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Asian Paints: Material cost concerns ease

Jul 31, 2012

Asian Paints has announced the first quarter results of financial year 2012-2013. Topline increased 12.5% YoY while bottomline increased 9.4% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Topline grew 12.5% YoY in 1QFY13. The growth was fuelled by a price increase of 3.2% undertaken during the quarter.
  • Operating margins were relatively flat at 17.5% in 1QFY13. Inflationary trend in the raw material costs have eased out a bit but rupee depreciation continues to hurt the company.
  • The raw material price index for the decorative products stood at 106.7 in 1QFY13, on a base of 100.
  • Net profits increased 9.4% YoY in 1QFY13 due to strong performance at the operating level.
  • The capacity expansion at Khandala plant is on schedule. The first phase is expected to go on stream by 4QFY13.
  • Planned capex for FY13 is about Rs 7.5 bn.

Consolidated financial snapshot
(Rs m) 1QFY12 1QFY13 Change
Total income 22,656 25,479 12.5%
Expenditure 18,685 21,014 12.5%
Operating profit (EBDITA) 3,971 4,466 12.5%
Operating profit margin (%) 17.5% 17.5%  
Other income 254 239 -5.6%
Interest 65 109 67.0%
Depreciation 291 334 14.8%
Profit before tax 3,868 4,262 10.2%
Tax 1,152 1,273 10.5%
Minority interest 79 106 33.2%
Profit after tax/(loss) 2,637 2,884 9.4%
Net profit margin (%) 11.6% 11.3%  
No. of shares (m)   95.9  
Basic diluted earnings per share (Rs)   30.1  
P/E ratio (x) *   34.2  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Net sales increased 12.5% YoY in 1QFY13. The growth was led by buoyancy in demand from the decorative segment. However, demand conditions in the industrial segment remain subdued due to difficulty in passing price increases.

  • As far as the international operations are concerned, the Middle East region continues to face challenging conditions. However, in Asia, Bangladesh and Sri Lanka have done well. Growth from the Caribbean region was steady except Jamaica.

  • The operating margin was relatively flat at 17.5% in 1QFY13. Downward trend in raw material cost and price hike undertaken during the quarter shielded the margins of the company.

  • Bottom line increased 9.4% YoY during the quarter due to strong performance at the operating level. However, fall in other income; rise in interest and depreciation expenses curtailed the profitability growth. Lastly, it may be noted that the company incurred an exchange loss of Rs 125.1 m during the quarter which was included in other expenditure.

What to expect?
At the current price of Rs 3,615, the stock is trading at 34.2 times its trailing twelve month earnings. Going forward, growth from the international business, particularly Middle East remains a key concern. Nonetheless, with raw material prices softening the company was able to maintain its margins. However, going forward, weak rupee and prices of titanium dioxide will play a key role in margin sustenance.

As far as the demand scenario is concerned, management expects both urban and rural segments to drive volumes in the future. However, weak monsoons could see the demand tapering off especially in the rural segment. Nonetheless, management is confident about the future volume growth (though lower than witnessed in the past 4-5 years) especially in the area of emulsions. However, considering the expensive valuations, we maintain our Sell view on the stock.

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