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Asian Paints (APNT)
Consumer products
Expect some ‘pain’ in paints; downgrade to REDUCE. A confluence of factors could
impact APNT’s FY2012E performance: (1) Input cost inflation may not be a passthrough
in FY2012E (TiO2 and crude-linked inputs), after a 13% price increase in
YTDFY11, in our view, (2) uncertainty in international operations, particularly Middle
East, (3) likely moderation in decoratives paint demand; auto and industrial demand
may not provide a buffer. We remain bullish on the medium-term (2-3 years) prospects
of paint industry. However, we believe expensive valuations and near-term earnings risk
could provide better entry points.
Uncertainty in international operations, particularly Middle East operations
International business accounts for ~15% of APNT’s consolidated sales and Middle East operations
account for half of it. Egypt accounts for half of Middle East operations. The company has
manufacturing units in Egypt, Oman, UAE etc. According to the management, market conditions
in Egypt are expected to remain tough and unpredictable. Paint consumption across the region
could get impacted by political and economic uncertainty.
Input cost inflation is not a pass-through in FY2012E, in our view
Input cost inflation is starting to hurt consumer companies now (palm oil for HUL and GCPL,
copra for Marico, LLPO for Marico and Dabur etc.). TiO2, a key input for paints has been
inflationary through CY2010 and the paint industry has managed gross margins well. However,
considering the paint industry has implemented an input-cost-inflation driven ~13% price increase
in FY2011, the ability for another double-digit price increase (to maintain absolute margins) in
FY2012E is limited. Both the key raw materials for APNT—TiO2 as well as MTO (Mineral Turpentine
Oil, with linkages to crude) are likely inflationary in FY2012E.
Likely moderation in decoratives paint demand, auto and industry may not provide buffer
Higher interest rates and a likely slowdown in some segments of real estate could impact demand
for decorative paints in FY2012E. This is pertinent in the context of the high retail price index in
FY2011 (13% price increase by APNT). Moreover, KIE’s infrastructure analyst Lokesh Garg points
out that weak inflow across most capital goods companies (19% decline in 3QFY11) reflects a
weak capex cycle. Coincidental indicators such as capital goods imports, cement/ steel production
corroborate this weakness.
We remain bullish on medium-term (2-3 years) prospects for the paint industry
Capacity additions are the biggest signaling effect; in our view (industry, including APNT is
doubling the capacity in FY2010-14E). The growing interest among MNCs to scale-up in the
Indian paint market validates the long-term opportunity in paint industry, in our view. We
see increasing activity levels from Nippon, Sherwin Williams and Jotun. According to industry
sources, Nippon is planning to increase capacity to ~100,000 MT from 20,000 MT currently.
The new players, after prototyping their business plans in one market (example of Nippon in
South India), are likely to extend it to other contiguous markets.
The consumer mindset is changing for good. Painting is gradually shifting from being a
discretionary spend to a necessity. This is being triggered by (1) increase in home ownership,
(2) increase in salary levels and disposable income and (3) penetration-led opportunity—of
the 210 mn households in India, industry experts estimate that <20 mn engage in
painting/repainting activity.
Downgrade to REDUCE on risks to earnings, relative valuations
We cut our EPS estimates for FY2012E by 5% as we model lower EBITDA margins (17.6%
versus 18.9% earlier) despite assuming a higher price increase (8%) and strong volume
growth (15%).
We see several challenges for margins in FY2012E (1) continuing inflation in TiO2, (2) inflation
in crude-linked inputs, (3) likely increase in excise rates and (4) higher fuel costs impacting
freight costs. APNT has market leadership and dominance, but in an environment of likely
moderation in demand conditions, it is unlikely that the company will implement another
double-digit price increase in FY2012E on the back of a ~13% price increase in FY2011.
We have cut our target price to Rs2,550 (Rs3, 000 previously), (1) in line with an earnings
cut as well as lower profitability assumptions in international business and (2) lower multiple
of 24X FY2012E on domestic operations (26X previously). We continue to value the
international business at 6X EV/EBITDA. We recommend a REDUCE (ADD previously) rating.
A key risk to our rating is better-than-expected volume growth or significant change in the
input cost scenario. Our Cautious coverage view on consumer sector remains.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Paints (APNT)
Consumer products
Expect some ‘pain’ in paints; downgrade to REDUCE. A confluence of factors could
impact APNT’s FY2012E performance: (1) Input cost inflation may not be a passthrough
in FY2012E (TiO2 and crude-linked inputs), after a 13% price increase in
YTDFY11, in our view, (2) uncertainty in international operations, particularly Middle
East, (3) likely moderation in decoratives paint demand; auto and industrial demand
may not provide a buffer. We remain bullish on the medium-term (2-3 years) prospects
of paint industry. However, we believe expensive valuations and near-term earnings risk
could provide better entry points.
Uncertainty in international operations, particularly Middle East operations
International business accounts for ~15% of APNT’s consolidated sales and Middle East operations
account for half of it. Egypt accounts for half of Middle East operations. The company has
manufacturing units in Egypt, Oman, UAE etc. According to the management, market conditions
in Egypt are expected to remain tough and unpredictable. Paint consumption across the region
could get impacted by political and economic uncertainty.
Input cost inflation is not a pass-through in FY2012E, in our view
Input cost inflation is starting to hurt consumer companies now (palm oil for HUL and GCPL,
copra for Marico, LLPO for Marico and Dabur etc.). TiO2, a key input for paints has been
inflationary through CY2010 and the paint industry has managed gross margins well. However,
considering the paint industry has implemented an input-cost-inflation driven ~13% price increase
in FY2011, the ability for another double-digit price increase (to maintain absolute margins) in
FY2012E is limited. Both the key raw materials for APNT—TiO2 as well as MTO (Mineral Turpentine
Oil, with linkages to crude) are likely inflationary in FY2012E.
Likely moderation in decoratives paint demand, auto and industry may not provide buffer
Higher interest rates and a likely slowdown in some segments of real estate could impact demand
for decorative paints in FY2012E. This is pertinent in the context of the high retail price index in
FY2011 (13% price increase by APNT). Moreover, KIE’s infrastructure analyst Lokesh Garg points
out that weak inflow across most capital goods companies (19% decline in 3QFY11) reflects a
weak capex cycle. Coincidental indicators such as capital goods imports, cement/ steel production
corroborate this weakness.
We remain bullish on medium-term (2-3 years) prospects for the paint industry
Capacity additions are the biggest signaling effect; in our view (industry, including APNT is
doubling the capacity in FY2010-14E). The growing interest among MNCs to scale-up in the
Indian paint market validates the long-term opportunity in paint industry, in our view. We
see increasing activity levels from Nippon, Sherwin Williams and Jotun. According to industry
sources, Nippon is planning to increase capacity to ~100,000 MT from 20,000 MT currently.
The new players, after prototyping their business plans in one market (example of Nippon in
South India), are likely to extend it to other contiguous markets.
The consumer mindset is changing for good. Painting is gradually shifting from being a
discretionary spend to a necessity. This is being triggered by (1) increase in home ownership,
(2) increase in salary levels and disposable income and (3) penetration-led opportunity—of
the 210 mn households in India, industry experts estimate that <20 mn engage in
painting/repainting activity.
Downgrade to REDUCE on risks to earnings, relative valuations
We cut our EPS estimates for FY2012E by 5% as we model lower EBITDA margins (17.6%
versus 18.9% earlier) despite assuming a higher price increase (8%) and strong volume
growth (15%).
We see several challenges for margins in FY2012E (1) continuing inflation in TiO2, (2) inflation
in crude-linked inputs, (3) likely increase in excise rates and (4) higher fuel costs impacting
freight costs. APNT has market leadership and dominance, but in an environment of likely
moderation in demand conditions, it is unlikely that the company will implement another
double-digit price increase in FY2012E on the back of a ~13% price increase in FY2011.
We have cut our target price to Rs2,550 (Rs3, 000 previously), (1) in line with an earnings
cut as well as lower profitability assumptions in international business and (2) lower multiple
of 24X FY2012E on domestic operations (26X previously). We continue to value the
international business at 6X EV/EBITDA. We recommend a REDUCE (ADD previously) rating.
A key risk to our rating is better-than-expected volume growth or significant change in the
input cost scenario. Our Cautious coverage view on consumer sector remains.
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