Asian Paints -Opportunity to Buy - RBS

Visit http://indiaer.blogspot.com/ for complete details �� ��


Asian Paints
Opportunity to Buy
The stock has underperformed the market by 10% in the past two months, largely
discounting the weak 2QFY11 earnings. Weakness in sales growth in 2Q was
largely due to cyclical factors: 1) prolonged monsoons; and 2) a delayed festival
season shifting sales to 3Q. We maintain our estimates; Buy.




2QFY11 earnings were weak due to cyclical factors
Asian Paints reported yoy growth of 6% in net sales and 4% in EBITDA, and a 23% drop in
PAT. EBITDA margin was stable at 19.6%. Other income fell by 71% as there was an
exceptional gain on sale of investments in 2QFY10. The key reasons for weaker sales were:
1) the monsoon season this year was prolonged, impacting sales in September; and 2) prefestival
season sales, which were booked in 2Q last year, will show in 3Q this time.
Rising cost inflation remains a concern, but pricing power intact
AP faced 6.5% inflation in raw material costs in 1QFY11, and a further 5.9% in 2QFY11. The
company has raised prices three times, for a total rise of about 8%, in FY11 to neutralise the
cost pressure. It has also sustained an average EBITDA margin of 19.9% in the past six
quarters (since the steep rise in 1QFY10 from the historic band of 15-16%). Officially, the
management stance has been one of caution, but the recent price hikes do suggest that the
company is defending its 20% margin level. We have assumed a margin of 18.8% in FY11,
rising to 19.2% in FY12 and 19.4% in FY13.
We maintain our estimates our Buy rating
The stock has underperformed the market by 10% in the past two months. The company is
entering seasonally strong quarters and all festival season sales will be reflected in 3Q this
year. Paint is one of the few consumer goods categories in India where volume growth
remains robust, and where, more importantly, there no is disruptive competition among
industry players. We are a bit concerned about the long-term implications of AP’s steep jump
in EBITDA margin, given: 1) implications for ongoing up-trading, from the unorganised sector
to branded paints; and 2) emerging competition in the organised sector. However,
management said it was very conscious of market share losses, so we remain positive. Our
DCF-based target price rises slightly, to Rs2,958 (from Rs2,924) as we roll forward our
estimates. Buy.


Entering seasonally strong quarters
Weaker sales growth in 2QFY11 was largely due to cyclical factors. The positive highlight
was the margin stability at 19.6% despite a 12% rise in raw material prices over FY10.
Key highlights of the 2QFY11 results
􀀟 AP reported sales growth of 6%, weaker than our estimate of 15%. The key reason for this
was the prolonged monsoon in most parts of India, which clearly weakened paint demand
more than expected. In 2QFY10, the company’s sales grew 19% because of a particularly bad
monsoon in 2009, creating a high base for growth in 2QFY11. Cement demand growth in
2QFY11 was also at a very weak 4%, reflecting the base impact of the monsoon.
􀀟 EBITDA was up just 4% yoy, reflecting mild pressure on margin. EBITDA margin fell 40bp yoy
and 60bp qoq. Nevertheless, we believe the 19.6% margin was impressive in the context of
6% inflation in raw material prices in 2QFY11 over 1QFY11.
􀀟 Other income in 2QFY10 included Rs630m from the sale of long-term investments, hence
there was a 71% drop this year, which resulted in PBT declining 17% and PAT 23%.
􀀟 EPS was Rs41.4 in 1HFY11. Our full-year estimate is Rs85.9, which we believe is achievable,
given that the second half has seasonally strong quarters and the festival season also falls in
2H this year.
􀀟 Asian Paints continues to strengthen its distribution, and currently has over 17,000 Color
World outlets across India. These outlets have given the company’s dealers a unique
advantage in serving the needs of the clients without investing much in inventory.