Sell Asian Paints; target of Rs 3336: SPA Research

SPA Research is bearish on Asian Paints and has recommended sell rating on the stock with a target of Rs 3336 in its July 24, 2012 research report.

“Asian Paints reported disappointing set of numbers for Q1FY13 on the back of meagre volume growth. Company reported consolidated sales of INR 25,479mn, a YoY growth of 12.72% largely led by price increases. EBIDTA margin improved by 18bps YoY to 17.53%. PAT grew by 9.38% YoY to INR 2,884mn which was below our expectation. We expect volume growth to pick in next quarter; however, improvement in monsoon and stable exchange rate would be the key catalyst for the company's performance. We expect consolidated sales and PAT CAGR of 16.77% and 18.62% over FY12-14. At CMP, stock is trading at 30x FY13E EPS, which in our view is high on the backdrop of falling demand and continued pressure on margins. We downgrade to SELL.”
“Company's domestic decorative paints (standalone) business grew by 11.24% (after adjustment for shift in industrial business from standalone to subsidiary) representing a meagre volume growth of ~1% which is quite low compared to ~14% CAGR in last 2 years. The lower growth in volumes is attributed to higher stocking by dealers in previous quarter and lower consumer confidence in weak macro-environment which was also dented by ~25% cumulative price hikes taken by the company in last two years. However, we expect volume growth to pick up from next quarter onwards albeit at slower pace. Effective price hikes of ~5% YTD in decorative paints business supported by lower cost inventory helped company to improve its standalone EBIDTA margin by 343bps QoQ and 112bps YoY to 19.68%. However, the margin expansion in Q1FY13 in our view is not sustainable and is likely to contract in next quarter. Continued pressure on international and industrial paints business resulted in consolidated EBIDTA margins to improve by 249bps QoQ and 18bps YoY, lower than standalone. INR depreciation bereft company to take benefit of fall in international prices of key RM like TiO2 and crude derivatives.”
“After considerable slowdown on volume front from ~16% in FY11 to ~11% in FY12 and ~1% in Q1FY13, we expect the downward trend in demand to continue. Lower demand also reduces the scope for any price hikes which would continue to put pressure on margins on the backdrop of high RM cost pressure. Poor monsoon and INR depreciation (against USD) could pose further risk to the overall performance of the company and therefore are key watchable. We downgrade the rating on the stock to SELL with target price of INR 3,336 (18 months) discounting FY14E EPS at 23x,” says SPA Research report.  Public holding more than 90% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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