Asian Paints To Sustain Double-Digit Volume Growth For Five–Seven Years: Macquarie

Asian Paints Ltd.'s volumes for the second half of the current financial year are expected to grow in double digits and the entry of Grasim Industries' new paint brand will likely have only a limited impact on the company's performance, Macquarie Research has said.

In the first half of the current fiscal, price hikes impacted the Asian Paints' top-line numbers as customers shifted towards lower-price products, it said in a note on Tuesday after a meeting with the company.

The brokerage expects the paint company's volume growth in the second half to be driven by festive demand in the third quarter and a typical increase in exterior painting during the fourth. This double-digit growth is expected to sustain over the next five–seven years.

The company is also "expanding share in the budget end through differentiated offerings at value prices" and gain in share from unorganised players will help it outgrow the market, it told Macquarie.

The financial services firm maintains its 'outperform' rating for the stock, citing demand outlook and limited impact of Grasim's new brand. The 12-month target price has been set at Rs 3,800 apiece, implying an 18.97% upside from the current market price.

Limited Impact Of Grasim's Entry

Grasim is set to launch its paint brand, Birla Opus, in the fourth quarter. This will only have a limited impact on the company's performance, given the long gestation period between customer purchases. It needs to focus on brand development as customers paint once in six–seven years, the brokerage said.

Grasim has weaned the company's middle management by offering them two–three times their salary. "Through enhanced engagement, Asian Paints has been able to contain attrition without materially engaging employee costs," it said, citing the company.

Dealer Economics Offsets Lower Margins

Despite margin being 200–300 basis points lower than its peers, Asian Paints' ability to service dealers in 150 cities every day ensures that working capital needs for the dealers is lower than its peers, it said. "The servicing frequency along with the ability to provide an entire range of products from putty to coatings ensure superior dealer economics."

In the waterproofing market also, the company is able to determine pricing, given its shift to a leadership position after the initial follower approach, Macquarie said.