Asian Paints - 4QFY2012 Result Update - Reliance Securities

Results beat estimates

Key highlights of the result

- Robust volume and value growth boosts top-line performance: Asian Paints reported robust revenue growth of 29% yoy to Rs2,546cr (Rs1,970cr) on a consolidated basis aided by strong demand in the decorative paints segment. The company had taken an effective ~12.3% yoy price hike in FY2012, despite which, revenue growth was aided by strong volume growth. While, the management deferred giving volume growth guidance, we believe that Asian Paints reported volume growth of ~17% yoy. The international business registered revenue growth of 17% yoy to Rs1,156cr (Rs988cr) driven by good growth in South Asian markets (up 31% yoy to Rs315cr) and South Pacific markets (up 21% yoy to Rs91cr). Singapore and Caribbean reported muted revenue growth on account of subdued economic conditions. Demerger of APCO, resulted in one-time revenue realization (not comparable yoy) of Rs267cr (Rs73cr) in APICL.

- Currency fluctuation impacts gross margin: At the operating level, Asian Paints registered a muted growth of ~11bp yoy for operating margin. Gross margin contracted 123bp yoy on account of increase in crude price and price of TiO2 (supply constraints). Management has indicated that though the supply issue has eased for TiO2, the prices of the same continue to be firm. In terms of other costs, staff cost (down 52bp yoy) and other expenses (down 83bp yoy) declined.

- Earnings growth primarily aided by high other income: In terms of recurring earnings, Asian Paints reported an increase of 39% yoy to Rs265cr (Rs191cr) despite higher interest and depreciation costs (up 118% yoy and 8% yoy respectively). Higher other income up 149% yoy (on account of treasury income and Rs15.8cr dividend income from Asian Paints International, Mauritius) aided the company's earnings.

Outlook and Valuation

Asian Paints reported robust results this quarter. The company continues to exhibit strong pricing power (for FY2012, Asian Paints took a price hike of ~12.3%yoy and has further taken a price hike of ~2% yoy in the fag-end of March 2012). Despite ~25% yoy price hike taken in past two years, the company has been able to keep up with the demand momentum, recording volume growth of ~17% yoy for FY2012 (as per our estimate). Over FY2012-14E, we estimate the company to report a CAGR in revenue, EBIT (post depreciation) and PAT of 21.1%, 25.8% and 24.6% respectively. For Asian Paints, we have factored the paints volume CAGR of ~17% over FY2012-14E driven by underlying strong demand for decorative paints (company is setting up a plant in Khandala, Maharashtra with capacity of 300,000KL, expected to commence by 4QFY2013E). The operating margins for the company are expected to be stable at ~16% over FY2013E and FY2014E respectively. We roll over to FY2014E and remain Neutral on the stock with a fair value of Rs3,813, as at the CMP the stock price captures most of the positives.

Risks to the view

- Unabated price hikes may affect volume growth

- Political uncertainty in the international business could result in lower than estimated revenue.

Source : Equity Bulls

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