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Asian Paints: Visible impact of slowdown, cost pressures - Views on News from Equitymaster

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  • Jan 22, 2014 - Asian Paints: Visible impact of slowdown, cost pressures

Asian Paints: Visible impact of slowdown, cost pressures
Jan 22, 2014

Asian Paints has announced the results for third quarter and first nine months of financial year 2013-2014 (9mFY14). The topline increased 14% YoY while bottomline increased by 8% YoY during the first nine months of the fiscal.

Performance summary
  • Sales grew by a tepid pace of 13.8% YoY in 9mFY14 on the back of slow demand in domestic and international markets. The company's power coatings plant at Baddi in Himachal Pradesh was also shut down. In addition, there was a strike in the paint manufacturing facility at Sriperumbudur since December 20th 2013.
  • Operating margins declined marginally to 15.2% in 9mFY14 from 15.8% in 9mFY13. The prices rises undertaken by the company did not entirely mitigate the impact of rise in the cost of a key raw material.
  • Higher depreciation costs for the newly commissioned plant in Khandala and negative impact of forex losses affected profits. However lower interest costs compensated for the same. Net profits went up by 8% YoY in 9mFY14 and was down by 1.7% in 3QFY14.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Total income 30,338 34,126 12.5% 81,836 93,152 13.8%
Expenditure 25,390 29,146 14.8% 68,897 78,950 14.6%
Operating profit (EBDITA) 4,948 4,980 0.6% 12,939 14,202 9.8%
Operating profit margin (%) 16.3% 14.6% 15.8% 15.2%  
Other income 464 693 49.4% 1,211 1,955 61.4%
Interest 78 99 26.9% 308 304 -1.3%
Depreciation 366 633 73.0% 1,057 1,834 73.5%
Profit before tax 4,968 4,941 -0.5% 12,785 14,019 9.7%
Tax 1,465 1,539 5.1% 3,779 4,378 15.9%
Minority interest 150 107 -28.7% 378 326 -13.8%
Profit after tax/(loss) 3,353 3,295 -1.7% 8,628 9,315 8.0%
Net profit margin (%) 11.1% 9.7%   10.5% 10.0%  
No. of shares (m)#         959.2
Diluted earnings per share (Rs)         12.3  
P/E ratio (x) *         39.0  
*Based on trailing 12 month earnings

What has driven performance in 9mFY14?
  • The tepid growth in sales was on the back of sluggish demand both in the decorative and industrial paint segments in the domestic and international markets. The industrial business was impacted by poor demand from projects business and slowdown in OEM segment. The new 300,000 KL capacity at Khandala plant commissioned in 4QFY14, taking total capacity to 9,44,000 KL per annum. Second 50:50 JV with global paint major PPG has also become operational.

  • As per the management, the overall demand scenario remained challenging during 3QFY14. The company has effected cumulative price increase of 4.1% so far in FY14 (1st May'13 - 1.2%, 1st Aug'13 - 1%, 1st Sept'13 - 1.8%). Yet another price hike of 2.1% is in the offing from 1st February 2014. This could also hurt volumes.

  • The powder coating plant at Baddi was closed on in November 2013 due to significant decline in the processing volume of powder coatings in the last two years. Going forward, the company will cater to the demand for powder coatings from the facility at Sarigam in Gujarat.

  • The company's operating margins dropped to 15.2% in 9mFY14 from 15.8% in 9mFY13. Rise in the prices of a key raw material affected margins during the fiscal. Raw material cost as a percentage of sales stood at nearly 60%.

  • Asian Paints has outlined capex of Rs 2 bn for facility optimization and regular maintenance in FY14.
What to expect?
At the current price of Rs 474 (post stock split), the stock is trading at 38.5 times trailing twelve month earnings and 23.2 times our FY16 estimated EPS. The company's management remains cautious for FY15 amid a weak macro environment. In addition to the broader economic environment, a lot depends on the demand from the rural regions.

As per the management, the pre-election spending may have a positive impact on the rural demand. Additionally, the good agriculture growth might also drive rural growth. However a weak currency can continue to pose challenges on the margin front due to raw material cost pressures. Further the demand in the auto and non-auto industrial segments to remain challenging due to higher policy rates and investment slowdown given the policy logjam. Internationally,political instability in countries like Egypt and Bangladesh are the concern areas.

Asian Paints acquired 51% stake in modular kitchen maker Sleek Group in 4QFY13. While the company has not divulged the exact value of investment, we believe it could be a while before the 'home development' segment contributes meaningfully to the company's revenues and profits.

Coming to valuations, we believe the same continues to remain out of our comfort zone. We continue to believe that the current expansion in multiples is more so because of the consumption boom rather than anything else. We believe investors should wait before buying the stock at more attractive valuations.

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