Asian Paints reported disappointing set of numbers for Q1FY13 on the back of meagre volume growth. Company reported
consolidated sales of INR 25,479mn, a YoY growth of 12.72% largely led by price increases. EBIDTA margin improved by
18bps YoY to 17.53%. PAT grew by 9.38% YoY to INR 2,884mn which was below our expectation. We expect volume growth
to pick in next quarter; however, improvement in monsoon and stable exchange rate would be the key catalyst for the
company's performance. We expect consolidated sales and PAT CAGR of 16.77% and 18.62% over FY12-14. At CMP, stock is
trading at 30x FY13E EPS, which in our view is high on the backdrop of falling demand and continued pressure on margins.
We downgrade to SELL.
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Disappointed volume growth
Company's domestic decorative paints (standalone) business
grew by 11.24% (after adjustment for shift in industrial business
from standalone to subsidiary) representing a meagre volume
growth of ~1% which is quite low compared to ~14% CAGR in last
2 years. The lower growth in volumes is attributed to higher
stocking by dealers in previous quarter and lower consumer
confidence in weak macro-environment which was also dented
by ~25% cumulative price hikes taken by the company in last two
years. However, we expect volume growth to pick up from next
quarter onwards albeit at slower pace.
Price hikes supported margin expansion
Effective price hikes of ~5% YTD in decorative paints business
supported by lower cost inventory helped company to improve its
standalone EBIDTA margin by 343bps QoQ and 112bps YoY to
19.68%. However, the margin expansion in Q1FY13 in our view is
not sustainable and is likely to contract in next quarter. Continued
pressure on international and industrial paints business resulted
in consolidated EBIDTA margins to improve by 249bps QoQ and
18bps YoY, lower than standalone. INR depreciation bereft company
to take benefit of fall in international prices of key RM like TiO2
and crude derivatives.
Sumit Duseja
sumit.duseja@spagroupindia.com
Ph. No. 91 4289 5600 Ext.630
July 24, 2012 RESULT UPDATE - Q1FY13
Other business, a mixed bag
Other businesses including international and industrial paints
business grew by ~32% YoY. International business reported good
growth on the back of continued growth momentum in South Asian
markets (except Nepal) and improved macro-environment in
Middle East. Industrial paints business though reported growth
in revenues but inability to pass RM inflation to institutional
clients resulted in margin erosion. Growth in international and
industrial paints business is expected to come down on the back
of overall slowdown in Global economy and industrial sector.
Bad monsoon could be a damper
Company saw slowdown in rural demand owing to high inflation
and delayed monsoon. In the event of bad monsoon, there could
be risk to demand scenario particularly in rural markets which
currently contribute ~50% to decorative paints revenue.
Outlook & Valuation
After considerable slowdown on volume front from ~16% in FY11 to
~11% in FY12 and ~1% in Q1FY13, we expect the downward trend in
demand to continue. Lower demand also reduces the scope for any
price hikes which would continue to put pressure on margins on
the backdrop of high RM cost pressure. Poor monsoon and INR
depreciation (against USD) could pose further risk to the overall
performance of the company and therefore are key watchable. We
downgrade the rating on the stock to SELL with target price of INR
3,336 (18 months) discounting FY14E EPS at 23x.
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