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Asian Paints: Betting on diversification
Aug 3, 2013

Asian Paints has announced the results for first quarter of financial year 2013-2014 (1QFY14). The topline increased 11% YoY while bottomline fell by 4.6% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Sales grew 11% YoY in 1QFY14 on the back of growth in emulsion segment and cumulative price rise of 5.1% over past 12 months. Price rise of 1.2% effected in May 2013.
  • Operating margins dropped to 15.7% in 1QFY14 from 17.3% in 1QFY13. Rise in the prices of a key raw material affected margins for the quarter.
  • The raw material price index for the decorative products stood at 106.6 in 1QFY14, on a base of 100, as against 101.7 for 1QFY13.
  • Net profits dropped by 4.6% YoY in 1QFY14 due to weak performance at the operating level.
  • The new 300,000 KL capacity at Khandala plant commissioned in 4QFY14, taking total capacity to 9,44,000 KL per annum. Second 50:50 JV with global paint major PPG becomes operational.

Consolidated financial snapshot
(Rs m) 1QFY13 1QFY14 Change
Total income 25,373 28,182 11.1%
Expenditure 20,994 23,764 13.2%
Operating profit (EBDITA) 4,379  4,418 0.9%
Operating profit margin (%) 17.3% 15.7%  
Other income  326 505 54.9%
Interest  108 85 -21.3%
Depreciation  334 599 79.3%
Profit before tax 4,263  4,239 -0.6%
Tax 1,273 1,390 9.2%
Minority interest  106 98 -7.6%
Profit after tax/(loss) 2,885  2,752 -4.6%
Net profit margin (%) 11.4% 9.8%  
No. of shares (m)#    959.2  
Diluted earnings per share (Rs)    11.5  
P/E ratio (x) *    43.2  
*Based on trailing 12 month earnings
#Post stock split

What has driven performance in 1QFY14?
  • The growth in sales was on the back of demand in the emulsion segment, prices rises and improved demand conditions in the Middle East. The industrial business was however impacted by poor demand from projects business and slowdown in OEM segment.

  • As far as the international operations are concerned, all the four regions (Caribbean, Middle East, Asia and South Pacific) where the company has presence grew in excess of 15% during 1QFY13. However, some part of this growth was fuelled by currency impact.

  • The company’s operating margins dropped to 15.7% in 1QFY14 from 17.3% in 1QFY13. Rise in the prices of a key raw material affected margins for the quarter. Raw material cost as a percentage of sales stood at nearly 60%.

  • The 4.6% fall in net profits can be attributed to not just weak operating margins but also relatively lower capacity utilization and volume offtake.

What to expect?

At the current price of Rs 497 (post stock split), the stock is trading at 43.2 times trailing twelve month earnings and 28.6 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. While 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 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. We will update the FY16 estimates for the stock by end of August 2013.

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