ICICI Direct recommended is bullish on Asian Paints has recommended buy rating on the stock with a target price of Rs 1600 in its research report dated January 23, 2019.
ICICI Direct's research report on Asian Paints
Asian Paints recorded a stupendous performance with topline growth of ~24% YoY led by ~21% YoY (I-direct estimate) growth in volume. Strong festive demand coupled with aggressive price hikes (~6% YoY in May-December 2018) helped drive the topline in Q3FY19. The volume growth was led by lower end product categories (higher distemper sales in Q3FY9) resulting in lower realisation growth. According to the management, the price hike was insufficient to offset the higher raw material prices. As a result, despite strong volume growth, the gross margin declined 127 bps YoY, impacting EBITDA margin. Further, commencement of new plant in Mysuru resulted in higher fixed cost leading to a spike in employee cost, other expenditure by 26%, 19% YoY, respectively We introduce FY21E estimates and model volume CAGR of ~14% in FY18-21E supported by a shorter repainting cycle and increasing presence in the southern region through two news facilities (with capacity of 3 lakhs/KL each) in Andhra Pradesh and Karnataka. We also believe the company would maintain EBITDA margin of ~19% led by fall in crude linked raw material prices.
Outlook
We expect APL to record revenue, earnings CAGR of ~17%, ~15%, respectively, in FY18-21E led by volume CAGR of 14% in the domestic segment. We believe pressure on gross margin (due to change in product mix coupled and higher raw material cost) will ease, going forward, supported by aggressive price hikes. We believe the strong volume witnessed during the quarter factoring in structural demand given the lower per capita paint consumption in India. We roll over our valuation on FY21E with a revised target price of Rs 1600/share. We change our stance on the stock from HOLD to BUY.
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