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 October 29, 2012 research report.

“Asian Paint's domestic decorative paints (standalone; 80% of overall sales) business grew by 16% to INR 21.46bn in Q2FY13 in line with our expectation. The sales were backed by volume growth of ~7% compared to flattish growth in Q1FY13. Although, company is witnessing higher growth in premium products category, overall demand conditions remained subdued compared to previous year. Going ahead, we expect volume growth to pick up in next quarter on the back of delayed festive season. EBIDTA margin of standalone business improved by 21bps YoY to 15.72% in Q2FY13 on the back of cumulative 5.3% price hikes taken by the company in Q1FY13 supported by stable RM prices. Key RM prices like TiO2 have been slipping in international markets largely due to slowdown in China.”

“Sales of other businesses (international and industrial paints) grew by ~20% YoY, while EBIDTA declined by 127bps YoY to 9% . International business reported YoY growth of 29% in H1FY13 buoyed by depreciating INR to the tune of 17-18%. Company saw improvement in sales in all the major international markets but continued pressure on margin resulted in EBIT to grow by 18%. Challenging demand conditions in industrial segment due to slowdown in manufacturing industry and subdued investments resulted in decline in sales and margin for this segment.”

“Although, Asian Paints reported revival in volume growth in Q2FY13, the overall volume growth for FY13 is expected to be in the range of 5-8% which indicates continued YoY declining trend from 16% in FY11 and 11% in FY12. Inability to pass on the higher RM prices amid sluggish demand environment is resulting in persistent pressure on margins and a decline in RM cost would aid margins going ahead. We believe company is the best play in paints industry space owing to its dominant position in the fast growing domestic paint market. However, slowing demand and increasing competitive environment does not warrant higher valuation to the stock (27x FY14E EPS). We continue to recommend sell,” says SPA Research report.

Institutional holding more than 40% in Indian cos

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