Asian Paints Share price: Edelweiss maintain buy rating with target price of Rs 3140

Asian Paints clocked a record-breaking Q3 FY21. However, we had highlighted the possibility of correction post news of Grasim’s entry in the paints segment; Asian Paints has now corrected a healthy 12%. In the paints industry, no new player has touched even INR10bn revenue after 10 years as gaps in either product or servicing are not significant in the industry to exploit. Asian Paints share price today is Rs 2392, up Rs 19 or 0.8%.

New distribution innovations by new entrants have also failed:

(1)    Set up exclusive paint shops--expensive and lack of scale,
(2)     Localised supply centres in a city rather than servicing via dealer shop--not much success as customer needs quick service, look &feel of product.

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In the near term, Edelweiss expects price hikes by Asian Paints to be calibrated with focus on double-digit volume growth. Maintain ‘BUY’ rating on the stock.

Asian Paints significant success has eluded most new entrants:

One strategy which a new entrant in any industry uses is the price warrior strategy.

However, that has not worked in the past in the paints industry as:

(1)    consumers paint houses once in five years
(2)    while paint cost is only 40% of total expense, 60% is labour cost. Despite several players entering India’s paint market in the past two decades, Asian Paints has clocked double-digit volume growth in most years.

In the consumption sector it is very rare for a new entrant to gain market share from the leader however deep the pockets may be. HUL is a case in point; it failed to achieve desired success in noodles, breakfast and toothpaste in spite of having the best distribution network.

New entrants face multiple challenges:

Access to paint shops does not give Grasim’s paints products any huge advantage as:

(1)    physical space in paint shop is limited
(2)    lack of direct distribution
(3)    no brand pull in paints–again this takes many years and huge ad budgets
(4)    not easy to differentiate at product level as Asian Paints has dominance across price spectrums.

It engages with painters on a regular basis and these relationships take decades to develop.

Having said that, Edelweiss would closely monitor Grasim due to:

(1)    its large fund outlay (Rs 50 bn)
(2)    reasonable existing network (but largely indirect)

Asian Paints Outlook and valuations: Shining bright; maintain ‘BUY’

The domestic paints industry commands strong pricing power, which is evident from frequent price hikes amid inflationary raw material prices; moreover, price cuts happen with a lag in a deflationary environment. Industry volume growth has a strong correlation with GDP growth (1.5–2.0x). Recovery in GDP from FY22 should give it a boost. Edelweiss expects double-digit decorative volumes to sustain riding potential demand shift from the unorganised segment (30%). This, coupled with Asian Paints’s capability to hike prices, should help maintain margin. Edelweiss maintains ‘BUY/SO’ with target price of Rs 3140 on Asian Paints. The stock is trading at 59.9x FY22E EPS.