Buy Asian Paints With A Target Price of Rs. 3,550: Sharekhan

The brokerage’s take on Asian Paints Ltd (APL)

Sharekhan has noted in its research report that "Asian Paints Ltd's (APL's) decorative paint volumes grew by ~18% in H1FY2022 (two-year CAGR stood at 22%) with strong growth in Tier 1/Tier 2 cities, which was higher than growth in Tier-3/Tier-4 towns. Double-digit volume growth is expected to sustain in H2FY2022 with sustained buoyancy in urban demand (led by sustained repainting activities and an uptick in the real estate sector especially in affordable housing space) and a gradual pick-up in the rural demand. Further, in line with its aggressive pricing strategy, APL hiked prices by ~9% on November,21 (cumulative price increase of 16%) and is planning to take an additional hike of 5% to mitigate the impact of a sharp surge in input costs. As input costs stabilise, margins would return to 18-20% by Q4FY2022."

According to the brokerage "APL registered a strong volume growth of 34% (two-year volume CAGR of 22%) in Q2FY2022 with strong growth in tier-1/tier-2 towns, which stood ahead of rural demand. We expect the strong double-digit volume growth momentum to sustain in H2 as the company is witnessing good demand in project business with deep inroads across segments - building construction, speedy completion of real estate projects due to strong demand in the affordable housing segment, government infra projects and cooperative housing societies. This along with sustained demand from home improvement space (in wake of festive / wedding season) would help the double-digit volume growth to sustain in H2FY2022."

Sharekhan has also claimed in its research report that "A significant increase in the crude oil and crude derivatives prices led to APL's consolidated gross margins were down by 828 bps to 36.2% in H1FY22 (down by 965 bps in Q2). Raw material inflation in Q2 stood at 20%. The company decided to undertake an aggressive price increase to mitigate the raw material inflation and took a price hike of ~9% in November 2021 and has planned for a further price hike of 5% in the first week of December. This will help reduce stress on profitability and OPM is expected to normalise to 18-20% by Q4 (with raw material prices remaining at current levels)."

Buy Asian Paints Ltd (APL) with a target price of Rs. 3,550

According to the brokerage's call "APL's dominant positioning in the domestic decorative paints business and focus on becoming complete home décor play in the long run gives us visibility of better earnings growth in the medium term. We expect APL's revenues and PAT to grow at a CAGR of 20% over FY2021-24E. The company's stock price has corrected by 13% from its high and is trading at 68x/54x its FY2023/24E EPS. Recent correction provides a good opportunity to accumulate a quality consumer play with a monopoly in the domestic paint industry. We maintain our Buy recommendation on the stock with an unchanged price target of Rs. 3,550."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.