Asian Paints In Consonance; Maintain BUY : Emkay

n Change in its brand look signifies establishment of a closer
rapport with customers, while acquisition of Sleek Group
(51%) depicts metamorphosis into a home décor company
n Product mix, improved distribution, new product launches,
international operations and high dividend payout – Key
positives
n Low volume growth, margin offsets & cautious outlook on
business – Key negatives
n Emkay forecasts for APL with UVG of 7-9% and 170 bps yoy
expansion in Ebidta margins in consonance with management
commentary. Retain BUY
‘Changing the Look, Transforming the Outlook’ says Annual Report 2013
Annual Report 2013 marks major changes and transformation in business outlook. Asian
Paints has changed its brand look by unveiling a new corporate brand entity, signifying its
intent to establish a closer rapport with its customers. With its recent foray into the home
improvement segment through acquisition of a 51% stake in Sleek Group, it is
metamorphosing itself into a home décor company, depicting transformation in business.
Product mix, improved improvement, new product launches, international
operations and higher dividend payout – Key positives
§ Richer product mix led by premium interior and exterior emulsions paints. Interior
emulsions growth was driven by Royale and its variants, while Apex Ultima in exterior
emulsions saw strong growth, led by higher ad spends and marketing activations.
§ Value growth of 12.7% in standalone operations was supported by price increases
(5.1% price hike in FY13).
§ Lower inflation in most of the raw materials led to gross margin expansion of 180bps yoy
to 42.2% in standalone operations.
§ Continues to augment distribution network; installs 2900 Colour Worlds and total
installations reaching 24,000 in India. APL increases Colour Idea stores to 100 in FY13.
§ Launched ‘Smart Care’ range of water proofing and crack building, which received
excellent response. Also, enhanced focus on wood finish by launching products in key
wood finish market in collaboration with Renner of Italy.
§ Despite the turbulence in Middle East and slowdown in Caribbean & Asia, the global
operations posted a healthy revenue growth of 23% yoy to Rs14.2bn, with a constant
currency growth of 13% yoy and APAT growth of 45% yoy to Rs 1bn.
§ Commissioned its 7th decorative plant with initial installed capacity of 300,000 KL in
Khandala. Also expanded capacities in Rohtak plant by 50,000 KL p.a. to 200,000 KL
p.a. and added 240,00 KL p.a. globally.
§ Consolidated capex spends at Rs 6.4bn in FY13. Despite this, APL generated free cash
flows of Rs 5.5bn vs Rs 1.6bn in FY12.
§ Dividend payout increases to 43% in FY13 versus average of 40% in last 3 year. Higher
dividend payout exuberates confidence on future cash generation.

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Low volume growth, stable Ebidta margins & cautious outlook on business
– Key Negatives
§ APL does not disseminate volume growth in annual report. But our assessment for
volume growth in FY13 is approximately 7%. Slowing GDP growth, weaker demand
elasticity and high inflation are reasons for low growth in decorative paints.
§ Industrial paint was much weaker than decorative paint owing to slowdown in industrial
activities as reflected in IIP Nos.
§ Ebidta margins for standalone operations were 17.2%; stable vis-à-vis FY12. Higher A&P
spends (5.2% of revenues vs 4.3% in FY12), rising fuel costs (19% yoy), power costs
(32% yoy) offsets gains from benign material costs.
§ Availability of grid power and resultant dependence on diesel-gensets for power
generation is a key challenge.
§ On the backdrop of weak macro environment both in India and international,
management commentary ad verbatim “retains cautiously optimistic outlook and hopes
for an inclusive growth in the volatile and exciting environment’.
Other developments; completes restructuring of industrial paints business
Restructuring of industrial paints business gets approval of high court; (1) AP Coatings Ltd
and PPG Coatings India Pvt Ltd merged with PPG Asian Paints Pvt Ltd (first joint venture
with PPG) (2) industrial liquid paints and powder coatings of PPG Asian Paints Pvt Ltd is
demerged and transferred to Asian Paints PPG Pvt Ltd. The restructuring exercise would
sharpen focus on industrial paints and coatings business; thereby improving product mix
and margins.
APL commentary in consonance with FY14E earnings forecasts; Retain BUY
Management commentary ad verbatim “cautiously optimistic outlook and hopes for an
inclusive growth in the volatile and exciting environment’. Emkay’s forecasts for APL with
underlying volume growth of 7-9% and Ebidta margin expansion of 170 bps yoy is in
consonance to management commentary. Margin expansion to drive earnings performance
in FY14E; tailwind is yet to fructify. We retain BUY rating.