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Asian Paints -Safe to ignore near-term margin pressure
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„Volume growth outlook remains strong
Consumer demand continues to remain strong. While December-quarter sales
growth was high due to the delayed Diwali effect, we believe volume growth in the
mid-teens is sustainable on a recurring basis. The growth factor of ~2x GDP is
holding well for the company with no slowdown visible in any segment.
Raw material prices running high
Input cost scenario remains a cause for concern. Both crude derivatives and TiO2
are witnessing strong price rises. Input cost inflation is running at 15% yoy at this
point. There is some capacity expected to come back on stream for TiO2 which
could help to bring down prices from their current all-time high levels.
Margin pressures likely in near term
Management maintains that last year's margins are unsustainable in the current
scenario. However, they have taken yet another price hike of 1% effective endFebruary leading to a weighted average price hike of 12.5% this year. This, we
believe, should be sufficient to cover current input cost inflation, but near-term
pressure from a timing mismatch will play out.
International division is struggling
International business other than in South Asia continues to struggle due to weak
economic conditions across most markets and margin pressures as the
company's weaker market share does not allow it to take as much price
hikes internationally as it does for domestic business. Developments in Egypt are
further reason for concern as it accounts for 5% of overall sales and profits. Plants
have now been reopened but sales continue to suffer.
Price objective basis & risk
Asian Paints (XAPNF)
Our preferred valuation methodology is a target P/E multiple on projected oneyear forward EPS. Our target multiple for Asian Paints is 22x, which on FY12E
EPS of Rs121 gives us our price objective of Rs2700. Our target multiple is
largely in line with where Asian Paints is currently trading and is also in line with
its last five-year average trading multiple. We believe the multiple will be
sustained given strong earnings momentum-led higher sales growth on improved
consumer spending and increase in margins in international and industrials
divisions. Upside risks are higher-than-expected margin expansion and betterthan-expected top-line growth. Downside risks are rebound in crude prices,
weaker economic revival, stronger Rupee depreciation, and slowdown in the
international business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Paints -Safe to ignore near-term margin pressure
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„Volume growth outlook remains strong
Consumer demand continues to remain strong. While December-quarter sales
growth was high due to the delayed Diwali effect, we believe volume growth in the
mid-teens is sustainable on a recurring basis. The growth factor of ~2x GDP is
holding well for the company with no slowdown visible in any segment.
Raw material prices running high
Input cost scenario remains a cause for concern. Both crude derivatives and TiO2
are witnessing strong price rises. Input cost inflation is running at 15% yoy at this
point. There is some capacity expected to come back on stream for TiO2 which
could help to bring down prices from their current all-time high levels.
Margin pressures likely in near term
Management maintains that last year's margins are unsustainable in the current
scenario. However, they have taken yet another price hike of 1% effective endFebruary leading to a weighted average price hike of 12.5% this year. This, we
believe, should be sufficient to cover current input cost inflation, but near-term
pressure from a timing mismatch will play out.
International division is struggling
International business other than in South Asia continues to struggle due to weak
economic conditions across most markets and margin pressures as the
company's weaker market share does not allow it to take as much price
hikes internationally as it does for domestic business. Developments in Egypt are
further reason for concern as it accounts for 5% of overall sales and profits. Plants
have now been reopened but sales continue to suffer.
Price objective basis & risk
Asian Paints (XAPNF)
Our preferred valuation methodology is a target P/E multiple on projected oneyear forward EPS. Our target multiple for Asian Paints is 22x, which on FY12E
EPS of Rs121 gives us our price objective of Rs2700. Our target multiple is
largely in line with where Asian Paints is currently trading and is also in line with
its last five-year average trading multiple. We believe the multiple will be
sustained given strong earnings momentum-led higher sales growth on improved
consumer spending and increase in margins in international and industrials
divisions. Upside risks are higher-than-expected margin expansion and betterthan-expected top-line growth. Downside risks are rebound in crude prices,
weaker economic revival, stronger Rupee depreciation, and slowdown in the
international business.
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