Asian Paints: Slower growth, improved profitability

May 25, 2015

Asian Paints has announced the results for fourth quarter and financial year 2014-2015 (FY15). The topline increased 11.3% YoY while bottomline increased by 14.5% YoY in FY15. Here is our analysis of the results.

Performance summary

• Sales grew by a tepid pace of 11.3% YoY in FY15 on the back of slow demand in domestic and international markets. The demand for decorative and home improvement products was particularly impacted.
• Operating margins dropped marginally to 14.7% in FY15 from 14.8% in FY14.
• Fall in interest cost and higher other income boosted profitability at the net level. Net profits went up by 14.5% YoY in FY15.
• The board declared dividend of Rs 4.3 per share over and above the interim dividend of Rs 1.8 per share (dividend yield 0.8%).

Consolidated financial snapshot

(Rs m)	4QFY14	4QFY15	Change	FY14	FY15	Change
Total income	32,664	34,903	6.9%	125,816	140,053	11.3%
Expenditure	28,220	29,759	5.5%	107,169	119,474	11.5%
Operating profit (EBDITA)	4,444	5,144	15.8%	18,647	20,579	10.4%
Operating profit margin (%)	13.6%	14.7%		14.8%	14.7%
Other income	716	869	21.4%	2,673	3,471	29.9%
Interest	117	102	-12.8%	422	347	-17.8%
Depreciation	621	671	8.1%	2,456	2,659	8.3%
Profit before tax	4,422	5,240	18.5%	18,442	21,044	14.1%
Tax	1,436	1,721	19.8%	5,815	6,772	16.5%
Minority interest	112	110	-1.8%	439	321	-26.9%
Profit after tax/(loss)	2,874	3,409	18.6%	12,188	13,951	14.5%
Net profit margin (%)	8.8%	9.8%		9.7%	10.0%
No. of shares (m)#					959.2
Diluted earnings per share (Rs)					14.5
P/E ratio (x) *					52.6

*Based on trailing 12 month earnings

What has driven performance in FY15?

• FY15 turned out to be a difficult year led by 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. Further the new home improvement division also failed to sport higher growth, as per the management’s expectations.

• As per the management, the overall demand scenario remained challenging. The cumulative price increase taken in FY15 was barely 0.39% as against the 6.25% increase taken in FY15. However, the improvement in profitability was primarily due to softening crude prices.

• The company booked expense of Rs 24 m for impairment of assets at Bhandup plant and Rs 252 m for the VRS of employees there.

• Asian Paints continues to face labour problems at the Sriperumbudur plant and the workers have once again gone on strike since April 28, 2015. However the capacity expansion plans at the Rohtak plant (from 2 lac kilolitres to 4 lac kiloletres) is on track. It has also signed an MoU with Andhra Pradesh government to set up a 4 lac kilolitres plant at an outlay of Rs 17.5 bn in a phased manner.

• The company incurred capex of Rs 3.5 m in FY15 and is expected to incur capex of Rs 7 bn in FY16.

• Asian Paints is in the process of setting up of paint manufacturing plant in Indonesia with a 24,550 MT capacity subject to necessary regulatory and other approvals

• The second year operations of Sleek (post acquisition) generated revenue of Rs 1.1 bn in FY15 and posted operating loss of Rs 145 m after amortization charges of Rs 49 m. The bath fitting business ESSESS acquired in June 2014 registered sales of Rs 818 m in FY15 and loss of Rs 98 m at the operating level.

What to expect?

At the current price of Rs 762, the stock is trading at 52.6 times trailing twelve month earnings and 34 times our FY17 estimated EPS.

The company's management remains cautious amidst slow economic revival. In addition to the broader economic environment, a lot depends on the demand from the rural regions. Additionally, the good agriculture growth might also drive rural growth. However, the demand in the auto and non-auto industrial segments may continue to remain challenging if policy reforms do not speed up.

Up move in crude prices could impact the margins of the company. Also the devastating earthquake in Nepal and poor business conditions in Eqypt and Caribbean regions could affect growth in the near term.

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.