Hold Asian Paints; target of Rs 1900: ICICI Direct

ICICI Direct's research report on Asian Paints

As expected, Asian Paint’s Q1FY21 revenue, earnings declined due to washout of sales in April 2020 but ~14% YoY decorative volume growth in June 2020 was encouraging. Demand was largely supported by a pick-up in repainting/maintenance activities in suburban and rural India, post relaxation from lockdown. According to the management while tier II, tier III cities saw a strong demand recovery in Q1FY21, demand recovery in metros, tier 1 cities (contribute ~40-50% in sales) was slower due to intermediary lockdowns especially in western regions. On the raw material fronts, gross margins expanded ~110 bps YoY but were down QoQ in similar lines mainly due to change in product mix. The favourable raw material prices movement on a month on month basis is likely to keep gross margins elevated for the coming quarter as well. This, coupled with rationalisation of other costs (like rents, advertisement & distribution expenses) would lead to a recovery in EBITDA margin (16.6% in Q1FY21), going forward. We revise our revenue, earnings estimates upside by 10% and 7%, respectively, for FY21E factoring in the current quarter performance. We maintain our positive stance on the stock given its strong balance sheet and robust dealer network.

Outlook

Asian Paints with its prudent balance sheet management with stringent control on working capital cycle should easily navigate through this challenging demand condition. However, we believe most positives are priced in the stock. Hence, we maintain our target price and HOLD rating on the stock.

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