Hold Asian Paints; target of Rs 1180: ICICI Direct

ICICI Direct's research report on Asian Paints

Asian Paints’ (APL) Q2FY19 performance was operationally weak in EBITDA margin terms. We believe paint volume growth at ~10% YoY was achieved through a change in product mix while APL refrained from taking a price hike in an inflationary scenario looking at festive demand around the corner. It has instead passed on the GST rate cut to its dealers with immediate effect to fast liquidate the inventory. APL has taken a price hike of 2.35% effective from October 1, 2018 and guided at a few more price hikes in upcoming quarters to negate the impact of higher crude related raw material prices and adverse currency movements. However, demand being more skewed towards lower end products like distemper, we believe margin pressure would remain in near future We believe the volume CAGR of ~13% in FY18-20E would be largely supported by a shorter repainting cycle and increasing presence in the southern region through two news facilities (with capacity of 3 lakhs/KL each) in Andhra Pradesh and Karnataka. We also believe the company would gradually take a price hike to maintain EBITDA margin in the range of ~18-19%.

Outlook

Asian Paints’ (APL) Q2FY19 performance was operationally weak in EBITDA margin terms. We believe paint volume growth at ~10% YoY was achieved through a change in product mix while APL refrained from taking a price hike in an inflationary scenario looking at festive demand around the corner. It has instead passed on the GST rate cut to its dealers with immediate effect to fast liquidate the inventory. APL has taken a price hike of 2.35% effective from October 1, 2018 and guided at a few more price hikes in upcoming quarters to negate the impact of higher crude related raw material prices and adverse currency movements. However, demand being more skewed towards lower end products like distemper, we believe margin pressure would remain in near future We believe the volume CAGR of ~13% in FY18-20E would be largely supported by a shorter repainting cycle and increasing presence in the southern region through two news facilities (with capacity of 3 lakhs/KL each) in Andhra Pradesh and Karnataka. We also believe the company would gradually take a price hike to maintain EBITDA margin in the range of ~18-19%.