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Asian Paints: Margin pressures prevail - Views on News from Equitymaster

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Asian Paints: Margin pressures prevail
Feb 2, 2012

Asian Paints has announced the third quarter results of financial year 2011-2012 (3QFY12). Topline increased 22% YoY while bottomline increased 16.6% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Topline grew 22% YoY in 3QFY12. The decorative business segment witnessed good growth amidst healthy demand environment. However, demand conditions in the industrial segment including auto continued to remain challenging.
  • Operating margins declined to 15.5% this quarter as compared to 16.4% in 3QFY11 due to continuing inflationary trend. While the prices of titanium dioxide (key raw material) have eased they continue to remain a concern. It may be noted that the company took a price hike of 2.2% from 01st December to eschew margin concerns.
  • The raw material price index for the decorative products stood at 121.6 in 3QFY12 and 117.4 during 9MFY12, on a base of 100.
  • Net profits increased 16.6% YoY in 3QFY12 due to rise in other income and fall in minority interest.

Consolidated financial snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 20,996 25,605 22.0% 57,406 70,717 23.2%
Expenditure 17,547 21,632 23.3% 47,171 59,593 26.3%
Operating profit (EBDITA) 3,449 3,974 15.2% 10,235 11,124 8.7%
Operating profit margin (%) 16.4% 15.5%   17.8% 15.7%  
Other income 194 225 16.4% 627 823 31.3%
Interest 59 90 54.4% 146 244 66.6%
Depreciation 286 307 7.1% 840 898 6.9%
Profit before tax 3,298 3,802 15.3% 9,876 10,806 9.4%
Tax 974 1,138 16.8% 2,971 3,247 9.3%
Minority interest 120 96 -20.6% 333 266 -20.0%
Profit after tax/(loss) 2,203 2,569 16.6% 6,572 7,293 11.0%
Net profit margin (%) 10.5% 10.0%   11.4% 10.3%  
No. of shares (m)         95.9  
Basic & diluted earnings per share (Rs)         76.0  
P/E ratio (x) *         31.1  
*On a trailing 12-months basis

What has driven performance in 3QFY12?
  • Net sales increased 22% YoY in 3QFY12. The growth was led by buoyancy in demand from the decorative segment. However, demand in the industrial segment including auto was impacted due to challenging conditions.

  • As far as the international operations are concerned Oman, Nepal and Sri Lanka registered strong growth during the quarter. However, growth from the Middle East region was subdued due to uncertain political environment. Even margins from the international business remained under pressure due to inflationary conditions.

  • The construction work at Khandala plant in Maharashtra is progressing on schedule. It is expected to start production by 4QFY13 and would require an investment of Rs 10 bn.

  • During the current quarter, company's Pentaerythritol plant situated in Cuddalore was impacted due to a storm in Tamil Nadu. While the plant was temporarily shut down it has commenced production now.

  • The operating margin stood at 15.5% in 3QFY12, a decline of 90 bps over 3QFY11. Significant raw material price inflation has been impacting the margins of the company. Although the company is undertaking a gradual and calibrated price increase it is insufficient to shield margins. In the current quarter the company undertook a price hike of 2.2% taking the total price increase to 10.5% on a year to date basis. While the prices of titanium dioxide have eased rupee depreciation continues to impact margins (It may be noted that other expenditure for the quarter includes a foreign exchange impact of Rs 150 m).

  • Bottom line increased 16.6% YoY during the quarter due to increase in other income and fall in minority interest.

What to expect?
At the current price of Rs 2,966, the stock is trading at 20 times our estimated FY14 earnings. Going forward, growth from the international operations remains a key concern. However, with prices of titanium dioxide showing signs of cooling down raw material pricing pressure could ease down. Nonetheless, the demand environment in the automotive and industrial segment continues to remain challenging. In light of these factors, we maintain our negative view on the stock.

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