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Asian Paints (APNT)
Consumer products
Downside risks to earnings not fully priced in: SELL. We find the Street’s
expectations of APNT’s medium-term business performance aggressive. We retain our
contrarian SELL rating despite the stock’s 15% correction over the past six months as
we see downside risks to consensus estimates. APNT’s volume growth over the three
quarters of CY2011—12%, 11% and 8% (on a base of ~4% decline)—shows a
decelerating trend, in our view. Industry experts suggest major TiO2 producers hiked
prices by 5-7% from January 1, 2012.
We expect a muted 3QFY12
We forecast a muted 3QFY12 for APNT: Sales growth of 19% and PAT growth of 9%. We expect
volume growth of ~3% (downside risks exist), 150 bps contraction in EBITDA margins to 15.7%—
among its lowest over the past 10 quarters. In our view its price increases are insufficient to cover
input cost inflation (the TiO2 index for 3QFY12 is up ~40% yoy in US dollar terms, crude and its
derivates are up ~30% yoy, and the Rupee devaluation will have an impact on APNT). We
highlight that APNT (and the paints industry) typically stay away from price increases during festive
seasons. APNT took a price hike of just ~2.2% in 3QFY12, which is likely to result in a gross
margin decline in 3QFY12.
Near-term outlook not improving either
APNT faces volume growth risks as well, in our view. Its volumes have grown at an average 2X
GDP growth rate over the past 10 years and we highlight that during times of GDP growth
deceleration, the impact on APNT’s growth rate would be potentially higher. APNT’s volume
growth over the three quarters of CY2011—12%, 11% and 8% (on a base of ~4% decline)—
shows a decelerating trend, in our view. Moreover, the outlook on input prices is not improving
either. Industry experts suggest that major producers of TiO2 have hiked prices by 5-7% effective
January 1, 2012 (due to higher prices of feedstock, ilmenite ore and titanium slag). We highlight
that our EPS estimates are ~10% lower than the consensus—Rs94.4 and Rs106.9 for FY2012 and
FY2013, respectively.
Look for better entry points; retain SELL
We retain SELL on APNT with a target price of Rs2, 500. Our worries about APNT are intact:
(1) Uncertainty in international operations, particularly the Middle East and Egypt operations,
(2) scope to take further price hikes is limited and (3) likely moderation in decoratives paint
demand, auto and industry may not provide a buffer. We remain bullish on the medium-term
(2-3 years) prospects of the paint industry. However, we believe expensive valuations and nearterm
earnings risk could provide better entry points. Key upside risks include higher-than-expected
demand conditions and a significant correction in input costs, providing an 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
Downside risks to earnings not fully priced in: SELL. We find the Street’s
expectations of APNT’s medium-term business performance aggressive. We retain our
contrarian SELL rating despite the stock’s 15% correction over the past six months as
we see downside risks to consensus estimates. APNT’s volume growth over the three
quarters of CY2011—12%, 11% and 8% (on a base of ~4% decline)—shows a
decelerating trend, in our view. Industry experts suggest major TiO2 producers hiked
prices by 5-7% from January 1, 2012.
We expect a muted 3QFY12
We forecast a muted 3QFY12 for APNT: Sales growth of 19% and PAT growth of 9%. We expect
volume growth of ~3% (downside risks exist), 150 bps contraction in EBITDA margins to 15.7%—
among its lowest over the past 10 quarters. In our view its price increases are insufficient to cover
input cost inflation (the TiO2 index for 3QFY12 is up ~40% yoy in US dollar terms, crude and its
derivates are up ~30% yoy, and the Rupee devaluation will have an impact on APNT). We
highlight that APNT (and the paints industry) typically stay away from price increases during festive
seasons. APNT took a price hike of just ~2.2% in 3QFY12, which is likely to result in a gross
margin decline in 3QFY12.
Near-term outlook not improving either
APNT faces volume growth risks as well, in our view. Its volumes have grown at an average 2X
GDP growth rate over the past 10 years and we highlight that during times of GDP growth
deceleration, the impact on APNT’s growth rate would be potentially higher. APNT’s volume
growth over the three quarters of CY2011—12%, 11% and 8% (on a base of ~4% decline)—
shows a decelerating trend, in our view. Moreover, the outlook on input prices is not improving
either. Industry experts suggest that major producers of TiO2 have hiked prices by 5-7% effective
January 1, 2012 (due to higher prices of feedstock, ilmenite ore and titanium slag). We highlight
that our EPS estimates are ~10% lower than the consensus—Rs94.4 and Rs106.9 for FY2012 and
FY2013, respectively.
Look for better entry points; retain SELL
We retain SELL on APNT with a target price of Rs2, 500. Our worries about APNT are intact:
(1) Uncertainty in international operations, particularly the Middle East and Egypt operations,
(2) scope to take further price hikes is limited and (3) likely moderation in decoratives paint
demand, auto and industry may not provide a buffer. We remain bullish on the medium-term
(2-3 years) prospects of the paint industry. However, we believe expensive valuations and nearterm
earnings risk could provide better entry points. Key upside risks include higher-than-expected
demand conditions and a significant correction in input costs, providing an opportunity for APNT
to improve margins.
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