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Asian Paints (APL) posted mixed set of numbers for 3QFY2011on the top-line and
earnings front. Top-line was robust reporting 29.6% yoy growth (ahead of our
estimate of 24% yoy growth). However, earnings growth was modest at 9.8% yoy
(below our estimate of 19% yoy growth) as the company faced margin pressures
and high depreciation cost. We maintain an Accumulate on the stock.
Full impact of festivities/ holiday season fuel growth: APL reported a strong
growth of 29.6% yoy in consolidated top-line to `2,099cr (`1,620cr) fuelled by
the festival season falling completely in 3QFY2011and price hikes taken during
the quarter. We believe APL recorded a healthy ~23% volume growth. In terms
of recurring earnings, APL reported a modest growth of 9.8% yoy to `232cr owing
to margin contraction of 320bp yoy (gross margins contracted by 336bp yoy) and
46% rise in depreciation charges (owing to commencement of new plant).
Outlook and Valuation: The current quarter results show a strong top-line growth
indicating robust demand for paints and ability to pass on the price hikes on
account of its leadership position in the sector. However, management has
indicated the company will continue to face margin pressures on account of the
input cost inflation going forward. While we have modeled in 48-49bp
contraction in gross margins, we believe APL will be able to maintain its margins
at 18-19% aided by: 1) higher value growth on account of price hikes (further
price hikes are not ruled out), and 2) various cost rationalisation measures
adopted by the company (for 9MFY2011, marginal increase of 16bp yoy in other
expense and 34bp yoy decline in staff cost). At `2,600, the stock is trading at
22.4x FY2012E revised EPS of `116. We maintain an Accumulate on the stock,
with a revised Target Price of `3,016 (`2,952) based on 26x FY2012E earnings.
Top-line growth strong due to full impact of festivities
APL reported a strong growth of 29.6% yoy in consolidated top-line to `2,099cr
(`1,620cr) aided by increase in demand (we estimate a volume growth of ~23%
yoy) on account of higher festival sales qoq (3QFY2010 recorded partial sales
from festivals). Full benefits of the price hikes taken during the quarter and post
3QFY2011 would reflect in 4QFY2011.
Standalone paint sales registered a growth of 37% yoy. However, the industrial and
international businesses posted a dismal performance, contributing a mere 0.9% to
top-line
Investment Rationale
Demand conditions robust, model in volume CAGR of 16% over FY2010-12:
Underlying demand conditions in decorative paints continues to be robust across
markets driven by: 1) economic recovery, 2) shorter repainting cycles, and 3)
continuing strong demand in tier-II and III cities. For APL, we have modeled in a
16% CAGR in paint volumes over FY2010-12 driven by robust demand
conditions and market share gains.
Margins to sustain at ~18–19% levels aided by price hikes and mix
improvement: We expect APL to sustain OPM at ~18–19% levels aided by: 1)
strong pricing power as reflected in the recent price hikes amounting to
cumulative weighted average price hike of ~11.4% YTD, 2) superior product mix
(higher proportion of emulsions), and 3) higher operating leverage (driven by
strong top-line growth).
JV with PPG in industrial business: APL has formed a second 50:50 JV with PPG
to offer products in protective, industrial powder, industrial containers and light
industrial coatings markets. We believe that this JV is a positive for the company
and will help it improve its position in industrial coatings where it is second
largest player. The JV would be operational from 4QFY11 post regulatory
confirmations.
Outlook and Valuation
Post the 3QFY2011 results we have marginally tweaked our FY2011 and FY2012
estimates upwards: 1) top-line revised to factor in consistent double-digit volume
growth on the back of increase in demand driven by uptick in the domestic economy
and higher value growth, and 2) revised margins to factor in 48-49bp yoy gross
margin contraction on account high input cost inflation scenario and cost
rationalisation, however we expect margins to sustain at 18-19% levels, aided by
higher value growth, ~3% weighted average price hike taken in December 2010
and YTD increase of 11.3% (further price hikes not ruled out) and various cost
rationalisation measures adopted by the company (for 9MFY2011, marginal
increase of 16bp yoy in other expense and 34bp yoy decline in staff cost).
At `2,600, the stock is trading at 22.4x FY2012E revised EPS of `116. We maintain
an Accumulate on the stock with a revised Target Price of `3,016 (`2,952) based on
26x FY2012E earnings (~20-25% premium to its historical valuations), justified by
the sustained double-digit volume growth , stronger pricing power (as reflected in the
recent round of price hikes) and expansion plans.
Concerns for the stock include: 1) higher-than-anticipated increase in raw material
costs, and 2) sluggish growth in international business in markets like Caribbean,
Middle East and Singapore.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Paints – 3QFY2011 Result Update
Angel Broking maintains an Accumulate on Asian Paints with a Target Price of Rs. 3,016.
Asian Paints (APL) posted mixed set of numbers for 3QFY2011on the top-line and
earnings front. Top-line was robust reporting 29.6% yoy growth (ahead of our
estimate of 24% yoy growth). However, earnings growth was modest at 9.8% yoy
(below our estimate of 19% yoy growth) as the company faced margin pressures
and high depreciation cost. We maintain an Accumulate on the stock.
Full impact of festivities/ holiday season fuel growth: APL reported a strong
growth of 29.6% yoy in consolidated top-line to `2,099cr (`1,620cr) fuelled by
the festival season falling completely in 3QFY2011and price hikes taken during
the quarter. We believe APL recorded a healthy ~23% volume growth. In terms
of recurring earnings, APL reported a modest growth of 9.8% yoy to `232cr owing
to margin contraction of 320bp yoy (gross margins contracted by 336bp yoy) and
46% rise in depreciation charges (owing to commencement of new plant).
Outlook and Valuation: The current quarter results show a strong top-line growth
indicating robust demand for paints and ability to pass on the price hikes on
account of its leadership position in the sector. However, management has
indicated the company will continue to face margin pressures on account of the
input cost inflation going forward. While we have modeled in 48-49bp
contraction in gross margins, we believe APL will be able to maintain its margins
at 18-19% aided by: 1) higher value growth on account of price hikes (further
price hikes are not ruled out), and 2) various cost rationalisation measures
adopted by the company (for 9MFY2011, marginal increase of 16bp yoy in other
expense and 34bp yoy decline in staff cost). At `2,600, the stock is trading at
22.4x FY2012E revised EPS of `116. We maintain an Accumulate on the stock,
with a revised Target Price of `3,016 (`2,952) based on 26x FY2012E earnings.
Top-line growth strong due to full impact of festivities
APL reported a strong growth of 29.6% yoy in consolidated top-line to `2,099cr
(`1,620cr) aided by increase in demand (we estimate a volume growth of ~23%
yoy) on account of higher festival sales qoq (3QFY2010 recorded partial sales
from festivals). Full benefits of the price hikes taken during the quarter and post
3QFY2011 would reflect in 4QFY2011.
Standalone paint sales registered a growth of 37% yoy. However, the industrial and
international businesses posted a dismal performance, contributing a mere 0.9% to
top-line
High depreciation, margin contraction impact recurring earnings growth
In terms of recurring earnings, APL reported a modest growth of 9.8% yoy to
`232cr (`212cr), despite the 155bp decline in the tax rate (partially owing to
higher contribution of the international business) impacted by margin contraction
and 45% yoy rise in depreciation charges (APL is setting up a mega plant in
Kesurdi, Maharashtra).
Gross margin contraction impacts OPM
At the operating level, APL registered a 320bp yoy contraction in OPM, which
resulted in a muted 8.5% yoy growth in EBITDA to `345cr (`318cr), impacted by
higher input costs as gross margins contracted by 336bp yoy and other expenses
increased by 64bp yoy. The decline in staff cost (down 80bp yoy) arrested further
contraction in margins. Management has indicated that they would continue to get
impacted by raw material inflation, though they haven’t completely ruled out
passing on the increase in prices.
Investment Rationale
Demand conditions robust, model in volume CAGR of 16% over FY2010-12:
Underlying demand conditions in decorative paints continues to be robust across
markets driven by: 1) economic recovery, 2) shorter repainting cycles, and 3)
continuing strong demand in tier-II and III cities. For APL, we have modeled in a
16% CAGR in paint volumes over FY2010-12 driven by robust demand
conditions and market share gains.
Margins to sustain at ~18–19% levels aided by price hikes and mix
improvement: We expect APL to sustain OPM at ~18–19% levels aided by: 1)
strong pricing power as reflected in the recent price hikes amounting to
cumulative weighted average price hike of ~11.4% YTD, 2) superior product mix
(higher proportion of emulsions), and 3) higher operating leverage (driven by
strong top-line growth).
JV with PPG in industrial business: APL has formed a second 50:50 JV with PPG
to offer products in protective, industrial powder, industrial containers and light
industrial coatings markets. We believe that this JV is a positive for the company
and will help it improve its position in industrial coatings where it is second
largest player. The JV would be operational from 4QFY11 post regulatory
confirmations.
Outlook and Valuation
Post the 3QFY2011 results we have marginally tweaked our FY2011 and FY2012
estimates upwards: 1) top-line revised to factor in consistent double-digit volume
growth on the back of increase in demand driven by uptick in the domestic economy
and higher value growth, and 2) revised margins to factor in 48-49bp yoy gross
margin contraction on account high input cost inflation scenario and cost
rationalisation, however we expect margins to sustain at 18-19% levels, aided by
higher value growth, ~3% weighted average price hike taken in December 2010
and YTD increase of 11.3% (further price hikes not ruled out) and various cost
rationalisation measures adopted by the company (for 9MFY2011, marginal
increase of 16bp yoy in other expense and 34bp yoy decline in staff cost).
At `2,600, the stock is trading at 22.4x FY2012E revised EPS of `116. We maintain
an Accumulate on the stock with a revised Target Price of `3,016 (`2,952) based on
26x FY2012E earnings (~20-25% premium to its historical valuations), justified by
the sustained double-digit volume growth , stronger pricing power (as reflected in the
recent round of price hikes) and expansion plans.
Concerns for the stock include: 1) higher-than-anticipated increase in raw material
costs, and 2) sluggish growth in international business in markets like Caribbean,
Middle East and Singapore.
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