Asian Paints - Volumes recover; margins to follow - Edelweiss

Asian Paints' Q2FY13 revenue came ahead of our estimate while PAT came bang in line. Key positives were: (1) Recovery in domestic volume growth at ~6% YoY (vs flattish volumes in Q1FY13) and (2) Slight improvement in domestic EBITDA margin. Key negatives include: (1) lowest consolidated EBITDA margin in the last 14 quarters (likely to have bottomed out) and (2) Spurt in interest cost by 37.7% YoY (on a low base). We remain positive due to re-launch of brand identity in India (after 10 years), innovation (entered the construction chemicals business in "dampness correction") and scaling up of benefits. Although the discretionary spending remains under pressure in near term, this could reverse if sentiments improve (due to recent reforms and a possible cut in interest rates). Maintain 'BUY'.

Volume growth sees recovery

Q2FY13 consolidated net revenue increased 16.8% YoY. PAT rose 14.6% YoY. Other income in Q2FY12 includes INR158.3mn received as dividend from its subsidiary Asian Paints International Ltd (Mauritius). The company's standalone business posted revenue growth of 16.2% YoY to ~INR21.5bn. Q2FY13 standalone numbers do not include revenues of INR180mn and loss of INR10mn relating to AP Coatings Ltd (a wholly owned subsidiary). In H1FY13 constant currency growth in international business was 17-18%.

Gross margin expands, but EBITDA margin remains flat

Asian Paints' COGS declined 24bps YoY reflecting correction in TiO2 prices. COGS benefit was offset by an increase in other expenses (up 28bps YoY), leading to flat EBITDA margin at 14.5%. Margin was better at the standalone level (domestic business) coming in at 15.7% (up 21bps YoY).

Outlook and valuations: Positive; maintain 'BUY'

We remain positive on Asian Paints due to investment in new growth drivers (construction chemicals business), higher growth in decorative business and its JV with PPG. At CMP, the stock is trading at 32.7x and 27.0x FY13E and FY14E, respectively. We maintain 'BUY' and rate it 'Sector Performer' on a relative return basis.

Source : Equity Bulls

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