1. Asian Paints key beneficiary of high oil prices: JP Morgan

Asian Paints key beneficiary of high oil prices: JP Morgan

Asian Paints will be a key beneficiary of falling crude oil prices in our view.

Updated: December 4, 2014 11:46 AM

Asian Paints will be a key beneficiary of falling crude oil prices in our view. Crude oil prices are trending 30% below the past 12-month average. We build in gains from lower oil prices and revise our FY16/17E earnings estimates upwards by 17/10% and set a new Sept 2015 target price of R710.

Asian Paints will be a direct beneficiary of lower crude oil prices. Another key raw material, Titanium Dioxide has also been benign. Lower raw material costs pose upside risk to gross margin assumptions as benefits would flow in with a lag of 1-2 quarters. We build in 350 bps y-o-y expansion in gross margins for domestic decorative business in FY16e as a result.

Some gains to be offset by higher promotions/marketing investments. We also note the possibility of some of the benefits being passed on to consumers in the form of price cuts and higher brand investments. We assume marginally negative pricing growth in FY16e expecting no price increases and some gains to be passed on to consumers.  We also forecast higher brand investments to push for volume growth. As a result we estimate EBITDA margin expansion of 300 bps in FY16e.

Key upside risk to our EPS estimates is a more prolonged/severe reduction in crude oil/titanium dioxide prices and higher volume growth rate Key downside risk is increase in raw metarial costs, competitive spends and lower demand growth.

JPMorgan

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