Asian Paints: Recommendation Review

We had recommended Asian Paints to investors in DSIJ Vol. 27, Issue No. 5 (dated February 13-26, 2012), when the scrip was trading at Rs 2985. Our recommendation was backed by factors like the company’s ability to sail through a difficult macro-economic situation, its leadership position in the decorative paints market, the ability to pass on costs to consumers and a strong management bandwidth. We had also put a target price of Rs 3350 on it. As the target was achieved, we had asked investors through our ‘Book Profits’ SMS service to book profits at that level. The company has now announced a strong set of numbers for March 2012. This has resulted in the scrip touching a new high, and it is now trading at Rs 3750.

For the quarter ended March 2012, it posted a consolidated topline of Rs 2539 crore and a bottomline of Rs 261 crore as against Rs 1966 crore and Rs 186 crore respectively during the same period last year. The sales growth was aided by good volume growth as well as price hikes. The best part was that the company’s operating margins too improved to 14.80 per cent from 14.70 per cent. In a scenario of rising crude oil prices, this is commendable.

Going ahead though, we feel that the company may be impacted by a few factors. First, the steep decline in the rupee is expected to set about a sluggishness in its international business. Further, some margin pressure is expected to continue in the coming quarters. The management has indicated a capex of Rs 400 crore and Rs 500 crore in FY2013 and FY2014 respectively towards scaling capacity in its Rohtak plant and building its Khandala plant. As of now, the scrip is trading at 36x its FY12 consolidated earnings. We recommend that investors book profits at the current levels.