We reiterate our non-consensus ‘buy’ rating on Asian Paints with a target price of Rs 700, valuing the stock at 35x FY16e. Asian Paints is one of our top picks. The company’s consensus earnings in FY15/16 have likely upside risks from a favorable input cost scenario. Weaker-than-expected recovery in paint volume growth and margin contraction due to losses from new businesses are key risks.
Q2FY15 faced strong tailwinds for volumes/mix — delayed monsoon (more painting days, fewer rainy days) and the Diwali festival that started 10 days earlier than last year. In that context, sales, ebitda and PAT grew 16%, 2%, 5%, respectively. A better mix raised gross margin by 20 bps, while a 31% higher employee cost due to one-time provision and 28% higher other costs due to increased advertisements (timing mismatch due to the early festive season) resulted in a 15% miss in ebitda. The recent correction in crude prices bodes well, ceteris paribus, every 1% correction in crude prices could raise consensus earnings by 2%.
Management maintains that the currency and crude prices remain vulnerable and, hence, the company is holding on to the prices. The management indicated that should prices correct further, it would pass on the benefit. An early start to the festive season has resulted in high ad spending in the quarter, which would normalise in the next quarter. For the Sleek Business, the company continues to work on network expansion and streamlining of operations by pushing sleek products through its existing dealers network.