>ASIAN PAINTS: Painting the town red

We initiate coverage on Asian Paints with ‘BUY’ rating and a target price of Rs2,600, an upside of 9%. Healthy earnings growth CAGR of 19% for FY10-12E, continued pickup in urban discretionary demand and leadership position in a growing market with relatively benign competitive intensity, underline our positive investment thesis on Asian Paints.

■ Continued robust demand to drive healthy 18% earnings CAGR: Asian Paints is an undisputed leader in the Indian paints market (55% market share of the organized segment), with more than 2x the share of its next competitor. Pick-up in urban discretionary demand and continued healthy volume growth in semiurban and rural markets will result in robust 18% earnings CAGR for FY10-12e, in our view.

■ Expect 80bps EBITDA contraction in FY11e: We model for 80bps contraction in FY11e EBITDA margin, given the high base (highest EBITDA margin of 18.4% in FY10) and sequential increase in input costs. We believe that Asian Paints has enough pricing power to pass on any adverse input cost hike (~4% price hike in May 2010).

■ Favourable macro catalysts: We believe that Asian Paints is a direct play on the growing economy and India consumption story. Apart from consumption and penetration-led opportunity, several favourable demographic catalysts viz. rising income levels, increasing urbanisation and nuclear families can act as structural growth drivers for decorative paints demand growth.

■ Valuation and Outlook: We value Asian Paints at a P/E of 23x (3 year average) to arrive at target price of Rs2,600, an upside of 9%. We expect the valuations to sustain, given our expectations of healthy earnings CAGR of 19% for FY10-12E, led by a pick-up in urban discretionary consumption. Asian Paints has the pricing power to pass on input cost inflation (price hike of 4.15% in May and 2.8% in July). We initiate with ‘BUY’. Upside risk includes better-than-expected margin performance (we model for 100bps decline in FY11e) and downside risk including moderation in rural demand on account of poor monsoon.

To read the full report: ASIAN PAINTS