Home » Research » Kotak Research Center » Stock Recommendation Asian Paints Reduce Target Price 1140
How it helps?
  • Zero maintenance charges
  • Zero fees for demat account opening
  • Volume based brokerage
Reach Us
Learn the art of Investing

Read More >


  • Stock Recommendation | Asian Paints - REDUCE - Target price : 1,140

    Publish date: OCTOBER 24, 2018

    Short-term earnings prognosis sketchy. APNT delivered a disappointing 2QFY19 and the driver of disappointment was not RM pressure. RM pressure is likely to keep earnings growth in check in the near term. Management's commentary in the earnings call was more guarded than we have seen in a while and did not suggest confidence in a quick earnings growth inflection. Earnings forecasts see sharp cuts. One-year forward fair-value target stands revised down to ₹1,140/share (from ₹1,200). REDUCE stays.

    Consolidated financials-revenues grew 9% yoy to ₹46.4 bn, 6% below our estimate (2-year CAGR: 11.8%). Gross margins declined 148 bps yoy and 343 bps qoq to 39.8%. EBITDA was down 2% yoy to ₹7.84 bn, 23% below our estimate and nearly 14-15% below consensus (2-year CAGR: 5.4%). EBITDA margins declined 188 bps yoy and 302 bps qoq to a 14-quarter-low 16.9%. Recurring PAT declined 3% yoy to ₹4.93 bn, 23% below our estimate (2-year CAGR: 2.3%). TTM EPS stood at ₹21.8/share, up 13.2% yoy (2-year CAGR: 3.6%, multi-year low). This was the sixth consecutive quarter of single-digit 2-year CAGR in TTM EPS.
    Standalone financials-revenues grew 9% yoy (KIE 16%; 2-year CAGR: 12.3%). Revenue growth was below volume growth (low double digit) despite 3.4% price increase; net realization declined 2.2% yoy. The management attributed the big gap between pricing and realization to (1) higher sales of distempers (inferior product mix), and (2) higher trade discount ahead of GST rate cut implementation (July 27) to dispose stocks with higher MRP and avoid logistical issues. Gross margins declined 143 bps yoy and 382 bps qoq to 40.8%. EBITDA was up 1% yoy to ₹7.27 bn, 21% below our estimate (2-year CAGR: 7.3%). EBITDA margins declined 141 bps yoy and 368 bps qoq to 18.6%. Recurring PAT was up 2% yoy to ₹4.82 bn, 20% below our estimate (2-year CAGR: 5.2%).
    Aggregate subsidiary performance (consolidated less standalone)-aggregate subsidiary performance was weak again with double-digit EBITDA decline for the 4th consecutive quarter. Aggregate subs' PAT was the lowest 2Q PAT since FY2012.
    We cut our FY2019-21E EPS estimates by 9-12% as we trim our volume growth/realization assumptions and bake in higher RM costs. APNT's price hike of 2.35% in October 2018 was lower than needed to offset RM inflation; the management is cautious in view of antiprofiteering implications. We revise our DCF-based fair value target price to ₹1,140 (from ₹1,200). Even as valuations have corrected, we do not see enough margin of safety yet. We would wait for a better entry price to play what remains a solid medium-term story. REDUCE stays.
    Even as APNT's RM basket has non-crude-linked components as well, there has been a pretty strong correlation between crude inflation in INR terms and APNT's reported per-unit RM inflation (see Exhibit 2 on the next page). We compute per-unit RM inflation or volumeadjusted RM inflation simply as the gap between reported standalone COGS increase and indicated domestic decoratives volume growth. APNT's COGS (standalone) grew 11% yoy in 2QFY19 in absolute terms while indicated volume growth was 'low double digits'. Assuming volume growth in the 10-12% range, per-unit RM was flat yoy or there was zero volumeadjusted RM inflation. This is surprising given the 59% increase in crude price in INR terms. The last time INR crude inflation was this high (35-46% between 4QFY11 and 3QFY12), the company saw volume-adjusted RM inflation of 12-22%.
    We appreciate that mix movement could be at play here. HUVR-style UVG, which depicts mix-adjusted volume growth, would have been very helpful here. However, even if we were to assume a 500 bps mix impact, i.e. a UVG of 6%, volume-adjusted RM inflation would have still been a low 5% yoy. We are not sure (1) whether low inflation reflects smart RM forward and covers, and (2) if RM inflation impact will show up with a lag; if it does, price increases taken thus far may not be enough to prevent gross margins from going down further. Earnings call did not provide any insight to help us on this aspect.
    Explanation on net realization decline or price-realization delta gap-A 9% revenue growth in standalone financials despite a low-double-digit volume growth (KIE 11%) in decorative business and 3.4% price increase implies net realization decline of 2-3% yoy. The management attributed net realization decline to (1) deterioration in product mix. Higher sales of distemper in 2QFY19 and higher-than-usual contribution of emulsions in the base quarter adversely impacted realization, (2) higher trade discounts to liquidate about 170,000 KL of stock four days ahead of GST rate cut implementation. The management indicated that it helped the company avoid a logistical issue of changing MRP stickers on the stock, (3) some impact of discontinuation of Pthalic Anhydride sales on revenues (present in the base quarter but discontinued thereafter). We appreciate management's disclosures but are not sure if these factors explain 100% of the large (550 bps+) gap between price and realization delta.
    Commentary on demand-APNT management indicated that the demand environment is consistent with what they have seen over the past 18 months and they have not seen any signs of uptick. GST rate cuts, monsoons and imminent election season, expected to prop up volume growth, do not seem to be doing so yet. From a geographic standpoint, East is growing well and the company is seeing some signs of recovery in the South (weak for the past few years).
    Pricing, RM inflation and margins-APNT management has increased prices by 2.35% in October 2018 (cumulative price increase of 5.6%; first in March, second in May and third in October). The management indicated that October price increase was sufficient to offset the impact of high RM prices and weak rupee as of August 2018 levels. RM price inflation and depreciation of rupee since then calls for another price increase. It is considering another price increase in current quarter. Titanium dioxide is about 20-22% of RM costs and crude derivatives account for 30% of RM costs. APNT expects monomer (derivative of crude) prices to increase in the current quarter (usually follows crude inflation with lag). APNT management expects margins to be under pressure in the near term in view of timing gap between price increase and RM inflation.
    Commissioning of new capacities-first phase of Mysore plant has been commercially commissioned in September 2018. The upcoming facility at Vizag will be commissioned in 4QFY19. New facilities would reduce logistics costs and manufacturing costs to some extent.
    Capex-standalone capex for the year would be ₹10 bn including ₹8 bn pertaining to Mysore and Vizag expansions. Consolidated capex would be ₹12 bn (no change from previous guidance).
    International business performance-(1) Sri Lanka suffered from incessant rains, (2) Ethiopia continued to face challenges pertaining to currency availability for imports, (3) Egypt market was weak due to sluggish economy and reduction in fuel subsidies added to inflationary environment, (4) Dubai business was impacted from hypercompetition as volume leader in that market reduced prices to absorb 5% increase in VAT despite RM inflation, (5) greenfield operations in Indonesia are progressing as per plans with a focus on expansion of retail network.
    Industrial business-both JVs APPPG and PPGAP reported good growth in the industrial segment but price increases taken were not adequate to offset RM pressure. The management alluded to difficulty and delays in passing on RM costs to large B2B customers.

    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.


    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.


    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.


    Corporate Office
    Kotak Securities Ltd.
    27 BKC, Plot No. C-27, "G Block"
    Bandra Kurla Complex, Bandra (E)
    Mumbai 400 051, India
    Tel: +91-22-43360000
    Overseas Affiliates
    Kotak Mahindra (UK) Ltd
    8th Floor, Portsoken House
    155-157 Minories
    London EC3N 1LS
    Tel: +44-20-7977-6900
    Kotak Mahindra Inc
    369 Lexington Avenue
    28th Floor, New York
    NY 10017, USA
    Tel:+1 212 600 8856

    Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
    1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
    2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
    3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at vinay.goenka@kotak.com.
    This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore.
    Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
    Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
    Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
    We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
    We offer our research services to clients as well as our prospects.
    This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
    This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
    We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
    Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
    Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
    We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
    The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
    No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
    Research Analyst has served as an officer, director or employee of subject company(ies): No
    We or our associates may have received compensation from the subject company(ies) in the past 12 months.
    We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
    We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
    Research Analyst or his/her relative's financial interest in the subject company(ies): No
    Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
    Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
    Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
    Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
    Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
    "A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
    Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
    In case you require any clarification or have any concern, kindly write to us at below email ids:
    ● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
    ● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
    ● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
    ● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
    First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view


Also read

Don't have an account? Click here to open an account

Click here to go back