back in double digits anytime soon we believe.
Q: We have not heard from the likes of Dabur, Marico just yet, but ahead of earnings anything that you would recommend? Anything you expect a good set of numbers from in your sector?
A: Dabur should be reporting good numbers, both on top-line and margin. So Dabur is one stock where we are expecting close to 10 percent volume growth, which means it will be one of the few companies which will not see any drop in volume growth trajectory sequentially. Marico top-line growth could be muted this time, especially volume growth. Value growth will be back, but volume growth will be muted. Britannia should report a good set of numbers again given that margins will be up a lot on Y-o-Y basis, though on top-line we believe even Britannia could see some moderation. So I think probably Dabur would be the best among the midcap basket in terms of a Q3 performance which we expect followed by Britannia and Marico in that order.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
