Maintain buy on Asian Paints, volume growth of 6-7% likely in Q1: HSBC

By: | Updated: July 17, 2015 11:31 AM

Asian Paints stock price has corrected significantly since its peak in January this year on short-term weakness in volume growth.

Asian PaintsAsian Paints stock price has corrected significantly since its peak in January this year on short-term weakness in volume growth. (Image: AsianPaints)

Asian Paints stock price has corrected significantly since its peak in January this year on short-term weakness in volume growth. We believe valuation remains appealing at current levels and reiterate our buy rating.

A key disappointment had been the volume growth in the last two quarters, which came in at c2% and c4%, respectively. Our recent checks with dealers suggest that volume growth appears to have inched up, particularly in the months of April and May, while early rains impacted some demand in June. On balance, we anticipate volume growth in the range of 6-7% in the first quarter of FY16, which should ease some concerns that volume growth has persistently slowed down. If the volume growth is in the higher single digits, we believe this could serve as a key catalyst for the stock.

While softening crude prices may be accompanied by modest price cuts or tactical discounting, the margin outlook now looks benign and should transcend beyond FY16, which we would expect to trigger some upwards consensus earnings revisions.

At a FY17e PE multiple of 37x, the stock is pricing in long term earnings growth expectations of 12%, which we think is fairly modest for Asian Paints, for which we believe volume growth sustainably can remain in high single to double digits. We have a buy rating with a target price of Rs 925.

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