We hosted Asian Paints (APNT) at our Nomura Investment Forum 2020. Management highlighted that robust demand trends (Q2FY21 volume development of +11%) continued in October, supported by the wedding season, festive demand, and pent-up demand. November also saw sturdy development, albeit not as higher as October. The firm does not anticipate any stress on gross margins from the current uptick in crude oil rates.
Management expects the volume-worth gap of c.5% to continue in the close to term (trend more than the previous eight quarters) as APNT’s concentrate is on driving upgrade of economy-segment buyers on the other hand, it expects the gap to narrow more than the medium term (2-3 years). Premium and luxury items are witnessing excellent demand in Tier-3,4 and rural markets. Tier-2,3,4 towns and rural markets continue to see robust demand.
APNT has a keen concentrate on increasing economy emulsions (not margin-dilutive) and undercoats, putty, primer (higher-development allied items) as it sees a important marketplace size for them. Given the larger proportion of unorganised/ regional players in these items, APNT expects to get share as buyers increasingly choose branded items (‘formalisation’). Its other crucial concentrate region is the waterproofing small business (which has much better margins), and it is growing sales from the building projects segment.
APNT’s extended-term technique is to come to be a comprehensive dwelling décor player rather than just a paints player, and it desires to be recognized as a dwelling ‘décor + solutions’ provider. APNT has taken additional measures (immediately after getting into the kitchen and bath companies) in expanding into dwelling furnishings, furnishings & lightings below the ‘Beautiful Homes’ brand by means of its dealer network and outsourced manufacturing (therefore not entailing any important investments).
Our view
We think the paints category has distinctive options, not only enabling APNT to recover its lost sales for the duration of lockdown but also arguably come back stronger. We feel buyers will see the category in a new light—from décor to décor+guard with anti-virus paints. We also anticipate formalisation of the market to accelerate as buyers adopt services such as Safe Painting, and so on, provided by APNT. We think APNT is in a land-grab phase, and need to get share in the bottom-of-pyramid segment with economy-segment items at disruptive value points, leverage its superior attain and advantage from scaling new higher-margin categories like waterproofing. We sustain our Buy with a FY21-23F EPS CAGR of 23%.
Maintain Buy with TP of Rs 2,384 APNT trades at 59x Sep’22F EPS
We worth APNT at a P/E of 60x Dec’22F EPS and arrive at a TP of Rs 2,384. Lower-than-anticipated volume development is a crucial danger.