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Asian Paints: Margin pressure eases out

Jan 24, 2013

Asian Paints has announced the third quarter results of financial year 2012-2013 (3QFY13). Topline increased 19% YoY while bottomline increased 31% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Sales grew 19% YoY in 3QFY13 on the back of growth in rural demand as the company did not resort to any price increase during the quarter.
  • Operating margins improved to 16.3% in 3QFY13 from 15.5% in 3QFY12. For the nine months period though the operating margins were relatively flat. Softening in the prices of a key raw material helped margins for the quarter.
  • The raw material price index for the decorative products stood at 102.5 in 3QFY13, on a base of 100, and 105.6 for 9mFY13.
  • Net profits increased 31% YoY in 3QFY13 due to strong performance at the operating level.
  • The capacity expansion at Khandala plant is on schedule. The first phase (of 3 lac kilo litres per annum) is expected to go on stream by 4QFY13.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Total income 25,588 30,371 18.7% 70,606 81,923 16.0%
Expenditure 21,619 25,425 17.6% 59,586 68,987 15.8%
Operating profit (EBDITA) 3,969 4,946 24.6% 11,020 12,936 17.4%
Operating profit margin (%) 15.5% 16.3% 15.6% 15.8%
Other income 241 467 93.7% 933 1,214 30.1%
Interest 106 78 -26.4% 259 308 18.9%
Depreciation 306 366 19.6% 897 1,057 17.8%
Profit before tax 3,798 4,969 30.8% 10,797 12,785 18.4%
Tax 1,135 1,465 29.1% 3,238 3,779 16.7%
Minority interest 95 150 57.9% 266 378 42.1%
Profit after tax/(loss) 2,568 3,354 30.6% 7,293 8,628 18.3%
Net profit margin (%) 10.0% 11.0%   10.3% 10.5%  
No. of shares (m)         95.9  
Basic & diluted earnings per share (Rs)         117.7  
P/E ratio (x) *         40.5  
* On a trailing 12-months basis

What has driven performance in 9mFY13?
  • Net sales increased 18.7% YoY in 3QFY13 and 16% YoY in 9mFY13. The growth was led by buoyancy in volumes during the festival season as the company did not undertake any price increase during the quarter. The industrial business was however impacted by poor demand from projects business and slowdown in OEM segment.

  • As far as the international operations are concerned, all the four regions (Caribbean, Middle East, Asia and South Pacific) where the company has presence grew in excess of 20% during 9mFY13. However, some part of this growth was fuelled by currency impact.

  • The company's operating margins improved to 16.3% in 3QFY13 from 15.5% in 3QFY12. For the nine months period though the operating margins were relatively flat. Softening in the prices of Titanium Dioxide and some other chemicals during the quarter eased pressure on margins.

  • The 31% and 18% growth in net profits can be attributed to not just improved operating margins but also buoyancy in other income growth.

What to expect?
At the current price of Rs 4,412, the stock is trading at 40.5 times its trailing twelve month earnings and 25.4 times our FY15 estimates. Going forward, growth from the international business, particularly Middle East and South Asia remains a key concern. However, considering strong demand emanating from the rural economy, top line growth is expected to remain healthy. The uptick in volume growth due to increased capacity may be evident FY14 onwards. Also, with raw material prices softening margin pressures have started easing out.

But valuations leave very little on the table for the investors. It may be noted that since April 2007 to April 2010 the stock has traded within a PE band of 20-30x (TTM annualized EPS). However, without any dramatic improvement in financials, the stock re-rated to a new territory altogether, after April 2010. Since April 2010, the stock is trading within a PE band of 30-35x (TTM annualized EPS) breaching the upper band on few occasions as well. And this is precisely the period where valuation multiples of all the consumption stories expanded. Thus, the current expansion in multiple, after April 2010, is more because of the consumption boom rather than anything else. Considering such expensive valuations we maintain our SELL view on the stock.

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