Asit C Mehta initiates 'buy' on Asian Paints

16 Apr, 2008, 1816 hrs IST, INDIATIMES NEWS NETWORK

Asit C Mehta Investment Intermediates has initiated 'buy' on Asian Paints for target price of Rs 1,419 (implying a forward P/E multiple of 23x) on account of robust domestic demand for decorative paints. The brokerage expects the company to register a 3-year EPS CAGR of 28.2 per cent till FY10E. At CMP of Rs 1,200 the stock is trading at 25.0 times FY09E & 19.5 times FY10E earnings per share.

The company’s revenue is expected to grow at a CAGR of 18.5 per cent from Rs. 3,978.1 crore in FY07 to Rs. 6,627.04 crore in FY10E, mainly due to capactiy addition and better realisations.

In FY08E, the company was able to pass on the increase in the raw material cost which helped the company to sustain in its raw material cost as a percentage to net sale. Further, the increase in volume led to economies of scale resulting in better operating margins. Asian Paints’ net profit margins are in line with EBIDTA margins and are expected to grow at a 28.2 per cent CAGR from Rs 281.03 crore in FY07 to Rs. 591.64 crore in FY10E Hence EPS is expected to grow at a CAGR of 28.2 per cent from Rs 29.30 in FY07 to Rs. 61.7 in FY10E.

The paint industry is divided into organized and unorganized sector. The unorganized segment plays a huge role in decorative paint segment due to low technical know-how and highly scattered market. The organized segment constitutes 54 per cent of the total volume and 65 per cent of value of paints industry. Again the whole paints industry can be classified into decorative (75% of total industry size) and industrial paints (25% of total industry size).

The Indian Paint Industry grew by 18 per cent from Rs 9,500 crore in FY06 to Rs 11,200 crore in FY07. The industry has a positive correlation with GDP as both have same drivers for growth. Demand for paints is both, derived as well as direct. The demand for decorative paints is a direct demand whereas the demand for industrial paints is a derived demand.

Indian climatic conditions are not conducive for foreign formulations and modification cost in product formulation is quite high. As a result, imports are no threat to the Indian players. In case of industrial paints, most of the major players in the industry already have a tie-up with global players, for latest technology and markets accessible to them. It negates the further supply from the international markets even after reduction of import duty from 40 per cent to 15.3 per cent in last 8 years.

The paint industry is raw material intensive industry. It takes around 300 different raw materials to make paint, most of which are petroleum based. Titanium Dioxide is the largest consumed raw material for manufacture of paints. It constitutes around 30% of the total manufacturing cost. Besides Titanium Dioxide, there are other petroleum based raw materials which constitute 40-50 per cent of total raw material consumed. Hence any movement in crude oil prices will impact the profitability of the company.