The Hindu Business Line : Asian Paints: Buy

With the demand environment continuing to be conducive, Asian Paints is well placed to capitalise on the rising opportunities. Our bullish stance is underpinned by the continuing buoyant demand.

FOCUS ON the decorative segment is a positive given the buoyant demand for housing.

Investments can be considered in the stock of Asian Paints, the leading player in the decoratives space, at the current price of Rs 670.

Though it has almost doubled since our previous `buy' recommendation in March last, the stock does not appear to have run out of steam, yet.

Our bullish stance is underpinned by the continuing buoyant demand for housing and the positive developments in the infrastructure and the auto sectors.

Announcements in the latest Budget also have triggers that are marginally positive for the industry.

One pertains to the reduction of peak import duty by 2.5 percentage points to 12.5 per cent that should lower material costs, as a significant portion of inputs are imported.

The other concerns the reduction of excise duty on small cars, which by providing a fillip to the auto industry, will indirectly rub off positively on auto paint manufacturers.

Prospects

Though the bulk of Asian Paints' revenues flow from the decorative segment, its joint venture for auto paints (Asian Paints PPG) and the industrial paints division are exhibiting strong growth.

Coupled with rapid activity in the construction sector, we believe Asian Paints is in a demand sweet spot that it is well equipped to take advantage of.

Though the performance in Q3 FY-06 may have belied street expectations on account of the extended monsoon playing spoilsport, we view such an event as a one-off occurrence and believe that the long-term structural story is intact.

Further, the inherent strength in demand confers on Asian Paints the ability to pass on price increases to the consumer, should there be a hardening of input costs.

At the current price, the stock trades at 23 times its expected per-share earnings for FY-07.

Reiterate buy.

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