Asian Paints - Volume growth drives top-line - Ventura

Outlook

In every subsequent quarter, Asian Paints continued to register improvement in volume growth backed by the growing demand scenario (supported by favorable base effect). The investment in new growth drivers (construction chemicals business), higher growth in decorative business and its JV with PPG are likely to drive growth further. With Asian Paints (decorative business) witnessing traction in volumes, we believe that the trend is expected to continue supported by elections and improved sentiments. At the CMP of Rs 4,397, Asian Paints trades at a PE multiple of 30.1x and 24.9x FY14E & FY15E consensus earnings estimates and at premium valuations. Considering the improvement in macro environment and current premium valuations, we recommend a SELL on the stock.

Key Takeaways

- Asian Paints' Q3FY13 consolidated revenues were at Rs 3052.9 crore, grew by 19% YoY. On a standalone basis (decorative business), the net sales grew by a mere 20% YoY in value terms to Rs 2536.9 crore led by ~11-12% volume growth during the quarter. The volume growth was driven primarily by premium products.

- Other businesses (international and industrial paints) registered sales and PAT of Rs 519.5 crore (up 14% YoY) and Rs 23.2 crore (263% YoY) respectively. International business of the company reported good performance backed by the improved economic sentiments in the Middle East and Asian region. While industrial business was impacted due to poor demand from projects business and slowdown in OEM segment. Other businesses of the company also saw sharp revival on EBIDTA margin front, which expanded by 381 bps YoY to 11.47% backed by softening in RM cost and reduction in other expenditure.

- The company's EBITDA margin expanded to 105 bps YoY to 16.7% primarily on account of 107bps reduction in COGS (TiO2, a key RM, has declined 20% from peak in past 6 months). Further, the company has been able to manage its A&P spends (reflected by meager 50 bps expansion in other expenditure of standalone business) in current difficult scenario indicating strong brand salience. The company's index of raw material costs for the decorative business fell by 4.8% sequentially.

- Volume growth in decorative paints picked up sharply during the quarter on strong festive demand. Volumes were up 11-12% YoY in Q3FY13 against flat YoY volumes in Q1FY13 and 6% YoY growth in Q2FY13. Consolidated sales grew at 19% YoY far higher than the street expectations.

Greenfield expansion at Khandala (capex cost-Rs10 bn) is on schedule and the first phase of 300,000 KL per annum is expected to be on stream in Q4FY13. This was a major capex incurred by company in FY13-14E period.

Source : Equity Bulls

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