ASIAN PAINTS Volumes recover; margins to follow:: Edelweiss

Asian Paints’ Q2FY13 revenue came ahead of our estimate while PAT
came bang in line. Key positives were: (1) Recovery in domestic volume
growth at ~6% YoY (vs flattish volumes in Q1FY13) and (2) Slight
improvement in domestic EBITDA margin. Key negatives include: (1)
lowest consolidated EBITDA margin in the last 14 quarters (likely to have
bottomed out) and (2) Spurt in interest cost by 37.7% YoY (on a low
base). We remain positive due to re-launch of brand identity in India
(after 10 years), innovation (entered the construction chemicals business
in “dampness correction”) and scaling up of benefits. Although the
discretionary spending remains under pressure in near term, this could
reverse if sentiments improve (due to recent reforms and a possible cut
in interest rates). Maintain ‘BUY’.

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Volume growth sees recovery
Q2FY13 consolidated net revenue increased 16.8% YoY. PAT rose 14.6% YoY. Other
income in Q2FY12 includes INR158.3mn received as dividend from its subsidiary Asian
Paints International Ltd (Mauritius). The company’s standalone business posted revenue
growth of 16.2% YoY to ~INR21.5bn. Q2FY13 standalone numbers do not include
revenues of INR180mn and loss of INR10mn relating to AP Coatings Ltd (a wholly owned
subsidiary). In H1FY13 constant currency growth in international business was 17-18%.
Gross margin expands, but EBITDA margin remains flat
Asian Paints’ COGS declined 24bps YoY reflecting correction in TiO2 prices. COGS benefit
was offset by an increase in other expenses (up 28bps YoY), leading to flat EBITDA margin
at 14.5%. Margin was better at the standalone level (domestic business) coming in at
15.7% (up 21bps YoY).
Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on Asian Paints due to investment in new growth drivers
(construction chemicals business), higher growth in decorative business and its JV with
PPG. At CMP, the stock is trading at 32.7x and 27.0x FY13E and FY14E, respectively. We
maintain ‘BUY’ and rate it ‘Sector Performer’ on a relative return basis.