Asian Paints: Retain ‘buy’ with target price of Rs 3,500

Retain 'buy' and target price of Rs 3,500: We estimate that APNT’s current share price builds in long-term earnings growth expectations of c15%, which looks undemanding given its portfolio, strategy and execution.

Asian Paints continued to surprise with its volume-led growth in 2Q FY22: 1) APNT delivered yet another quarter of strong decorative sales, aided by 34% volume growth, which is impressive even adjusted for the base, evidence that it is consistently winning and gaining market share. 2)

The steep inflation across key raw materials (18-20% since 3Q FY21) and logistics pulled down the ebitda margin by 1090bp YoY to 12.7%, which as a strategic near-term choice rather than the forced outcome, in our view. 3) APNT took a 4% price hike in 2Q FY22e (7.5% cumulative in 1H FY22e) and plans to continue to take staggered price hikes. 4) consolidated sales rose 32.6% YoY, but ebitda fell 28.5% YoY and clean PAT by 28.2%

Our key takeaways from management conference call: 1) Decorative demand remains strong, driven by first- and second-tier towns with strong growth in the premium and luxury segments. Projects business and the waterproofing segment also witnessed strong growth.

APNT is confident of delivering strong double-digit growth in 2H FY22 as well. 2) APNT continues to rapidly expand its footprint, adding 40k+ retail points (direct and indirect) in the past 1.5 years. 3) It launched several innovative products in the premium segment (wood coatings, emulsions and waterproofing) and expects its mix to improve. 4) It aims to pursue a profitable volume growth strategy and expects margins to return to normal levels by 4Q FY22 as it raises prices in a staggered manner.

Why we remain positive: 1) APNT is aggressively pursuing volume growth, led by growing markets, and consistently gaining market share both from organised and unorganised participants. 2) Margins is only a transient issue as we believe APNT commands substantial pricing power but chooses to use a staggered approach for price hikes to avoid any near-term demand disruptions.

3) Out-investing rivals: APNT’s aggressive distribution expansion and roll-out of AP Homes are sunk costs and investments in consumer centricity and experiences, which leave rivals behind and further raise barriers to entry. And

4) building several categories for the future: Apart from its dominant leadership in decorative paints, which is a structurally attractive category, APNT continues to scale up its waterproofing (growing exceptionally well) business and expand several home improvement categories that should augment the company’s long-term growth trajectory and help it grow ahead of the industry.

Retain ‘buy’ and target price of Rs 3,500: We estimate that APNT’s current share price builds in long-term earnings growth expectations of c15%, which looks undemanding given its portfolio, strategy and execution.