ICICI Direct research report on Asian PaintsAs APL is the market leader in the decorative segment with over 57% market share, the company has commanded rich valuations compared to peers in spite of volume pressure and the declining trend of margin and return ratios. The company recorded revenue, PAT CAGR of 19.6%, 33%, respectively, supported by ~16% volume CAGR in FY05-08. Better operating leverage led to EBITDA margin expansion of 200 bps during the same period. The company has commanded an average one year forward earnings multiple of 22x in FY05-08 with average RoE of 39%. For FY11- 13, revenue, PAT CAGR was 12%, 10%, respectively, supported by ~7- 8% volume growth. Despite an EBITDA margin erosion by ~142 bps due to lower operating leverage (higher fixed cost) and RoE on a declining trend, the stock has commanded average one year forward earnings multiple of 30x. However, we have revised our revenue, estimate downward by 3% and 4%, for FY16E and FY17E, respectively, considering passing on of benefits of lower raw material prices to customers. We estimate PAT CAGR of ~27% for FY15-17E due to expansion in EBITDA margin by 307 bps in FY15-17E. Historically, in FY10, the company has witnessed a sharp increase in gross margin on account of lower crude prices. We believe crude oil prices will remain at lower levels in the medium term, which will benefit the market leader as it is least likely to pass on the entire benefit of lower raw material prices. Also, high cash on the books could lead to an increase in dividend payout and improvement in RoEs. We reiterate BUY rating on the stock with a target price of | 951/share (40x its FY17E earnings). 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.
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