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AP's 330bps q.o.q drop in EBITDA margins was due to 1) translation impact of Rs150m due to
rupee depreciation on outstandings 2) increased pre-festival season spends on media in Q2FY12
vs in Q3FY11. Demand remains robust, and management seemed optimistic to recover lost
margins. We remain bullish.
Robust sales growth continues.
AP recorded a sales growth of 25.5% in Q2FY12, slightly lower than 28.9% recorded in
Q1FY12. The company indicated that it did not take any price hikes in Q2FY12, but had taken
an 8.8% hike in Q1FY12.
The growth has been wide-spread across India, except weakness in the State of Andhra
Pradesh due to ongoing potilical unrest.
The company indicated that delayed monsoons did impact its exterior paints business in
September, but for the same the growth could have been much higher.
Company did not take up prices in Q2FY12, as the rupee depreciation impact happened
suddenly in end September, and the delayed rains were also impacting volumes in certain
segments.
In its international business, while the overall growth was at 9%, the largest region of AP i.e
Middle East recorded just a 2% growth.
EBITDA margins drop seems transitionary
AP's EBITDA margins declined y.o.y by 430bps y.o.y and 330bps q.o.q, which resulted in the
EBITDA being 12% lower than our expectations.
The management in the analyst meet indicated that 2 key factors 1) Rs150m was the impact
of the sudden rupee deprecation in translating the outstandings due to suppliers as on
30/9/2011. 2) There has been a 390bps spike in other expenditure q.o.q basis, which they
highlighted was due to increased media spends on advertisements ahead of the festival
season. This was done largely in Q3FY11 last year, as compared to entirely in Q2FY12 in the
current year. While, they did not quantify, the impact of this could have been significant as
well. After one adjusts for both these factors, the EBITDA margin decline would not have
been beyond 100bps as compared to 330bps which is reported.
Management indicated that they had not taken any price hikes in Q2FY12, but did indicated
that they would consider future hikes to recover lost margins. They indicated that while rupee
depreciation is a concern as 30% of its raw materials is directly imported, the stabilisation in
the prices of most commodities is a good sign.
We remain positive on stock, buy on dips
The inherent drivers of paint demand remain intact, and we believe the secular growth driven
by re-painting demand, and increasing frequency of painting by Indian households will
continue.
The disappoinment in results was largely due to margins pressure, which we believe was due
to delayed pricing action which management has consiously taken due to tactical business
reasons.
The company PAT was broadly in line with our expectations in Q2FY12, due to dividend
income received from its overseas subsidiary.
The company has achieved an EPS of Rs48.3 in 1HFY12, as compared to Rs105.68 which is
our full year forecasts. We remain confident of the company achieving these numbers given
scope for better growth in the festival season in 2HFY12, and expected pricing action to
recover margin drop in Q2FY12.
We maintain our Buy recommendation, and recommend increasing exposure in any
weakness in the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
AP's 330bps q.o.q drop in EBITDA margins was due to 1) translation impact of Rs150m due to
rupee depreciation on outstandings 2) increased pre-festival season spends on media in Q2FY12
vs in Q3FY11. Demand remains robust, and management seemed optimistic to recover lost
margins. We remain bullish.
Robust sales growth continues.
AP recorded a sales growth of 25.5% in Q2FY12, slightly lower than 28.9% recorded in
Q1FY12. The company indicated that it did not take any price hikes in Q2FY12, but had taken
an 8.8% hike in Q1FY12.
The growth has been wide-spread across India, except weakness in the State of Andhra
Pradesh due to ongoing potilical unrest.
The company indicated that delayed monsoons did impact its exterior paints business in
September, but for the same the growth could have been much higher.
Company did not take up prices in Q2FY12, as the rupee depreciation impact happened
suddenly in end September, and the delayed rains were also impacting volumes in certain
segments.
In its international business, while the overall growth was at 9%, the largest region of AP i.e
Middle East recorded just a 2% growth.
EBITDA margins drop seems transitionary
AP's EBITDA margins declined y.o.y by 430bps y.o.y and 330bps q.o.q, which resulted in the
EBITDA being 12% lower than our expectations.
The management in the analyst meet indicated that 2 key factors 1) Rs150m was the impact
of the sudden rupee deprecation in translating the outstandings due to suppliers as on
30/9/2011. 2) There has been a 390bps spike in other expenditure q.o.q basis, which they
highlighted was due to increased media spends on advertisements ahead of the festival
season. This was done largely in Q3FY11 last year, as compared to entirely in Q2FY12 in the
current year. While, they did not quantify, the impact of this could have been significant as
well. After one adjusts for both these factors, the EBITDA margin decline would not have
been beyond 100bps as compared to 330bps which is reported.
Management indicated that they had not taken any price hikes in Q2FY12, but did indicated
that they would consider future hikes to recover lost margins. They indicated that while rupee
depreciation is a concern as 30% of its raw materials is directly imported, the stabilisation in
the prices of most commodities is a good sign.
We remain positive on stock, buy on dips
The inherent drivers of paint demand remain intact, and we believe the secular growth driven
by re-painting demand, and increasing frequency of painting by Indian households will
continue.
The disappoinment in results was largely due to margins pressure, which we believe was due
to delayed pricing action which management has consiously taken due to tactical business
reasons.
The company PAT was broadly in line with our expectations in Q2FY12, due to dividend
income received from its overseas subsidiary.
The company has achieved an EPS of Rs48.3 in 1HFY12, as compared to Rs105.68 which is
our full year forecasts. We remain confident of the company achieving these numbers given
scope for better growth in the festival season in 2HFY12, and expected pricing action to
recover margin drop in Q2FY12.
We maintain our Buy recommendation, and recommend increasing exposure in any
weakness in the stock.
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