The dull macroeconomic backdrop is impacting consumer sentiment and discretionary spending, Motilal Oswal said in a research report. Given the positive correlation between decorative paints volume growth and GDP growth (decorative paint volumes usually grow at 1.5-2x GDP growth), paint volumes are expected to moderate in calendar year 2013, the report said.
Titanium Oxide, a key raw material, prices have corrected ~25% from the peak and this augurs well for Asian Paints' gross margin. Industry participants believe that the correction in Titanium Oxide prices is structural. (Until recently, TiO2 prices had remained stubbornly high despite weak global demand for paints. The high prices were, therefore, unnatural.) However, the brokerage notes that the prices of other crude-based raw materials remain firm. The brokerage has factored in 70/100bps expansion in gross/EBITDA margin in FY14.
Competition has intensified, with Berger and Akzo Nobel increasing investments
in capacity and distribution. However, the brokerage believes that Asian Paints enjoys a very strong first mover advantage with the trade and is unlikely to be impacted significantly.
Asian Paints is currently trading at all-time high valuations of 33.6x FY14E and 26.8x
FY15E EPS. The brokerage does not expect these multiples to sustain, especially when discretionary consumption is under stress and there are downside risks to volume growth.
Although the brokerage remains positive on the long-term prospects of the paints industry, at current valuations, it believes that the risk-reward is unfavorable. Downgrade to Neutral, with target price unchanged at Rs 5,000," the research report said.
