Asian Paint’s decorative paint segment has been doing good and with lower crude prices will aid to margins expansion.
Asian Paints has 25 manufacturing plants in 17 countries, serving consumers in 65 countries globally. The decorative segment accounts for almost 80% of the overall paints market. Paints sales in domestic and international markets contributed 81% and 13%, respectively, to the company’s consolidated revenue; chemical sales accounted for the balance. Among APL’s international businesses, Asia contributes the lion’s share at 49% to revenue, Africa and West Asia contributes 21% and 24%, respectively. Asian Paint’s standalone sales grew 8.7% y-o-y primarily due to a volume surge of 11% y-o-y. This is despite of 3-3.5% price hikes, therby, reflecting unfavourable product mix.
With Brent crude trading below $60 per barrel, It will lead to decline in the raw material costs which in turn will lead to gross margins expansion. Lower crude prices have turned the entire negative sentiments of margins contraction which was earlier projected to absolute positive sentiments for the next couple of quarters.
Asian Paint’s decorative paint segment has been doing good and with lower crude prices will aid to margins expansion. Also, with the hike in MSP prices, urban development, farm loan waivers, we expect rural disposable income to increase which will further aid demand. The stock is currently trading at 587x FY20 E PE and looking at the lower crude prices and rising disposable income from the rural and urban areas, we would like to allot a PE multiple of 65x to arrive at a target price of `1,530 per share.