We expect Asian Paints (APL) to reinforce its leadership in FY23 with double-digit volume growth. Q2FY23 in our view, will likely benefit from a strong September, but see a weak Jul-Aug as heavy rains delay exterior painting. On a three-year basis, APL’s 20% CAGR is much brighter than the industry’s 15%. Auto coatings has picked up well with a fair share in Indian OEMs. Kitchen, bath, lighting etc. make up 4% of revenue, and APL aims to scale it up to 8–10% in four years.
Waterproofing revenue, which had doubled in FY22, would continue to undergo strong double-digit growth. In our view, the paints sector has huge moats, and would not be an easy pushover for new entrants. Maintain ‘BUY’ with a TP of `3,815.
* Demand: July-August demand postponed due to excessive rainfall. Management anticipates a good festive season—advanced to the third week of October.
* Barring crude-linked raw material (RM), majority of the RMs have not stabilised.
* Waterproofing business: Doing well in repair and renovation. In our view, Pidilite is more into new projects, so we expect both to do well.
* 22 patents filed; 29 products developed in FY22. 200-plus scientists in R&D: It is focussed on alternative material sourcing and formulation optimisation.
* Second factory in Bangladesh with initial capacity of 25,000KL/year operational.
* Indonesia foray: APL is gaining good presence in the ‘value for money’ market segment.
* Safe Painting service gained major traction in FY22, up almost 3x YoY. This is a strong differentiator vis-à-vis competition.
Outlook and valuation: Fundamentals strong; maintain ‘BUY’
APL continues to be the dominant player, and we expect the status quo to sustain despite Grasim’s impending entry. APL’s industry-leading growth in the decorative segment (31%/36% y-o-y by volume/value in FY22) was driven by upgradation of ‘bottom-of-the-pyramid’ and focus on premiumising the mid/top-end. Auto coatings has picked up well over the past 5-6 months, and APL has a fair share of Indian OEMs.
Kitchen, bath, lighting and others make up 4% of revenue. APL aims to scale it up to 8–10% of revenue in four years. The Indonesia arm too has scaled up well due to creditable presence in ‘value for money’. We expect meaningful growth in decorative volumes to sustain. Maintain ‘BUY/SO’ with a target price of `3,815.