Asian Paints share price: Maintain ADD rating with target price of Rs 2600

Asian Paints is test-marketing / introduced designer tiles maintaining the template of entering at least one new business each year in last seven years. In ICICI Securities view, designer tiles can open up additional revenue opportunity of Rs 30000 per household. Asian Paints share price closed at Rs 2355 in yesterday's session, down Rs 46 or 1.9%. 

Asian Paints can leverage:

(1)    its existing brands
(2)    relationships with real estate developers (initially to achieve critical size)

Asian Paints can also offer better value to consumers via:

(1)    matching tiles with paints
(2)    protection against damp walls

See Zee Business Live TV Streaming Below:

However, Asian Paints may need to invest in distribution as there is limited overlap in paint and tile retail outlets. The skill sets, labour charges/hour of painter and mason are also different. Considering Asian Paints new product template of lower investments in capex and branding, ICICI Securities believes success can create (potentially huge) value with negligible downside in case of failure. ADD retained on Asian Paints.

Launch of designer tiles:

After entering waterproofing, putty, adhesives, kitchen, bath and Home Decor and strengthening presence in primers, Asian Paints has now entered designer wall tiles under the brand ‘royale with Asian Paints’.

ICICI Securities believes it is entering multiple businesses considering:

(1)    large opportunity in adjacent categories
(2)    better utilization of existing distribution and brands
(3)    rising competitive pressures in core business of paints

Likely headwinds in tiles business:

There is hardly any overlap between distribution of paints and tiles and it may force Asian Paints to invest more in distribution. Also, the skill sets of a painter and mason are different. As a painter is paid more labour charges/ hour, he might be reluctant to work as a mason.

Analyzing ‘right to win’ in tiles:

The entry in designer tiles opens up revenue opportunity of Rs 30000 per household.

ICICI Securities believes Asian Paints has tailwinds in tiles business as:

(1)    better service to the consumers via offering tiles matching with their paints
(2)    solution to the damp walls
(3)    better utilization of relationships with real estate developers (Projects business)
(4)    higher revenues of tile adhesives. It will also be able to benefit from umbrella advertising

Similar to other new businesses of Asian Paints, ICICI Securities expect limited investments (initially) in fixed assets.

Tiles - A growth industry with strong RoCE for incumbents:

Considering the 50% share of unorganized/ smaller players and the premiumization potential, the organized players are likely to sustain healthy revenue growth in low-mid teens over FY20-30. Incumbents also generate RoCE of 15%+ (> Cost of capital) across business cycles.

ICICI Securities Maintain ADD:

ICICI Securities model sales and earnings CAGR of 12.5% and 17.3% respectively, for FY20-FY23E. Maintain ADD with a DCF-based TP of Rs 2600. Lower-than-expected urban recovery and potential execution challenges in new categories are key risks.