Buy Asian Paints; target of Rs 1310: ICICI Direct

Asian Paints (APL) posted sales growth of 10% YoY driven by strong domestic and international performance. It reported strong volume growth of 12% supported by strong demand from tier II and tier III cities. We believe realisation has declined 2% YoY mainly because 1) the company has passed on the benefit of lower raw material prices and 2) a change in the product mix Raw material prices as a percent of sales declined 457 bps YoY due to benign raw material prices while other expenses increased 130 bps YoY. As a result, operating margins increased 177 bps YoY. This finally helped in sharp PAT growth of 18.5% YoY. We modelled revenue CAGR of 12% FY16-18E led by volume growth while realisation growth is expected to stay subdued largely due to a change in product mix. We believe PAT would record a CAGR of 23% supported by expansion in EBITDA margin during FY16-18E.

We have modelled revenue CAGR of 12% for FY16-18E led by volume growth during the same period. We believe the company will pass on some benefits to customers considering the benign raw material prices. We estimate PAT CAGR of 23% for FY16-18E supported by higher EBITDA margin in FY16-18E (19.1% and 19.2% for FY17E and FY18E, respectively). Considering the sustained leadership position of APL in the decorative paint segment, any price variation in the raw material would be easily passed on to end customers. Also, high cash on the books could lead to an increase in dividend payout and improvement in RoEs. We reiterate our BUY recommendation on the stock with a revised target price of Rs 1310/share. For all recommendations, click here 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.