Asian Paints (India) - 1Q FY14 continues to disappoint - Standard Chartered Securities

IN-LINE, APNT IN, CMP INR 5050.3, Price Target INR 4172

- Results are below IER's expectations - net sales and EBITDA grew 11% and 4%, but PAT declined 5%.

- On a very low base, decorative volumes grew a moderate c.10%. Volume growth for January to June 2013 stands at 6%, the lowest in more than a decade.

- Despite gross margin expansion, a sharp increase of 24% in operating expenses resulted in OPM decline of 110bps y/y.

- IER expects an unfavourable INR to continue to keep margins low. IER lowers OPM and cut FY14/15E EPS by 8%/6%.

- FY13 EPS has been below street estimates and FY14E has already witnessed a c.10% cut since January 2012.

- Maintain In-Line with a revised price target of INR 4,172.

Volume growth on a low base; demand concerns remain: From a very low base (flat growth in 1QFY13), Asian Paints (APNT) reported domestic volume growth of c.10% (in line with expectations). Including the modest growth in international and industrial, consolidated sales growth was moderate at 11% y/y. Demand for paint continues to be weak due to discretionary slowdown. APNT's volume growth of c.6% y/y over Jan-June'13 is the lowest in more than a decade. With expected recovery in 2HFY14, IER estimates volume growth of 10.5% in FY14.

Margins substantially lower; cut FY14/15E EPS by 8%/6%: Input cost-to-sales declined 120bps y/y due to lower raw material prices. Despite gross margin expansion y/y, a sharp jump in operating costs (up 24%) led to OPM declining c.110bps y/y to 16.5%. Increase in costs was due to high staff costs (partly due to actuarial changes) and other expenses related to the new plant at Khandala. This resulted in muted EBITDA growth of 4% and a PAT decline of 5% y/y. In IER's view, unfavourable FX will continue to keep margins under pressure. IER lowers its OPM in FY14/15E to 15.9/16.6% from 16.9/17.2% and cut EPS by 8.4/6.4%.

Earnings cut to continue; retain In-Line: APNT's earnings have been disappointing in the past 18 months. FY13 EPS was down c.12% versus consensus estimates as of April 2011 and FY14E EPS is down c.10% since January 2012. IER expects FY14E consensus EPS to be cut further. With the expectation of improvement in macro economic conditions, we estimate APNT will deliver steady sales and EPS CAGR of 16% and 19% over FY13-16E. However, at current forward P/E of 38x (c.60% premium to its historical) valuations are elevated and fully factor the growth potential. Maintain In-Line with a revised price target of INR 4,172 (earlier INR 4,200).

Source : Equity Bulls

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