Color your Portfolio with Asian Paints – HOLD

Asian Paints (APNT) continues to be Analysts top pick in midcap FMCG as they see (1) good volume growth sustaining, (2) potential for positive margin surprise in FY2010E versus Street estimates and (3) likely pickup in residential sales volumes in FY2010-11E. Our EPS estimates are the highest on the Street and 10% higher than consensus. Reiterate ADD.

Factors aiding the good volume growth in decorative (likely >12% in 1QFY10, similar trends seen in 2QFY10E) for APNT are (1) continuing good demand conditions in Tier II and III towns, (2) shorter repainting cycle driven by likely improvement in penetration and (3) likely return of demand in key metros.

While Asian Paints prefers volume growth over pricing led growth, we believe that, (1) relatively stronger position in emulsions, (2) underlying mix improvement and (3) benefits of input cost correction have helped EBITDA margins expansion of 650 bps to 21% in 1QFY10.

Company has a reach of ~26,000 distributors, we believe that further upsides from mix improvement is likely over the next 3-4 years as the company’s plans to continue adding 1,000 TMs every year.

The company is expected to report a fully diluted EPS of Rs 60 and Rs 70 for FY10 and FY11 respectively. HOLD and ADD on Corrections.