Concerns over surge in crude prices and drag from capacity additions are overdone; ‘Add’ retained.
We see the recent price correction in Asian Paints (APNT) as a good buying opportunity. Despite recent crude oil surge, we expect APNT to deliver on our revenue/Ebitda growth assumptions due to (i) relatively benign RM environment (our paint RM index indicates 0.5% deflation in FY20); (ii) sufficient price hikes taken to combat current crude/INR level (and headroom at consumer level for further hikes); (iii) robust operating leverage due to pick-up in volume growth (led by GST cut-led tailwinds). Robust 12.5% volume CAGR, 20% EPS CAGR, 600 bps expansion in RoIC to 30% and 67% FCF CAGR (albeit on a low base led by capex normalisation, with healthy 50% FCF/ Ebitda conversion) over FY19-21e are likely to support premium valuations for the stock; it is higher on most metrics vs. consumer staples companies under coverage. Our estimates & target price of Rs 1,550 remain unchanged; we have Add rating on the stock.
Concerns overdone, recent correction a good buying opportunity
The stock has corrected due to rising concerns over surge in crude oil prices and drag from recent capacity additions on profitability. We note overall RM inflation for APNT remains benign in FY20 given high base (our paint RM Index suggests 0.5% deflation y-o-y in FY20 assuming current crude/INR levels sustain). Recent price hikes of 4% taken in Q3FY19 to combat crude oil at `5,500-6,000/barrel (current level is at ~Rs 5,000/barrel) and sufficient headroom to take further hikes at consumer level (cumulative hike of just 3-4% vs. 14% at company level over CY2017-18 due to GST rate cut) lend additional comfort.
Drag from recent capacity additions has been a concern for us (and aptly baked in our estimates) which we have highlighted in our past reports. However, we remain confident of APNT’s ability to post robust Ebitda growth led by a combination of (i) significant improvement in volume growth trajectory over past few quarters (led by both GST cut-led tailwinds and conscious efforts by paint companies to gain share through aggressive rebates/schemes at lower-end portfolio of distempers/putty) driving higher operating leverage and (ii) relatively benign RM scenario well covered by sufficient price hikes.