Asian Paints - Result Update - SPA Securities

Asian Paints reported impressive set of numbers for Q4FY12. Company reported consolidated sales of INR 25,460mn, a YoY growth of 29.52%. EBIDTA margins also improved in the quarter by 31bps YoY to 15%. PAT at INR 2,595mn was up 39.49% YoY. For the full year, consolidated sales at INR 96,177mn was up 25% while PAT at INR 9,887mn grew by 17.25%. However, EBIDTA margins declined by 150bps YoY to 15.55% due to significant raw material cost pressures. We expect company to register revenue & PAT CAGR of 16.77% and 18.62% respectively over FY12-14. We retain our HOLD rating on the stock with a revised target of INR 3,336 (18 months) discounting FY14E EPS at 23x.

Resilient demand boosted sales

Demand in domestic decorative paints market (83% of FY12 consolidated sales) has remained resilient despite significant price hikes of ~12% YoY in last two years. Company reported YoY standalone sales growth of 29.14% & 25.8% in Q4FY12 and in FY12 respectively. This is on the back of estimated volume growth of 16-17% in FY12. The growth has been supported by increasing distribution reach and strong demand from rural regions. Going ahead, we expect demand to slow down marginally on the back of higher price increases taken by the company and lower consumer confidence due to sluggish economic environment. Further, we expect lower price component in sales in next two years.

Raw material inflation to moderate, margins to expand

Consolidated EBIDTA margins in Q4FY12 expanded by 31bps to 15% on the back of price hikes taken by the company during the year. For the full year EBIDTA margins declined by 150bps to 15.55% due to significant jump in RM cost, also aided by INR depreciation. Material price index which company uses to measure RM inflation in domestic market was at 118.88, taking FY11 base at 100. Company has taken further price hikes of 2% and 3.2% on 29th March, 2012 and 1st May, 2012 respectively to mitigate cost pressure and gain the lost ground on margins front. Going ahead, we expect raw material cost pressure to moderate resulting in consolidated EBIDTA margins to expand by 98bps by FY14 to 16.52%.

International business's margins impacted

International business revenue growth also picked up in FY12 to 17% YoY (INR 11,554mn) from 2% in FY11. The growth has been highest in South Asian markets at 30% followed by South Pacific at 21%. Middle East region which accounted for 50% of international business also reported a turnaround in sales growth at 12% (from 4% de-growth in FY11). On EBIT front, company reported de-growth of 9.25% YoY (265bps EBIT margin decline to 9.2%) due to higher RM cost pressure and lesser ability of the company to pass on the increased cost to consumers in these markets. Going ahead, we expect sales to remain strong in Southern markets and moderate growth in Middle East region due to uncertain economic environment. Also, margins are expected to improve on expected moderation in cost pressures.

Capacity & Capex Plan

The construction of green-field decorative paints plant at Khandala is on schedule to be commissioned in Q4FY13. Company did a capex of INR 4bn in FY12 and plan to spend another INR 5bn in FY13. Company added 50,000 KL/annum capacity in Rohtak plant in April, 2012. Current total installed paints capacity stands at 644,000 KL/annum.

Outlook & Valuation

Asian Paints is a leader in Indian paint industry with market share of over 55%. Company has done quite well by maintaining volume growth despite tough business environment. This enhances the confidence in the company to be able to maintain its dominance in the industry. Further, sales and marketing measures like engaging directly with customers and continuously expanding distribution reach would keep the demand strong for the company's products. We retain our HOLD rating on the stock with a revised target of INR 3,336 (18 months) discounting FY14E EPS at 23x.

Source : Equity Bulls

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