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Asian Paints (APNT IN, CMP 2,502, Buy )
n Results below estimate
Asian Paints’ consolidated net revenues of INR 18.1 bn is below our estimate of INR 20.8
bn. The company achieved PAT of INR 2.1 bn (our estimate of INR 2.4 bn). Q2FY11
revenue increased 6% Y-o-Y, to INR 14.69 bn for the domestic business. The prolonged
monsoon experienced in most parts of the country, delayed onset of festive season
(Diwali) and high base affected the paint demand in Q2FY11. Economic recovery in some
of the overseas market still remains sluggish with the exception of South Asia and Egypt.
n EBITDA flat; margins decline marginally
The company posted EBIDTA of INR 3.3 bn in Q2FY11 vis-à-vis INR 3.2 bn in Q2FY10.
EBIDTA margins decline marginally by 47bps, led by 40bps and 54bps expansion in
employee cost and other expenses respectively. This was offset by 52bps dip in COGS.
Prices of raw materials have increased considerably, and could bring margins under
pressure in the coming quarters. The company has already undertaken price hikes of
4.15% on May 01 and 2.6% on July 01, 2010. Post this, the company took one more
price hike of 1.2% on August 01, 2010.Increase in other expense can be attributed to
increase in ad spends as both Nerolac and Nippon Paints are advertising heavily (which
we had pointed out earlier)
n Gross margin expansion- backed by Price hike, change in sales mix
As per the company, price hike did not really impact the volumes as the price increase
was more or less in line with competition. Inspite of raw material price index ballooning
from 106.48 in Q1FY11 to 112.38 in Q2FY11, the company was able to maintain gross
margin due to sufficient price hike and change in sales mix.
n Outlook and valuations: Positive; ‘BUY’
Asian Paints gave disappointing set of numbers for Q2FY11. We expect that Ad spends
will increase on account of higher competitive intensity. Also RM is estimated to harden
further and company usually avoids taking price hike in Diwali quarter (although they
took price hike before Diwali last year), adversely impacting the margin. However the
company has a dominant market share, is a leveraged play to GDP and domestic
consumption and largely caters to the retail consumer. Due to economy doing well,
normal weather condition and festive season, demand is expected to recover in coming
quarter. We maintain ‘BUY ’ on the stock and rate it ‘Sector Outperformer’ on relative
returns. We will come out with revised estimates in detailed note tomorrow.
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