Maintain ‘neutral’ on Asian Paints and roll-forward our price target of R810 to December 2015. We raise FY16/17e EPS by 3-5% as we build in higher margin assumptions led by further weakness in crude prices. Our target implies one-year forward P/E multiple of 32x, which is in line with the company’s past three-year average. Stock valuations at 37x/34x FY16/17e leave little headroom for further outperformance.
Asian Paints registered low single digit volume growth in Q3FY15 owing to weak demand trends for the decorative segment. We expect domestic demand conditions to improve gradually over the course of FY16 aided by improving macro indicators and forecast 16% revenue CAGR over FY15-17E, though weighed down by flat to marginally negative price growth.
Benefits from recent sharp fall in crude/TiO2 prices will lead to further gross margin gains going forward. APNT is yet to take any pricing decisions, though the possibility of price cuts and/or higher brand investments cannot be ruled out if low RM costs sustain as the company aims to push for above-industry volume growth. We have built in 450 bps y-o-y expansion in ebitda margins for domestic decorative business in FY16.
By JP Morgan