CMP: Rs.1,263.75
Target: Rs.1,310
FY18
was no doubt a challenging year for Asian Paints as it had to contend
with high input costs inflation and tax rates (unlike consumer staples,
GST did not result in any saving for the Paints industry).
On BS
side, the company incurred huge capex on greenfield factories and
acquisitions. The combination of above resulted in a 620 bps compression
in ROIC (30.1 per cent versus 36.2 per cent in FY17) of which 290 bps
was on account of gestating assets. Interestingly, the efficiencies that
Asian Paints consistently displayed in managing its overheads until
FY12 returned to help constrict operating margin decline to mere 67 bps
in FY18 versus 220 bps decline in gross margin. Net cash position was
down ?830 crore on account of the huge
capex spends that will up capacity by over 50 per cent by end-FY19E, and
cost of acquisition of Sri Lanka’s Causeway Paints.
Operating CF
generation growth has, however been strong (+38.4 per cent) due to a
negligible increase in working capital; FCFF, though, was down 18 per
cent due to capex spends mentioned earlier. The company’s ability to
sustain the recent recovery in volume growth to double-digit level would
be key for the stock to sustain its premium valuation (51x NTM EPS) —
we expect earnings to accelerate to c.20 per cent CAGR over FY18-20E
versus 11.7 per cent over FY15-18.