>ASIAN PAINTS (CITI)

Upgrade to Buy: 4QFY09 Signals a Turnaround

■ 4QFY09 bucks the trend — Consolidated PAT rose 7% Y/Y, driven by a strong 25% Y/Y revenue growth. This was in contrast to our expectations of a c20% profit decline, as we expected continued pressure on revenues and margins.

■ Headwinds appear to be abating — During the analyst meeting, management indicated that: a) demand in the key decorative paints business continues to remain firm (except in cities like Mumbai and Bangalore), b) growth in the international business remains steady (although macro concerns persist), and c) cost pressures are abating. We also note that the trend of sharp INR
depreciation vs. the US$ should reverse going forward, which should positively impact EBITDA margins.

■ Consequently, we upgrade to Buy from Sell... — We increase our target price to Rs1090 from Rs801 based on 20x Sept10e EPS. We raise our target multiple to 20x from 18x, in line with the average multiple of the past 5 years. Our comfort in setting a higher multiple stems from the fact that we expect earnings growth trajectory to improve; we forecast ~19% CAGR over FY09-11e. Over the past year, ASPN has underperformed the FMCG index by 10%; more recently YTD,
it has underperformed the broad market and peers by 22% and 4% respectively. ASPN is now our preferred pick in the Indian mid cap consumer space.

■ ...and raise our estimates — We increase EPS estimates by 9-11% over FY10- 11e, factoring: a) lower input costs which would drive margin growth, and b) visibility of a recovery in domestic demand. Key risks to earnings stem from delay in domestic volume recovery, impacted by adverse macro environment and continued deceleration in key international markets.

To see full report: ASIAN PAINTS