Asian Paints had been one of our key ‘overweight’ ideas in 2014 and it performed strongly in the year in part due to a strong volume-led performance in the year of slowdown and increasingly benign outlook for commodity costs. We think investor should continue to accumulate Asian Paints even in 2015. Despite the significant run up (c23% in last three months), Asian Paints is still discounting a modest 12-13% long-term earnings growth. We revise our earnings estimates and increase our DCF-based target price to Rs 920 (earlier Rs 760).
Crude Oil, which has direct and indirect linkage to c45% of the raw materials for Asian Paints has corrected c50% since July 2014 creating significant margin tailwinds (starting from Q3FY15 and full impact running into FY16) for Asian Paints. We estimate that ebitda margin can increase to c20% in FY16e (from 16.7% in FY15e) even after accounting for a conservative impact on gross margins and some price cuts. Earnings growth is likely to accelerate and we pencil in three year earnings CAGR of c27%.
Structurally, decorative paint is a large long-term growth opportunity with a potential to double in volume terms in 6-7 years. Dominant scale and leadership makes Asian Paints a structural winner in oligopolistic industry with high barriers to entry. Asian Paints has astute growth strategy aimed at exploiting its vast dealer network to add home improvement categories to its portfolio and buttressing its geographical presence in Asia and Africa in decorative coatings.