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Asian Paints: International operations continue to remain laggard - Views on News from Equitymaster

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  • May 14, 2011 - Asian Paints: International operations continue to remain laggard

Asian Paints: International operations continue to remain laggard

May 14, 2011

Asian Paints has announced the fourth quarter results of financial year 2010-2011 (4QFY11). Topline increased 4.7% YoY during the quarter. However, the bottom line declined 3.4% YoY due to increase in depreciation expenses and fall in other income. Here is our analysis of the results.

Performance summary
  • Topline grew 4.7% YoY in 4QFY11. Growth in the topline was led by strong demand environment in the decorative business segment. However, demand conditions in the industrial paint segment continue to remain challenging. Except for South Asia, even the international operations faced growth headwinds.
  • Operating margins declined to 14.7% this quarter as compared to 16.6% in 4QFY10. The dip in margins was due to raw material price inflati0n. It may be noted that raw material price index stood at 121.8 in 4QFY11 on a base of 100.
  • Net profits decline 3.4% YoY in 4QFY11 despite healthy revenue growth due to increase in depreciation expenses and fall in other income
  • The company announced a dividend of Rs 23.5 per share inFY11.

Consolidated financial snapshot
(Rs m) 4QFY10 4QFY11** Change FY10 FY11** Change
Sales 18,768 19,656 4.7% 66,809 77,062 15.3%
Expenditure 15,660 16,762 7.0% 54,535 63,933 17.2%
Operating profit (EBDITA) 3,108 2,894 -6.9% 12,274 13,130 7.0%
Operating profit margin (%) 16.6% 14.7%   18.4% 17.0%  
Other income 208 200 -3.9% 1,405 826 -41.2%
Interest 69 76 9.5% 285 222 -21.9%
Depreciation 241 292 20.9% 836 1,131 35.4%
Profit before tax 3,015 2,726 -9.6% 12,570 12,602 0.3%
Tax 868 818 -5.7% 3,731 3,789 1.5%
Minority interest 221 49 -78.1% 483 381 -21.0%
Profit after tax/(loss) 1,926 1,860 -3.4% 8,356 8,432 0.9%
Net profit margin (%) 10.3% 9.5%   12.5% 10.9%  
No. of shares (m)         95.9  
Basic & diluted earnings per share (Rs) *         87.9  
P/E ratio (x) *         31.1  
* On a trailing 12-months basis
** Consolidation for overseas subsidiaries is not on a like-to-like period basis making the comparision ineffective

What has driven performance in 4QFY11?
  • Net sales increased 4.7% YoY in 4QFY11. The growth was led by price increases in the decorative segment amidst rising input cost. It may be noted that the company undertook five price increases during the year. The cumulative price increase in the decorative segment was in the region of 12% during the year.

  • Management stated that the demand conditions in the decorative segment continue to remain robust. However, the overall demand environment in the industrial paint segment remains challenging. In order to accelerate the growth in industrial paints segment the company entered into a second JV with PPG Industries Inc (PPG). Even the international operations of the company suffered a setback due to global slowdown and unrest in Egypt. Except for South Asia both Caribbean and Middle East regions reported declining revenue growth.

  • The Rohtak plant is operating as per initial plans and has produced in excess of 80,000 metric tons (MT) in the first year of operations. The second plant at Khandala is under construction and is expected to be commissioned in 4QFY13.

  • The operating margin stood at 14.7% in 4QFY11, a decline of 190 bps over 4QFY10. Margins of the company are on a consistent declining trend due to raw material price inflation. However, the company is undertaking a gradual and a calibrated price increase to shield margins. Nonetheless, as a complete pass on of raw material price increase is not possible in the industrial segment, the blended margins continue to suffer.

  • Bottom line declined 3.4% YoY during the quarter due to muted performance at the operating level and higher depreciation expenses. Depreciation expenses increased during the quarter due to commissioning of Rohtak plant.

  • Capex for FY12 is likely to be in the region of Rs 9 bn (FY11 capex was 1.5 bn).

What to expect?
At the current price of Rs 2,733, the stock is trading at 21 times our estimated FY13 earnings. Going forward, domestic demand conditions are expected to remain robust. However, industrial and international operations are expected to remain laggard in terms of growth. Even raw material price inflation remains a big concern. Although Asian Paints remains our preferred play given the quality of the management the overall business environment is not conducive for growth. Even the valuations are above our comfort zone. As a result, we maintain our negative view on the stock.

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