HSBC puts 'neutral' on Asian Paints

Research: HSBC
Rating: Neutral
CMP: Rs 2605

HSBC downgrades the rating of Asian Paints to `Neutral’. Asian Paints reported strong numbers, 22.8% sales growth versus the estimate of 18%, and adjusted PAT growth at 20.6% versus the estimate of 12%. Domestic business grew much ahead at 28%, driven by strong consumer demand, but also due to increase in pipeline inventory as dealers stocked up in anticipation of a price increase. While gross margins declined by 120 bps, operating leverage helped to mitigate margin hit.

Since price increases are mitigating the cost increase impact, and demand environment is strong, HSBC is increasing the EPS estimates for FY11/12 by 5.3%/9.5%. The company has cautioned about demand supply mismatches existing in products such as titanium dioxide and acrylic acid, and hence will be circumspect in painting too bullish a story.

The new multiple is at a 10% premium to its historical average to account for improved volume growth and margins and is slightly below the current multiple of 26.6x.

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