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For 2QFY2011, Asian Paints (APL) posted weak set of numbers and significantly
below our estimates on both the revenue and profitability front. Consolidated
top-line grew by a mere 5% yoy impacted by heavy monsoons, floods in the north
and shift in festival sales to 3QFY2011. Recurring earnings grew a muted 4.4%
yoy owing to weak top-line growth and margin contraction. We have marginally
tweaked our estimates to discount the disappointment in results. We re-iterate that
the current quarter results should be taken as an aberration and expect growth
momentum to pick in 2HFY2011. Hence, we maintain Buy on the stock.
Heavy monsoons/shift in festivities drag growth: APL reported a weak 5% yoy
growth in consolidated top-line to `1,811cr due to heavy monsoons and shift in
festival sales. We believe APL recorded ~1-2% contraction in paint volumes, and
growth in top-line was largely driven by three rounds of recent price hikes (though
full benefits would be registered in 2HFY2011). In terms of recurring earnings,
APL reported dismal growth of 4.4% yoy to `215cr owing to weak top-line growth,
margin contraction and 42% rise in depreciation charges (commencement of new
plant). At the operating level, APL registered a 42bp contraction resulting in a
muted 2.7% yoy growth in EBITDA to `332cr. However, surprisingly gross margins
expanded by 52bp yoy despite rising input costs on account of full impact of ~7%
weighted average price hikes.
taken as an aberration and expect growth momentum to pick in 2HFY2011
driven by - 1) full quarter of festival sales, and 2) higher value growth on account
of price hikes (further price hikes cannot be ruled out). At `2,503, the stock is
trading at 22x FY2012E revised EPS of `113.5. We maintain a Buy on the stock,
with a revised Target Price of `2,952 (`2,974) based on a P/E multiple of 26x
FY2012E earnings.
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