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 January 22, 2013 research report.
 
“Asian Paints registered numbers broadly in line with our expectations. The consolidated sales at INR 30.53bn grew by 19% YoY and PAT at INR 3.35bn registered a growth of 31% YoY. On EBIDTA margin front, the company reported expansion of 120bps YoY to 16.72% on the back of softening in RM cost. We expect the company to maintain its decent run next quarter as well on the back of improvement in demand and reducing RM cost. However, we continue to remain uncomfortable on the valuation front. At CMP, the stock is trading at 35x FY13E EPS which is higher than its historical average (TTM PE avg. of 25x). We, therefore, continue to recommend SELL sighting higher valuation with 12months target price of INR 3,336.”
 
“Asian Paint's domestic decorative paints (standalone; 80% of overall sales) business grew by 20% to INR 25.37bn in Q3FY13 in line with our expectation. The sales were backed by volume growth of ~9-10% compared to ~7% in Q2FY13 and flattish growth in Q1FY13. For the 9M FY13, standalone sales grew by 15% backed by ~7% YoY volume growth. The volume growth has declined substantially from ~16% in FY11 and ~11% in FY12 on the back of sluggish macro-environment. However, with expected improvement in economic environment, demand would pick up going ahead. EBIDTA margin of standalone business improved by 59bps YoY to 17.79% in Q3FY13 on the back of softening in RM prices. Prices of key RM like TiO2 (~20% of total RM cost) declined by ~22% from its high in Q1FY13. The price has been reducing on the back of slowdown in China and capacity expansion by global suppliers. Stabilization in exchange rate also supported RM cost management. With continued declining trend in RM cost and expected stabilization in exchange rate, EBIDTA margins would see further improvement going ahead.”
 
“Asian Paints continued to registered improvement in volume growth in every subsequent quarter on the back of improvement in demand scenario supported by favorable base effect. Expected improvement in demand scenario will help company to maintain growth momentum in top line, whereas, continued softening in RM cost aided by exchange rate would result in improvement in margins going ahead. Although, we are positive about company's business and believe that the company is the best consumer play in paints industry owing to its dominant position, we remain uncomfortable on the valuation front. Therefore, we recommend SELL with 12months target price of INR 3,336, valuing the company at 23x FY14E EPS,” says SPA Research report.

Bodies Corporate holding more than 50% in Indian cos

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