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Asian Paints: Muted expectations - Views on News from Equitymaster

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Asian Paints: Muted expectations
May 15, 2013

Asian Paints has announced its results for the quarter and year ended March 2013. While the company's revenues increased 14% YoY during FY13, its profits increased by 13% YoY during the year. Here is our analysis of the results.

Performance summary
  • Consolidated sales rise by 8% YoY during the quarter.
  • Operating margins contract by 0.5% YoY to 14.4% largely due to higher other expenses (mainly power, fuel and transportations expenses) and employee costs. Operating profits rise by 4% YoY during 4QFY13.
  • The raw material price index for the decorative products stood at 101.76 in 4QFY13, on a base of 100. The same averaged to 104.6 for full year FY13.
  • Profits declined by 3% YoY on the back of lower other income coupled with higher depreciation charges.
  • Phase I (300,000 kilo litres) of new plant at Khandala is commissioned (February 2013) taking company's installed paint capacity to 944,000 kilo litre by FY13.
  • Board recommended final dividend of Rs 36.5 per share (dividend yield of about 0.7%).
  • Board approved the sub-division of shares from a face value of Rs 10 to Re 1.

Consolidated financial snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Total income 25,429 27,331 7.5% 96,322 109,707 13.9%
Expenditure 21,649 23,401 8.1% 81,235 92,388 13.7%
Operating profit (EBDITA) 3,780 3,930 4.0% 15,088 17,319 14.8%
Operating profit margin (%) 14.9% 14.4%   15.7% 15.8%  
Other income 428 382 -10.7% 1,074 1,145 6.6%
Interest 150 58 -61.5% 410 367 -10.5%
Depreciation 314 489 55.7% 1,211 1,546 27.6%
Profit before tax 3,744 3,766 0.6% 14,541 16,552 13.8%
Tax 1,097 1,178 7.4% 4,335 4,957 14.3%
Minority interest 52 78 47.9% 319 456 43.3%
Profit after tax/(loss) 2,595 2,511 -3.2% 9,887 11,139 12.7%
Net profit margin (%) 10.2% 9.2%   10.3% 10.2%  
No. of shares (m)         95.9  
Basic & diluted earnings per share (Rs)         116.1  
P/E ratio (x) *         41.5  

What has driven performance in FY13?
  • Net sales rise by 8% YoY during 4QFY13 and by 14% YoY during year ended FY13. The growth during both the periods seems to be a mix of volumes increase and pricing action (5.1% cumulatively during the year; company marginally cut prices in January 2013).

  • As far as the international operations are concerned, all the four regions (Caribbean, Middle East, Asia and South Pacific) where the company has presence reported good growth during FY13. While the Caribbean region grew by 15% YoY, the other regions reports growth rates in the range of 20%-26% YoY. Overall international business revenues increased by 23% YoY.

  • Operating profits increase by 4% YoY and 15% YoY during 4QFY13 and FY13 respectively. While margins improved by 0.1% YoY during FY13 (to 15.8%), margins contracted by 0.5% YoY to 14.4% during 4QFY13. During both the periods, the company reported higher other expenses (fuel, power and transportation costs), while input costs eased on a YoY basis.

  • Profits decline by 3% YoY during the quarter while they rise by 13% YoY in the full year. During 4QFY13, the profit decline is on account of a muted operating performance coupled with lower other income coupled with higher depreciation charges. The profit growth for the full year is largely due to the company reporting a slow but steady operating performance.

What to expect?
At the current price of Rs 4,825, the stock is trading at 41.5 times its trailing twelve month earnings and 27.7 times our FY15 estimates. While the lower input costs may help the company, all eyes will be the volume growth going forward. The company's management remains cautious for FY14 amid a weak macro environment. In addition to the broader economic environment, a lot depends on the demand from the rural regions.

The outlook for the international business is not so strong as well given that the environment in the Middle East and Egypt remains uncertain. The company is also not very upbeat about the Caribbean and South Asian regions as well. As for the third segment which is the auto and non-auto industrial segments, lower manufacturing activity seems to have kept the management's expectations low.

Asian Paints acquired 51% stake in modular kitchen maker Sleek Group in 4QFY13. Why 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 that the stock has run up significantly in recent times. At current valuations, the stock is definitely out of our comfort zone in terms of valuations. As was mentioned in the earlier quarterly update, since April 2007 to April 2010 the stock 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. We continue to believe that the current expansion in multiples is more so because of the consumption boom rather than anything else. As such, we maintain our SELL view on the stock.

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