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Paints: 3QFY15 review – volume growth slowdown surprises. Weak volume growth for all the major paint names was a negative surprise against the backdrop of reasonably bullish managements and no major change in macro drivers. The volume slowdown could very well be a quarter-specific phenomenon. However, it does underscore an important point – assumed macro-improvement-led volume acceleration is not a given and therein lies the risk to estimates and (rich) multiples.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
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Volume growth weak across paint companies; earnings growth performance mixed The four major listed paint companies reported sharp deceleration in volume growth from double-digit growth over past few quarters to low-to-mid single digit growth. While GMs expanded yoy for all companies led by benign RM inflation and low base, earnings performance was mixed – APNT and Berger reported muted earnings growth while Kansai and Akzo reported strong earnings growth (favorable base and cost-savings initiatives). One-off blip (Diwali timing mismatch) or subdued demand environment? After two strong quarters of double-digit volume growth in FY2015, all paint majors posted weak volume growth in the range of 1-7% as aggregate volume growth slipped to 4% – lowest in the past seven quarters. While the sharp dip in volumes can be partly explained by advancement of Diwali sales to 2QFY15 (Diwali was earlier this time versus FY2014), the pace of deceleration was clearly a surprise versus our/Street’s expectations of another quarter of doubledigit growth. Now, we do not know if the weak demand environment the 3QFY15 results reflect is a worsening of market conditions or a quarter-specific phenomenon for paint companies; however, commentaries from paint majors, consumer durable/discretionary and even consumer staples companies do indicate that consumer off-take has worsened and may take more time to recover than earlier anticipated. RM tailwinds may keep the stock elevated at peak valuations The Street expects massive EPS growth over the next two years for paint majors assuming (1) accelerated volume growth (the broad recovery narrative) and (2) GM benefits (the crude narrative) to drive sharp jump in paint companies’ EBITDA margins. While logical, these assumptions are risky against the backdrop of high multiples being ascribed to the EPS estimate based on these assumptions. Crude and recovery narratives are both way too strong for our arguments to register well, we understand; however, we remain uncomfortable with the ‘peak multiples on peak GMs based EPS forecasts’ combination that paint stocks command right now. We remain cautious on Asian Paints, the only paint name in our coverage list.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily03022015ga.pdf
Paints: 3QFY15 review – volume growth slowdown surprises. Weak volume growth for all the major paint names was a negative surprise against the backdrop of reasonably bullish managements and no major change in macro drivers. The volume slowdown could very well be a quarter-specific phenomenon. However, it does underscore an important point – assumed macro-improvement-led volume acceleration is not a given and therein lies the risk to estimates and (rich) multiples.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Volume growth weak across paint companies; earnings growth performance mixed The four major listed paint companies reported sharp deceleration in volume growth from double-digit growth over past few quarters to low-to-mid single digit growth. While GMs expanded yoy for all companies led by benign RM inflation and low base, earnings performance was mixed – APNT and Berger reported muted earnings growth while Kansai and Akzo reported strong earnings growth (favorable base and cost-savings initiatives). One-off blip (Diwali timing mismatch) or subdued demand environment? After two strong quarters of double-digit volume growth in FY2015, all paint majors posted weak volume growth in the range of 1-7% as aggregate volume growth slipped to 4% – lowest in the past seven quarters. While the sharp dip in volumes can be partly explained by advancement of Diwali sales to 2QFY15 (Diwali was earlier this time versus FY2014), the pace of deceleration was clearly a surprise versus our/Street’s expectations of another quarter of doubledigit growth. Now, we do not know if the weak demand environment the 3QFY15 results reflect is a worsening of market conditions or a quarter-specific phenomenon for paint companies; however, commentaries from paint majors, consumer durable/discretionary and even consumer staples companies do indicate that consumer off-take has worsened and may take more time to recover than earlier anticipated. RM tailwinds may keep the stock elevated at peak valuations The Street expects massive EPS growth over the next two years for paint majors assuming (1) accelerated volume growth (the broad recovery narrative) and (2) GM benefits (the crude narrative) to drive sharp jump in paint companies’ EBITDA margins. While logical, these assumptions are risky against the backdrop of high multiples being ascribed to the EPS estimate based on these assumptions. Crude and recovery narratives are both way too strong for our arguments to register well, we understand; however, we remain uncomfortable with the ‘peak multiples on peak GMs based EPS forecasts’ combination that paint stocks command right now. We remain cautious on Asian Paints, the only paint name in our coverage list.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily03022015ga.pdf
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