Following Asian Paints’ (APNT) better-than-expected Q3FY17 performance and the price hike on March 1, we raise our FY18F/FY19F revenue estimates by 1.9%/1.0%. We also increase our FY18F Ebitda margin estimates by 30 bp because of stable crude oil prices, which results in a 1.8%/1.2% rise in our FY18/FY19F EPS estimates. Accordingly, we lift our TP to R1,043, but retain our Neutral rating on the stock.
We like stock but expensive valuation deters us from buying at current levels
India is a fairly underpenetrated paint market relative to the rest of the world, with its per capita consumption being the lowest globally, as per Nielsen. Strong urbanisation trends, rising incomes and consumer aspirations for a better lifestyle should drive the growth of the paints sector and that of market leader APNT. In fact,
APNT has outperformed its peers in the FMCG space in terms of volume growth, and we expect the trajectory to continue, driven by steady real GDP growth, an experienced management team and strong performance of the international business, along with the company’s efforts to move up the value chain and be a home solutions provider. However, the stock trades at 37.3x FY19F EPS of R28.6, ~1 SD above its five-year average, and we think it is fairly valued at current levels.
We maintain our Neutral rating, and lift our target price to R1,043. Our TP is based on our 36x target multiple. Our top Buys in the space are ITC and Godrej Consumer .
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The short term story starts to look favourable
A stronger-than-expected Q3 leads us to increase our Q4 estimates: With 2.8% revenue growth in Q3FY17, APNT beat our and Bloomberg consensus estimates of 5.0% and 1.6% declines in revenue, respectively. The company recorded low single-digit volume growth for the domestic business, significantly higher than our expectations. As a result, we increase our Q4FY17F EPS estimates: we now build in 8% revenue growth for the consolidated business, and 70 bp Ebitda margin improvement.
Pricing action returns: With crude prices increasing since the start of the year, Asian Paints announced a 3% price hike from March 1 this year . However, stable crude prices along with recent Rupee appreciation should help ease the pressure on margins.
Crude prices remain stable: APNT has benefitted from low crude oil prices for over two years now, and stable crude prices continue to aid the company’s gross and operating margins.
Long-term growth potential remains intact
The paint industry continues to outperform overall GDP growth, mainly because of the thrust of major paint manufacturers to popularise paints and the still relatively low per capita annual paint consumption of ~2.7 kg in India. We expect this trend to continue.
Also, we believe that industry growth will be supported by the above R2 trillion of allocation for roads and railways, and the many measures announced in the Union Budget to boost the infrastructure sector. According to industry estimates (Shalimar Paints), the Indian paints industry is expected to record a CAGR of around 12% from 2016-17 to 2021-22 in value terms, and we expect Asian Paints to outperform due to its product portfolio and dominant position in the industry.