Buy Asian Paints + RIL

Asian Paints reported 49% increase in 2QFY08 profit (pre exceptionals), domestic growth (13% YoY) seems to be slowing down. On the positive side, margins expanded 258bps.Management has indicated that there is a slowdown in domestic construction activity which has impacted paint sales.

International business growth was only 7.85%, adversely impacted by an appreciating rupee, EBIT margins have been improving sharply, especially for key areas such as Middle East and South Asia. Asian Paints is likely to report an EPS of Rs 36.62 for FY08 and Rs 44.08 for FY08 and FY09 respectively. Price target of Rs1102 is based on 25x FY09E consolidated EPS.

Reliance Industries reported a solid Q2. Earnings upgrade of 17-42%, incorporating IPCL merger, higher GRMs/petchem margins, MA oil, and lower tax; Include RPL estimates; Greater confidence in sustainability of E&P cash flows.

Recent but not-yet-quantified discoveries in KG-D4 and CY-D5 vindicate this further and increase confidence to value E&P on EV/FCF of 12x FY11E (10x earlier). At US$35bn a 47% premium to NAV. Citi upgrades the stock to Rs 2,860 from Rs 2,005. Other brokerage recommendations on RIL – RELI.BO are also covered here.