Buy Asian Paints Ltd For Target Rs. 3,691- Geojit Financial Services Ltd
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Coloured by margins...
Asian Paints Ltd. (APNT), is engaged in the business of manufacturing, selling and distribution of paints and related products for home décor. APNT is the market leader in the Indian paint manufacturing industry. • APNT maintained double digit volume growth of 10% YoY, aided by improving rural demand. While revenue grew by 6.7% YoY in Q1FY24.
* EBITDA margin expanded by 502bps YoY to 23.1%, supported by a fall in raw material prices and efficient sourcing of raw materials.
* Robust demand and expansion in the distribution network supported the decorative volumes, while industrial paint demand was supported by the Auto segments.
* Good progress in the monsoon and a longer festival season augur well for peak season demand.
* Superior product mix and comfort with moderating raw material prices bode well for profitability. We increase FY24 & FY25 earnings forecasts by 5%/2%, respectively, in expectation of margin expansion. We revise our rating to BUY with a TP of Rs. 3,691, based on a P/E of 60x on FY25E EPS.
Maintained double digit volume growth...
APNT reported revenue growth of 6.7% YoY to Rs 9,82cr, supported by a 10% YoY growth in decorative paint volume and double digit volume growth in industrial paints. The sustained growth in the industrial paint business driven by Auto OEMs and the refinish segment. However, the kitchen and bath fitting business reported de-growth of –12% YoY to Rs 96cr and –28% YoY to Rs85cr respectively, due to subdued retail demand. The management expects demand conditions to improve further with double digit growth in FY24. Good progress in the monsoon bode well for rural demand in H2FY24.
Raw material prices softening...
Gross margin improved by 523bps YoY to 42.9% in Q1FY24 due to deflation in input prices by ~2% and efficient sourcing of raw materials. The EBITDA margin expanded by 502bps YoY to 23.1% during the quarter. However, the management remains conservative and guides EBITDA margins in the range of 18% to 20% in the medium term as the company may increase advertising expenses. We expect softening raw material prices and operating leverage to lead to improvements in profitability
Key con-call highlights
* Maintained strong growth in smartcare, waterproofing, premium wood finishes, enamels, and economy emulsions.
* A robust expansion of the distribution footprint, catering to almost 1.6 lakh retail touchpoints, added 6,000 retail touchpoints in Q1.
* The home decor segment is contributing ~4% of decorative revenue, and the company is focusing on increasing the mix to 8% to 10% in the medium term.
Valuations
We expect a better product mix and a softening of raw material prices to drive earnings. The management indicated double digit volume growth would continue, supported by distribution expansion and innovation. We revise our rating to BUY with a TP of Rs. 3,691, based on a P/E of 60x on FY25E EPS.
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