Buy Asian Paints; target Rs 5000: Emkay

Emkay's research report on Asian Paints

• Channel Checks indicate Asian Paints has taken price hike of 1.5 percent-1.7 percentin July 2013 largely in solvent-based paints. YTD price hike for FY14E totals to 2.8 percent
• Trade indicates muted volume growth of 3 percent- 4 percent in Q1FY14E vs expectation of 10 percent; a disappointment given favourable base of Q1FY13 and low intensity in Q4FY13
• Reiterate our core thesis of ability to demonstrate strong pricing power despite low volumes and deliver strong earnings growth.

"Asian Paints imple mented 1.2 percent price hike in May 2013; implemented on water based paints and especially emulsion paints. The price action in July 2013 has covered solvent-based paints at large. The price hike totals 2.8 percent for YTD FY14E, higher than our expectations of 2.0 percent amidst expectation of benign input costs and low inflationary environment. But, 11 percent depreciation of rupee in current environment has already challenged our assumptions."

"Channel check seems to indicate a weak Q1FY14E for paints category in general and Asian Paints in particular. Though, April 2013 was strong in volume sales, May 2013 and June 2013 took the sheen away with lackluster volume sales. The trade is pegging Q1FY14E volume growth at 3 percent - 4 percent yoy against erstwhile expectations of 10 percent yoy. This is disappointing especially in light of favorable base in Q1FY13 (volumes -2 percent) and lack of intensity in Q4FY13 (volumes +2 percent). The expectation of strong volume performance in Q1FY14E seems unlikely to play-out."

"Reiterating our core thesis; Asian Paints demonstration of strong pricing power despite lower volume growth and better ability to deliver earnings growth remains our core investment argument. The price hike in July 2013 is totally in conjunction to core theme; Prefer Price Makers. We retain BUY with price target of Rs 5,000/Share," says Emkay Global Financial Services research report.

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