"Asian Paints, our dealer checks indicate that after a strong 3QFY13 (13 percent volume growth in decorative paints), led by festive season demand, 4QFY13 was a subdued quarter. Our recent interactions with (a) Indian Paints Association President, Mr Ramakanth Akula, and (b) Akzo Nobel management suggest a challenging environment in CY13. The dull macroeconomic backdrop is impacting consumer sentiment and discretionary spending. Given the positive correlation between decorative paints volume growth and GDP growth (decorative paint volumes usually grow at 1.5-2x GDP growth), we expect paint volumes to moderate in CY13.
Ti02 prices have corrected ~25 percent from the peak and this augurs well for APNT's gross margin. Industry participants believe that the correction in TiO2 prices is structural. (Until recently, TiO2 prices had remained stubbornly high despite weak global demand for paints. The high prices were, therefore, unnatural.) However, we note that the prices of other crude-based raw materials remain firm. We factor in 70/100bp expansion in gross/EBITDA margin in FY14.
Owing to weak capex spending and slowdown in the investment cycle, outlook for the industrial paints segment remains lackluster. Slowdown in auto sales portends incremental challenges ahead. However, this segment constitutes just 7 percent of APNT's revenue. Performance of the international division remains mixed and is heavily dependent on the Middle East.
Competition has intensified, with Berger and Akzo Nobel increasing investments in capacity and distribution. However, we believe that APNT enjoys a very strong first mover advantage with the trade and is unlikely to be impacted significantly.
APNT is currently trading at all-time high valuations of 33.6x FY14E and 26.8x FY15E EPS. It is now the third most expensive stock in our universe. We do not expect these multiples to sustain, especially when discretionary consumption is under stress and there are downside risks to volume growth. While we remain positive on the long-term prospects of the paints industry, at current valuations, we believe risk-reward is unfavorable. Downgrade to Neutral, with target price unchanged at INR5,000," says Motilal Oswal research eport.
FIIs holding more than 30% in Indian cos
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