>ASIAN PAINTS (ICICI DIRECT)

Dip in crude boosts margin…

Asian Paints reported a 17.0% rise in topline to Rs 1164.8 crore in Q1FY10 on the back of higher volumes lead by improved demand conditions in the decorative paints segment. On account of a major dip in crude prices and a simultaneous decline in its derivatives PAN and Penta, raw material costs rose by a mere 9.8%. This resulted in a significant improvement in the EBITDA margin to 21.0% from 15.5%. Depreciation provisioning increased by 29% to Rs 15.0 crore from Rs 11.6 crore in Q1FY09 on account of the capital expenditure undertaken. A higher EBITDA margin resulted in net profit growth of 66.8% to Rs 164.5 crore from Rs 120.0 crore in Q1FY09.

Highlight of the quarter
A significant decline in crude-based raw materials has resulted in a sudden jump in the EBITDA margin to 21.0%. We believe the company would be unable to maintain these margins as crude prices remain volatile.

Valuations
At the CMP of Rs 1360, the stock is trading at 22.7x its consolidated FY10E EPS of Rs 59.8 and 20.9x its consolidated FY11E EPS of Rs 65. We believe demand for decorative as well as industrial paints is likely to witness robust growth on the back of a gradual revival in real estate and automobile industry. Simultaneously, a significant improvement in the EBITDA margin on the back of a decline in prices of crude derivatives would boost the bottomline for the company. We believe the stock is fairly valued after the recent run up in stock prices. Subsequently, we value the stock at 21x its consolidated FY11E EPS of Rs 65 to arrive at a target price of Rs 1365.

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