Stock Views on ITC, ASIAN PAINTS

BANK OF AMERICA MERRILL LYNCH  on ASIAN PAINTS


Bank of America Merrill Lynch has reiterated `Buy' on Asian Paints and has also increased EPS estimates for FY11-12 following the announcement of 2.8% price hike by the paint major. The price hike of decorative paints is effective from 1st July and is over and above the 4.15% price hike taken from 1st May. The brokerage believes that this fits with the possibility of margin surprise by Asian Paints contrary to management guidance of a possible margin decline. Post this price hike, it now expects flat margins for Asian Paints over FY11-12E against the earlier estimate of a 70-basis point decline. With this, the brokerage has raised EPS estimate by over 5% over FY11-12E and price target to Rs 2,700 in line with the earnings rise. The brokerage believes that unlike staples, competition will remain relatively benign (at least in terms of pricing) for paints in India. This should allow Asian Paints to exert its pricing power going forward as well.

HSBC on ITC

Though ITC's FMCG division is expected to report a loss in the coming quarter, HSBC believes that the division may perform well in future. HSBC expects the segment to clock compounded growth of about 20% over the next five years. The division is also expected to increase market share in almost every category. Moreover, the newer launches by ITC have been in higher margin categories. HSBC estimates a 160-basis point margin benefit on the mix improvement. Coupled with a margin gain on account of increased prices and operating leverage, it estimates stable-state EBIT margin for this segment at over 10% by FY15. HSBC has arrived at a valuation of Rs 315 for ITC on a sumof-the-parts basis. It has applied a multiple of 21x for the cigarettes division. It believes this is in line with the global peers, adjusting for growth and return metrics. Its FY11 EPS estimate is the highest among all the estimates by other brokerages.