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UBS Investment Research
Asian Paints Ltd.
Raw material cost pressures to hurt
margins
Costs to eat into profits; downgrade to Sell
We downgrade Asian Paints to Sell (from Buy) as we believe they have taken
multiple price increases over the last one year which would now hurt volume
growth and leverage in FY12E. We believe management would sacrifice margins
to enable volume growth in the interim period. While some price increases have
been passed through, but we believe cost inflation is higher and there are more
price increases required.
High crude prices in FY12E – key to call
UBS analysts expect Brent crude prices to stay above $100/bbl in CY11E and at
$95/bbl in Y12E; adding to this TiO2 – a key raw material (~9% of sales) has seen
some further tightening. With 1HFY12, being a weak demand period, we believe
the stock could be under pressure.
Earnings cut, PT cut
We are reducing our FY12/13E EPS estimates to Rs107.63/121.48 from
Rs117.14/131.36 to incorporate higher COGS. Consequently we are reducing our
price target to Rs2,500 from Rs3,150
Valuation
We derive our price target from a DCF based methodology and explicitly forecast
long term valuation drivers using UBS’s VCAM tool. Our price target is equivalent
to 23.4x our 2012 EPS estimate.
Downgrade to Sell
We downgrade Asian Paints to a Sell as we believe they have taken multiple
price increases over the last one year (~12-13%) which would now hurt volume
growth and leverage in FY12E.
We believe management would sacrifice margins to enable volume growth in
the interim period. While some price increases have been passed through, but we
believe cost inflation is higher and there are more price increases required to
neutralize gross margin fall.
COGS
The RM costs of Asian Paints are highly correlated to prices of crude oil. A
correlation analysis indicates a positive correlation coefficient of +0.66. The
increase in COGS/sales ration for Asian Paints has coincided with spikes in
Brent crude prices (chart 4). Most of the previous inflationary cycles have been
fuel driven and the impact on Asian Paints’ COGS is clearly evident from the
charts below.
Estimate changes
We are reducing our EPS estimates to Rs107.63/121.48 in FY12/13E from
Rs117.14/131.36 previously. We are in turn reducing our price target from Rs
3,500 to Rs2,500.
Asian Paints Ltd.
Asian Paints is the leading paint manufacturer in India with a 45% share of the
organised sector paint market. It ranks among the top 10 decorative coatings
companies in the world. Asian Paints operates in 20 countries across the world.
International business accounts for 17% of sales. Decorative paints accounted
for around 80% of the group's sales in FY08.
Statement of Risk
Asian Paints is the leading paint manufacturer in India with a 45% share of the
organised sector paint market. It ranks among the top 10 decorative coatings
companies in the world. Asian Paints operates in 20 countries across the world.
International business accounts for 15% of sales. Decorative paints accounted
for around 80% of the group's sales in FY10
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asian Paints Ltd.
Raw material cost pressures to hurt
margins
Costs to eat into profits; downgrade to Sell
We downgrade Asian Paints to Sell (from Buy) as we believe they have taken
multiple price increases over the last one year which would now hurt volume
growth and leverage in FY12E. We believe management would sacrifice margins
to enable volume growth in the interim period. While some price increases have
been passed through, but we believe cost inflation is higher and there are more
price increases required.
High crude prices in FY12E – key to call
UBS analysts expect Brent crude prices to stay above $100/bbl in CY11E and at
$95/bbl in Y12E; adding to this TiO2 – a key raw material (~9% of sales) has seen
some further tightening. With 1HFY12, being a weak demand period, we believe
the stock could be under pressure.
Earnings cut, PT cut
We are reducing our FY12/13E EPS estimates to Rs107.63/121.48 from
Rs117.14/131.36 to incorporate higher COGS. Consequently we are reducing our
price target to Rs2,500 from Rs3,150
Valuation
We derive our price target from a DCF based methodology and explicitly forecast
long term valuation drivers using UBS’s VCAM tool. Our price target is equivalent
to 23.4x our 2012 EPS estimate.
Downgrade to Sell
We downgrade Asian Paints to a Sell as we believe they have taken multiple
price increases over the last one year (~12-13%) which would now hurt volume
growth and leverage in FY12E.
We believe management would sacrifice margins to enable volume growth in
the interim period. While some price increases have been passed through, but we
believe cost inflation is higher and there are more price increases required to
neutralize gross margin fall.
COGS
The RM costs of Asian Paints are highly correlated to prices of crude oil. A
correlation analysis indicates a positive correlation coefficient of +0.66. The
increase in COGS/sales ration for Asian Paints has coincided with spikes in
Brent crude prices (chart 4). Most of the previous inflationary cycles have been
fuel driven and the impact on Asian Paints’ COGS is clearly evident from the
charts below.
We are reducing our EPS estimates to Rs107.63/121.48 in FY12/13E from
Rs117.14/131.36 previously. We are in turn reducing our price target from Rs
3,500 to Rs2,500.
Asian Paints Ltd.
Asian Paints is the leading paint manufacturer in India with a 45% share of the
organised sector paint market. It ranks among the top 10 decorative coatings
companies in the world. Asian Paints operates in 20 countries across the world.
International business accounts for 17% of sales. Decorative paints accounted
for around 80% of the group's sales in FY08.
Statement of Risk
Asian Paints is the leading paint manufacturer in India with a 45% share of the
organised sector paint market. It ranks among the top 10 decorative coatings
companies in the world. Asian Paints operates in 20 countries across the world.
International business accounts for 15% of sales. Decorative paints accounted
for around 80% of the group's sales in FY10
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