Key Takeaway
APNT 1Q14 was below expectations as EBITDA remained flat despite 15%
growth in gross profits. While volume growth was reasonably strong, the
mixed pattern in input cost inflation (stable raw materials, higher operating
expenses) continues to weigh on margins. Maintain Underperform.
1Q14 results below expectations: Asian Paints’ 1Q14 revenues (+12% YoY) and gross
profits (+15% YoY) grew in line with expectations. However, this failed to offset the inflation
in other operating costs, up 22% YoY adjusting for higher gratuity provision. As a result, adj.
EBITDA came in 4.5% below forecast.
Domestic volume growth strong in 1Q14: Domestic decorative paint volumes grew
in double-digits. Despite the favorable base (volumes in 1Q13 were likely flat), we believe
the growth was reasonably strong considering an otherwise weak economic environment
as well as the negative impact of early monsoons. Sustaining this level of growth for the rest
of FY14, though, could be a challenge if weak demand conditions persist. Nonetheless, we
marginally raise our domestic volume assumptions (c1%) for FY14.
Margins - the mixed pattern continues: The mixed pattern in underlying input cost
inflation continued to weigh on overall margins for the company. While international
commodity prices have turned benign (stable in INR terms), other operating costs have
increased on account of the newly commissioned plant as well as higher freight and power
costs. Therefore, while gross margins expanded 150bps YoY, EBITDA margins declined
110bps YoY. We believe this could continue to be a drag on earnings growth in coming
quarters and marginally lower our FY14E EBITDA forecast (c1%). We also incorporate higherthan-expected depreciation and tax rates, leading to c2-5% cut in earnings estimates.
Valuation/Risks
Our DCF-based PT now stands at Rs4142 up from Rs4107 (11.3% COE, 6% terminal growth
rate), as we factor in these changes and roll over our estimates. The stock trades at 39x
FY14E EPS, at a significant premium relative to peers and its own history. Upside from her is
contingent upon earnings delivery assuming steady multiples, which we believe is at risk.
Maintain Underperform. Risks: a) faster revival in demand, b) higher-than-forecast gross
margin gains
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APNT 1Q14 was below expectations as EBITDA remained flat despite 15%
growth in gross profits. While volume growth was reasonably strong, the
mixed pattern in input cost inflation (stable raw materials, higher operating
expenses) continues to weigh on margins. Maintain Underperform.
1Q14 results below expectations: Asian Paints’ 1Q14 revenues (+12% YoY) and gross
profits (+15% YoY) grew in line with expectations. However, this failed to offset the inflation
in other operating costs, up 22% YoY adjusting for higher gratuity provision. As a result, adj.
EBITDA came in 4.5% below forecast.
Domestic volume growth strong in 1Q14: Domestic decorative paint volumes grew
in double-digits. Despite the favorable base (volumes in 1Q13 were likely flat), we believe
the growth was reasonably strong considering an otherwise weak economic environment
as well as the negative impact of early monsoons. Sustaining this level of growth for the rest
of FY14, though, could be a challenge if weak demand conditions persist. Nonetheless, we
marginally raise our domestic volume assumptions (c1%) for FY14.
Margins - the mixed pattern continues: The mixed pattern in underlying input cost
inflation continued to weigh on overall margins for the company. While international
commodity prices have turned benign (stable in INR terms), other operating costs have
increased on account of the newly commissioned plant as well as higher freight and power
costs. Therefore, while gross margins expanded 150bps YoY, EBITDA margins declined
110bps YoY. We believe this could continue to be a drag on earnings growth in coming
quarters and marginally lower our FY14E EBITDA forecast (c1%). We also incorporate higherthan-expected depreciation and tax rates, leading to c2-5% cut in earnings estimates.
Valuation/Risks
Our DCF-based PT now stands at Rs4142 up from Rs4107 (11.3% COE, 6% terminal growth
rate), as we factor in these changes and roll over our estimates. The stock trades at 39x
FY14E EPS, at a significant premium relative to peers and its own history. Upside from her is
contingent upon earnings delivery assuming steady multiples, which we believe is at risk.
Maintain Underperform. Risks: a) faster revival in demand, b) higher-than-forecast gross
margin gains
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