Asian Paints premium valuation is justified: ICICI Direct

Favourable base, pent up demand drive topline…

About the stock: Asian Paints (APL) is India’s largest decorative paint company. The company derives ~98% revenue from the paints business while 2% business comes from the home improvement business (kitchen and bathroom fittings).

 The company has a pan-India distribution of ~70,000 dealers, ~2.3x more than the No.2 player
 Despite being into a capital intensive business, the company has maintained a strong balance sheet with RoCE, RoE of 31%, 27% respectively

Q1FY22 Results: Revenue and bottomline growth was ahead of our estimates but EBITDA margins came in lower than expected

 Reported revenue growth of 91% YoY to Rs 5585 crore (up 91% YoY)
 Gross margins declined 630 bps YoY to ~38% while EBITDA margin was flat at 16.4% due to better operating leverage and savings in other costs
 PAT growth of ~162% YoY to Rs 574 crore was supported by strong sales growth on a YoY basis
 The company has taken a price hike of 3% in Q1FY22 and has further guided to take price hikes to maintain EBITDA margin in the range of 19-21%, going forward

What should investors do? Strong brand, market leadership position and a robust balance sheet condition justifies APL’s premium valuation. APL has been a consistent compounder with stock price appreciating at 31% CAGR over the last five years.

 We introduce our FY24 estimates and roll over our valuation on FY24E. We maintain our BUY rating on the stock

Target Price and Valuation: We value APL at Rs 3665 i.e. 62x P/E FY24E EPS

Key triggers for future price performance:

 Repainting represents ~80% of total decorative paint demand. Gradual reduction in re-painting cycle would drive future paint demand
 Increased focus on the ‘water proofing & building chemical’ category will continue drive revenue growth for Asian Paints. Water proofing & building chemical industry is pegged at | 6000 crore vs. | 1.5 lakh crore in China
 Model revenue, earnings CAGR of 20%, 21%, respectively, in FY21-24E
Alternate Stock Idea: Apart from APL, in our paint coverage we also like Kansai
 Trigger for Kansai’s future revenue growth would be strong automotive paint demand (45% of Kansai’s total revenue) and increased focused on construction chemical business
 BUY with target price of Rs 655