We reiterate our buy rating on Asian Paints with a target price of R720, valuing the stock at 31x FY17e EPS. The industry exhibits a strong pricing power reflected by frequent price hikes. APL has initiated 1% price hike in the decorative business from May 1 and has taken a further 1.2% price hike from June 1. With urban recovery on the cards, discretionary spends and GDP growth rate are bound to rise. The paint sector exhibits a strong correlation with GDP growth (1.5-2x); hence, we expect APL to clock double-digit volume CAGR over FY15-FY17, which would furtherbe bolstered by market share gains, innovations and strong repainting demand (90% of total demand). Industrial segment growth has languished over the past few quarters, which we believe is likely to pick up (some signs already seen in Q1FY15), especially in the automotive space.
We expect distribution synergies between the home dcor segments and the existing paint distribution network to aid APLs operating leverage. Also, brand investments in home dcor brands (Sleek, Ess Ess) will help these businesses gain scale riding APLs strong brand equity.
APL Q1FY15 consolidated revenue and PAT were marginally above our expectations. Key positives included strong volume growth of 11-12% y-o-y on a base of 10% y-o-y in the domestic decorative business (volume growth of 14% y-o-y in Q4FY14 was on a low base of 3% y-o-y). Good volume growth in industrial coatings business as compared to a decline in Q1FY14.