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Asian Paints' results were below estimates as consolidated EBITDA margin contracted 320bp YoY to 16.4%. Net sales
grew well by 29.6% due to strong growth (up 37%) in the standalone business. Adjusted PAT grew 11% to RsRs2.2b.
Decorative paint volumes up ~27% amid robust demand: Standalone sales grew 37% due to a robust decorative
paints segment. We estimate volume growth of ~27% and highlight the benefit from Diwali being in 3QFY11 against
2QFY11 a year earlier, and a prolonged monsoon, which impacted demand in 2QFY11. We are strong believers in
the volume growth story in decorative paints in India and favor Asian Paints' ability to best capture the opportunity.
We upgrade our FY11 volume growth assumptions to 17% (16% earlier).
Input cost index up; lagged price increase impacts margins temporarily: The RM index in 3QFY11 was 115.4,
up 15.4% YoY. In an environment of volatile input costs, paint companies increased prices with a lag and Asian
Paints raised prices by 2.9% in December 2010 (total price increase of 11.4% YTD), which will improve its margin
profile henceforth. The price increase has been nearly matched by followers, giving little indication of price-led
competition. We are cutting our FY11 margin assumption by 50bp to 17.4% (effective decline of 100bp v/s 130bp
decline in 9mFY11) and by 50bp for FY12 (decline of 10bp in FY12).
Volume growth story intact; margins to stabilize at lower levels: We believe the volume growth story in the
domestic decorative paints segment is intact due to shorter re-painting cycles, increased residential construction
and higher growth in tier-II and tier-III cities. Besides, the sales mix will improve, led by rising consumerism. We
expect gross margins to revive in the coming quarters and settle at FY08 levels of ~42.5 (44.6% in FY10). EBITDA
margins however would be ~18.5% due to higher economies of scale and efficiencies. We expect consolidated
EBITDA margins to stabilize at ~17.4 over FY10-13 v/s 17.9% earlier. Increase in input prices is a major risk to our
estimates as it could restrict the ability of paint companies to pass on the hike (11% increase YTD). We are
downgrading our FY11, FY12 and FY13 estimates by 3-4%. The stock trades at 23.3x FY12 and 19.5x FY13. Buy.
Key takeaways from the concall
Volume growth is strong in most parts of India with tier-II and tier-III cities growing
faster than metros and tier-I cities.
The company increased prices by 2.9% on 1 December 2010, the full benefit of
which will be reflected in 4QFY11. Cumulative price increases so far have been
11.4%.
The raw material index in 3QFY11 was 115.4 (FY10=100). The management doesn't
expect respite in the near term due to the demand supply equation in titanium dioxide
and the trend in crude prices. However, input costs have been fairly stable since
November.
The management indicated that the paint industry had historically been able to increase
prices in line with inflation without having tio take a big dent in volumes and the
YTD price increase has been in line with inflation.
The company formed a JV with PPG to make non-automobile industrial paint. The
management expects the combined entity to leverage PPG's inherent technological
strength and reach and Asian Paints' clientele to capture the opportunity offered by
the fast growing industrial paints segment.
The management indicated the company may have gained some market share in
the decorative paints segment during the year and that the organized paints market
grew faster than the unorganized sector.
Results below estimates; sales growth strong; lagged price hike hits margins
temporarily
Net sales grew 29.6% to Rs21b (against our estimate of Rs20.4b). We estimated
decorative paint volume growth of ~27%.
Gross margins contracted 340bp YoY to 40.3% due to intense input cost pressure and
delay in taking price increases.
EBITDA margin contracted 320bp YoY to 16.4%. Lower staff costs (down 80bp)
were offset by higher other expenditure (up 60bp). Adjusted PAT grew 11% to Rs2.2b.
Standalone sales grew 37% to Rs17.5b, EBITDA margins contracted 320bp to 17.2%
while standalone adjusted PAT grew 15.6% to Rs2b.
Decorative paints volume up ~27% amid robust demand
Standalone sales grew 37% due to a robust decorative paints segment. We estimate volume
growth of 27% partly helped by the benefit from Diwali being in 3QFY11 against being in
the second quarter a year earlier, and the impact of a prolonged monsoon on demand in
2QFY11. The management indicated that demand for decorative paints was robust with
tier-II and tier-III cities growing faster than metros.
We believe in the volume growth story in decorative paints in India and favor Asian Paints'
ability to best capture the opportunity. Strong volume visibility has resulted in Asian Paints
continuing its streak of capacity addition. In addition to the 150,000KL augmentation at the
Rohtak plant, Asian Paints bought land in Maharashtra for greenfield capacity of 3,00,000KL
(all in the emulsion range), which is likely to become operational in 4QFY13. We upgrade
our FY11 volume growth assumptions to 17% (16% earlier).
Asian Paints formed a JV (50:50) with PPG Industries to develop its non-decorative
industrial coating business (besides its JV for automobile coating). Industrial coating accounts
for ~25% of the ~Rs170b paints segment and has a high presence of unorganized players.
Major organized players in the segment include Kansai Nerolac, ICI and Jotun Paints,
apart from Asian Paints Industrial Coating (APICL), a 100% subsidiary of Asian Paints.
We understand the new JV will use APICL's existing plant though ownership will remain
with Asian Paints.
Input cost index up; lagged price increase impacts margins
Asian Paints has been at the receiving end of an input cost surge over the past 6-8 months.
Prices of major raw material like titanium dioxide, solvents and other crude-linked inputs
have increased 15-30% over the past 6-8 months and near-term respite seems unlikely
given the trend in crude prices. The input cost index for the quarter was 115.4 (FY10=100).
The management doesn't expect the input cost scenario to turn benign in the near term
given the demand-supply mismatch and trend in crude prices.
In an environment of volatile input costs, paint companies have increased prices with a
lag. Asian Paints increased prices by 2.9% in December (YTD price increase of 11.4%).
The full benefit of the price increase will improve margin profile henceforth. The price
increase was nearly matched by followers, giving little indication of price-led competition.
The management also indicated that input costs had been stable since November. We are
cutting our FY11 margin assumption by 50bp to 17.4% (effective decline of 100bp v/s
130bp decline in 9mFY11) and by 50bp for FY12 (decline of 10bp in FY12).
Volume growth story intact; margins to rebound; maintain Buy
We believe the volume growth story in domestic decorative paints is intact due to shorter
re-painting cycles, increased residential construction and higher growth in tier-II and tier-
III cities. Besides, we believe the sales mix will improve, led by rising consumerism. We
see margins reviving in the coming quarters as the benefit of price increases get factored
in. An increase in input prices from these levels is a major risk to our estimates as it could
restrict the ability of paint players to pass on the hike (11% increase YTD). We are
downgrading our estimates by 3-4% for FY11, FY12 and FY13. The stock trades at 23.3x
FY12 and 19.5x FY13. Maintain Buy.
Company description
Asian Paints is India's largest paint manufacturer and
marketer with a dominant share in the decorative paints
segment. For industrial and automobile paints, the company
has a JV with PPG of the US. Asian Paints acquired Berger
International of Singapore to expand its operations in other
markets in Asia, the Middle East and the Caribbean.
Key investment arguments
Expansion in housing and construction will drive demand
for decorative paints over 3-5 years.
International operations, which have turned around, will
contribute to the company's earnings.
Key investment risks
Demand for decorative paints is heavily dependent on
a normal monsoon.
Input costs are trending upwards and a higher-thanexpected
increase in input costs is a key risk to our
EPS estimates.
Recent developments
Asian Paints increased prices by 2.9% from 1
December 2010, taking the total price increase YTD to
11.4%.
Asian Paints entered into a new JV with PPG to capture
the non-automobile industrial paint opportunity.
Valuation and view
We are downgrading our estimates for FY11, FY12
and FY13 by 3-4% and our EPS has been revised to
Rs92.9, Rs11.4 and Rs133.2 respectively.
The stock trades at 23.3x FY12 and 19.5x FY13.
Maintain Buy.
Sector view
We are positive about the long-term demand potential
in the sector. Near term concerns due to the monsoons
notwithstanding, Asian Paints is the best play on the
structural growth story in decorative paints.
Longer term prospects are bright, given rising incomes
and low penetration and booming construction and
infrastructure development.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Paints' results were below estimates as consolidated EBITDA margin contracted 320bp YoY to 16.4%. Net sales
grew well by 29.6% due to strong growth (up 37%) in the standalone business. Adjusted PAT grew 11% to RsRs2.2b.
Decorative paint volumes up ~27% amid robust demand: Standalone sales grew 37% due to a robust decorative
paints segment. We estimate volume growth of ~27% and highlight the benefit from Diwali being in 3QFY11 against
2QFY11 a year earlier, and a prolonged monsoon, which impacted demand in 2QFY11. We are strong believers in
the volume growth story in decorative paints in India and favor Asian Paints' ability to best capture the opportunity.
We upgrade our FY11 volume growth assumptions to 17% (16% earlier).
Input cost index up; lagged price increase impacts margins temporarily: The RM index in 3QFY11 was 115.4,
up 15.4% YoY. In an environment of volatile input costs, paint companies increased prices with a lag and Asian
Paints raised prices by 2.9% in December 2010 (total price increase of 11.4% YTD), which will improve its margin
profile henceforth. The price increase has been nearly matched by followers, giving little indication of price-led
competition. We are cutting our FY11 margin assumption by 50bp to 17.4% (effective decline of 100bp v/s 130bp
decline in 9mFY11) and by 50bp for FY12 (decline of 10bp in FY12).
Volume growth story intact; margins to stabilize at lower levels: We believe the volume growth story in the
domestic decorative paints segment is intact due to shorter re-painting cycles, increased residential construction
and higher growth in tier-II and tier-III cities. Besides, the sales mix will improve, led by rising consumerism. We
expect gross margins to revive in the coming quarters and settle at FY08 levels of ~42.5 (44.6% in FY10). EBITDA
margins however would be ~18.5% due to higher economies of scale and efficiencies. We expect consolidated
EBITDA margins to stabilize at ~17.4 over FY10-13 v/s 17.9% earlier. Increase in input prices is a major risk to our
estimates as it could restrict the ability of paint companies to pass on the hike (11% increase YTD). We are
downgrading our FY11, FY12 and FY13 estimates by 3-4%. The stock trades at 23.3x FY12 and 19.5x FY13. Buy.
Key takeaways from the concall
Volume growth is strong in most parts of India with tier-II and tier-III cities growing
faster than metros and tier-I cities.
The company increased prices by 2.9% on 1 December 2010, the full benefit of
which will be reflected in 4QFY11. Cumulative price increases so far have been
11.4%.
The raw material index in 3QFY11 was 115.4 (FY10=100). The management doesn't
expect respite in the near term due to the demand supply equation in titanium dioxide
and the trend in crude prices. However, input costs have been fairly stable since
November.
The management indicated that the paint industry had historically been able to increase
prices in line with inflation without having tio take a big dent in volumes and the
YTD price increase has been in line with inflation.
The company formed a JV with PPG to make non-automobile industrial paint. The
management expects the combined entity to leverage PPG's inherent technological
strength and reach and Asian Paints' clientele to capture the opportunity offered by
the fast growing industrial paints segment.
The management indicated the company may have gained some market share in
the decorative paints segment during the year and that the organized paints market
grew faster than the unorganized sector.
Results below estimates; sales growth strong; lagged price hike hits margins
temporarily
Net sales grew 29.6% to Rs21b (against our estimate of Rs20.4b). We estimated
decorative paint volume growth of ~27%.
Gross margins contracted 340bp YoY to 40.3% due to intense input cost pressure and
delay in taking price increases.
EBITDA margin contracted 320bp YoY to 16.4%. Lower staff costs (down 80bp)
were offset by higher other expenditure (up 60bp). Adjusted PAT grew 11% to Rs2.2b.
Standalone sales grew 37% to Rs17.5b, EBITDA margins contracted 320bp to 17.2%
while standalone adjusted PAT grew 15.6% to Rs2b.
Decorative paints volume up ~27% amid robust demand
Standalone sales grew 37% due to a robust decorative paints segment. We estimate volume
growth of 27% partly helped by the benefit from Diwali being in 3QFY11 against being in
the second quarter a year earlier, and the impact of a prolonged monsoon on demand in
2QFY11. The management indicated that demand for decorative paints was robust with
tier-II and tier-III cities growing faster than metros.
We believe in the volume growth story in decorative paints in India and favor Asian Paints'
ability to best capture the opportunity. Strong volume visibility has resulted in Asian Paints
continuing its streak of capacity addition. In addition to the 150,000KL augmentation at the
Rohtak plant, Asian Paints bought land in Maharashtra for greenfield capacity of 3,00,000KL
(all in the emulsion range), which is likely to become operational in 4QFY13. We upgrade
our FY11 volume growth assumptions to 17% (16% earlier).
Asian Paints formed a JV (50:50) with PPG Industries to develop its non-decorative
industrial coating business (besides its JV for automobile coating). Industrial coating accounts
for ~25% of the ~Rs170b paints segment and has a high presence of unorganized players.
Major organized players in the segment include Kansai Nerolac, ICI and Jotun Paints,
apart from Asian Paints Industrial Coating (APICL), a 100% subsidiary of Asian Paints.
We understand the new JV will use APICL's existing plant though ownership will remain
with Asian Paints.
Input cost index up; lagged price increase impacts margins
Asian Paints has been at the receiving end of an input cost surge over the past 6-8 months.
Prices of major raw material like titanium dioxide, solvents and other crude-linked inputs
have increased 15-30% over the past 6-8 months and near-term respite seems unlikely
given the trend in crude prices. The input cost index for the quarter was 115.4 (FY10=100).
The management doesn't expect the input cost scenario to turn benign in the near term
given the demand-supply mismatch and trend in crude prices.
In an environment of volatile input costs, paint companies have increased prices with a
lag. Asian Paints increased prices by 2.9% in December (YTD price increase of 11.4%).
The full benefit of the price increase will improve margin profile henceforth. The price
increase was nearly matched by followers, giving little indication of price-led competition.
The management also indicated that input costs had been stable since November. We are
cutting our FY11 margin assumption by 50bp to 17.4% (effective decline of 100bp v/s
130bp decline in 9mFY11) and by 50bp for FY12 (decline of 10bp in FY12).
Volume growth story intact; margins to rebound; maintain Buy
We believe the volume growth story in domestic decorative paints is intact due to shorter
re-painting cycles, increased residential construction and higher growth in tier-II and tier-
III cities. Besides, we believe the sales mix will improve, led by rising consumerism. We
see margins reviving in the coming quarters as the benefit of price increases get factored
in. An increase in input prices from these levels is a major risk to our estimates as it could
restrict the ability of paint players to pass on the hike (11% increase YTD). We are
downgrading our estimates by 3-4% for FY11, FY12 and FY13. The stock trades at 23.3x
FY12 and 19.5x FY13. Maintain Buy.
Company description
Asian Paints is India's largest paint manufacturer and
marketer with a dominant share in the decorative paints
segment. For industrial and automobile paints, the company
has a JV with PPG of the US. Asian Paints acquired Berger
International of Singapore to expand its operations in other
markets in Asia, the Middle East and the Caribbean.
Key investment arguments
Expansion in housing and construction will drive demand
for decorative paints over 3-5 years.
International operations, which have turned around, will
contribute to the company's earnings.
Key investment risks
Demand for decorative paints is heavily dependent on
a normal monsoon.
Input costs are trending upwards and a higher-thanexpected
increase in input costs is a key risk to our
EPS estimates.
Recent developments
Asian Paints increased prices by 2.9% from 1
December 2010, taking the total price increase YTD to
11.4%.
Asian Paints entered into a new JV with PPG to capture
the non-automobile industrial paint opportunity.
Valuation and view
We are downgrading our estimates for FY11, FY12
and FY13 by 3-4% and our EPS has been revised to
Rs92.9, Rs11.4 and Rs133.2 respectively.
The stock trades at 23.3x FY12 and 19.5x FY13.
Maintain Buy.
Sector view
We are positive about the long-term demand potential
in the sector. Near term concerns due to the monsoons
notwithstanding, Asian Paints is the best play on the
structural growth story in decorative paints.
Longer term prospects are bright, given rising incomes
and low penetration and booming construction and
infrastructure development.
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