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Asian Paints: Input cost pressures remain - Views on News from Equitymaster

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Asian Paints: Input cost pressures remain
Jul 27, 2011

Asian Paints has announced the first quarter results of financial year 2011-2012 (1QFY12). Both topline and bottomline increased 23.5% YoY and 18.7% YoY respectively during the quarter. Here is our analysis of the results.

Performance summary
  • Topline grew 23.5% YoY in 1QFY12. Growth in the topline was led by strong demand environment in the decorative business segment. However, demand conditions in the industrial and international businesses continued to remain challenging.
  • Operating margins declined to 17.3% this quarter as compared to 19% in 1QFY11. The dip in margins was due to raw material price inflati0n. It may be noted that raw material price index for the decorative products stood at 114 in 1QFY12 on a base of 100.
  • Net profits increased 18.7% YoY in 1QFY12.

Consolidated financial snapshot
(Rs m) 1QFY11 1QFY12 Change
Sales 18,302 22,604 23.5%
Expenditure 14,831 18,682 26.0%
Operating profit (EBDITA) 3,471 3,922 13.0%
Operating profit margin (%) 19.0% 17.3%  
Other income 184 305 65.8%
Interest 42 65 54.3%
Depreciation 269 291 8.1%
Profit before tax 3,344 3,871 15.8%
Tax 1,013 1,155 14.0%
Minority interest 109 79 -27.4%
Profit after tax/(loss) 2,222 2,637 18.7%
Net profit margin (%) 12.1% 11.7%  
No. of shares (m)   95.9  
Basic & diluted earnings per share (Rs) *   27.49  
P/E ratio (x) *   34.0  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Net sales increased 23.5% YoY in 1QFY12. The growth was led by price increases in the decorative segment amidst rising input cost. It may be noted that the company undertook three price increases during the quarter. The cumulative price increase in the decorative segment was in the region of 8% during the quarter.

  • As far as the international operations are concerned the situation is alarming. The overall business environment in Egypt and UAE remains fluid. This has been impacting overall volumes and profitability growth. Further, it may be noted that in order to accelerate the growth in industrial paints segment (has been a laggard off late) the company has entered into a JV with PPG Industries Inc (PPG). The entire JV process is expected to be completed in the current year.

  • The construction work at the second plant near Khandala is on schedule and is expected to be commissioned in 4QFY13.

  • The operating margin stood at 17.3% in 1QFY12, a decline of 170 bps over 1QFY11. Margins of the company are on a 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 continued to suffer.

  • Bottom line increased 18.7% YoY during the quarter due to strong performance at the operating level and higher other income.

What to expect?
At the current price of Rs 3,145, the stock is trading at 26 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. In light of these factors, we maintain our negative view on the stock.

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