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Buoyant demand growth and good pricing power in the Paints category will help AP sustain
margins, in our view. The 12% price hike in FY11 and the 8% hike in 1Q12 have had no impact
on volume growth so far. We believe structural demand drivers remain strong. We raise our EPS
estimates by 2-11%. Maintain Buy.
Strong start to the year with 28.9% revenue growth
Despite the high base of 1Q11, when the company achieved sales growth of 28%. AP recorded
revenue growth of 28.9% in 2Q11. This was better than our expectation of 21%. It may be
recalled that AP increased prices by 12% in FY11 and followed it up with an 8% hike in 1Q12.
Prices were raised again in 1Q11: 4.4% in May, 2.5% on 1 June, and 1.33% at end-June. So
clearly, the hikes were not fully reflected in 1Q12. We expect volume growth of 13-14% in the
domestic paints business. AP's EBITDA margins slipped to 15.8% in 4Q11, when raw material
costs rose to 59% of net sales. Despite raw material costs rising further to 59.8% to net sales in
1Q12, the EBITDA margin improved 280bp as the ratio of other expenditure to net sales dropped
sharply to 17% from 20.8% in 4Q11 (19.5% in FY11).
Paint business remains in a sweet spot
AP’s volumes in the domestic decorative paint markets have been achieving at a CAGR of 14.2%
over the past 10 years. The company has raised its prices by around 20% in the past 15 months
to pass on the impact of higher titanium dioxide prices and crude-based raw materials. Despite
these frequent price hikes, volume momentum has sustained at healthy double-digit levels. We
believe the increase in frequency of re-painting and the ongoing shift in demand from the
unorganised sector to the organised sector are key structural demand drivers.
We raise our EPS estimates; Buy maintained
AP is expanding its current 600,000mt capacity to 1mmt to meet growing domestic demand; the
additional capacity is likely to come on stream by January 2013. We have raised our EPS
estimates for FY12 by 2%, and FY13 by 11%, and have introduced FY14 EPS estimates at
Rs149.9/share. We raise our DCF-based target price to Rs3,458, which translates to 28x FY12F
earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Buoyant demand growth and good pricing power in the Paints category will help AP sustain
margins, in our view. The 12% price hike in FY11 and the 8% hike in 1Q12 have had no impact
on volume growth so far. We believe structural demand drivers remain strong. We raise our EPS
estimates by 2-11%. Maintain Buy.
Strong start to the year with 28.9% revenue growth
Despite the high base of 1Q11, when the company achieved sales growth of 28%. AP recorded
revenue growth of 28.9% in 2Q11. This was better than our expectation of 21%. It may be
recalled that AP increased prices by 12% in FY11 and followed it up with an 8% hike in 1Q12.
Prices were raised again in 1Q11: 4.4% in May, 2.5% on 1 June, and 1.33% at end-June. So
clearly, the hikes were not fully reflected in 1Q12. We expect volume growth of 13-14% in the
domestic paints business. AP's EBITDA margins slipped to 15.8% in 4Q11, when raw material
costs rose to 59% of net sales. Despite raw material costs rising further to 59.8% to net sales in
1Q12, the EBITDA margin improved 280bp as the ratio of other expenditure to net sales dropped
sharply to 17% from 20.8% in 4Q11 (19.5% in FY11).
Paint business remains in a sweet spot
AP’s volumes in the domestic decorative paint markets have been achieving at a CAGR of 14.2%
over the past 10 years. The company has raised its prices by around 20% in the past 15 months
to pass on the impact of higher titanium dioxide prices and crude-based raw materials. Despite
these frequent price hikes, volume momentum has sustained at healthy double-digit levels. We
believe the increase in frequency of re-painting and the ongoing shift in demand from the
unorganised sector to the organised sector are key structural demand drivers.
We raise our EPS estimates; Buy maintained
AP is expanding its current 600,000mt capacity to 1mmt to meet growing domestic demand; the
additional capacity is likely to come on stream by January 2013. We have raised our EPS
estimates for FY12 by 2%, and FY13 by 11%, and have introduced FY14 EPS estimates at
Rs149.9/share. We raise our DCF-based target price to Rs3,458, which translates to 28x FY12F
earnings.
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