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Asian Paints: Margins stable in a difficult year - Views on News from Equitymaster
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Asian Paints: Margins stable in a difficult year
Jun 17, 2014

Asian Paints has announced the results for financial year 2013-2014 (FY14). The topline increased 15.7% YoY while bottomline increased by 9.4% YoY. Here is our analysis of the results.

Performance summary
  • Sales grew by a tepid pace of 15.7% YoY in 9mFY14 on the back of slow demand in domestic and international markets. The impact of currency depreciation on raw material cost was offset by price rise of 6.25% in FY14.
  • The company's power coatings plant at Baddi in Himachal Pradesh was shut down. It also ceased manufacturing activity at the Bhandup plant in Mumbai. In addition, there was a strike in the paint manufacturing facility at Sriperumbudur from December 20th 2013 to 23rd April 2014.
  • Operating margins declined marginally to 14.8% in FY14 from 15.3% in FY13.
  • Higher depreciation costs for the newly commissioned plant in Khandala and negative impact of forex losses affected profits. Net profits went up by 9.4% YoY in FY14.

Consolidated financial snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Total income 26,906 32,664 21.4% 108,743 125,816 15.7%
Expenditure 23,170 28,221 21.8% 92,066 107,169 16.4%
Operating profit (EBDITA) 3,736 4,443 18.9% 16,677 18,647 11.8%
Operating profit margin (%) 13.9% 13.6%   15.3% 14.8%  
Other income 575 716 24.5% 1,787 2,673 49.6%
Interest 58 117 101.7% 366 422 15.3%
Depreciation 488 621 27.3% 1,546 2,456 58.9%
Profit before tax 3,765 4,421 17.4% 16,552 18,442 11.4%
Tax 1,177 1,336 13.5% 4,956 5,715 15.3%
Minority interest 78 211 170.5% 458 539 17.7%
Profit after tax/(loss) 2,510 2,874 14.5% 11,138 12,188 9.4%
Net profit margin (%) 9.3% 8.8%   10.2% 9.7%  
No. of shares (m)#         959.2  
Diluted earnings per share (Rs)         12.7  
P/E ratio (x) *         42.4  
*Based on trailing 12 month earnings

What has driven performance in FY14?
  • FY14 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. However, the double digit volume growth in tier 2 and tier 3 cities along with cumulative price rise to the extent of 6.25% in FY14 helped the company grow its topline by 15.7%.

  • As per the management, the overall demand scenario remained challenging. It has effected further price rise of 1% in May 2014 and 1.2% in June 2014.

  • The powder coating plant at Baddi was closed on in November 2013 due to significant decline in the processing volume of powder coatings in the last two years. Going forward, the company will cater to the demand for powder coatings from the facility at Sarigam in Gujarat.

  • The company had to provide Rs 99.6 m towards impairments having ceased manufacturing activity at the Bhandup plant in Mumbai.

    In addition, there was a strike in the paint manufacturing facility at Sriperumbudur from December 20th 2013 to 23rd April 2014. This resulted in higher freight costs as materials had to be moved from other plants to the southern region.

  • The company's operating margins dropped to 14.8% in FY14 from 15.3% in FY13. Rise in the prices of a key raw material affected margins during the fiscal. Raw material cost as a percentage of sales stood at nearly 60%.

  • Sales from international operations grew 15% YoY while operating profits were up 4.6% YoY. The royalty received was higher by 17% YoY. Except for Egypt and Bahrain, which witnessed political turmoil and the Caribbean region which saw drastic economic slowdown, most other markets performed well.

  • The first year operations of Sleek (post acquisition) generated revenue of Rs 793 m in FY14.
What to expect?
At the current price of Rs 556 (post stock split), the stock is trading at 43.8 times trailing twelve month earnings and 27.2 times our FY16 estimated EPS.

The company's management remains cautious for FY15 amid a weak macro environment. 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 a weak currency can continue to pose challenges on the margin front due to raw material cost pressures. Further the demand in the auto and non-auto industrial segments to remain challenging due to higher policy rates and investment slowdown given the policy logjam. Internationally, political instability in countries like Egypt and Bangladesh are the concern areas.

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.

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