Asian Paints Cost Pressure Circling, HOLD :: Emkay

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Asian Paints

Cost Pressure Circling, Maintain HOLD

HOLD

CMP: Rs 2,503                                        Target Price: Rs 2,510

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n     Asian Paints (APL) Q3FY11 APAT at Rs2.2 bn meets expectation, but Ebidta margin contraction at 320 bps yoy was higher then expectation

n     Bounces back with volume growth of 17-19% at company level and 27%yoy in standalone operations

n     APL implemented another price increase of 2.9% w.e.f December 2010, total price increase in YTD 2011 is 11.4%

n     No significant change in earnings – FY11E at Rs91.5/Share and  FY12E at Rs106.1/Share) – Maintain ‘HOLD’ rating with target price of Rs2510/Share

APL Q3FY11 APAT at Rs2.2 bn meets expectation – but Ebidta margins

contraction was higher then expectation

Though, APL Q3FY11 APAT at Rs2.2 bn meets expectation, sharp contraction of gross

margin and Ebidta margin was surprising. We had forecasted 100 bps declines in Ebidta

margins, but 320 bps yoy declines to 16.4% was negative surprise. These happened

despite near 8.6% price increase implemented until August 2011, implying material cost

inflation was significant and remain unattended. Since, revenue growth at 29.6% yoy to

Rs21.0 bn was ahead of expectation; APL achieved our APAT expectations by reporting

APAT of Rs2.2 bn, an 11.0% yoy growth.

Favored by Q2FY11- APL registers 17-19% volume growth at company

level and 27% in standalone operations

Q1FY11 marked robust volume growth of 18-20% yoy, but Q2FY11 saw slippages with

volume growth of 1.5% yoy and Q3FY11 bounces with volume growth of 17-19% yoy.

Growth has been erratic, few quarters influenced by pipeline filling and dealer inventory

in anticipation of price increases. In Q3FY11, domestic volume growth was relatively

strong at 27% yoy; however international operations and JV operations continue to

register lower single-digit volume growth. We retain our annual volume growth

assumptions at 2X GDP or 15-17% range for FY11E and FY12E.

Taken calibrated price increase, but cost pressures also circling

APL has taken another price increase – weighted increase of 2.9% w.e.f. 1st December

2010, benefit should be visible in Q4FY11. The total price increase in YTD 2011 is

11.4% implemented at various time intervals. The corresponding raw material increase

on weighted average basis is 15% - Index of 115 in December 2010 versus 100 in April

2010. Most importantly, recent price increase is to offset the sharp jump in Titanium

Dioxide, which is witnessing supply-demand problem. Management believes that, prices

of Titanium Dioxide are unlikely to cool-off in near term, which could impact future gross

margins absence of price increases.

Extends relationship with PPG Industries- willing to participate in entire nondecorative

coatings market

APL is extending its 14 year relationship with PPG Industries in India. It is forming new JV

alongside existing JV Asian PPG to participate in all specters of non-decorative coatings

market. Currently, Asian PPG participates in Indian industrial coatings market. This will be

extended to entire non-decorative coatings market which is 25% of Rs150-170 bn paint

market. APL will commence operations of new JV in Q3FY12E. Current relationship

generates revenues of Rs4.6 bn and APAT of Rs160 mn.

Maintain earnings estimates for FY11E and FY12E, Maintain ‘HOLD’ rating

No significant change in earnings estimates – FY11E at Rs91.5/Share and Rs106.1/Share

for FY11E and FY12E. Our forecasts already factors pressure from material prices and

price hikes undertaken – assumed reduction of 140 bps in gross margins and 70 bps in

Ebidta margins. So far, Asian Paints has showcased strong volume growth with historic

high margins and withered onslaught of competition, but does not guarantee the

continuation of performance in future- which is key risk to our earnings estimates. APL

trades at rich valuations of 24.5X FY12E – leaving little room for upsides. We maintain our

HOLD rating with target price of Rs2510/Share.