Asian Paints rating- Buy: Robust demand trends have continued in Q3

We hosted Asian Paints (APNT) at our Nomura Investment Forum 2020. Management highlighted that robust demand trends (Q2FY21 volume growth of +11%) continued in October, supported by the wedding season, festive demand, and pent-up demand. November also saw strong growth, albeit not as high as October. The company does not expect any pressure on gross margins from the recent uptick in crude oil prices.

Management expects the volume-value gap of c.5% to continue in the near term (trend over the past eight quarters) as APNT’s focus is on driving upgrade of economy-segment consumers; however, it expects the gap to narrow over the medium term (2-3 years). Premium and luxury products are witnessing good 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 focus on growing economy emulsions (not margin-dilutive) and undercoats, putty, primer (high-growth allied products) as it sees a significant market size for them. Given the higher proportion of unorganised/ regional players in these products, APNT expects to gain share as consumers increasingly prefer branded products (‘formalisation’). Its other key focus area is the waterproofing business (which has better margins), and it is increasing sales from the construction projects segment.

APNT’s long-term strategy is to become a complete home décor player rather than just a paints player, and it wants to be known as a home ‘décor + solutions’ provider. APNT has taken further steps (after entering the kitchen and bath businesses) in expanding into home furniture, furnishings & lightings under the ‘Beautiful Homes’ brand through its dealer network and outsourced manufacturing (hence not entailing any significant investments).

Our view
We believe the paints category has unique features, not only enabling APNT to recover its lost sales during lockdown but also arguably come back stronger. We think consumers will see the category in a new light—from décor to décor+protect with anti-virus paints. We also expect formalisation of the industry to accelerate as consumers adopt services such as Safe Painting, etc, offered by APNT. We believe APNT is in a land-grab phase, and should gain share in the bottom-of-pyramid segment with economy-segment products at disruptive price points, leverage its superior reach and benefit from scaling new high-margin categories like waterproofing. We maintain 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 value APNT at a P/E of 60x Dec’22F EPS and arrive at a TP of Rs 2,384. Lower-than-expected volume growth is a key risk.