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Asian Paints (APNT)
Consumer products
Decelerating volume growth trajectory. While APNT’s 2Q results disappointed lineby-
line, the key is volume growth slowdown—in three quarters of CY2011, it was 12%,
11% and 8% (despite a 4% decline in base), in our view. APNT is likely headed for a
volume decline in 3QFY12E, in our view. Modest qoq improvement in gross margins is
no solace as Rupee depreciation could likely impact gross margins in 2HFY12E. The
management-attributed reasons of extended rainfall and Telengana agitation impacting
demand in 2Q appear less convincing as the base quarter also had extended rainfall and
Andhra accounts for just ~7% of sales. SELL.
Just ~8% volume growth in domestic business
APNT reported standalone (domestic business) net sales of Rs18.4 bn (+25% yoy, KIE Rs19.7 bn),
EBITDA of Rs2.8 bn (-2% yoy, KIE Rs3.5 bn) and PAT of Rs2.1 bn (+9% yoy, KIE Rs2.5 bn).
In our view, the volumes have likely grown ~8% yoy during the quarter and pricing/mix witnessed
growth of ~17%. Gross margins declined 390 bps yoy to 40.8% as price increases were lagging
cost inflation. However, gross margins expanded 60 bps qoq as the company benefited from the
full impact of 8% price increase effected in 1QFY12. Modest qoq improvement in gross margins is
no solace as Rupee depreciation could likely impact gross margins in 2HFY12E. EBITDA margins
declined 430 bps yoy due to gross margin decline and higher other expenditure (higher
advertisement and promotional spends and MTM impact of Rs150 mn).
The company has appointed Mr. K B S Anand as MD & CEO with effect from April 1, 2012. Mr.
Anand succeeds Mr. P M Murty who is the incumbent since April 2009. Mr. Anand is the second
professional MD & CEO (other than from the promoter families) in the recent history of APNT.
Likely volume decline in 3QFY12E
Domestic volume growth in three quarters of CY2011 was 12%, 11% and 8% (despite a 4%
decline in base), in our view. APNT is likely headed for a volume decline in 3QFY12E, in our view.
The company commented that rains in September have likely impacted festival sales demand
(Diwali festival this year is in October versus November last year). Our discussions with key industry
players suggest that demand conditions in the paint industry are facing slowdown in pockets –
primarily in smaller towns and rural areas where consumers are downtrading. However, for the
long term, they remain confident on the demand scenario and are stepping up capacities (industry
capacity is expected to double by FY2014E).
We reiterate that APNT’s near-term business prospects look weak due to (1) delay in completion of
real estate projects, (2) likely postponement in repainting due to inflationary environment, (3)
weak automotive and industrial sales and (4) likely downside risks to EBITDA margins in FY2012E.
Retain SELL; expensive valuations and near-term earnings risk could provide
better entry points
We retain SELL on Asian Paints with a target price of Rs2,900. The stock is trading close to
its highest-ever relative P/E versus BSE-30 index since 1993. Moreover, our worries about
APNT’s FY2012E performance are intact, (1) uncertainty in international operations,
particularly Middle East and Egypt operations, (2) input cost inflation is not entirely a passthrough
in FY2012E, in our view, and (3) likely moderation in decoratives paint demand,
auto and industry may not provide buffer. We have modeled a 100 bps decline in EBITDA
margin to 17.1% in FY2012E, largely on account of gross margin pressure offset to some
extent by savings in SG&A (positive effects of operating leverage). 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. We broadly
maintain earnings estimates and retain our SELL rating.
Key upside risks include higher-than-expected demand conditions and significant correction
in input costs providing opportunity for APNT to improve margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Paints (APNT)
Consumer products
Decelerating volume growth trajectory. While APNT’s 2Q results disappointed lineby-
line, the key is volume growth slowdown—in three quarters of CY2011, it was 12%,
11% and 8% (despite a 4% decline in base), in our view. APNT is likely headed for a
volume decline in 3QFY12E, in our view. Modest qoq improvement in gross margins is
no solace as Rupee depreciation could likely impact gross margins in 2HFY12E. The
management-attributed reasons of extended rainfall and Telengana agitation impacting
demand in 2Q appear less convincing as the base quarter also had extended rainfall and
Andhra accounts for just ~7% of sales. SELL.
Just ~8% volume growth in domestic business
APNT reported standalone (domestic business) net sales of Rs18.4 bn (+25% yoy, KIE Rs19.7 bn),
EBITDA of Rs2.8 bn (-2% yoy, KIE Rs3.5 bn) and PAT of Rs2.1 bn (+9% yoy, KIE Rs2.5 bn).
In our view, the volumes have likely grown ~8% yoy during the quarter and pricing/mix witnessed
growth of ~17%. Gross margins declined 390 bps yoy to 40.8% as price increases were lagging
cost inflation. However, gross margins expanded 60 bps qoq as the company benefited from the
full impact of 8% price increase effected in 1QFY12. Modest qoq improvement in gross margins is
no solace as Rupee depreciation could likely impact gross margins in 2HFY12E. EBITDA margins
declined 430 bps yoy due to gross margin decline and higher other expenditure (higher
advertisement and promotional spends and MTM impact of Rs150 mn).
The company has appointed Mr. K B S Anand as MD & CEO with effect from April 1, 2012. Mr.
Anand succeeds Mr. P M Murty who is the incumbent since April 2009. Mr. Anand is the second
professional MD & CEO (other than from the promoter families) in the recent history of APNT.
Likely volume decline in 3QFY12E
Domestic volume growth in three quarters of CY2011 was 12%, 11% and 8% (despite a 4%
decline in base), in our view. APNT is likely headed for a volume decline in 3QFY12E, in our view.
The company commented that rains in September have likely impacted festival sales demand
(Diwali festival this year is in October versus November last year). Our discussions with key industry
players suggest that demand conditions in the paint industry are facing slowdown in pockets –
primarily in smaller towns and rural areas where consumers are downtrading. However, for the
long term, they remain confident on the demand scenario and are stepping up capacities (industry
capacity is expected to double by FY2014E).
We reiterate that APNT’s near-term business prospects look weak due to (1) delay in completion of
real estate projects, (2) likely postponement in repainting due to inflationary environment, (3)
weak automotive and industrial sales and (4) likely downside risks to EBITDA margins in FY2012E.
Retain SELL; expensive valuations and near-term earnings risk could provide
better entry points
We retain SELL on Asian Paints with a target price of Rs2,900. The stock is trading close to
its highest-ever relative P/E versus BSE-30 index since 1993. Moreover, our worries about
APNT’s FY2012E performance are intact, (1) uncertainty in international operations,
particularly Middle East and Egypt operations, (2) input cost inflation is not entirely a passthrough
in FY2012E, in our view, and (3) likely moderation in decoratives paint demand,
auto and industry may not provide buffer. We have modeled a 100 bps decline in EBITDA
margin to 17.1% in FY2012E, largely on account of gross margin pressure offset to some
extent by savings in SG&A (positive effects of operating leverage). 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. We broadly
maintain earnings estimates and retain our SELL rating.
Key upside risks include higher-than-expected demand conditions and significant correction
in input costs providing opportunity for APNT to improve margins.
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