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Indiabulls Ventures
Asian Paints (Buy)
CMP: ₹1,381.55
Target: ₹1,530
Asian Paints is the largest paint company in India and figures among the top 10 players in the world. The company has 25 manufacturing plants in 17 countries, serving consumers in 65 countries globally.
Investment rationale: a) Asian Paints’ standalone sales grew 8.7 per cent y-o-y primarily due to a volume surge of 11 per cent y-o-y. This is despite of 3-3.5 per cent price hikes, therby, reflecting unfavourable product mix.
b) With Brent crude trading below $60 per barrel, it will lead to decline in the raw material costs which in turn will lead to expansion in gross margins. Lower crude prices have turned the entire negative sentiments of margins contraction which was earlier projected to absolute positive sentiments for the next couple of quarters.
Outlook and valuations: Asian Paints’ decorative paint segment has been doing good and with lower crude prices will aid to margins expansion. Also, with the hike in MSP prices, urban development, farm loan waivers we expect rural disposable income to increase which will further aid demand. The stock is currently trading at 587x FY20 E PE and looking at the lower crude prices and rising disposable income from the rural and urban areas, we would like to allot a PE multiple of 65x to arrive at a target price of ₹1,530 a share.
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