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MOSL: ASIAN PAINTS (Neutral)-Strong performance-Maintain Neutral as valuations remain fair

Asian Paints: Strong performance; Maintain Neutral as valuations remain fair

(APNT IN, Mkt Cap USD18.9b, CMP INR1407, TP INR1500, 7% Upside, Neutral)

 

• Asian Paints (APNT) showcased a strong 3QFY19 performance with consolidated net sales growing 24.3% YoY to INR52.9b (est. INR48.1b) with a calculated volume growth of ~21% (est. 11.5%) in the Domestic Decorative paints business. EBITDA grew by 17% YoY to INR10.4b (est. INR8.7b), and adjusted PAT grew 14.1% YoY to INR6.5b (est. INR5.5b).
• 9MFY19 performance: Sales/EBITDA/adj. PAT grew 16.1%/14.6/12.6%, while gross margins/EBITDA margins were down 80bp (41.3%)/20bp (18.9%) YoY.
• 2QFY19 + 3QFY19 performance (To normalize the effect of delay in festive season): Consol. Sales/EBITDA/adj. PAT grew 16.5%/8%/5.5%.
• Concall highlights: (1) Environment is a bit uncertain due to upcoming general elections, INR volatility, crude price movement, etc., and (2) APNT took a 1.7% price hike in Dec'18. If material costs rise again, it will hike prices again.
• Valuation & View: Because of better-than-expected results we have raised our EPS forecasts by 4.9%/4.4% in FY19/FY20. Due to the festive season mismatch as cited by the company, it makes sense to look at combined 2QFY19 and 3QFY19 Sales, EBITDA and PAT which are up 16.5%, 8.0% and 5.5% YoY respectively compared to the corresponding period last year, which is not as impressive as the 3QFY19 numbers. While the company has a history of delivering strong volume growth, which is likely to continue, near-term upsides are capped by fair valuations of 50.1x FY20 EPS. Valuing the company at 46x Dec'20 EPS (in line with 5-year average), we get limited upside at a target price of INR1,500. ROCEs at 25% in FY20 are also lower than peers and closer to the company’s own decadal lows. Any sharp increase in crude prices and rising competition could lead to risks to earnings forecasts. Maintain Neutral.