Demand outlook for FY17 seems better than FY16
Consolidated revenue/standalone revenue both grew c10.2% y-o-y, while clean consolidated PAT/standalone PAT grew c18% and c17% y-o-y, respectively. Consolidated Ebitda was c5% above Bloomberg consensus. Q1 performance was driven by strong double-digit volume growth (c12% y-o-y). Despite lower overall pricing, consolidated gross margins expanded by 457bp due to significant tailwinds from lower commodity prices. As a result, the consolidated Ebitda margin was up 179bp, driving clean PAT growth of c18% y-o-y. The demand outlook for FY17 appears to be better than in FY16 as the monsoon is likely to be normal and there are potential income catalysts, such as the 7th Pay Commission and One Rank One Pension (OROP) in the offing.
Key highlights from con call
(i) The demand environment seems to be better than last year and Q1 volume growth (of c12%) was across categories and regions.
(ii) While Asian Paints doesn’t give guidance on margins, it appears that input prices remain in a manageable range and margins don’t appear to be at risk. Industry growth has been good and pricing is rational and, in our view, margins are likely to stay elevated.
(iii) Asian Paints’ clear priority is volume growth and it aims to grow at par or ahead of the category. (iv) Its home improvement business is sleek and Ess Ess too has grown well.
(v) The international business grew well too.
Valuation remains attractive
We think investors should continue to accumulate Asian Paints at these levels as strong volume-led earnings growth momentum should continue to be a key catalyst. At a consensus FY18e price earnings ratio multiple of 41x, which may appear optically expensive, the stock appears to be pricing in long-term annualised earnings growth expectations of c13%. We believe this is not demanding, considering the structural growth potential of decorative paints. Asian Paints remains one of our top long-term ideas. We reiterate our Buy rating and increase our target price to R1,200 (from R1,125) as we revise our estimates. We value the stock using a DCF methodology. We use a cost of equity of 9.5%, which includes a risk-free rate of 3%, a market risk premium of 6.5%, a beta of 1, and terminal growth of 4%.
We revise our earnings estimates following Q1 results, increasing our FY17-19e earnings estimates by 2-3%. We increase our long-term volume growth estimate by 50bp to 11%, which leads to higher revenue and earnings estimates. We believe the company’s structural attractiveness is a long-term positive.