Buy Asian Paints; target of Rs 2440: ICICI Direct

ICICI Direct's research report on Asian Paints

Asian Paints reported stellar numbers with one of the best quarterly EBITDA margins in Q2FY21. The EBITDA margin at 23.6%, up ~470 bps YoY led by benign raw material prices and saving in other expenditure in Q2FY21. On the revenue front, sales growth at ~6% YoY was led by double digit (I-direct estimate: ~10%) volume growth in Q2FY21. Despite being a lean season on account of monsoons, the strong decorative volume growth is attributable to significant pent up demand in rural and semi urban regions led by repainting/maintenance activities. Gradual opening up of metro regions along with inventory build-up in the wake of festive seasons at dealer would have also help drive the volume growth in Q2FY21. We believe normalisation in metro regions, revival in the real estate industry and intact repainting demand from semi-urban, rural India would drive paint demand, going forward. Besides, we believe favourable raw material prices are likely to keep gross margins elevated in the coming quarters even with a change in product mix. This, coupled with rationalisation of other costs would help drive EBITDA margin, going forward. We revise our revenue, earnings estimates upside by 6% and 33%, respectively, for FY21E factoring in the current quarter performance. We introduce FY23 estimates with revenue, earning CAGR of 12%, 15% respectively in FY20-23E.

Outlook

We introduce FY23E estimates and model revenue, earning CAGR of 12%, 13% in FY20-23E supported by strong volume growth and elevated margin profile. We roll over our valuation on FY23E and upgrade our recommendation from HOLD to BUY with a revised target price of Rs 2440.

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