Asian Paints - Positive surprise on volume growth and margins:: Standard Chartered Research,

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Asian Paints Limited (APL)
Positive surprise on volume growth and margins


 APL’s 1Q FY12 results were above expectations −
standalone net sales, EBITDA and net profit growth at
28.9%, 18.7% and 24.6%, respectively.
 Despite sequential increase in raw material cost-to-sales
(up 90bps qoq), standalone EBITDA margins improved
280bps qoq to 18.6%.
 International and industrial business sales growth was
flat with profit declining ~30% yoy.
 We raise our EPS estimates marginally by 1-2% and roll
forward to June’13 earnings with a revised price target
of Rs3,350. Maintain OUTPERFORM.


Strong volume growth despite high base. Robust
demand and market share gains helped APL post
standalone net sales growth of 29% in 1Q FY12 with a
healthy underlying volume growth of ~16%. We note that
this volume growth is on a high base – volume growth in 1Q
FY11 stood at 25% yoy. Consolidated sales growth was
lower at 23.5% yoy due to challenging conditions in both
industrial segment and international business.
Margins resilient despite input cost inflation. Continuing
inflationary trend in key inputs like titanium dioxide and
crude-based derivatives increased input cost-to-sales by
330bps yoy (and 90bps qoq) to 59.8% in 1Q FY12. Control
over operating expenses (down 170bps yoy) helped APL to
post healthy EBITDA margin of 18.6% (down 160bps yoy
but up 280bps qoq). Higher other income and lower
effective tax rate aided net profit growth of 24.6% yoy.  
Int’l & industrial business performance remains poor.
Challenging demand conditions in industrial segments and
uncertainty in some of its key international markets (Egypt &
Bahrain) resulted in flat combined sales for these two
segments. Decline in margins to 10.5% (down 325bps yoy)
resulted in sharp ~30% decline in profit. As a result,
consolidated net profit growth was lower at 18.7% yoy.
Maintain OP, with revised price target of Rs3,350. APL
has raised prices by ~8% in FY12 (to date) to counter raw
material inflation. We expect sequential improvement in
gross margins and raise our FY12/13 EPS estimates
marginally by 1/2%. We roll forward to Jun ’13 EPS and
revise our price target to Rs3,350 (earlier Rs3,106) based
on one-year forward P/E of 24x. Re-iterate OUTPERFORM.
Key risk – Sharp volume slowdown in an environment of
economic uncertainty. We await clarity on management
commentary on moderate volume growth in Jun ’11.