**[investwise]** PL Puts A BUY On Asian Paints

 

Asian Paints-BUY Over the past 12 months while most fund managers have treaded a tortous path between growth and value, one sector that has stood out is the Paints industry. It is not only a defensive play as it grows on consumer growth, it is also an aggressive play on automobiles growth which again are in some measure a consumer play. The top four players in the industry Asian Paints, Kansai Nerolac, Akzo Nobel and Berger have done extremely well and there seems more to come. 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'. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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