Asian Paints (ASPN.BO)
1QFY14: Results Disappoint; Unfavourable Risk Reward Balance
PAT declines 5% YoY despite a weak base — Consol revenues at Rs28.2bn rose
11% YoY - below expectations (Citi / consensus: Rs28.8/ Rs28.3bn). Decorative paints
volume growth is est. ~10% YoY on a low base (no growth in 1QFY13). Despite input
cost tailwinds, EBITDA was flat & PAT down 5% to Rs4.4bn & Rs2.8bn - missing our /
street ests by >10%. While some cost pressures (operating / capital costs on Khandala
plant + higher fuel & freight costs) were known - but the revenues miss, lower than
expected GM expansion & certain negative surprises (discount rate change for
gratuity/leave liabilities + FX loss) led to the sharp profit miss.
Rupee plays spoilsport — ~40-45% of inputs are imported & thus weak INR is a net
negative (offsets any translation gains from international revs). Soft global commodity
prices haven’t flown through entirely; TiO2 was flat-to-marginally higher in INR terms.
Paring ests, TP — We cut EPS ests by 3-6% (lower revenues, GMs & cost pressures)
& consequently TP to Rs4,050 (28x Sept14E EPS). Retain Sell.
There are structural positives… — APNT is a solid business benefiting from: a) its
dominant positioning, b) pricing power, c) extensive portfolio, d) slow, but steady
premiumisation trends, and, e) high entry barriers given the extensive dealer network.
... but priced into current valuations (+3 std. deviations above mean) — However,
expectations on the stock are fairly high & we see downside risks to consensus nos.
Valuations at ~36x 1-yr fwd P/E are ~3 std. deviations above its historical mean,
providing limited comfort and making the risk reward balance unfavorable.
And the business negatives / imponderables? — a) The economy is still slow & we
think it is early to call a demand recovery; base effect going forward isn’t as favourable
as 1Q. b) Mgmt admits operating margins may be capped given sharp increase in
manufacturing & distribution costs. c) Diversification into home improvement is a
strategic change – questions around capital allocation, higher capital intensity, limited
scalability, APNT’s USP, and, lower near/medium-term profitability remain.
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1QFY14: Results Disappoint; Unfavourable Risk Reward Balance
PAT declines 5% YoY despite a weak base — Consol revenues at Rs28.2bn rose
11% YoY - below expectations (Citi / consensus: Rs28.8/ Rs28.3bn). Decorative paints
volume growth is est. ~10% YoY on a low base (no growth in 1QFY13). Despite input
cost tailwinds, EBITDA was flat & PAT down 5% to Rs4.4bn & Rs2.8bn - missing our /
street ests by >10%. While some cost pressures (operating / capital costs on Khandala
plant + higher fuel & freight costs) were known - but the revenues miss, lower than
expected GM expansion & certain negative surprises (discount rate change for
gratuity/leave liabilities + FX loss) led to the sharp profit miss.
Rupee plays spoilsport — ~40-45% of inputs are imported & thus weak INR is a net
negative (offsets any translation gains from international revs). Soft global commodity
prices haven’t flown through entirely; TiO2 was flat-to-marginally higher in INR terms.
Paring ests, TP — We cut EPS ests by 3-6% (lower revenues, GMs & cost pressures)
& consequently TP to Rs4,050 (28x Sept14E EPS). Retain Sell.
There are structural positives… — APNT is a solid business benefiting from: a) its
dominant positioning, b) pricing power, c) extensive portfolio, d) slow, but steady
premiumisation trends, and, e) high entry barriers given the extensive dealer network.
... but priced into current valuations (+3 std. deviations above mean) — However,
expectations on the stock are fairly high & we see downside risks to consensus nos.
Valuations at ~36x 1-yr fwd P/E are ~3 std. deviations above its historical mean,
providing limited comfort and making the risk reward balance unfavorable.
And the business negatives / imponderables? — a) The economy is still slow & we
think it is early to call a demand recovery; base effect going forward isn’t as favourable
as 1Q. b) Mgmt admits operating margins may be capped given sharp increase in
manufacturing & distribution costs. c) Diversification into home improvement is a
strategic change – questions around capital allocation, higher capital intensity, limited
scalability, APNT’s USP, and, lower near/medium-term profitability remain.
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