 "Asian Paints: Sleek acquisition not a game-changer")
Asian Paints’ stock closed with 1.7% gain today and rubbished investor’s concerns over the synergies with Sleek Group. The stock had declined 1.9% Tuesday, when the company announced the board's decision to approve the acquisition of 51% (undisclosed sum) in Sleek Group.
The stock today made good the loss it made on the day of acquisition announcement. However, it does not necessarily indicate that the company’s move is strategically positive for the long term. There has been a mixed reaction from the analyst community.
Says Abneesh Roy, analyst, Edelweiss Securities, in the post event note: “Although modular kitchen does not have much synergy with the paints business, every consumer who paints his house can be a potential buyer of modular kitchen as well. Also, the acquisition will help reduce the cyclicality risk of the business since paint volume growth is dependent on GDP growth. Entry into a fast growing space will aid the overall growth of the company.”
However, Manish Jain, analyst, Nomura Equity Research, remains 'Neutral' on the stock (Target price of Rs 4,105) as he seeks more cues from the company about long term strategic direction.
“This acquisition is not a game changer and does not move the needle for Asian Paints. Moreover, it could be a while before the segment contributes meaningfully to revenues and profits,” he points out.
Sleek Group is a major organised player in the modern kitchen space with seven years of experience and popular Chef Sanjeev Kapoor as its brand ambassador. The company is engaged in the manufacture, sale and distributor of kitchens and kitchen components with 30 showrooms and a network of 250 dealers. It is a profitable company though financials have not been made available.
According to analysts, Rs 2,000-3,000 crore organised modular kitchen market in India is growing at 25% CAGR (penetration less than 10%) and is a sunrise sector with tremendous growth potential as it is at a nascent stage of development. However, competition is stiff thanks to relatively higher share of the unorganised market and presence of international players namely Hafele, Gilma, Haecker and Veneta Cucine besides domestic (Godrej Interio). Nevertheless, with such high growth rates, share of orgnaised players is only going to rise and Asian Paints will gain.
Analysts expect similar moves from the company in the future as it has expressed its intention to foray into the home décor (read: improvement) segment in December 2012. While the market reacted positively to the deal, further upside potential in Asian Paints’ stock is expected to be limited, say analysts.
Demand scenario continues to be tough and uncertain though further softening of titanium dioxide prices (down 22% from the peak touched in Q1FY13 and 8% sequentially) will no doubt aid margins going ahead. But at 34 times FY14 estimated earnings, stock’s valuation already appears stiff and factors in the positives of likely margin expansion.
The stock today made good the loss it made on the day of acquisition announcement. However, it does not necessarily indicate that the company’s move is strategically positive for the long term. There has been a mixed reaction from the analyst community.
Says Abneesh Roy, analyst, Edelweiss Securities, in the post event note: “Although modular kitchen does not have much synergy with the paints business, every consumer who paints his house can be a potential buyer of modular kitchen as well. Also, the acquisition will help reduce the cyclicality risk of the business since paint volume growth is dependent on GDP growth. Entry into a fast growing space will aid the overall growth of the company.”
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He maintains 'Buy' recommendation on the stock with target price of Rs 4,990 (current market price of Rs 4,994).
However, Manish Jain, analyst, Nomura Equity Research, remains 'Neutral' on the stock (Target price of Rs 4,105) as he seeks more cues from the company about long term strategic direction.
“This acquisition is not a game changer and does not move the needle for Asian Paints. Moreover, it could be a while before the segment contributes meaningfully to revenues and profits,” he points out.
Sleek Group is a major organised player in the modern kitchen space with seven years of experience and popular Chef Sanjeev Kapoor as its brand ambassador. The company is engaged in the manufacture, sale and distributor of kitchens and kitchen components with 30 showrooms and a network of 250 dealers. It is a profitable company though financials have not been made available.
According to analysts, Rs 2,000-3,000 crore organised modular kitchen market in India is growing at 25% CAGR (penetration less than 10%) and is a sunrise sector with tremendous growth potential as it is at a nascent stage of development. However, competition is stiff thanks to relatively higher share of the unorganised market and presence of international players namely Hafele, Gilma, Haecker and Veneta Cucine besides domestic (Godrej Interio). Nevertheless, with such high growth rates, share of orgnaised players is only going to rise and Asian Paints will gain.
Analysts expect similar moves from the company in the future as it has expressed its intention to foray into the home décor (read: improvement) segment in December 2012. While the market reacted positively to the deal, further upside potential in Asian Paints’ stock is expected to be limited, say analysts.
Demand scenario continues to be tough and uncertain though further softening of titanium dioxide prices (down 22% from the peak touched in Q1FY13 and 8% sequentially) will no doubt aid margins going ahead. But at 34 times FY14 estimated earnings, stock’s valuation already appears stiff and factors in the positives of likely margin expansion.